[Federal Register Volume 69, Number 148 (Tuesday, August 3, 2004)]
[Proposed Rules]
[Pages 46632-46863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17234]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 403, 411, 417, and 423



Medicare Program; Medicare Prescription Drug Benefit; 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 403, 411, 417, and 423

[CMS-4068-P]
RIN 0938-AN08


Medicare Program; Medicare Prescription Drug Benefit

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement the new Medicare 
Prescription Drug Benefit. This new voluntary prescription drug benefit 
program was enacted into law on December 8, 2003, in section 101 of the 
Medicare Prescription Drug, Improvement and Modernization Act of 2003 
(MMA). The addition of a prescription drug benefit to Medicare 
represents a landmark change to the Medicare program that will 
significantly improve the health care coverage available to millions of 
Medicare beneficiaries. The MMA specifies that the prescription drug 
benefit program will become available to beneficiaries beginning on 
January 1, 2006. Please see the executive summary in the SUPPLEMENTARY 
INFORMATION section for further synopsis of this rule.

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-4068-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 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-4068-
P, P.O. Box 8014, Baltimore, MD 21244-8014.
    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 
telephone number (410) 786-7197 in advance to schedule your arrival 
with one of our staff members.
    (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 received after the comment 
period.
    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: Lynn Orlosky (410) 786-9064 or Randy 
Brauer (410)786-1618 (for issues related to eligibility, elections, 
enrollment, including auto-enrollment of dual eligible beneficiaries, 
and creditable coverage).
    Wendy Burger (410) 786-1566 (for issues related to marketing and 
user fees).
    Vanessa Duran-Scirri (214) 767-6435 (for issues related to benefits 
and beneficiary protections, including Part D benefit packages, Part D 
covered drugs, coordination of benefits in claims processing and 
tracking of true-out-of-pocket costs, pharmacy network access 
standards, plan information dissemination requirements, and privacy of 
records).
    Craig Miner, RPh. (410) 786-1889 or Tony Hausner (410) 786-1093 
(for issues of pharmacy benefit cost and utilization management, 
formulary development, quality assurance, medication therapy 
management, and electronic prescribing).
    Mark Newsom (410) 786-3198 (for issues of submission, review, 
negotiation, and approval of risk and limited risk bids for PDPs and 
MA-PD plans; the calculation of the national average bid amount; 
determination and collection of enrollee premiums; calculation and 
payment of direct and reinsurance subsidies and risk-sharing; and 
retroactive adjustments and reconciliations.)
    Jim Owens (410) 786-1582 (for issues of licensing and waiver of 
licensure, the assumption of financial risk for unsubsidized coverage, 
and solvency requirements for unlicensed sponsors or sponsors who are 
not licensed in all States in the region in which it wants to offer a 
PDP.)
    Terese Klitenic (410) 786-5942 (for issues of coordination of Part 
D plans with providers of other prescription drug coverage including 
Medicare Advantage plans, state pharmaceutical assistance programs 
(SPAPs), Medicaid, and other retiree prescription drug plans; also for 
issues related to eligibility for and payment of subsidies for 
assistance with premium and cost-sharing amounts for Part D eligible 
individuals with lower income and resources; for rules for states on 
eligibility determinations for low-income subsidies and general state 
payment provisions including the phased-down state contribution to drug 
benefit costs assumed by Medicare).
    Frank Szeflinski (303) 844-7119 (for issues related to conditions 
necessary to contract with Medicare as a PDP sponsor, as well as 
contract requirements, intermediate sanctions, termination procedures 
and change of ownership requirements; employer group waivers and 
options; also for issues related to cost-based HMOs and CMPS offering 
Part D coverage.)
    John Scott (410) 786-3636 (for issues related to the procedures PDP 
sponsors must follow with regard to grievances, coverage 
determinations, and appeals.)
    Tracey McCutcheon (410) 786-6715 (for issues related to 
solicitation, review and approval of fallback prescription drug plan 
proposals; fallback contract requirements; and enrollee premiums and 
plan payments specific to fallback plans.)
    Jim Mayhew (410) 786-9244 (for issues related to the alternative 
retiree drug subsidy.)
    Joanne Sinsheimer (410) 786-4620 (for issues related to physician 
self-referral prohibitions.)
    Brenda Hudson (410) 786-4085 (for issues related to PACE 
organizations offering Part D coverage.)
    Julie Walton (410) 786-4622 or Kathryn McCann (410) 786-7623 (for 
issues related to provisions on Medicare supplemental (Medigap) 
policies.)
    For general questions: Please call (410) 786-1296.

SUPPLEMENTARY INFORMATION:
    Executive Summary. Generally, coverage for the prescription drug

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benefit will be provided under private prescription drug plans (PDPs), 
which will offer only prescription drug coverage, or through Medicare 
Advantage prescription drug plans (MA-PDs), which will offer 
prescription drug coverage that is integrated with the health care 
coverage they provide to Medicare beneficiaries under Part C of 
Medicare. PDPs must offer a basic prescription drug benefit. MA-PDs 
must offer either a basic benefit or broader coverage for no additional 
cost. If this required level of coverage is offered, the PDP or MA-PD 
plan may also offer supplemental benefits through enhanced alternative 
coverage for an additional premium. All organizations offering drug 
plans will have flexibility in the design of the prescription drug 
benefit. Consistent with the MMA, this proposed rule provides for 
subsidy payments to sponsors of qualified retiree prescription drug 
plans.
    We intend to implement the drug benefit to permit and encourage a 
range of options for Medicare beneficiaries to augment the standard 
Medicare coverage for drug costs above the initial coverage limit 
($2250 in 2006) and below the annual out-of-pocket threshold ($5100 in 
2006). In addition to the coverage established by the statute for low-
income beneficiaries, we seek comments on the best way to support 
options for expanding beneficiaries' drug coverage. Potential options 
include facilitating coverage through employer plans, MA-PD plans and/
or high-option PDPs, as well as through charity organizations and State 
pharmaceutical assistance programs. We specifically seek comments on 
ways to maximize the continued use of non-Medicare resources (private 
contributions, employer/union contributions, state contributions, 
health plan contributions, and other sources) that currently provide at 
least partial coverage for three-fourths of Medicare beneficiaries. See 
sections II.C, II.J, and II.P, and II R of this preamble for further 
details on these issues. We are also considering establishing a CMS 
demonstration to evaluate possible ways of achieving such extended 
coverage, and we welcome all suggestions in this regard.
    Throughout the preamble, we identify options and alternatives to 
the provisions we propose. We strongly encourage comments and ideas on 
our approach and on alternatives to help us design the Medicare 
Prescription Drug Benefit Program to operate as effectively and 
efficiently as possible in meeting the needs of Medicare beneficiaries.
    Although this proposed rule specifies most of the requirements for 
implementing the new prescription drug program, readers should note 
that we are also issuing a closely related proposed rule that concerns 
Medicare Advantage plans, which will usually combine medical and 
prescription drug coverage. In addition, although this proposed rule 
specifies requirements related to PDP regions it does not designate 
those regions. Regional boundary decisions will be made through a 
separate process. Additional non-regulatory guidance on this and other 
topics will also be forthcoming.
    We have considered and, in some places, have identified how this 
proposed rule intersects with other Federal laws, such as the Health 
Insurance Portability and Accountability Act (HIPAA) of 1996 
Certification of Creditable Coverage and the HIPAA Privacy Rule. We are 
interested in learning how this proposed rule may interact with other 
legal obligations to which the PDP sponsors and MA-PD plans may be 
subject and intend to make appropriate changes in the final rule to 
address such issues.
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. Comments will be most useful if they are 
organized by the section of the proposed rule to which they apply. You 
can assist us by referencing the file code [CMS-4068-P] and the 
specific ``issue identifier'' that precedes the section on which you 
choose to comment.
    Inspection of Public Comments: 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 Web site. Comments received 
timely will be available for public inspection as they are received, 
generally beginning approximately 3 weeks after publication of a 
document, at the headquarters of the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, phone 410-786-7197.
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
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calling the order desk at (202) 512-1800 (or toll-free at 1-888-293-
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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

(If you choose to comment on issues in this section, please include the 
caption ``Background'' at the beginning of your comments.)

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

    Section 101 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended Title XVIII 
of the Social Security Act (the Act) by redesignating Part D as Part E 
and inserting a new Part D, which establishes the Voluntary 
Prescription Drug Benefit Program. (For ease of reference, we will 
refer to the new prescription drug benefit program as Part D of 
Medicare and the Medicare Advantage Program as Part C of Medicare.) We 
believe that the new Part D benefit constitutes the most significant 
change to the Medicare program since its inception in 1965. The 
addition of outpatient prescription drugs to the Medicare program 
reflects Congress' recognition of the fundamental change in recent 
years in how medical care is delivered in the U.S. It recognizes the 
vital role of prescription drugs in our health care delivery system, 
and the need to modernize Medicare to assure their availability to 
Medicare beneficiaries. This proposed rule is designed to ensure broad 
participation in the new benefit both by organizations that offer 
prescription drug coverage and by eligible beneficiaries. In 
conjunction with complementary improvements to the Medicare Advantage 
program, these changes should significantly increase the coverage and 
choices available to Medicare beneficiaries. Effective January 1, 2006, 
the new program

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establishes an optional prescription drug benefit for individuals who 
are entitled to or enrolled in Medicare benefits under Part A and/or 
Part B. Beneficiaries who qualify for both Medicare and Medicaid (full-
benefit dual eligibles) will automatically receive the Medicare drug 
benefit. The statute also provides for assistance with premiums and 
cost sharing to eligible low-income beneficiaries.
    In general, coverage for the new prescription drug benefit will be 
provided through private prescription drug plans (PDPs) that offer 
drug-only coverage, or through Medicare Advantage (MA) (formerly known 
as Medicare+Choice) plans that offer integrated prescription drug and 
health care coverage (MA-PD plans). PDPs must offer a basic drug 
benefit. MA-PDs must offer either a basic benefit or broader coverage 
for no additional cost. If this required level of coverage is offered, 
the PDP or MA-PD plan may also offer supplemental benefits through 
enhanced alternative coverage for an additional premium.
    All organizations offering drug plans will have flexibility in 
terms of benefit design, including the authority to establish a 
formulary to designate specific drugs that will be available within 
each therapeutic class of drugs, and the ability to have a cost-sharing 
structure other than the statutorily defined structure, subject to 
certain actuarial tests. The plans also may include supplemental drug 
coverage such that the total value of the coverage offered exceeds the 
value of basic prescription drug coverage. The specific sections of the 
Act that address the prescription drug benefit program are the 
following:

1860D-1 Eligibility, enrollment, and information.
1860D-2 Prescription drug benefits.
1860D-3 Access to a choice of qualified prescription drug coverage.
1860D-4 Beneficiary protections for qualified prescription drug 
coverage.
1860D-11 PDP regions; submission of bids; plan approval.
1860D-12 Requirements for and contracts with prescription drug plan 
(PDP) sponsors.
1860D-13 Premiums; late enrollment penalty.
1860D-14 Premium and cost-sharing subsidies for low-income individuals.
1860D-15 Subsidies for Part D eligible individuals for qualified 
prescription drug coverage.
1860D-16 Medicare Prescription Drug Account in the Federal 
Supplementary Medical Insurance Trust Fund.
1860D-21 Application to Medicare Advantage program and related managed 
care programs.
1860D-22 Special rules for employer-sponsored programs.
1860D-23 State pharmaceutical assistance programs.
1860D-24 Coordination requirements for plans providing prescription 
drug coverage.
1860D-41 Definitions; treatment of references to provisions in Part C.
1860D-42 Miscellaneous provisions.

    Specific sections of the MMA that also relate to the prescription 
drug benefit program are the following:

Sec. 102 Medicare Advantage Conforming Amendments
Sec. 103 Medicaid Amendments
Sec. 104 Medigap
Sec. 109 Expanding the work of Medicare Quality Improvement 
Organizations to include Parts C and D.

B. Organizational Overview of Part 423

    The regulations set forth in this proposed rule will be codified in 
the new 42 CFR part 423--Prescription Drug Benefit Program. There are a 
number of places in which statutory provisions in Part D incorporate by 
reference specific sections in Part C of Medicare (the Medicare 
Advantage program). The MA regulations appear at 42 CFR part 422. Since 
the same organizations that offer MA coordinated care plans will also 
be required to offer MA-PD plans, we believe it is appropriate to adopt 
the same organizational structure as part 422. MA coordinated care 
plans (defined in Sec.  1851(a)(2)(A)) are a type of Medicare Advantage 
plan. For example, requirements relating to eligibility, election, and 
enrollment would be set forth in subpart B of new part 423, just as 
they now are set forth in subpart B of part 422. Therefore, wherever 
possible, we have modeled the proposed prescription drug regulations on 
the parallel provisions of the part 422 regulations.
    The major subjects covered in each subpart of part 423 are as 
follows:
    Subpart A, General Provisions: Basis and scope of the new part 423, 
Definitions and discussion of important concepts used throughout part 
423, and sponsor cost-sharing in beneficiary education and enrollment-
related costs (user fees).
    Subpart B, Eligibility, Election, and Enrollment: Eligibility for 
enrollment in the Part D benefit, enrollment periods, disenrollment, 
application of the late enrollment penalty, approval of marketing 
materials and enrollment forms, and the meaning and documentation of 
creditable coverage. (Please note that other, related topics, are 
discussed in the following subparts: Subpart P, eligibility and 
enrollment for low-income individuals; Subpart S, provisions relating 
to the phase-down of state contributions for dual-eligible drug 
expenditures; Subpart F, calculation and collection of late enrollment 
fees; Subpart C, plan disclosure; Subpart Q, eligibility and enrollment 
for fallback plans; and Subpart T, the definition of a Medicare 
supplemental (Medigap) policy.)
    Subpart C, Benefits and Beneficiary Protections: Prescription drug 
benefit coverage, service areas, network and out-of-network access, 
formulary requirements, dissemination of plan information to 
beneficiaries, and confidentiality of enrollee records. (Please note 
that actuarial valuation of the coverage offered by plans, as well as 
the submission of the bid, is discussed in subpart F. Access to 
negotiated prices is discussed in subpart C, while the reporting of 
negotiated prices is discussed in subpart G. Formularies are discussed 
in subpart C, while the appeals of formularies are discussed in subpart 
M. Incurred costs toward true out-of-pocket (TrOOP expenditures) are 
discussed in subpart C, while the procedures for determining whether a 
beneficiary's Part D out-of-pocket costs are actually reimbursed by 
insurance or another third-party arrangement are discussed in subpart 
J. Information that plans must disseminate to beneficiaries is 
discussed in subpart C, while Part D information that CMS must 
disseminate to beneficiaries is discussed in subpart B.)
    Subpart D, Cost Control and Quality Improvement Requirements for 
Prescription Drug Benefit Plans: Utilization controls, quality 
assurance, medication therapy, and fraud, waste and abuse, as well as 
rules related to identifying enrollees for whom medication therapy 
management is appropriate, consumer satisfaction surveys, and 
accreditation as a basis for deeming compliance.
    Subpart E, Reserved.
    Subpart F, Submission Of Bids and Monthly Beneficiary Premiums; 
Plan Approval: Bid submission, the actuarial value of bid components, 
review and approval of plans, and the calculation and collection of 
Part D premiums.
    Subpart G, Payments To PDP Sponsors and MA Organizations Offering 
MA-PD Plans for All Medicare Beneficiaries for Qualified Prescription 
Drug Coverage: Data submission, payments and reconciliations for direct

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subsidies, risk adjustment, reinsurance, and risk-sharing arrangements.
    Subpart H, Reserved.
    Subpart I, Organization Compliance With State Law and Preemption By 
Federal Law: Licensure, assumption of financial risk, solvency, and 
State premium taxes.
    Subpart J, Coordination Under Part D With Other Prescription Drug 
Coverage: Applicability of Part D rules to the Medicare Advantage 
program, waivers available to facilitate the offering of employer group 
plans, and procedures to facilitate calculation of true out-of-pocket 
expenses and coordination of benefits with State pharmaceutical 
assistance programs and other entities that provide prescription drug 
coverage. (Please note that subpart C discusses, in more detail, 
coordination of benefits and the determination of which incurred 
beneficiary costs will be counted as TrOOP expenditures. Provisions 
relating to disenrollment for material misrepresentation by a 
beneficiary are discussed in subpart J and also referenced in subpart 
B.)
    Subpart K, Application Procedures and Contracts With PDP Sponsors: 
Application procedures and requirements; contract terms; procedures for 
termination of contracts; reporting by PDP sponsors.
    Subpart L, Effect of Change of Ownership or Leasing of Facilities 
During Term of Contract: Change of ownership of a PDP sponsor; novation 
agreements; leasing of a PDP sponsor's facilities.
    Subpart M, Grievances, Coverage Determinations and Appeals: 
Coverage determinations by sponsors, exceptions procedures, and all 
levels of appeals by beneficiaries.
    Subpart N, Medicare Contract Determinations and Appeals: 
Notification by CMS about unfavorable contracting decisions, such as 
nonrenewals or terminations; reconsiderations; appeals.
    Subpart O, Intermediate Sanctions: Provisions concerning available 
sanctions for participating organizations.
    Subpart P, Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals: Eligibility determinations and payment calculations for 
low-income subsidies.
    Subpart Q, Guaranteeing Access to a Choice of Coverage (Fallback 
Plans): Definitions; access requirements; bidding process; contract 
requirements.
    Subpart R, Payments to Sponsors of Retiree Prescription Drug Plans: 
Provisions for making retiree drug payments to sponsors of qualified 
retiree prescription drug plans.
    Subpart S, Special Rules for States--Eligibility Determinations for 
Subsidies and General Payment Provisions: State/Medicaid program's role 
in determining eligibility for low-income subsidy and other issues 
related to the Part D benefit.
    In addition, in subpart T, this proposed rule also provides changes 
to: Part 403 relating to Medicare supplemental policies (Medigap), part 
411 relating to exclusions from Medicare and limitations on Medicare 
payment (the physician self-referral rules), part 417 relating to cost-
based HMOs, part 460 relating to PACE organizations, and part 442 
relating to Medicaid amendments.

II. Provisions of the Proposed Rule

A. General Provisions

(If you choose to comment on issues in this section, please include the 
caption ``General Provisions'' at the beginning of your comments.)
1. Overview
    Section 423.1 of subpart A specifies the general statutory 
authority for the ensuing regulations and indicates that the scope of 
part 423 is to establish requirements for the Medicare prescription 
drug benefit program. Section 423.4 of subpart A provides definitions 
for terms that appear in multiple sections of part 423 and whose 
meaning we believe should be featured prominently in order to aid the 
reader.
    Consistent with the MMA statute, we are in many cases proposing 
procedures that parallel those now in effect under the Medicare 
Advantage program (for example the regulations concerning PDP and MA-PD 
plan contract and appeal requirements). We anticipate receiving at 
least two categories of comments on such provisions: (1) 
Recommendations for changes that would impact only the proposed Part D 
provisions (based for example on underlying differences between the MA 
and Part D programs); and (2) recommendations for changes that would 
impact both the MA and Part D provisions. Our goal is to maintain 
consistency between these two programs wherever possible; thus we will 
evaluate the need for parallel changes in the MA final rule when we 
receive comments on provisions that affect both programs.
2. Discussion of Important Concepts and Key Definitions (Sec.  423.4)

a. Introduction

    For the most part, the definitions in the proposed rule are taken 
directly from section 1860D-41 of the Act. The definitions set forth in 
subpart A apply to all of part 423 unless otherwise indicated, and are 
applicable only for the purposes of part 423. For example, ``insurance 
risk'' applies only to pharmacies that contract with PDP sponsors under 
part 423. Definitions that have a more limited application are not 
included in subpart A, but instead are set forth within the relevant 
subpart of the regulations. For example, in subpart F, we have included 
all the definitions related to bids and premiums. The detailed 
definitions and requirements related to prescription drug coverage are 
included in subpart C, but because of their direct relevance to the 
bidding process they are also referenced in subpart F.
    Following our discussion of important concepts, we provide brief 
definitions of terms that occur in multiple sections of this preamble 
and part 423. We believe that it is helpful to define these frequently 
occurring terms to aid the reader but that these terms do not require 
the extended discussion necessary in our section on important concepts.

b. Discussion of Actuarial Equivalence, Creditable Prescription Drug 
Coverage, PDP Plan Regions, Service Area, and User Fees

i. Discussion of the Meaning of Actuarial Equivalence

    The concept of actuarial equivalence is applied in different 
contexts in Title I of the MMA, including: Determinations related to 
creditable coverage (subpart B), determinations related to the value of 
drug coverage and bid components (subpart F); and determinations 
related to subsidy payments for employer or union sponsors of qualified 
retiree health plans that include prescription drugs (subpart R). In 
very general terms, actuarial equivalence refers to a determination 
that, in the aggregate, the dollar value of drug coverage for a set of 
beneficiaries under one plan can be shown to be equal to the dollar 
value for those same beneficiaries under another plan. Given the 
various uses for this term in the Part D context, we propose the 
following relatively general definition:
    ``Actuarial equivalence'' means a state of equivalent values 
demonstrated through the use of generally accepted actuarial principles 
and in accordance with section 1860D-11(c) of the Act and Sec.  
423.265(c)(3) of this part.
    This concept is discussed in further detail below and in those 
sections of this preamble, such as section II.F, where actuarial 
equivalence comes into play.

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    According to section 1860D-11(c) of the Act, we will develop 
processes and methods using generally accepted actuarial principles and 
methodologies for determining the actuarial valuation of prescription 
drug coverage. Although the statute sets forth specific requirements 
for actuarial equivalence and valuation, there is no formal definition 
of actuarial equivalence. Also, in each of the contexts described 
above, we must address the question of whether actuarial equivalence is 
determined from the perspective of the plan, or the beneficiary.
    In the sections dealing with actuarial equivalence throughout this 
proposed rule, we have tried to avoid being overly prescriptive, in 
order to maintain flexibility to adjust and refine the needed valuation 
processes as we gain more experience with the administration of the new 
benefit. Thus, we fully expect to provide additional guidance in the 
future on these provisions.

ii. Discussion of the Meaning of Creditable Prescription Drug Coverage

    The types of coverage considered creditable prescription drug 
coverage in proposed 42 CFR 423.4 are discussed in the preamble to 
subpart B.
    In the preamble to subpart T, we discuss in more detail the effect 
of Part D on Medigap policies, one of the forms of drug coverage that 
may be creditable if it meets the actuarial equivalence test.

iii. Prescription Drug Plan Regions

    Prescription drug plan regions are areas in which a contracting PDP 
plan must provide access to covered Part D drugs. Although we have 
included specifications for regions in Sec.  423.112, the regions 
themselves are not set forth in this proposed rule. To the extent 
feasible, we intend that the PDP regions will be consistent with the 
regions established for the MA program (see Sec.  422.455 of the MA 
proposed rule). In establishing the regions for both programs, we will 
use the results of a market survey that includes the examination of 
current insurance markets. MMA specifically states that there will be 
no fewer than 10 regions and no more than 50 regions, not including the 
territories. For a further discussion of the PDP regions, see section 
II.C of this preamble.

iv. Service Area

    Medicare beneficiaries are eligible to enroll in a PDP or an MA-PD 
plan only if they reside in the PDP's or MA-PD plan's ``Service Area.'' 
As noted above, for PDPs, this is the Region established by CMS 
pursuant to proposed Sec.  423.112, within which the PDP is responsible 
for providing access to the Part D drug benefit in accordance with the 
access standards in proposed Sec.  423.120. Under the MA program, an MA 
plan's Service Area is defined in Sec.  422.2. For coordinated care 
plans, the definition of ``service area'' expressly includes the 
condition that the service area is an area in which access is provided 
in accordance with access standards in Sec.  422.112.
    Prior to this rulemaking, we had not considered how this access 
requirement in the MA plan Service Area definition would apply to a 
jail or prison within the boundaries of a plan Service Area. 
Beneficiaries incarcerated there clearly would not have access to 
services as required under Sec.  422.112. Such an area thus would not 
meet the coordinated care plan definition of ``Service Area,'' which 
requires that such access standards be met. This issue never arose 
under the MA program because there would be no reason for an individual 
to enroll in an MA plan while incarcerated, since services typically 
are all covered by the jail or prison and the prisoner could always 
enroll in an MA plan without penalty upon being released.
    We have however, considered this issue in the context of Part D 
benefits. If a prison or jail is located within the boundaries of a PDP 
region, or an MA PDP-plan Service Area, a Medicare-eligible individual 
incarcerated there technically would reside within the service area, 
and be eligible to enroll to receive Part D benefits. Under this 
scenario, such an individual then would have to pay a penalty for not 
enrolling while in prison if he or she enrolled in Part D upon being 
released.
    We do not believe this to be an equitable result, as the 
beneficiary would face the choice of paying for services he or she 
would not be receiving, or paying a penalty at a later time. We also do 
not believe that it would be appropriate for a PDP or MA-PD plan to 
receive monthly Part D payments for such an individual, since drugs 
typically would be covered for the individual by the prison or jail. 
Such payments would represent an unwarranted ``windfall'' for services 
the PDP or MA-PD would not have to deliver.
    In focusing on this situation, we have decided to propose that for 
purposes of enrolling in Part D with a PDP, or under an MA-PD plan, the 
definition of Service Area that governs eligibility to enroll is the 
area within which the Part D access standards under Sec.  423.120 are 
met.
    Beneficiaries in jail or prison do not have access to pharmacies 
available as required under Sec.  423.120. Therefore, such 
beneficiaries would not be considered to be in a PDP or MA-PD plan's 
Service Area for purposes of enrolling in Part D. Incarcerated 
individuals accordingly would not be assessed a late penalty when they 
enroll in Part D (either with a PDP or MA-PD plan) upon being released.
    We note that the analysis above would apply equally to a 
beneficiary who lives abroad, and does not reside within the boundaries 
of any PDP Region or MA-PD Service Area.

v. Sponsor Cost-Sharing in Beneficiary Education and Enrollment Related 
Costs--User Fees (Sec.  423.6)

    The last section of subpart A proposes regulations implementing the 
user fees provided for in section 1857(e)(2) of the Act, as 
incorporated by section 1869D-12(b)(3)(D) of the Act. These fees are 
currently required of MA plans for the purpose of defraying part of 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 assistance 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).
    The MMA expands the user fee to apply to PDP sponsors as well as MA 
plans. The expansion of the application of user fees recognizes the 
increased Medicare beneficiary education activities that we would 
require as part of the new prescription drug benefit. In 2006 and 
beyond, user fees would 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.
    In fiscal year 2006 and thereafter, the MMA authorizes up to 
$200,000,000 to be spent on beneficiary education and enrollment 
activities reduced by the fees collected from MA organizations and PDP 
sponsors in that fiscal year. In each year, the total amount of 
collected user fees could 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 (described below) of $200,000,000, whichever is 
less.
    Finally, these user fee provisions would establish the applicable 
aggregate

[[Page 46637]]

contribution portions for PDP sponsors and MA organizations. There are 
two calculations. First, we calculate the PDP sponsors' applicable 
portion as a group; their portion is the estimate of the total 
proportion of expenditures under Title 18 that are attributable to 
expenditures made to PDP sponsors for prescription drugs under Part D. 
The applicable portion of the user fee for MA organizations would be 
equal to the total expenditures for Medicare Part C, as well as for 
payments under Part D that are made to MA organizations, as a percent 
of Title 18 expenditures. Then, we calculate the fees charged to 
individual PDP sponsors and MA plans.

c. Definitions of Frequently Occurring Terms

    Full-benefit dual eligible beneficiary means an individual who 
meets the criteria established in Sec.  423.772 (subpart P), regarding 
coverage under both Part D and Medicaid.
    Insurance risk means, for a participating pharmacy, risk of the 
type commonly assumed only by insurers licensed by a State and does not 
include payment variations designed to reflect performance-based 
measures of activities within the control of the pharmacy, such as 
formulary compliance and generic drug substitutions, nor does it 
include elements potentially in the control of the pharmacy (for 
example, labor costs or productivity).
    MA means Medicare Advantage, which refers to the program authorized 
under Part C of the Act.
    MA-PD plan means an MA plan that provides qualified prescription 
drug coverage.
    Medicare prescription drug account means the account created within 
the Federal Supplementary Medical Insurance Trust Fund for purposes of 
Medicare Part D.
    Part D eligible individual means an individual who is entitled to 
or enrolled in Medicare benefits under Part A and/or Part B.
    Prescription drug plan or PDP means prescription drug coverage that 
is offered under a policy, contract, or plan that has been approved as 
specified in Sec.  423.272 and that is offered by a PDP sponsor that 
has a contract with CMS that meets the contract requirements under 
subpart K.
    PDP region means a prescription drug plan region as determined by 
CMS under Sec.  423.112.
    PDP sponsor means a nongovernmental entity that is certified under 
this part as meeting the requirements and standards of this part for 
that sponsor.

d. Financial Relationships Between PDP Sponsors, Health Care 
Professionals and Pharmaceutical Manufacturers

    The financial relationships that exist between or among PDP 
sponsors, health care professionals (including physicians and 
pharmacists), and/or pharmaceutical manufacturers may be subject to the 
anti-kickback statute and, if the relationship involves a physician, 
the Stark statute. These financial relationships could potentially 
implicate the anti-kickback and physician self-referral statutes, 
therefore, they should be structured appropriately to comply with legal 
requirements. Nothing in this regulation should be construed as 
implying that financial relationships described in the regulations meet 
the requirements of the anti-kickback statute or physician self-
referral statute or any other applicable Federal or State law or 
regulation. All such relationships must comply with these laws. 
Therefore, PDPs are not prevented from paying pharmacists, for 
instance, for medication therapy management, provided that the PDPs do 
not violate anti-kickback and physician self-referral laws.

B. Eligibility and Enrollment

1. Eligibility To Enroll (Sec.  423.30)
    The MMA established section 1860D-1 of the Act, which includes the 
eligibility criteria an individual must meet in order to obtain 
prescription drug coverage by enrolling in a PDP plan or an MA-PD plan. 
In accordance with section 1860D-1(a)(3) of the Act, a ``Part D 
eligible individual'' is defined as an individual who is entitled to or 
enrolled in Medicare benefits under Part A or enrolled in Part B. In 
order to enroll in a PDP plan, the individual must reside in the plan's 
service area, and cannot be enrolled in an MA plan, other than an MSA 
plan or private fee-for-service plan that does not provide qualified 
prescription drug coverage. This residency requirement flows from the 
statute's direction for us to use enrollment rules similar to MA (which 
has such a requirement) and the drug benefit's basic structure, which 
designates regions within which PDPs are to provide services.
    Section 1860D-1(b)(1)(B)(i) requires that we adopt a residency 
requirement similar to the Part C residency requirements under section 
1851(b)(1)(A) of the Act, which stipulates that a beneficiary is 
eligible to enroll in a plan only if the beneficiary resides in the 
plan's service area. Because a PDP's service area may consist only of 
one or more PDP regions, individuals who reside outside of the United 
States would be ineligible to enroll in a PDP or MA-PD plan. 
Consequently, these individuals are ineligible to enroll in Part D.
    Under section 1860D-1(b)(1)(B)(i) of the Act, which incorporates 
into Part D section 1851(b)(1)(A) of the Act, the Secretary may provide 
exceptions to the general rule that an individual is eligible to enroll 
in a PDP serving the geographic area in which the individual resides. 
We note also that section 1860D-1(b)(1)(B) of the Act directs us to 
adopt enrollment rules ``similar to,'' but not necessarily identical 
to, those under Part C, giving us some flexibility to modify the Part C 
enrollment rules as appropriate. We believe that incarcerated 
individuals should be ineligible to enroll in a PDP. We therefore 
provide in Sec.  423.4 of the proposed rule that a PDP's service area 
would exclude areas in which incarcerated individuals reside (that is, 
a correctional facility).
    Were we not to adopt these rules, individuals who are incarcerated 
or who live outside of the U.S. and who fail to enroll in a PDP or MA-
PD when first eligible, or remain enrolled thereafter, would face a 
late enrollment penalty if they later decide to enroll in Part D. In 
accordance with section 1860D-13(b) of the Act and Sec.  423.46 of the 
proposed rule, individuals are subject to a late penalty if there is a 
continuous period of eligibility of at least 63 days, beginning after 
the termination of the individual's initial enrollment period, during 
which the individual was not enrolled in a PDP or MA-PD plan. Thus, in 
order to avoid such a penalty, these individuals would have to enroll 
in a PDP or MA-PD, but would not be able to avail themselves of the 
plan's services while they are incarcerated or outside of the plan's 
service area. Under our proposed rule, individuals residing outside the 
U.S. and incarcerated individuals would be ineligible to enroll in a 
PDP. Thus, there would not be a continuous period of eligibility of at 
least 63 days during the time of the individuals' residency abroad or 
incarceration. Consequently, these individuals would not need to enroll 
in Part D in which they would not be able to receive services or 
benefits in order to avoid the late penalty.
    Generally, a Part D eligible individual enrolled in an MA plan that 
does not provide qualified prescription drug coverage (that is, an MA-
PD plan) may not enroll in a PDP; however, there are two exceptions. 
Section 1860D-1(a)(1)(B) of the Act permits a Part D eligible 
individual who is enrolled in either a MA private fee-for-service plan 
(as defined in section 1859(b)(2) of the

[[Page 46638]]

Act) that does not provide qualified prescription drug coverage or an 
MSA plan (as defined in section 1859(b)(3) of the Act) to enroll in a 
PDP. We have provided for these exceptions in Sec.  423.30(b) of the 
proposed rule.
    Except as provided above, in accordance with section 1860D-
1(a)(B)(i) of the Act and as provided in 423.30(c) of the proposed 
rule, a Part D eligible individual who is enrolled in an MA-PD plan 
must obtain prescription drug coverage through that plan. In order to 
enroll in an MA-PD plan, a Part D eligible individual must also meet 
the eligibility and enrollment requirements of the MA-PD plan as 
provided in 42 CFR 422.50 through 422.68 of proposed regulations.
    As discussed in Sec.  423.859, section 1860D-3(a)(1) of the Act 
requires the Secretary to ensure that each Part D eligible individual 
will have available a choice of enrollment in at least two qualifying 
plans, at least one of which must be a PDP. If this choice is not 
available, in accordance with section 1860D-2(b) of the Act, a fallback 
prescription drug plan will be made available and individuals will be 
eligible to enroll in that fallback plan if eligible for Part D. As 
discussed in Sec.  423.855 of the proposed rule, a fallback 
prescription drug plan is a prescription drug plan offered by an 
eligible fallback entity that provides only standard prescription drug 
coverage (without supplemental benefits), provides access to negotiated 
prices, and meets the requirements for PDP sponsors (except as 
otherwise indicated), and other requirements specified by CMS.
2. Part D Enrollment Process (Sec.  423.34)
    Section 1860D-1(b)(1) of the Act requires that we establish a 
process for the enrollment, disenrollment, termination, and change of 
enrollment of Part D eligible individuals in prescription drug plans. 
The statute further requires that this process use rules similar to, 
and coordinated with, the enrollment, disenrollment, termination, and 
change of enrollment rule for MA-PD plans under certain provisions of 
section 1851 of the Act. As such, we have incorporated, where possible, 
the MA enrollment and disenrollment requirements provided under 42 CFR 
422.50-422.80. In accordance with section 1860D-1(b)(1)(C) of the Act, 
we would establish a process to automatically enroll a full benefit 
dual-eligible individual (as defined under section 1935(c)(6) of the 
Act) who has failed to enroll in a PDP or MA-PD plan by either the end 
of the individual's initial enrollment period or upon becoming dual 
eligible after his/her initial enrollment period. Prior to this 
automatic enrollment process, a widespread education and information 
campaign (described later in this subpart at Sec.  423.48) will equip 
full benefit dual eligible individuals with information designed to 
explain options and encourage these individuals to take an active role 
in their enrollment rather than wait to be automatically enrolled.
    An full benefit dual eligible individual who fails to enroll in a 
PDP or MA-PD would be automatically enrolled into a prescription drug 
plan that has a monthly beneficiary premium equal to or below the 
subsidy amount available to low-income beneficiaries in accordance with 
section 1860D-14(a)(1)(A) of the Act. This premium may not exceed the 
low-income benchmark premium amount established under section 1860D-
14(b)(2) of the Act. The calculation of the low-income benchmark 
premium is further described in Sec.  423.780(a) of the proposed rule.
    Section 1860D-1(b)(1)(c) of the Act also directs us to enroll full 
benefit dual eligible individuals who fail to elect a PDP or MA-PD plan 
on a random basis if more than one PDP within an area has a monthly 
beneficiary premium equal to or below the low-income benchmark premium. 
To ensure that each full benefit dual eligible individual will have 
access to at least one PDP in each region, section 1860D-14(b)(3) of 
the Act provides that the premium subsidy amount for eligible 
individuals (including full benefit dual eligible individuals) cannot 
be less than the lowest monthly beneficiary premium for a PDP in a 
region. A more detailed discussion of the premium subsidy is found at 
Sec.  423.780 of the proposed rule.
    Two major issues require resolution because the statutory 
provisions are inherently contradictory in their requirements. The 
first is how to provide qualified prescription drug coverage to those 
full benefit dual eligible individuals who are in an MA-only plan and 
who have failed to enroll in a PDP or MA-PD plan. The second issue is 
how to provide qualified prescription drug coverage to a full benefit 
dual eligible enrolled in the Medicare Advantage program when the 
premium for the MA-PD plan(s) offered by an individual's MA 
organization exceeds the low income benchmark premium. We discuss each 
of these issues below and request comments on how best to reconcile 
these conflicting provisions.
    A literal reading of section 1860D-1(b)(1)(C) of the Act would seem 
to preclude automatic enrollment of full benefit dual eligible 
individuals into MA-PD plans. The language requires automatic 
enrollment into a ``prescription drug plan'' whose premium meets the 
aforementioned requirements. However, section 1860D-1(a)(1)(B)(ii) of 
the Act precludes Part D eligible individuals enrolled in MA (not MA-
PD) plans (other than those in some private fee-for-service or MSA 
plans) from enrolling in PDPs. To reconcile this apparent conflict, we 
propose that that the reference in section 1860D-1(b)(1)(C) of the Act 
to ``prescription drug plans'' be interpreted as including both PDPs 
and MA-PD plans, thereby allowing automatic enrollment of an MA full 
benefit dual eligible into a MA-PD plan offered by the same MA 
organization offering his or her MA plan if the basic premium for such 
plan does not exceed the low-income benchmark premium amount.
    General principles of statutory interpretation require us to 
reconcile two seemingly conflicting statutory provisions whenever 
possible, rather than allowing one provision to effectively nullify the 
other provision. Consequently, when a statutory provision may 
reasonably be interpreted in two ways, we have an obligation to adopt 
the interpretation that harmonizes and gives full effect to competing 
provisions of the statute. The rationale for automatic enrollment is to 
ensure that full-benefit dual eligible individuals receive outpatient 
drug coverage under Part D because Medicaid will no longer provide 
medical assistance for covered Part D drugs to such individuals. For 
full benefit dual eligible individuals enrolled in MA plans, we believe 
this objective is best accomplished by enrolling them in one of the MA-
PD plans offered by their MA organization.
    To the extent that the MA-only portion of the MA-PD plan parallels 
the coverage under a full benefit dual eligible individual's MA plan, 
enrolling the individual in the MA-PD plan would be similar to 
permitting the individual to remain enrolled in the MA plan while 
simultaneously enrolling the individual in a PDP. In other words, 
enrolling the individual in a MA-PD plan offered by the same MA 
organization is, in effect, simply adding qualified prescription drug 
coverage to the individual's MA benefits. For this reason, we believe 
the reference to ``prescription drug plans'' in section 1860D-
1(b)(1)(C) of the Act should be interpreted as requiring enrollment of 
a full benefit dual-eligible into a plan that will provide the 
individual with Part D drug benefits in addition to any other benefits 
the individual receives under

[[Page 46639]]

Medicare, whether through Medicare Part A and/or Part B, or through 
enrollment in the Medicare Advantage program under Part C. We believe 
this interpretation promotes the policies underlying sections 1860D-
1(b)(1)(C) and 1860D-1(a)(1)(B)(ii) of the Act, giving full effect to 
both statutory provisions. However, in the above situation, if the 
basic premium for the MA-PD plan exceeds the low-income benchmark 
premium amount, under section 1860D-1(b)(1)(C) of the Act, we could not 
permit automatic enrollment of a full-benefit dual eligible into that 
MA-PD plan.
    One possible solution for an MA full benefit dual eligible enrolled 
in an MA organization in which all of its MA-PD premiums exceed the 
allowable amount might be to allow that individual to remain in the MA 
plan and to automatically enroll him or her into a PDP that meets the 
premium requirements. However, according to section 1860D-1(a)(1)(A) of 
the Act, only a part D eligible individual who is not enrolled in an MA 
plan may enroll in a PDP, thereby precluding this option.
    Another possibility would be to involuntarily withdraw MA full 
benefit dual eligible individuals from their MA plan, which would 
default them to Original Medicare and then automatically enroll them 
into a PDP. However, there is no statutory authority to involuntarily 
disenroll the individual from his or her MA plan. In fact, we believe 
doing so would violate section 1851(c)(3)(B) of the Act, which provides 
that an individual who makes an MA election is considered to have 
continued to have made this election until he or she voluntarily 
changes the election, or the plan is discontinued or no longer serves 
the individual's service area.
    Enrolling an MA full dual eligible individual whose MA 
organization's MA-PD plan premiums exceed the benchmark amount into a 
MA-PD plan offered by another MA organization whose premiums are equal 
to or below the benchmark would be problematic as well since this would 
violate section 1851(c)(3)(B) of the Act. In addition, this would not 
be possible if the monthly premium amount of any available MA-PD plan 
is greater than the low-income benchmark premium amount. Similarly, we 
believe that requiring these full benefit dual eligibles to disenroll 
from the Medicare Advantage program so that we may automatically enroll 
them into less expensive PDPs would violate section 1851(c)(3)(B) of 
the Act.
    One last option would be to allow the beneficiary to go without 
outpatient prescription drug coverage unless the beneficiary chooses a 
MA-PD plan on his or her own accord. We do not see this as a reasonable 
option because it appears to violate section 1860D-1(b)(1)(C) of the 
Act and would leave a vulnerable beneficiary without outpatient drug 
coverage. While the statute prescribes an automatic enrollment process 
for full benefit dual eligibles who fail to elect a PDP or MA-PD plan, 
it is important to note that such full benefit dual eligible 
individuals may decline the enrollment or change the enrollment if they 
so choose. One option for such a process could be to provide notice to 
the individual to allow him or her to choose another option. Since the 
statute affords full benefit dual eligible individuals a special 
election period, they would be able to make a change in their election 
of PDP or MA-PD plans. Furthermore, while automatic enrollment of these 
individuals could be restricted to plans with premiums at or below the 
low-income benchmark premium, these dual eligible individuals would not 
be restricted to electing only such plans. However, if they select a 
high premium plan, they would be responsible for paying the difference 
between the premium and the low-income subsidy amount.
    In implementing the automatic enrollment process for full benefit 
dual eligible individuals, we are considering which entity is best 
suited to perform the automatic and random enrollment function. The 
options include CMS or the State performing this function, or a 
contracted entity or entities on their behalf. If we (or a contractor 
on our behalf) performed the auto assignment, we would expect 
consistent, clear oversight of the process, thus making the process 
uniform nationally; this might also reduce the need to transmit data 
from CMS to the States. However, this would be highly dependent on 
receiving timely, accurate Medicaid eligibility data from States and 
would also make us responsible for a new national workload of 
indeterminate size. An alternative is for States (or their contracted 
entities) to be responsible for performing the automatic enrollment. 
This approach may be appropriate because States have experience with 
random assignments through their Medicaid programs and have more 
immediate access to changes in Medicaid eligibility. We would define 
random assignment, establish standards for notification, and so forth, 
to ensure consistency. If we were to pursue this option, we could 
consider this function as necessary for the proper and efficient 
administration of the State plan. We would need to provide States with 
accurate and timely Part D data. States could be compensated for this 
effort through Federal financial participation (FFP) in their 
administrative expenses or through contractual or other arrangements. 
We invite comment on the most appropriate method of performing 
automatic assignment of dual eligibles and the appropriate entity to do 
so.
3. Part D Enrollment Periods (Sec.  423.36)

a. General Enrollment Periods

    The MMA directs us to establish three coverage enrollment periods: 
(1) The initial enrollment period; (2) the annual coordinated election 
period; and (3) special enrollment periods (SEPs). Generally, in 
accordance with section 1860D-1(b)(2)(B) of the Act, the initial 
enrollment period for Part D is the same as the initial enrollment 
period established for Part B. Specifically, this period is the seven-
month period that begins three months before the month an individual 
first meets the eligibility requirements for Part B and ends three 
months after that first month of eligibility. However, if an 
individual's initial enrollment period for Part B ends prior to May 15, 
2006, his or her initial enrollment period under Part D will be 
extended to May 15, 2006. In addition, as part of the implementation of 
the Part D program, and in accordance with section 1860D-1(b)(2)(A) of 
the Act, we would establish an initial enrollment period for Part D 
from November 15, 2005, until May 15, 2006, for those individuals who 
are already eligible to enroll in a Part D plan as of November 15, 
2005.
Examples:

 
------------------------------------------------------------------------
Month individual first entitled to part   Initial enrollment period for
        A or  enrolls in part B                       part D
------------------------------------------------------------------------
June 1, 2005...........................  November 15, 2005-May 15, 2006.
November 1, 2005.......................  November 15, 2005-May 15, 2006.
December 1, 2005.......................  November 15, 2005-May 15, 2006.

[[Page 46640]]

 
January 1, 2006........................  November 15, 2005-May 15, 2006.
February 1, 2006.......................  November 15, 2005-May 31, 2006.
May 1, 2006............................  February 1, 2006-August 31,
                                          2006.
June 1, 2006...........................  March 1, 2006-September 30,
                                          2006.
------------------------------------------------------------------------

    In accordance with section 1860D-1(b)(1)(B)(iii) of the Act, the 
annual coordinated election period for Part D is concurrent with the 
annual coordinated election period for the Medicare Advantage program 
under section 1851(e) of the Act. It is during this annual period in 
which all PDP plans must open enrollment to Medicare beneficiaries. For 
coverage beginning in 2006, the annual coordinated election period 
begins on November 15, 2005, and ends on May 15, 2006. As a result, the 
initial enrollment period for individuals who are eligible to enroll in 
a Part D plan as of November 15, 2005 and the annual coordinated 
election period will run concurrently during this time frame. The 
annual coordinated election period for MA and MA-PD plans will also 
occur during this time. In accordance with section 1851(e)(3)(B)(iv) of 
the Act, Sec.  423.36(b)(2) of our proposed rule provides that, for 
2007 and subsequent years, the annual coordinated election period would 
be November 15 through December 31 for coverage beginning on January 1 
of the following year.

b. Special Enrollment Periods

    The MMA also establishes special enrollment periods (SEPs). Special 
enrollment periods allow an individual to disenroll from one PDP and 
enroll in another PDP. Special enrollment periods are available as 
follows:
(i) Involuntary Loss, Reduction, or Non-notification of Creditable 
Coverage
    As discussed below in Sec.  423.56, Part D eligible individuals who 
fail to enroll in Part D during their initial enrollment period will 
not be subject to late penalties if they had creditable prescription 
drug coverage during the time they were not enrolled in Part D. Part D 
eligible individuals who involuntarily lose creditable prescription 
drug coverage, such as the loss of employment and associated health 
benefits, or the loss of coverage due to the death of a spouse, would 
have an SEP to enroll in a Part D plan, in accordance with section 
1860D-1(b)(3)(A) of the Act. Pursuant to section 1860D-1(b)(3)(A)(iii) 
of the Act, this SEP does not apply when the individual loses 
creditable coverage because of his or her failure to pay premiums for 
that coverage, since this would be considered a voluntary loss of 
coverage for purposes of this section.
    The SEP would also apply if the individual was never informed that 
the coverage that he or she had was not creditable or if current 
creditable coverage was reduced so that it was no longer creditable 
coverage under this part. In cases where the coverage is reduced, the 
SEP applies only when the current creditable coverage is reduced by the 
issuer or group through which the individual has such coverage. 
Therefore, if the covered individual voluntarily reduces the coverage, 
for example, to reduce his or her premium costs, this SEP would not 
apply because that action is voluntary.
(ii) Erroneous Enrollment
    Section 1860D-1(3)(B) of the Act provides for an SEP for an 
individual who has been subject to enrollment errors, similar to those 
provided for both Part A and Part B under section 1837(h) of the Act. 
We are using the same language provided for this SEP at Sec.  
423.36(c)(3) of the proposed rule as provided under Sec.  407.32, which 
establishes a special enrollment period for enrollment errors for Part 
B. Specifically, Sec.  407.32 refers to misrepresentation, inaction, or 
error by the Federal government that affects an individual's enrollment 
rights.
(iii) Individuals With Medicaid Coverage
    Section 1860D-1(b)(3)(D) of the Act provides an SEP for an 
individual who is eligible for both Medicare and full benefits under a 
State's Medicaid program, as those individuals are described in section 
1935(c)(6) of the Act. This would be available to individuals who are 
determined full benefit dual eligible after the initial enrollment 
period. This would also provide these individuals who have been 
automatically assigned to a plan the opportunity to change PDPs or MA-
PDs at any time.
(iv) Individuals Age 65
    During the Part D eligible individual's initial enrollment period, 
the individual has several options available, including remaining in 
original Medicare and enrolling in a PDP or enrolling in an MA-PD plan. 
Section 1860D-1(b)(3)(E) of the Act provides an SEP to an individual 
who enrolls in a MA-PD plan upon first becoming eligible for benefits 
under Part A at age 65 and then discontinues that enrollment and elects 
coverage under original Medicare and a PDP at any time during the 12-
month period beginning on the effective date of the MA-PD plan 
election. This specific provision applies only to an individual who 
elects an MA-PD plan during his or her initial enrollment period, as 
defined under section 1837(d) of the Act, which surrounds his or her 
65th birthday. This SEP will only apply to individuals who elect an MA-
PD plan, and does not pertain to individuals who elect an MA-only plan.
(v) Exceptional Circumstances
    Finally, in addition to providing for special enrollment periods as 
mentioned above, section 1860D-1(b)(3)(C) of the Act authorizes us to 
establish SEPs in exceptional circumstances. CMS has historically 
included in regulation those SEPs that have been specifically named in 
the statute and established the SEPs for exceptional circumstances in 
our manual instructions rather than through regulation. While we intend 
to continue establishing these exceptional SEPs through this process, 
we seek public input on other SEPs that should be considered through 
our manual process.
    In addition to those SEPs established by the MMA, we intend to 
apply certain SEPs established under the MA program. The SEPs that will 
be included from the MA program under this section will include the 
following conditions--
    (1) The PDP terminates its service area or is terminated in the 
area in which the individual resides;
    (2) The individual moves out of the plan's service area; or
    (3) The individual demonstrates to us, in accordance with 
guidelines that we establish, that the PDP offering the plan 
substantially violated a material provision of its contract with regard 
to the individual or the organization, its agent, representative, or 
the PDP materially misrepresented the plan's

[[Page 46641]]

provisions in marketing the plan to the individual.
    There is a disconnect issue between the enrollment period provided 
for individuals eligible to enroll in a Part D plan at section 1860D-
1(b)(1)(iii) of the Act and the open enrollment periods provided for MA 
eligible individuals under section 1851(e)(2) of the Act that we 
believe can be addressed through a special election period. Section 
1851(e)(2) of the Act provides for an open enrollment period for MA 
eligible individuals in which they may change their election once. 
Beginning in 2006, this period is limited to 6 months from January 
through June and in 2007, to 3 months, from January through March. The 
MMA, at Section 102 (a)(6), further limits individuals' elections 
during this open enrollment period to a specific ``type'' of plan. 
Specifically, an individual who is enrolled in an MA-PD plan may elect 
another MA-PD plan or elect original Medicare and a PDP, but cannot 
elect an MA-only plan. However, there is no corresponding enrollment 
period that would allow the individual to elect a PDP during this time. 
We propose to remedy this situation by establishing an SEP for these 
individuals under our aforementioned authority to establish SEPs for 
exceptional circumstances.
    In addition, section 1851(e)(2)(D) of the Act provides for a 
continuous open enrollment period for institutionalized individuals 
throughout the year. We also propose establishing an SEP for this 
through our exceptional circumstance authority in our manual 
instructions.
4. Effective Dates of Coverage and Change of Coverage (Sec.  423.38)
    Section 1860D-1(b)(1)(B)(iv) of the Act authorizes us to apply the 
effective date requirements provided under the MA program at section 
1851(f) of the Act. The three enrollment periods provided under Part D 
are the initial enrollment period, the annual coordinated election 
period, and special enrollment periods. The effective dates for these 
enrollment periods are as follows:

a. Initial Enrollment Period

    In accordance with section 1851(f)(1) of the Act, as incorporated 
into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an 
enrollment made during the initial enrollment period will generally be 
effective the first day of the calendar month following the month in 
which the individual enrolled in Part D. An enrollment made prior to 
the month of entitlement to or enrollment in Medicare benefits under 
Part A and/or Part B is effective the first day of the month the 
individual is entitled to or enrolled in Part A or Part B. Since the 
Part D provisions are not effective until January 1, 2006, we would 
clarify that in no case may enrollment in Part D be effective prior to 
this date. We are also clarifying that initial enrollments made between 
November 15 and December 31, 2005, will be effective January 1, 2006. 
An enrollment made during or after the month of entitlement to or 
enrollment in Medicare benefits under Part A and/or Part B is effective 
the first day of the calendar month following the month in which the 
enrollment in Part D is made. We have reflected these provisions in 
Sec.  423.38(a) of our proposed rule.

b. Annual Coordinated Election Period

    In accordance with section 1851(f)(2) of the Act, as incorporated 
into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an 
enrollment made during the annual coordinated election period is 
effective as of the first day of the following calendar year, that is, 
January 1st. We have reflected this provision in Sec.  423.38(b) of the 
proposed rule.

c. Special Enrollment Period

    A special enrollment period is effective in a manner that we 
determine to ensure continuity of health benefits coverage. We have 
reflected this provision in Sec.  423.38(c) of the proposed rule.
5. Coordination of Beneficiary Enrollment and Disenrollment Through 
PDPs (Sec.  423.42)
    Section 1860D-1(b)(1)(A) of the Act authorizes us to establish a 
process for enrollment in and disenrollment from prescription drug 
plans. We have outlined the coordination of enrollment and 
disenrollment through PDP organizations in the regulations at Sec.  
423.42. A Part D eligible individual who wishes to make, change, or 
discontinue an enrollment during applicable enrollment periods may do 
so by filing an enrollment with the PDP directly. We envision a paper 
enrollment form process and recognize the opportunity for other 
possible mechanisms that may prove secure, convenient for 
beneficiaries, and valuable to the efficient administration of the 
program. We request comments on other possible enrollment mechanisms 
that address data security and integrity, privacy and confidentiality, 
authentication, and other pertinent issues.
    We have added a provision at Sec.  423.42(e) of the proposed rule 
that would ensure that beneficiaries are not disenrolled from their PDP 
at the end of the calendar year. We are including this provision to 
clarify that beneficiaries will remain enrolled in their PDP without 
having to actively re-enroll in that PDP at the beginning of the 
calendar year.
6. Disenrollment by the PDP (Sec.  423.44)
    Section 1860D-1(b)(1)(B) of the Act generally directs us to use 
disenrollment rules similar to those established under section 1851 of 
the Act. We are applying the provisions of section 1851(g)(3) of the 
Act that provide authority for the basis of terminations for MA plans. 
We codify these in 42 CFR 422.74. The disenrollment provisions for PDPs 
are outlined in Sec.  423.44 of our proposed rules, including the basis 
for disenrollment--both optional and required--and guidance for notice 
requirements.
    Specifically, a PDP is required to disenroll an individual who 
dies, who no longer resides in the PDP's service area, loses 
entitlement or enrollment to Medicare benefits under Part A and is no 
longer enrolled in Part B, or who knowingly misrepresents to the PDP 
that he or she has received or expects to receive reimbursement for 
covered Part D drugs through third-party coverage. A PDP is also 
required to disenroll an individual if the PDP's contract is 
terminating.
    We are particularly interested in receiving comments about the 
requirement to disenroll individuals from a PDP if they no longer 
reside in the service area. Under the MA rules at 42 CFR 422.74, 
individuals who are out of the service area for more than 6 months will 
be disenrolled, unless the MA plan offers visitor or traveler benefits. 
We recognize the inherent difference between PDPs and MA plans (in 
particular, the range of services each provides) and that it may not be 
reasonable to apply the disenrollment requirements established under MA 
in the same way for PDPs. For example, while we have a limit on the 
length of time an MA enrollee may be out of the service area, this 
limit may not be necessary as long as there are specific assurances 
from the PDP that individuals will have access to PDP benefits while 
out of the area (provided the individual remains in the United States). 
For example, a regional PDP may either have a corporate or other 
relationship with a PDP in another region or have a network of 
pharmacies in other regions (or nationwide) that would provide access 
to prescription drugs outside of the region on the same basis as in-
network pharmacies within the enrollee's region of residence. We

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would appreciate any comments on this area.
    In addition to providing requirements for disenrollments that are 
required by the PDP, we also provide under Sec.  423.44(d) of our 
proposed rule that PDPs may disenroll individuals who do not pay 
monthly premiums or whose behavior is disruptive. However, we believe 
there are important beneficiary implications for those PDPs who 
disenroll individuals for these reasons. An individual who is 
disenrolled for failure to pay monthly PDP premiums, disruptive 
behavior, or misrepresentation of third party reimbursement will not be 
provided an SEP permitting him or her to enroll in another PDP. Since 
the individual generally will not be able to enroll in either a PDP or 
an MA-PD until the next annual coordinated election period, he or she 
may be subject to late enrollment penalties under Sec.  423.46 of the 
proposed rule.
    We plan to establish re-enrollment guidelines under the MA program 
for optional disenrollment for nonpayment of premium and disruptive 
behavior. We recognize, however, that this policy may not be 
appropriate for PDPs. If the individual is prohibited from re-enrolling 
in each of the MA plans available in an area, original Medicare is 
always available to provide and deliver services to that that 
individual. Under the PDP infrastructure, if the individual was 
prohibited from re-enrolling in each PDP available, there is no other 
option available. We would appreciate comments regarding the 
applicability of prohibiting re-enrollment in a PDP.
    As with the MA program, PDP sponsors will be required to provide 
proper notice to the beneficiary and afford him or her due process in 
accordance with the procedures outlined in our manual instructions. For 
example, a PDP that wishes to disenroll a beneficiary for disruptive 
behavior must receive prior approval from CMS and must demonstrate to 
CMS'' satisfaction that it has made a good faith effort to resolve the 
issue prior to requesting the disenrollment. CMS reviews these requests 
on a case-by-case basis, taking into account all of the facts and 
circumstances of a particular case, prior to making its decision. PDP 
sponsors must apply their policies for optional disenrollment for 
failure to pay premiums and disruptive behavior consistently among 
individuals enrolled in their plans, unless we permit otherwise, and 
must do so consistent with applicable laws regarding discrimination on 
the basis of disability.
7. Late Enrollment Penalty (Sec.  423.46)
    Section 1860D-13(b) of the Act establishes late enrollment 
penalties for beneficiaries who fail to maintain creditable 
prescription drug coverage for a period of 63 days following the last 
day of an individual's initial enrollment period and ending on the 
effective date of enrollment in a PDP or MA-PD. The calculation of the 
amount of the penalty is described in Sec.  423.286(d)(3) of our 
proposed rule. Specifically, the penalty amount for a Part D eligible 
individual for a continuous period of eligibility is the greater of an 
amount that CMS determines is actuarially sound for each uncovered 
month in the same continuous period of eligibility that is subject to 
this penalty; or 1 percent of the base beneficiary premium for each 
uncovered month in the period. An uncovered month is any month in which 
individual does not have creditable coverage at any time during that 
month. Because Part D is a voluntary benefit, it is susceptible to 
selection bias, where predominantly sicker beneficiaries, with higher 
than average prescription drug expenses enroll, and healthier, less 
expensive beneficiaries defer participation. Such a dynamic would make 
the initial premium levels higher than Congress expected at the time of 
MMA's enactment. Left unchecked, the selection bias would be 
exacerbated, potentially resulting in what has been called an insurance 
``death spiral.'' To ensure the affordability of the Part D benefit and 
the stability of the associated premium, we believe there is a strong 
public policy value in creating an incentive for immediate, widespread 
enrollment in this new, heavily subsidized benefit.
    The process for documenting creditable coverage is discussed in 
Sec.  423.56 of the proposed rule.
8. Part D Information That CMS Provides to Beneficiaries (Sec.  423.48)
    As provided under section 1860D-1(c)(1) of the Act, we would 
conduct activities designed to broadly disseminate information about 
Part D coverage to individuals who were either eligible or 
prospectively eligible for Part D benefits. This information would be 
made available to beneficiaries at least 30 days prior to their initial 
enrollment period as provided under Sec.  423.38 of our proposed rule. 
The information dissemination activities for Part D would be similar 
to, and coordinated with, the information dissemination activities that 
we currently perform for Medicare beneficiaries under sections 1851(d) 
and 1804 of the Act.
    As required under section 1860D-1(c)(3) of the Act, we would 
include the following comparative information with respect to qualified 
prescription drug coverage provided by PDPs and MA-PD plans as part of 
our dissemination of Part D information and our efforts to promote 
informed beneficiary decisions--
     Benefits and prescription drug formularies;
     Monthly beneficiary premium;
     Quality and performance;
     Beneficiary cost-sharing; and
     Results of consumer satisfaction surveys.
    We would not provide information on quality and performance or 
consumer satisfaction surveys during--
    (1) The first plan year; or
    (2) The next plan year if it were impracticable to obtain that 
information, or if the information were not available.
    As stated in section 1860D-1(c)(4) of the Act, we would also 
provide information to beneficiaries regarding the methodology we will 
use for determining late enrollment penalties, as provided in Sec.  
423.286(d) of our proposed rule.
    In carrying out the annual dissemination of Part D information, we 
anticipate conducting a significant public information campaign to 
educate beneficiaries about the new Medicare drug benefit and to ensure 
the broad dissemination of accurate and timely information. We would 
place an emphasis on ensuring that low-income individuals eligible for 
or currently enrolled in Part D benefits were aware of the additional 
benefits available to them and how to receive those benefits. In order 
to maximize the enrollment of Part D eligible individuals, this public 
information campaign would include outreach, information, mailings, and 
enrollment assistance with and through appropriate State and Federal 
agencies--including State health insurance assistance programs 
(SHIPs)--and would coordinate with other Federal programs providing 
assistance to low-income individuals. In addition, we would undertake 
special outreach efforts to disadvantaged and hard-to-reach 
populations, including targeted efforts among historically underserved 
populations, and coordinate with a broad array of public, voluntary, 
and private community organizations serving Medicare beneficiaries. 
Materials and information would be made available in languages other 
than English, where appropriate.
    We would require, as described in Sec.  423.48 of our proposed 
rule, that each organization offering a prescription drug plan or MA-PD 
plan provide us

[[Page 46643]]

annually with the information to disseminate to individuals who are 
currently or prospectively eligible for Part D benefits. This 
information would enable beneficiaries to make informed decisions 
regarding their Part D coverage options. Organizations offering a 
prescription drug plan or MA-PD plan would be required to provide this 
information in a format and to use standard terminology that we would 
specify in further operational guidance.
    Under the recently implemented Medicare Prescription Drug Discount 
Card and Transitional Assistance Program (42 CFR parts 403 and 408), we 
took the unprecedented step of establishing a price comparison Web site 
available through http://www.medicare.gov to provide beneficiaries with 
information about drug card sponsors' negotiated drug prices in actual 
dollars--including dispensing fee information--for the purpose of 
comparing negotiated prices across approved card programs. The prices 
and fees on the price comparison Web site reflect an estimate of the 
maximum prices beneficiaries will experience at the point of sale. The 
Web site also includes information about generic substitutes. In the 
interest of broadly disseminating information that promotes informed 
decision-making among Part D enrollees and prospective Part D 
enrollees, as required under section 1860D-1(c) of the Act, we propose 
extending the price comparison requirements to PDP sponsors and MA 
organizations offering MA-PD plans and making comparative information 
about Part D plans' negotiated prices available to beneficiaries 
through http://www.medicare.gov. Our drug card experience shows that 
providing drug price information can significantly reduce prices and we 
believe that information about negotiated drug prices will assist 
beneficiaries in deciding which Part D plan will offer them the 
greatest financial advantage. We propose building on our experience in 
implementing the drug discount card price comparison Web site as we 
develop requirements for the Part D price comparison Web site, and we 
are seeking comments on how to provide information in the drug benefit 
to help achieve maximum drug savings.
    Since the introduction of http://www.medicare.gov in 1998, CMS has 
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 
Medicare Modernization Act (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.
9. Approval of Marketing Materials and Enrollment Forms (Sec.  423.50)
    Section 1860D-1(b)(1)(B)(vi) of the Act directs CMS to use rules 
similar to those established under section 1851 of the Act to review 
PDP's marketing materials and application forms. While all entities 
with 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 provide such reference in this discussion.
    We are generally replicating the marketing provisions established 
under Sec.  422.80 for MA plans as appropriate for PDPs. Therefore, 
Sec.  423.50(a) of our proposed rule would provide guidance for our 
review of marketing materials, definition of marketing materials, 
deemed approval, and standards for PDP marketing.
    While we generally replicated MA provisions, we recognize that the 
differences between PDPs and MA plans may require different marketing 
requirements. For example, while we prohibit enrollment forms from 
being accepted in provider offices or other places where health care is 
delivered under the MA rules at 42 CFR 422.80, this may not be 
appropriate to extend to relationships between PDP sponsors and 
pharmacies with respect to marketing a PDP. We invite comment regarding 
the applicability of the MA marketing requirements to PDPs.
    We are proposing to add Sec.  423.50(a)(3) in order to establish a 
program that recognizes consistent compliance with marketing guidelines 
by providing for streamlined approval of marketing materials submitted 
by PDP sponsors that have demonstrated such 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 five days of 
submission to us for prior approval. Thus, under these circumstances, 
organizations only need submit material for our approval five days 
prior to their 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

[[Page 46644]]

budgeting for publication of these materials. Since PDPs will be new to 
the CMS marketing review process, we intend to not allow PDPs to 
qualify for the File & Use program until they have been in the program 
for a specified period of time, as determined by us, and establish 
consistent compliance with marketing guidelines.
    We are also aware that the ability to provide additional products 
(for example, financial services) to Medicare beneficiaries could 
provide additional tools to help beneficiaries manage their expenses 
and financial security, and could be a strong incentive for potential 
PDP sponsors to participate in Part D. We ask for comments on the 
advisability of allowing such products to be provided in conjunction 
with PDP services and the appropriate limitations on such activities. 
We note that in accordance with HIPAA privacy rules, the PDP sponsor 
may have to obtain beneficiary authorization to market certain 
products.
10. Information Provided to PDP Sponsors and MA Organizations
    Section 1860D-1(b)(4)(A) of the Act authorizes us to provide PDP 
sponsors and MA organizations with information about Part D eligible 
individuals so that their organizations may facilitate the marketing 
and enrollment of beneficiaries in their PDP and MA-PD plans and is 
intended solely for these purposes. That information is intended to 
assist in the outreach to individuals to ensure participation in the 
Part D program, as well as to reduce costs to those plans.
    While the statute provides us with broad authority to share 
information with PDPs and MA organizations, we have operational 
questions, especially regarding any potential adverse impact on 
beneficiaries. To the extent we were to share such information with PDP 
sponsors and MA organizations, should beneficiaries be given the 
ability to choose not to have their information shared with these 
entities? To the extent that such information is shared for purposes of 
marketing, should PDP sponsors and MA organizations be able to use this 
information to contact beneficiaries only through written 
communications, or should telephone contacts be permitted, and, if so, 
under what circumstances? We also have questions as to whether such 
information should be provided by CMS upon request, or only at 
specific, scheduled times during the year (for example, just prior to 
the Annual Coordinated Election Period). Further, we would like to know 
what specific information we could provide to PDP or MA organizations 
that would facilitate their marketing and enrollment activities. The 
new authority provided in section 1860D-1(b)(4)(A) of the Act gives us 
the ability to permit plans to interact with prospective enrollees on a 
different basis. At the extreme, plans would be permitted to market 
directly to Medicare beneficiaries, based on contact information we 
provide, using approved materials, but otherwise bypassing CMS. At the 
other extreme, current rules regarding the marketing activities of MA 
plans would remain unchanged. Because Part D is an entirely new, 
voluntary benefit that would not otherwise be available to 
beneficiaries absent positive enrollment, there arguably exists a 
compelling difference in beneficiary interests relative to marketing 
under Part D (including both PDP and MA-PDs) versus under Part C (for 
purposes of MA only). We therefore encourage input from the public on 
these specific concerns and the provision in general.
    While this section and discussion may appear to raise HIPAA Privacy 
rule issues with regards to disclosure of information between CMS and 
PDPs sponsors or MA-PD organizations, the statute explicitly provides 
for these activities. Therefore, the Privacy Rule, including the 
disclosure of protected health information, does not apply to the uses 
provided for by this section.
11. Procedures To Determine and Document Creditable Status of 
Prescription Drug Coverage (Sec.  423.56)
    Section 1860D-13(b)(6) of the Act identifies certain entities, 
which we describe in this section of our proposed rule, that must 
disclose whether the prescription drug coverage that they provide to 
their members who are Part D eligible is creditable coverage.
    Section 1860D-13(b)(4)(A)-(G) of the Act lists seven forms of 
creditable coverage: Coverage under a PDP or under an MA-PD; Medicaid; 
a group health plan (including coverage provided by a federal or a 
nonfederal government plan and by a church plan for its employees); a 
State pharmaceutical assistance program; veterans' coverage of 
prescription drugs, prescription drug coverage under a Medigap policy; 
and military coverage (including Tricare). Many of these terms are 
defined elsewhere in Federal regulations; some of them are under the 
jurisdiction of other Federal agencies. However, the definition of a 
Medicare supplemental (Medigap) policy, is under CMS' jurisdiction. 
This term is being clarified in subpart T of this regulation to 
coordinate with implementation of the Medicare prescription drug 
benefit.
    In addition to the forms of creditable coverage identified in 
section 1860D-13(b)(4)(A)-(G) of the Act, section 1860D-13(b)(4)(H) of 
the Act provides the Secretary with the flexibility to identify ``other 
coverage'' that could be considered to be creditable coverage. In 42 
CFR 423.56, we propose expanding the list of types of creditable 
coverage to include health insurance policies sold in the individual 
market (with the exception of policies that meet the definition of 
excepted benefits under section 2791 of the Public Health Service (PHS) 
Act, 42 U.S.C. 300gg-91). This category would include any policies that 
included prescription drug coverage, whether as part of a more 
comprehensive policy or as an independent ``stand-alone'' drug policy, 
that may have been sold to Medicare beneficiaries. Such stand-alone 
policies do not meet the definition of an excepted benefit under the 
Federal statute, even though States may regulate them as ``limited'' or 
``supplemental'' benefit plans. It would also include comprehensive 
individual market policies with drug coverage that may have been sold 
to individuals before they became eligible for Medicare.
    It is important to include these policies as creditable coverage. 
There are a variety of reasons why Medicare beneficiaries may have had 
individual market coverage, instead of Medigap coverage, after becoming 
eligible for Medicare. For example, as discussed in the preamble for 
subpart T, certain policies which will be regulated as Medigap policies 
after January 1, 2006, do not meet the definition of a Medigap policy 
prior to that date. Therefore they do not come within the scope of the 
statutory list of types of creditable coverage. Similarly, if an 
individual purchased a policy with prescription drug coverage before 
becoming eligible for Medicare, under title XXVII of the PHS Act, 42 
U.S.C. 300gg, et seq., the individual has a guaranteed right to 
continue to renew the policy. Again, while the policy might have met 
the definition of a Medigap policy had it been marketed and sold to 
Medicare beneficiaries, it does not meet those criteria, and does not 
come within the scope of the statutory list.
    We believe it is appropriate to give beneficiaries credit for this 
coverage, which does not fall within the scope of any of the types of 
creditable coverage listed in the statute, but which clearly fits 
within Congress' intent to provide credit for prior prescription drug 
coverage, and require that the individuals be informed of whether

[[Page 46645]]

their drug coverage is creditable and of the choices they will need to 
make relative to Part D enrollment.
    We are also adding coverage provided by the medical care program of 
the Indian Health Service, Tribe or Tribal organization, or Urban 
Indian organization (I/T/U) which is described under the Indian Health 
Improvement Act, 25 U.S.C. 1601 et seq. As a result of adding 
individual market and Indian Health Service coverage to the list of 
creditable coverage, beneficiaries with both of these types of drug 
coverage would receive notice of whether this coverage is creditable. 
We invite comments as to whether there are still more forms of coverage 
that we should consider creditable coverage.
    As discussed above in Sec.  423.46 of the proposed rule, upon 
becoming eligible for Part D, beneficiaries must decide whether to 
enroll in Part D, or forego that opportunity and face a possible 
financial penalty should they later decide to enroll. Beneficiaries who 
decide not to enroll in Part D because they have creditable 
prescription drug coverage would not face such a penalty if they later 
decide to enroll in Part D. According to section 1860D-13(b)(5) of the 
Act, an enrollee who would otherwise be subject to a late enrollment 
penalty may avoid the penalty if his or her previous coverage met the 
standards of ``creditable prescription drug coverage''. Under section 
1860D-13(b)(5) of the Act, previous coverage will only meet those 
standards ``* * * if the coverage is determined (in a manner specified 
by the Secretary) to provide coverage of the cost of prescription drugs 
the actuarial value of which (as defined by the Secretary) to the 
individual equals or exceeds the actuarial value of standard 
prescription drug coverage * * *''
    We are interpreting ``to the individual'' in this case as being to 
the average individual under the plan, as opposed to the sponsor of the 
plan. We believe that the relevant concern in this case is whether the 
beneficiary has been in a risk pool that on average provided benefits 
of equal value to Part D. Consequently, for purposes of determining 
creditable coverage, we are proposing to evaluate the actuarial value 
of the alternative coverage by means of a single test applied to all 
coverage: Will the expected plan payout on average under the coverage 
be at least equal to the expected plan payout under the standard 
benefit? For example, we propose to require sponsors of group health 
plans to determine the actuarial equivalency of each group health plan 
to the standard if, on average, the actuarial value of enrollee drug 
coverage under the plan as a whole is at least equal to the actuarial 
value of standard prescription drug coverage under Part D. (This 
approach set forth in Subpart R of this proposed rule concerning 
payments to sponsors of retiree prescription drug plans.) In other 
words, the calculation of actuarial equivalence would be based on the 
average plan payout across all benefit packages and all participants 
and beneficiaries receiving coverage under the sponsor's group health 
plan. We seek comments on our assumption that this approach is both 
familiar to employers (and unions) and imposes minimum burden on 
sponsors.
    We are also proposing that any entity seeking to offer creditable 
prescription drug coverage must attest to this actuarial equivalence 
(or non-equivalence) in their notice to Medicare beneficiaries and in a 
submission to CMS, and must maintain documentation of the actuarial 
analysis and assumptions supporting the attestation. In other words, we 
would not require CMS approval of this analysis, but would require that 
it be submitted to CMS and made available to participants upon request.
    In coordination with the provisions regarding the late enrollment 
penalty in Sec.  423.46 of our proposed rule, we would establish a 
process under which these entities would disclose the creditable status 
of their prescription drug coverage to us and to each part D eligible 
beneficiary enrolled in such coverage.
    We intend to describe the process for providing this disclosure, 
including guidance on the content, placement, and timing of the 
disclosure. The content of this notice and its timely receipt will be 
important components in the decision making process for beneficiaries, 
as the creditable status of the beneficiary's drug coverage will have a 
direct impact on the assessment of late enrollment penalties associated 
with Part D premiums. Equally important is the notification to the 
beneficiary of any subsequent changes in the creditable status of his 
or her coverage. Because beneficiaries have a limited time in which to 
make decisions about their Part D coverage without facing a penalty, it 
is important that the notice of creditable status be provided in a 
timely and conspicuous manner. However, we are also concerned about the 
potential administrative burden imposed by this requirement and are 
therefore soliciting comments on the format, placement, and timing of 
such a notice.
    There are several approaches we will consider. One approach would 
be to incorporate the required disclosure into materials these entities 
routinely disseminate to their Part D eligible beneficiaries. We could 
provide standard language to be inserted into such materials. We would 
benefit from comments regarding the types of materials that could 
provide an appropriate vehicle for this purpose and ways to ensure that 
the notice is conspicuous and readily identified by recipients, 
particularly in those instances where the coverage is not creditable. 
Another approach would be to require each entity to issue a separate 
notice to each Part D eligible enrollee. This type of notice would be 
most conspicuous and would therefore increase the likelihood that 
beneficiaries would become aware of the creditable status of their 
prescription drug coverage. Because beneficiaries are subject to 
financial penalties for the failure to maintain creditable coverage 
when they enroll in Part D, a separate notice may better inform 
beneficiaries and ensure that they take appropriate action to avoid 
such penalties.
    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Pub. L. 101-93, requires that certain entities that offer 
health coverage provide covered individuals with a document, called a 
``certificate of creditable coverage,'' that establishes the time 
period during which the coverage was in effect. Implementing 
regulations provide a model ``Certification of Creditable Coverage.'' 
Those regulations require that a certificate be produced and 
disseminated to individuals when their coverage ends. We have 
considered requiring that information about the creditable status of 
prescription drug coverage be included in this certification. However, 
since the certification required under HIPAA is not required to be 
provided until after such coverage has ended (or upon request), it 
would arrive too late to assist beneficiaries in deciding whether to 
enroll in Part D. However, the HIPAA certification may serve as a 
useful model and we invite comments about the administrative burden 
associated with producing and disseminating a similar notice of 
creditable status to beneficiaries.
    The timing and frequency of these notices is also a key 
consideration. The initial notice of creditable status could be 
coordinated with the first Annual Coordinated Enrollment Period for 
Part D, which begins November 15, 2005, to ensure that beneficiaries 
have this information when making decisions regarding their Part D 
coverage. Another option would be to coordinate this disclosure with 
the end of the first Part

[[Page 46646]]

D initial enrollment periods and the annual coordinated election 
period, both of which end May 15, 2006. Beneficiaries would also need 
to know about any change in the creditable status of existing coverage 
before such a change becomes effective so that they have sufficient 
time to decide whether to obtain Part D coverage. If a beneficiary's 
creditable drug coverage ends or is changed to the extent that it is no 
longer creditable, the beneficiary has a Special Enrollment Period 
(SEP) during which the beneficiary can enroll in Part D without 
financial penalty. Thus, we believe that such notice should be 
provided, at a minimum, at these two important times, as well as upon 
the beneficiary's request.
    We invite comments on how best to ensure that beneficiaries receive 
timely and adequate notice of the creditable status of their 
prescription drug coverage without imposing a significant 
administrative burden on entities that provide such coverage. We also 
note that the statute requires entities to disclose the creditable 
status of this coverage to us, and we invite comments on the possible 
methods of providing such disclosure. Given the importance of knowing 
whether coverage constitutes ``creditable coverage,'' we would like to 
receive feedback regarding whether it would be a significant 
administrative burden for group health plans and other sponsors to 
include in disclosures an indication of the value of their drug 
benefit, the total amount of the annual premium for their drug benefit, 
and the amount of the annual drug benefit premium that the beneficiary 
will be required to pay.
    Section 1860D-13(b)(6)(C) of the Act provides that an individual 
who was not adequately informed that his or her prescription drug 
coverage was not creditable may apply to CMS to have such coverage 
treated as creditable coverage for purposes of not having the late 
penalty imposed. We envision establishing a process in which an 
individual could apply for reconsideration of the late enrollment 
penalty based upon not being adequately informed. In this process, we 
would instruct beneficiaries as to the type of information that should 
be submitted as well as where the beneficiaries should submit the 
information. The process could also include CMS, or an entity with 
which CMS may contract, receiving and reviewing information related to 
the reconsideration, including validating that the entity in which the 
individual had previously been covered had provided the required 
disclosure. We appreciate comment on this process.

C. Voluntary Prescription Drug Benefit and Beneficiary Protections

1. Overview and Definitions (Sec.  423.100)
    Subpart C of part 423 implements sections 1860D-2, 1860D-4(a), 
1860D-4(b), 1860D-4(i), 1860D-4(k), 1860D-11(a), 1860D-21(a), 1860D-
21(c)(3), and 1860D-21(d)(2) of the Social Security Act. This subpart 
sets forth requirements regarding--
     The benefits offered by PDP sponsors and MA organizations 
that offer qualified prescription drug coverage.
     The establishment of prescription drug plan service areas.
     Access standards with regard to covered Part D drugs.
     Information dissemination by PDP sponsors and MA 
Organizations offering qualified prescription drug coverage.
     Disclosure to beneficiaries of pricing information for 
generic versions of covered Part D drugs.
     Privacy, confidentiality, and accuracy of PDP sponsors' 
beneficiary records.
    Section 423.100 of our proposed rule also includes definitions for 
terms that are frequently used in this subpart. Generally, we clarify 
the definitions in Sec.  423.100 in the relevant parts of section II.C 
of this preamble. However, we believe that additional clarification is 
needed with regard to the terms ``covered Part D drug'' and 
``dispensing fee'' in order to provide necessary context for the Part D 
benefit requirements in this subpart. We are providing that 
clarification below.

a. Covered Part D Drug

    The definition of a covered Part D drug in Sec.  423.100 of our 
proposed rule closely follows the statutory definition in section 
1860D-2(e) of the Act. According to this definition, a covered Part D 
drug must be available only by prescription, approved by the Food and 
Drug Administration (FDA), used and sold in the United States, and used 
for a medically accepted indication (as defined in section 1927(k)(6) 
of the Act). A covered Part D drug would include prescription drugs, 
biological products, and insulin as described in specified paragraphs 
of section 1927(k) of the Act and vaccines licensed under section 351 
of the Public Health Service Act. The definition also includes 
``medical supplies associated with the injection of insulin (as defined 
in regulations of the Secretary).'' We propose to define those medical 
supplies to include syringes, needles, alcohol swabs, and gauze.
    In accordance with section 1860D-2(e)(2) of the Act, the definition 
of a covered Part D drug would specifically exclude drugs or classes of 
drugs, or their medical uses, which may be excluded from coverage or 
otherwise restricted under Medicaid, with the exception of smoking 
cessation agents. In accordance with section 1927(d)(2) of the Act, the 
drugs or classes of drugs that may currently be excluded or otherwise 
restricted under Medicaid include--(1) Agents when used for anorexia, 
weight loss, or weight gain; (2) agents when used to promote fertility; 
(3) agents when used for cosmetic purposes or hair growth; (4) agents 
when used for the symptomatic relief of cough and colds; (5) 
prescription vitamins and mineral products, except prenatal vitamins 
and fluoride preparations; (6) nonprescription drugs; (7) outpatient 
drugs for which the manufacturer seeks to require that associated tests 
or monitoring services be purchased exclusively from the manufacturer 
or its designee as a condition of sale; (8) barbiturates; and (9) 
benzodiazepines. We are concerned that the aforementioned exclusion of 
outpatient drugs for which the manufacturer seeks to require that 
associated tests or monitoring services be purchased exclusively from 
the manufacturer (or its designee) as a condition of sale (item 7 
above) may prove too narrow to address inappropriate tying 
arrangements. We may consider expanding this exclusion and solicit 
public comments on how to reduce the risk of abusive tying 
arrangements.
    The definition of a covered Part D drug would also exclude any drug 
for which, as prescribed and dispensed or administered to an 
individual, payment would be available under Parts A or B of Medicare 
for that individual (even though a deductible may apply). By including 
the language ``as so prescribed and dispensed or administered,'' 
section 1860D-2(e)(B) makes a distinction between what would be paid 
for under Part D as opposed to Part B. This language indicates that 
Congress was aware that some covered Part D drugs could qualify for 
payment under Part B in some circumstances and Part D in other 
circumstances, depending on the way those drugs were dispensed or 
administered. Dispensation or administration should be interpreted to 
include the setting, personnel, and method involved, and not simply the 
route of administration.
    One goal of Part D is to fill any gaps in existing Part B coverage 
of drugs. Part B has a limited and specific drug benefit covering drugs 
furnished ``incident to'' a physician's service (for example, certain 
injectable drugs that are not usually self-administered and furnished 
incident to

[[Page 46647]]

a physician office visit); drugs furnished as a supply to covered items 
of durable medical equipment; certain oral drugs (immunosuppressive, 
and certain oral anti-cancer and anti-emetic drugs); certain 
immunizations; and several other drugs and biologicals. Part D cannot 
pay for these drugs because payment is available under Part B.
    Section 1860D-2(e)(2)(B) of the Act that specifies that a drug 
prescribed to a Part D eligible individual that would otherwise qualify 
as a Part D drug cannot be considered a covered Part D drug if payment 
for such drug ''* * * is available (or would be available but for the 
application of a deductible) under part A or B for that individual.'' 
We interpret this to mean that if payment could be available under Part 
A or B to the individual for such drug, then it will not be covered 
under Part D. This will be the case even if a beneficiary has Part A, 
but not Part B or vice versa, since, as we explain in section F of this 
preamble and at Sec.  423.265(c) of the Act, PDP sponsors must offer a 
uniform benefit package in order to carry out Congress's intent in 
section 1860D-13(a)(1)(F) of the Act. If Part B covered drugs were 
included in the Part D benefit package only for those enrollees without 
Part B, but not for others, it would not be possible for PDP sponsors 
to offer uniform benefit packages for a uniform premium to all 
enrollees. In addition, we believe that payment for a drug under Part A 
or B is available to any individual who could sign up for Parts A or B, 
regardless of whether they actually enrolled. All individuals who are 
entitled to premium-free Part A are eligible to enroll in Part B. This 
includes individuals who are entitled to Part A based on age, 
disability, and ESRD. All individuals who are entitled to Part B only 
are age 65 or older and, in almost all instances, not eligible for 
premium-free Part A. However, they are eligible to buy into Part A for 
a premium. Thus, for all Part D eligible individuals, drugs covered 
under Parts A and B are available if they choose to pay the appropriate 
premiums.
    We believe that the phrase ``for that individual'' in 1860D-
2(e)(2)(B) of the Act is intended to capture the fact that under local 
medical review policies (LMRPs), a drug that might be covered under 
Part B for an individual in one area of the country might not be 
covered in another area of the country. Thus, what is covered ``under 
Part B for that individual'' may be, as discussed earlier, different in 
different geographic regions. Under this reading, in a region where a 
drug is covered under Part B, it would be considered ``available'' to 
``that individual'' whether he or she had elected to enroll in Part B 
or not.
    The Part D drug coverage described in this proposed rule does not 
alter the coverage or associated rules for drugs that are currently 
covered by Medicare prior to the MMA, such as those included in the 
following list, which offers examples but is not meant to be 
exhaustive--
    1. Drugs furnished incident to a physician's service that are not 
usually self-administered by the patient.
    2. Drugs used in immunosuppressive therapy furnished to a 
beneficiary who receives an organ transplant for which Medicare makes 
payment.
    3. Drugs administered to ESRD patients and separately billed by 
dialysis facilities. These would include erythropoetin (EPO), both when 
administered in the dialysis facility or furnished to an ESRD patient 
for self-administration.
    4. Drugs taken orally during cancer chemotherapy provided that they 
have the same active ingredients as chemotherapy drugs and are used for 
the same indications as chemotherapy drugs which would be covered if 
they were not self-administered and were administered as incident to a 
physician's professional service, and certain oral drugs prescribed for 
use as an acute antiemetic as part of an anticancer chemotherapeutic 
regimen if the drug is administered by a physician.
    5. Blood clotting factors for hemophilia patients competent to use 
such factors to control bleeding without medical supervision, and items 
related to the administration of those factors.
    6. Supplies (including drugs) necessary for the effective use of 
covered durable medical equipment, including those which must be put 
directly into the equipment and furnished to a beneficiary via the 
equipment (for example, amphotericin B, an anti-fungal agent, 
administered with an infusion pump, or inhalation drugs furnished to a 
beneficiary via a nebulizer).
    7. Pneumococcal pneumonia vaccines, hepatitis B vaccines, and 
influenza virus vaccines.
    We intend to ensure that the Part D benefit ``wraps around'' Part B 
drug benefits to the greatest extent possible. For example, Part D 
would cover immunosuppressive drugs furnished to Medicare beneficiaries 
who did not have their transplant paid for by Medicare (e.g., a 
beneficiary who had his or her transplant paid for by a private insurer 
when he or was employed, and the beneficiary has now enrolled in Part 
B). Part D could pay for these immunosuppressive drugs for these 
beneficiaries since Part B is prohibited by statute from paying for 
them. Therefore, we are soliciting comments concerning any drugs that 
may require specific guidance with regard to their coverage under Part 
D, and any gaps that may exist in the combined ``Part D & B'' coverage 
package.

b. Dispensing Fees

    The Medicare Modernization Act (MMA) does not define the term 
``dispensing fee,'' although the terms ``dispensing fee'' and 
``dispense'' appear several times throughout the Act. Section 1860D-
2(d)(1)(B) states that negotiated prices available under Part D, 
``shall take into account negotiated price concessions * * * and 
include any dispensing fees for such drugs.'' Sections 1860D-15(b)(3) 
and (e)(1)(b) of the Act provide that reinsurance and risk corridor 
payments will be based on allowable costs that include ``costs directly 
related to the dispensing of covered part D drugs during the year.'' 
The costs used in calculating the retiree drug subsidy also include the 
``costs directly related to the dispensing of covered part D drugs 
during the year'' as provided in section 1860D-22(a)(3)(C)(ii) of the 
Act. Section 1860D-2(e)(1)(B) of the Act specifically includes the 
medical supplies associated with the injection of insulin (as defined 
in our proposed rule); this is the only reference to supplies 
associated with drug administration in the Part D drug benefit 
provisions of the MMA.
    Because the statute is ambiguous on the meaning of ``dispensing 
fee,'' in this proposed rule we are not proposing a specific definition 
of ``dispensing fee,'' but instead are offering three different options 
we believe would be reasonable, permissible definitions of the term. We 
invite comments on each of the definitions proposed below.
    Option 1: The dispensing fee would include only those activities 
related to the transfer of possession of the covered Part D drug from 
the pharmacy to the beneficiary, including charges associated with 
mixing drugs, delivery, and overhead. The dispensing fee would not 
include any activities beyond the point of sale (that is, pharmacy 
follow-up phone calls) or any activities for entities other than the 
pharmacy.
    Option 1 would differentiate between ``dispensing'' a covered Part 
D drug and ``administering'' one in order to restrict the scope of 
these fees to include only those charges for pharmacy services related 
to the preparation and delivery of a covered Part D drug. Under option 
1, the dispensing fee could not include

[[Page 46648]]

any charges associated with administering the drug once the drug has 
already been transferred to the beneficiary. Thus, for example, the fee 
would not include any professional fees (such as skilled nursing 
services), durable medical equipment (such as an external infusion pump 
or an IV pole), supplies (such as tubes and dressings), or even follow-
up telephone calls from the pharmacy to the patient to check on the 
patient's progress with the drug.
    Option 2: The dispensing fee would include the activities included 
in Option 1, but in addition would include amounts for the supplies and 
equipment necessary for the drugs to be provided in a state in which 
they can be effectively administered.
    Option 3: The dispensing fee would include the activities in Option 
2, but in addition would include activities associated with ensuring 
proper ongoing administration of the drugs, such as the professional 
services of skilled nursing visits and ongoing monitoring by a clinical 
pharmacist.
    Our proposed options 2 or 3 would also frame the definition so that 
supplies, equipment, and the professional services associated with 
administering the drug would be limited to cases where: (a) A typical 
patient with the condition at issue could not receive the benefit of 
the medication in the absence of the associated supplies, equipment or 
professional services, and (b) the patient is receiving home infusion 
therapy.
    We believe that option 1 represents the best reading of the 
statute, since it would limit dispensing fees to a transfer of 
possession of the drug and would not include any fees associated with 
administering the drug. In addition, where Congress wished for CMS to 
include the cost of supplies under Part D, it specifically directed CMS 
to do so (by requiring that the supplies associated with the injection 
of insulin be included in the definition of covered Part D drug).
    However, we also recognize that options 2 or 3 would eliminate 
current gaps in coverage relative to home infused drugs. We have 
limited options 2 and 3 to cases of home infusion because this is the 
only circumstance we know of where the additional services associated 
with administering the drug would not already be covered under Medicare 
Part A or B and would be necessary to ensure effective delivery of the 
drug. (For example, infusion therapy provided in a hospital outpatient 
setting or in a physician office could be covered under Part B. 
Infusion therapy by a hospice could be covered as part of the hospice 
benefit, if a patient meets the conditions for hospice care.) However, 
there may be related issues with respect to the administration of other 
drugs (for example, vaccines and injectable long-acting antipsychotic 
drugs), and we solicit comments regarding any implications for our 
proposed options for defining dispensing fees.
    Home infusion therapy equipment, supplies, and services typically 
are used in order to administer medications to patients using 
intravenous, subcutaneous, and epidural routes. Drug therapies commonly 
administered via infusion include antibiotics, chemotherapy, pain 
management, parenteral nutrition and immune globulin. Generally, home 
infusion therapy includes coordinating the varied services a patient 
might need in order to receive infusion in the home. For example, a 
home infusion company might provide, or facilitate the provision of, 
skilled nursing services, durable medical equipment (such as an 
external infusion pump or an IV pole), supplies (such as tubes and 
dressings), education of the patient, pharmacy services (including 
mixing the drugs if necessary), and delivery services. A home infusion 
company might also call the patient periodically to monitor care. Based 
on our research, home infusion is covered under the medical benefits of 
most commercial insurers and MA plans as a cost-effective alternative 
to inpatient care for administering drugs that cannot be self-
administered for treatment of acute or chronic medical conditions in 
patients who are sufficiently ill to be unable to visit an outpatient 
clinic or physician's office to receive the necessary therapy. Home 
infusion providers generally bill private insurance plans for these 
services by billing separately for the drug, and also charging a per 
diem for other services. The per diem charge represents the average 
daily expense associated with non-pharmaceutical expenses (including 
nursing services), such as equipment, supplies, labor, and non-nurse 
clinical services involved in the compounding, preparation, delivery, 
administration, and monitoring for a given drug therapy.
    While Parts A and B pay for some home infusion therapies (through, 
for example, the drugs and supplies that are provided incident to the 
provision of a home infusion pump), in other cases home infusion 
therapies would not be covered by Medicare Parts A and B (for example, 
when the drug is administered in the home through an intravenous drip 
and not a pump). In addition, infusion therapy policies may vary from 
region to region based on local DMERC coverage policies.
    Options 2 and 3 would therefore allow us to include in the Part D 
dispensing fee items and services that might be considered essential in 
order to effectively utilize the drug benefit. However, it would also 
extend the definition of dispensing fee beyond the mere transfer of 
possession of the drug. Also, to the extent that professional services 
are included in the definition of dispensing fees, we are concerned 
about double billing with regard to some of the skilled nursing costs 
associated with home infusion. In many cases these skilled nursing 
costs are separately billable to Part A, Medicaid, or supplemental 
insurance, and we are concerned about Part D supplanting these other 
sources of payment. In addition, as discussed in subpart D of this 
preamble, PDP sponsors and MA organizations offering MA-PD plans will 
be required to offer quality assurance and medication therapy 
management programs. These programs could be used for pharmacies to 
follow up with patients and ensure that patients are properly 
administering their drugs or adhering to their drug regimens. We are 
concerned about beneficiaries being charged for quality assurance 
services as part of the dispensing fee, when such charges might have 
already been included in the cost of the premium.
    Finally, we note that any definition we adopt for purposes of Part 
D would not carry over to Part B of the Medicare program. Section 
1842(o)(2) of the Act gives the Secretary discretionary authority to 
pay a dispensing fee to a licensed pharmacy that furnishes certain 
covered Part B drugs and biologicals to Medicare beneficiaries. While 
the term ``dispensing fee'' is not defined in section 1842(o)(2) of the 
Act, the considerations under Medicare Part B, a more comprehensive 
health insurance product that has separate payment mechanisms for 
durable medical equipment and professional services, are different from 
those under Part D. In addition, the Secretary is not required to pay 
any dispensing fee under section 1842(o)(2) of the Act, while in Part 
D, the dispensing fee is included in the negotiated price of a drug.

c. Long-Term Care Facility

    We request comments regarding our definition of the term long-term 
care facility in Sec.  423.100, which we have interpreted to mean a 
skilled nursing facility, as defined in section 1819(a) of the Act, or 
a nursing facility, as defined in section 1919(a) of the Act. We are

[[Page 46649]]

particularly interested in whether intermediate care facilities for the 
mentally retarded or related conditions (ICF/MRs), described in Sec.  
440.150, should explicitly be included in this definition given 
Medicare's special coverage related to mentally retarded individuals. 
It is our understanding that there may be individuals residing in these 
facilities who are dually eligible for Medicaid and Medicare. Given 
that payment for covered Part D drugs formerly covered by Medicaid will 
shift to Part D of Medicare, individuals at these facilities will need 
to be assured access to covered Part D drugs. Our proposed definition 
limits our definition to skilled nursing and nursing facilities because 
it is our understanding that only those facilities are bound to 
Medicare conditions of participation that result in exclusive contracts 
between long-term care facilities and long-term care pharmacies. 
However, to the extent that ICF/MRs and other types of facilities 
exclusively contract with long-term care pharmacies in a manner similar 
to skilled nursing and nursing facilities, we would consider modifying 
this definition.
2. Requirements Related to Qualified Prescription Drug Coverage (Sec.  
423.104)
    Under section 1860D-11(e)(2)(A) of the Act, we may approve as PDP 
sponsors or MA organizations offering MA-PD plans only those entities 
proposing to offer qualified prescription drug coverage in accordance 
with our requirements. As provided in section 1860D-2(a)(1) of the Act 
and Sec.  423.104(d) of our proposed rule, qualified prescription drug 
coverage may consist of either standard prescription drug coverage or 
alternative prescription drug coverage. Alternative prescription drug 
coverage may include supplemental benefits, and this coverage is 
referred to as ``enhanced alternative coverage'' (these concepts are 
discussed in detail below).
    We would review and approve current and potential PDP sponsors' 
proposed prescription drug plans and current and potential MA 
organizations' proposed MA-PD plans consistent with the rules described 
in section II.F.6 of this preamble. We will further articulate 
requirements regarding the approval of qualified prescription drug 
coverage in written policy guidelines and other CMS instructions.
    Section 1860D-1(b)(1) of the Act provides that we establish an 
enrollment process for prescription drug plans that uses rules similar 
to, with limited exceptions, those governing enrollment in an MA plan 
under various subsections of 1851 of the Act, including portions of 
1851(g). Section 1851(g)(1) of the Act provides that an MA organization 
must accept without restrictions individuals who are eligible to elect 
enrollment in its MA plan. Accordingly, section Sec.  423.104(b) of our 
proposed rule provides that a PDP sponsor offering qualified 
prescription drug coverage would be required to offer its plan to all 
Part D eligible individuals residing in the plan's service area. We 
note that, unlike a local MA-PD plan, a prescription drug plan is not 
eligible for a capacity waiver as described in 42 CFR 422.60(b) of our 
proposed rule.

a. Standard Prescription Drug Coverage

    As provided under section 1860D-2(b) of the Act and codified in 
Sec.  423.104(e) of our proposed rule, ``standard prescription drug 
coverage'' would consist of coverage of covered Part D drugs subject to 
an annual deductible; 25 percent coinsurance (or an actuarially 
equivalent structure) up to an initial coverage limit; and catastrophic 
coverage after an individual incurs out-of-pocket expenses above a 
certain threshold. In 2006, the annual deductible would be $250, the 
initial coverage limit would be $2,250, and the out-of-pocket threshold 
would be $3600. Once a Part D enrollee reached the annual out-of-pocket 
threshold, his or her nominal cost-sharing would be equal to the 
greater of: (1) 5 percent coinsurance, or (2) a copayment of $2 for a 
generic drug or a preferred multiple source drug and $5 for any other 
drug, or an actuarially equivalent structure. (See Table C-1 for a 
summary version of standard prescription drug coverage benefits for 
2006.)
    A multiple source drug is defined under section 1927(k)(7)(A)(i) of 
the Act as a drug for which there are two or more drug products that 
are (1) rated as therapeutically equivalent by the Food and Drug 
Administration (FDA), (2) are pharmaceutically equivalent and 
bioequivalent, as defined in section 1927(k)(7)(C) of the Act, and as 
determined by the FDA, and (3) are sold or marketed in a State during 
the relevant time period. Section 423.100 of our proposed rule provides 
definitions for therapeutically equivalent and bioequivalent drugs 
based on the definitions provided in sections 1927(k)(7)(A) of the Act 
and section 505(j)(8) of the Food, Drug, and Cosmetic Act, 
respectively. The term therapeutically equivalent refers to drugs that 
are rated as therapeutic equivalents under the Food and Drug 
Administration's most recent publication of ``Approved Drug Products 
with Therapeutic Equivalence Evaluations.'' Section 423.4 of our 
proposed rule defines a generic drug as a drug for which an application 
under section 505(j) of the Federal Food, Drug, and Cosmetic Act is 
approved. To clarify, generic drugs are both bioequivalent and 
therapeutically equivalent to an innovator drug. Section 423.100 of our 
proposed rule also clarifies that a preferred drug refers to a covered 
Part D drug on a prescription drug plan or MA-PD plan's formulary for 
which beneficiary cost-sharing is lower than for a non-preferred drug 
on the formulary.
    According to section 1860D-2(b)(4)(C) of the Act, and as defined in 
Sec.  423.100 of the proposed rule, beneficiary costs for covered Part 
D drugs are only considered incurred (for purposes of applicability 
toward beneficiary spending against the annual out-of-pocket limit) if 
they are--
    1. Incurred against any annual deductible, any applicable cost-
sharing for costs above the annual deductible and up to the initial 
coverage limit, and any applicable cost-sharing for costs above the 
initial coverage limit and up to the out-of-pocket threshold;
    2. Incurred by the Part D enrollee (or by another person on behalf 
of that individual); paid on behalf of a low-income individual under 
the Part D subsidy provisions described in Sec.  423.782 of the 
proposed rule; or paid on behalf of the enrollee under a State 
Pharmaceutical Assistance Program (SPAP) described in Sec.  423.454 of 
the proposed rule; and
    3. Incurred with respect to covered Part D drugs that are either 
included in a prescription drug plan or MA-PD plan's formulary or 
treated as being included in a plan's formulary as a result of a 
coverage determination, redetermination, or appeal under Sec. Sec.  
423.566, 423.580, and 423.600 of our proposed rule.
    As a point of clarification, we also propose that beneficiary costs 
incurred under the following circumstances count as incurred costs 
consistent with the definition of that term in Sec.  423.100 of our 
proposed rule (with plans explicitly accounting for such price 
differentials in the actuarial valuation of their coinsurance in their 
bids):
     Any differential between a network retail pharmacy's 
negotiated price and a network mail-order pharmacy's negotiated price 
for an extended (for example, 90-day) supply of a covered Part D drug 
purchased at a retail pharmacy, as described in section II.C.4.a of 
this preamble, and
     Any differential between an out-of-network pharmacy's 
usual and customary price for a covered Part D

[[Page 46650]]

drug purchased in accordance with the out-of-network access rules 
described in section II.C.5 of this preamble and the plan allowance for 
that covered Part D drug.
    Section 1860D-2(b)(4)(C)(ii) of the Act provides that any costs for 
which a Part D individual is reimbursed by insurance or otherwise, a 
group health plan, or another third-party payment arrangement do not 
count toward incurred costs; only costs paid by a Part D enrollee, or 
on behalf of a Part D enrollee by another person, would count as 
incurred costs. This provision thus creates a distinction between all 
enrollee out-of-pocket expenditures and those that are counted toward 
the out-of-pocket threshold (incurred costs).
    In Sec.  423.100 of our proposed rule, we define the terms 
``person,'' ``insurance or otherwise,'' ``group health plan,'' and 
``third-party payment arrangement'' in such a way as to strike what we 
believe to be an appropriate balance between: (1) allowing certain 
individuals or charitable organizations to provide financial assistance 
to Part D enrollees that would be counted toward those enrollees' 
incurred costs, and (2) reducing incentives for current employers, 
other insurers, and government programs to reduce their current levels 
of coverage and replace that coverage with Part D wrap-around benefits, 
thereby requiring Medicare to pay for drug costs that were previously 
borne by other payers. We propose defining ``person'' in such a way 
that other individuals, such as family members, could pay for covered 
Part D drug cost-sharing on behalf of Part D enrollees. The term 
``person'' is also defined more broadly than a human being based on 
legal definitions of the term that include corporate entities or 
organizations. This definition of ``person'' is consistent with other 
statutory definitions of the term ``person,'' including 1 U.S.C. 1, 
which provides that in interpreting an Act of Congress, unless the 
context indicates otherwise, the term ``person'' includes corporations, 
companies, associations, firms, partnerships, societies, and joint 
stock companies, as well as individuals.
    We believe that bona fide charities unaffiliated with employers or 
insurers could not be excluded from financially assisting Part D 
enrollees with covered Part D drug expenditures and having those 
expenditures count toward enrollees' incurred costs. Although allowing 
such financial contributions to count toward incurred costs could 
increase Medicare expenditures by allowing more beneficiaries to 
qualify, and to qualify sooner, for coverage above the out-of-pocket 
threshold, we expect that the number of people who are both assisted by 
charitable organizations and have expenditures high enough to qualify 
for protection against high out-of-pocket expenditures would be small. 
Since there will be many Part D eligible beneficiaries with incomes 
higher than the low-income subsidy eligibility limits described in 
Sec.  423.782 of our proposed rule, we believe it is a desirable goal 
to allow appropriate charitable assistance to count toward enrollees' 
incurred costs. This interpretation is consistent with (1) our 
interpretation of the term ``person'' and (2) our interpretation of the 
terms ``insurance or otherwise,'' ``group health plan,'' and ``third-
party payment arrangement'' (as discussed subsequently in this preamble 
section). In addition, we note that any arrangements pursuant to which 
a charitable organization pays a Medicare beneficiary's cost-sharing 
obligations must comply with the Federal fraud and abuse laws, 
including the anti-kickback statute, section 1128B(b) of the Act, as 
well as the civil monetary penalty provision at section 1128A(a)(5) of 
the Act. We are considering whether assistance in paying enrollees' 
out-of-pocket cost-sharing obligations provided through prescription 
drug patient assistance program sponsored by pharmaceutical 
manufacturers would be allowed under the aforementioned Federal fraud 
and abuse laws.
    We have defined the term ``insurance or otherwise'' consistent with 
our policy goal of reducing incentives for current employers, other 
insurers, and government programs to reduce their current levels of 
coverage and replace that coverage with Part D wrap-around benefits. 
The use of the term ``insurance or otherwise'' in section 1860D-
2(b)(4)(C)(ii) of the Act suggests that the Congress understood that 
programs other than insurance programs would be helping beneficiaries 
pay for covered Part D drugs.
    Section 1860D-24 of the Act, which extends the coordination of 
benefits provisions required for SPAPs to other types of plans--
including Medicaid programs, Section 1115 waiver demonstrations, group 
health plans, FEHBP, military coverage (including TRICARE), and ``such 
other health benefit plans or programs that provide coverage or 
financial assistance for the purchase or provision of prescription drug 
coverage on behalf of Part D eligible individuals as the Secretary may 
specify''--appears to support our proposed definition of ``insurance or 
otherwise,'' in Sec.  423.100 of our proposed rule, as a plan (other 
than a group health plan) or program that provides, or pays the cost 
of, medical care (as defined in section 2791(a)(2) of the Public Health 
Service Act). We note that our definition of ``insurance or otherwise'' 
does not modify the definition of ``health plan'' at 45 CFR 160.103 of 
the HIPAA Administrative Simplification Regulations, or any 
interpretation thereof issued by the Department of Health and Human 
Services.
    Therefore, ``insurance or otherwise'' would include the following 
programs and entities:
     Government programs and entities (for example, Department 
of Veterans Affairs (VA), Department of Labor Federal Workers' 
Compensation Program, and Federally Qualified Health Centers (FQHCs);
     Government insurers (for example, Medicaid 1115 
demonstrations and the State Children's Health Insurance Program 
(SCHIP); and
     Government-sponsored funds (for example, black lung 
benefits, Ryan White CARE Act funds, and State special funds that 
assist certain individuals with their medical costs, such as a special 
fund for AIDS patients).

Because costs for covered Part D drugs paid by insurance or otherwise 
on behalf of a Part D enrollee do not, as previously discussed, count 
as incurred costs, any Part D wrap-around coverage provided to 
beneficiaries by these entities would not count toward incurred costs. 
Wrap-around coverage provided to Part D enrollees by group health plans 
and other third-party payment arrangements would also not count as 
incurred costs. We have defined the term ``group health plan'' to have 
the same meaning as in 42 CFR 411.101. In addition, we have defined the 
term ``third party payment arrangements'' to mean any contractual or 
similar arrangement under which a person has a legal obligation to pay 
for covered Part D drugs.

    We request comments regarding the treatment of health savings 
account (HSAs) vis-[agrave]-vis our definition of ``group health 
plan,'' ``insurance or otherwise,'' and ``third party payment 
arrangements.'' Our strong preference is not to treat HSAs as group 
health plans, insurance or otherwise, or third party payment 
arrangements and therefore to allow HSA contributions to count toward 
incurred costs, since we see these funds as essentially analogous to a 
beneficiary's bank account. We also seek comments on how to treat FSAs, 
health reimbursement accounts (HRAs), and Medicare savings accounts 
(MSAs), relative to our definitions of group

[[Page 46651]]

health plan, insurance or otherwise, and third party payment 
arrangements.
    In proposing this policy, an assessment was made of the need for 
coordination of the Part D benefit with the Department of Health and 
Human Services' programs, including the Indian Health Service (IHS) and 
AIDS drug assistance programs. The IHS is the agency that fulfills the 
Secretary's unique relationship to provide health services to American 
Indians and Alaska Natives (AI/ANs) based on the government-to-
government relationship between the United States and tribes. The 
Department has a long history of recognizing AI/AN beneficiaries' dual 
eligibility for services both from the HIS and from other Department 
programs. We expect many AI/AN beneficiaries will qualify for full and 
partial low-income subsidies under Part D. For those not receiving a 
full or partial subsidy, the IHS may wish to pay for premiums to 
eliminate any barriers to Part D benefits.
    For AI/ANs not eligible for the low-income subsidies and enrolled 
in a prescription drug plan or MA-PD plan, the costs of covered Part D 
drugs obtained at an I/T/U pharmacy or a non-IHS retail pharmacy 
(through an appropriate IHS contract health services referral) will be 
applied to meet the beneficiary's deductible under qualified 
prescription drug coverage. These payments will not count as incurred 
costs towards meeting the out-of-pocket threshold, however. This will 
ensure that an IHS beneficiary receives a benefit for IHS expenditures 
between the deductible and the out-of-pocket limit. Once the deductible 
is met, the IHS will benefit from Part D coverage because the I/T/U 
pharmacy will be reimbursed for 75 percent of spending (on average) 
between the deductible and the initial coverage limit. We seek comments 
on how I/T/U pharmacies and IHS beneficiaries will achieve maximized 
participation in Part D benefits.
    We also assessed the role of the Ryan White CARE Act, and in 
particular the AIDS Drug Assistance Program (ADAP), which addresses the 
pharmaceutical needs of the neediest HIV/AIDS population. The 
implementation of Part D will enable approximately one-half of the ADAP 
enrollees who are potentially eligible for Part D to qualify for full 
Medicare low-income subsidies, and an additional 30 percent may qualify 
for partial low-income subsidies. In addition, for those not receiving 
a full or partial subsidy, the Part D benefit would pay--depending on 
the cost-sharing structure employed by the particular prescription drug 
plan or MA-PD plan--75 percent, on average, of an enrollee's covered 
Part D drug expenditures between the deductible and initial coverage 
limit. Although ADAP may realize savings with the implementation of 
Part D, these may be offset by the increased costs of picking up 
expenses no longer covered by Medicaid for the dual eligible 
population.
    To ensure coordination of benefits for the HIV/AIDS population, the 
ADAP program may wish to pay for this population's premiums to 
eliminate any barriers to Part D benefits. ADAP may also subsidize 
costs incurred toward a Part D plan's deductible or cost-sharing for 
those patients unable to afford these costs. It should be noted, 
however, that when ADAP does subsidize these costs, they would not 
count as incurred costs and thus may make it less likely that an 
eligible person would incur costs above the annual out-of-pocket 
threshold and thus qualify for catastrophic cost-sharing.
    ADAPs and other Ryan White ``titled'' programs are eligible to 
participate in what is known as the 340B Drug Pricing program and are 
encouraged to do so. Under Section 340B of the Public Health Service 
Act, discounted outpatient drugs are available to certain Federally-
funded grantees, such as Federally qualified health centers (FQHCs), 
AIDS drug assistance programs, and certain disproportionate (DSH) 
hospitals. Upon successful registration, these covered entities are 
eligible to purchase outpatient prescription medications from drug 
wholesalers and pharmaceutical manufacturers at significantly reduced 
prices. All but three ADAPs, which have State-based programs, 
participate in 340B. About one-half of these States purchase their 
drugs directly and receive an upfront discount. The other half operate 
under the rebate model and receive a rebate from manufacturers. Studies 
have indicated that the States receiving an upfront discount benefit 
more fully from the 340B program than those States receiving a rebate. 
States are encouraged to move toward the model of purchasing their 
drugs directly, as they can realize more savings than States using the 
rebate model.
    We welcome comments on how to maximize the savings for people in 
need of HIV/AIDS medications under the 340B program. In particular, is 
it feasible for ADAP programs to participate with prescription drug 
plans so that the drugs offered to individuals with HIV/AIDS can be 
offered at 340B prices? In addition, because it is of critical 
importance for Medicare beneficiaries with HIV/AIDS to comply with 
their drug regimens, we are soliciting comments regarding the 
coordination of ADAP and Medicare Part D benefits.
    We note that nothing precludes an insurer, group health plan, or 
other third party arrangement from paying for a Part D enrollee's 
deductible costs; while these payments will not count as incurred costs 
vis-[agrave]-vis the out-of-pocket threshold, they will not prevent a 
Part D enrollee from receiving a benefit for expenditures between the 
deductible and the out-of-pocket limit. In addition, these entities are 
not precluded from paying for a Part D enrollee's cost-sharing above 
the out-of-pocket threshold once a beneficiary has accumulated incurred 
costs in excess of the out-of-pocket threshold. Please refer to section 
II.J of this preamble for a detailed discussion regarding the 
collection of information regarding third-party reimbursement for 
covered Part D drugs for the purpose of determining enrollees' incurred 
costs.
    Section 1860D-2(b) of the Act provides that, beginning in 2007, the 
annual deductible, initial coverage limit, out-of-pocket threshold, and 
beneficiary cost-sharing after the out-of-pocket threshold is met are 
to be adjusted annually. In accordance with section 1860D-2(b)(6) of 
the Act and as provided in Sec.  423.104(e)(5)(iv) of our proposed 
rule, these amounts would be increased over the previous year's amounts 
by the annual percentage increase in average per capita aggregate 
expenditures for covered Part D drugs for the 12-month period ending in 
July of the previous year. The amounts for the annual deductible, 
initial coverage limit, out-of-pocket threshold, and catastrophic cost-
sharing amounts would be rounded to the nearest $5, $10, $50, and 
$0.05, respectively, as required by sections 1860D-2(b)(1)(B), 
(b)(3)(B), (b)(4)(B)(ii), and (b)(4)(A)(ii) of the Act, and codified in 
Sec. Sec.  423.104(e)(1)(ii), (e)(3)(ii), (e)(5)(iii)(B), and 
(e)(5)(i)(A)(2) of our proposed rule.
    We anticipate that in the first several years after the 
implementation of Part D, determining the annual percentage increase 
will be difficult and will require the use of alternative sources of 
data. We request comments regarding possible alternative data sources 
we could use to determine the annual percentage increase in the first 
several years of the Part D program. We will provide further detail 
regarding the methods and data sources we would use to determine this 
annual percentage increase in operational guidance to PDP sponsors and 
MA organizations offering

[[Page 46652]]

MA-PD plans prior to the deadline for bid submissions.

                        Table C-1.--Standard Prescription Drug Coverage Benefits for 2006
----------------------------------------------------------------------------------------------------------------
                                                                    Beneficiary
                                         Cost-sharing percentage   out-of-pocket   Plan payment    Plan payment
                                                                       costs        percentage
----------------------------------------------------------------------------------------------------------------
Annual Deductible ($0-$250 in spending  100.....................            $250               0              $0
 on covered Part D drugs covered under
 the plan).
Initial Benefit ($251-$2,250 in         25\1\...................          500\2\           75\1\           1,500
 spending on covered Part D drugs
 covered under the plan).
No coverage of costs ($2,251-$5,100     100.....................           2,850               0               0
 \3\ in spending on covered Part D
 drugs covered under the plan).
Catastrophic Coverage (after the        The greater of: (1) 5;    ..............              95  ..............
 enrollee has incurred out of-pocket     or (2) $2 for a generic
 costs on covered Part D drugs covered   or preferred multiple
 by the plan greater than $3,600; this   source drug/$5 for
 is generally equivalent to $5,100 \3\   other drugs \1\.
 in covered spending).
----------------------------------------------------------------------------------------------------------------
\1\ Entities have the option of substituting a cost-sharing structure that is actuarially equivalent.
\2\ $500 is the maximum out-of-pocket costs if coverage is based on 25 percent coinsurance. Under an actuarially
  equivalent cost-sharing structure, the maximum out-of-pocket costs and the maximum plan payment for any Part D
  enrollee could be higher or lower.
\3\ This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket
  costs for covered Part D drugs covered under his/her plan by a group health plan, insurance or otherwise, or
  other third party arrangement.

    We have interpreted the provisions of section 1860D-2(b) of the Act 
to provide for two distinct types of standard prescription drug 
coverage--``defined standard coverage'' and ``actuarially equivalent 
standard coverage.'' Defined standard coverage basically constitutes 
standard prescription drug coverage as defined in the statute--with 25 
percent coinsurance for costs above the deductible but below the 
initial coverage limit and cost-sharing for costs above the annual out-
of-pocket limit equal to the greater of: (1) A copayment (for 2006, and 
adjusted annually as specified earlier in this preamble) of $2 for a 
generic or preferred multi-source covered Part D drug, or $5 for other 
drugs; or (2) 5 percent coinsurance. Actuarially equivalent standard 
coverage is used to describe standard coverage with actuarially 
equivalent alternatives to these cost-sharing requirements and 
consistent with section 1860D-2(b) of the Act.
    Section 1860D-2(b)(2)(A)(ii) of the Act provides that PDP sponsors 
and MA organizations offering actuarially equivalent standard 
prescription drug coverage would be permitted to substitute cost-
sharing requirements (including tiered structures tied to plan 
formularies or particular pharmacies in a plan's network) for costs 
above the annual deductible and up to the initial coverage limit, 
provided that those alternative cost-sharing requirements were 
actuarially equivalent to an average expected coinsurance of 25 percent 
for costs above the annual deductible and up to the initial coverage 
limit. Alternative cost-sharing arrangements under actuarially 
equivalent standard coverage could include reducing cost-sharing to $0 
for generic or preferred covered Part D drugs, as provided under 
section 1860D-2(b)(5) of the Act, as long as the cost-sharing structure 
is actuarially equivalent to an average expected coinsurance of 25 
percent for costs above the annual deductible and up to the initial 
coverage limit. Plans with cost-sharing arrangements that are 
actuarially more generous than standard prescription drug coverage 
would be considered enhanced alternative coverage, as defined in 
section II.C.2.b.ii of this preamble. (Section II.F.2 of this preamble 
explains the methodology for determining actuarial equivalence).
    Based on our interpretation of section 1860D-2(b)(5) of the Act, we 
also propose allowing plans offering actuarially equivalent standard 
coverage to establish cost-sharing of an amount that is actuarially 
equivalent to the expected cost-sharing under Sec.  423.104(e)(5)(i) 
(taking into account both 5 percent coinsurance and $2/$5 copayments 
for costs above the out-of-pocket threshold required under defined 
standard coverage). As previously discussed, section 1860D-2(b)(5) of 
the Act indicates that plans cannot be prevented from reducing to $0 
the cost-sharing applicable to preferred or generic drugs. While this 
provision only references reductions based on the need to retain a 
standard benefit, we propose requiring that any alternative cost-
sharing structure for costs in the catastrophic range (whether under 
actuarially equivalent standard coverage or enhanced alternative 
coverage) be actuarially equivalent to standard prescription drug 
coverage's structure of 5 percent coinsurance or $2/$5 copayments. Our 
proposed requirement would function in the same manner as the 
requirement for actuarial equivalence to alternatives to the 25 percent 
coinsurance structure for costs above the deductible and below the 
initial coverage limit, as discussed in further detail in section 
II.F.4.b of this preamble. Any such alternative cost-sharing 
arrangements would be reviewed, along with the rest of a plan's benefit 
design, to ensure that they do not discriminate against certain Part D 
eligible individuals.

b. Alternative Prescription Drug Coverage

    Section 1860D-2(c) of the Act and Sec.  423.104(f) provide that a 
PDP sponsor offering a prescription drug plan or an MA organization 
offering an MA-PD plan may offer an alternative prescription drug 
benefit design, provided that the PDP sponsor or MA organization 
applies for and receives our approval for the proposed alternative. In 
order to receive approval to offer an alternative prescription drug 
benefit design, a PDP sponsor offering a prescription drug plan or an 
MA organization offering an MA-PD plan would have to meet the 
requirements related to actuarial equivalence described in section 
1860D-2(c)(1) of the Act and discussed in further detail

[[Page 46653]]

below (as well as in section II.F.3 of this preamble). It is important 
to note that, in modifying the standard coverage design to offer 
alternative prescription drug coverage per the following requirements, 
plans would have to use defined standard coverage (and not actuarially 
equivalent standard coverage) as a fixed point of comparison. Because 
numerous variants of actuarially equivalent standard coverage are 
possible, it would not be feasible to use actuarially equivalent 
standard coverage as a point of comparison for alternative prescription 
drug coverage.
    As provided under section 1860D-2(c)(2) of the Act and codified in 
Sec.  423.104(f)(1) of our proposed rule, any alternative prescription 
drug benefit design would be required to include a deductible that was 
no greater than the deductible offered under standard prescription drug 
coverage. Section 1860D-2(c)(3) of the Act requires that alternative 
coverage provide the coverage required under section 1860D-2(b)(4), 
which specifies the requirements for coverage to protect beneficiaries 
against high out-of-pocket expenditures. As provided in Sec.  
423.104(f)(2) of our proposed rule, we are interpreting this 
requirement to mean that prescription drug plans and MA-PD plans must 
provide coverage above the out-of-pocket threshold that is at least as 
generous as that provided under defined standard coverage. In other 
words, plans could--at their option--reduce cost-sharing below that 
included under defined standard coverage (the greater of 5 percent 
coinsurance or $2/$5 copayments).
    In addition, section 1860D-2(c)(1)(B) of the Act and Sec.  
423.104(f)(3) of our proposed rule would require that the actuarial 
value of alternative prescription drug coverage's unsubsidized coverage 
is at least equal to the actuarial value of unsubsidized defined 
standard coverage. Section 1860D-2(c)(1)(C) of the Act and Sec.  
423.104(f)(4) of our proposed rule would require that, under 
alternative prescription drug coverage, the plan payout at the dollar 
value of the initial coverage limit under standard coverage, for an 
individual whose total spending exceeds that limit, is at least equal 
to that provided under defined standard coverage.
i. Basic Alternative Coverage
    Beyond the required parameters for alternative coverage discussed 
above, we are interpreting the provisions of section 1860D-2(c) of the 
Act, together with section 1860D-2(a)(1) of the Act, as providing for 
two forms of alternative coverage--either ``basic alternative 
coverage'' or ``enhanced alternative coverage.'' Basic alternative 
coverage would refer to alternative coverage that is actuarially 
equivalent to defined standard prescription drug coverage, as described 
in section II.C.2.a of this preamble. Enhanced alternative coverage 
would refer to alternative coverage that exceeds defined standard 
coverage by offering supplemental benefits and is discussed in section 
II.C.2.b.ii of this preamble.
    Within the parameters for alternative prescription drug coverage 
described above, a PDP sponsor offering a prescription drug plan or an 
MA organization offering an MA-PD plan with a basic alternative 
prescription drug benefit design could theoretically--by combining 
features such as a reduction in the deductible, changes in cost-sharing 
(for example, benefit designs that use tiered copayments or coinsurance 
in an actuarially equivalent manner to the 25 percent cost-sharing 
above the deductible and below the initial coverage limit under defined 
standard coverage), and a modification of the initial coverage limit--
still be able to maintain an actuarial value of coverage equal to 
defined standard prescription drug coverage.
    Although basic alternative prescription drug coverage within the 
parameters described above is allowed, it is unclear because of 
utilization effects whether PDP sponsors and MA organizations could, in 
fact, offer coverage that meets the statutory requirements other than 
by modifying cost-sharing as already allowed under actuarially 
equivalent standard coverage. We invite comments on whether there are 
basic alternative benefit designs that go beyond actuarially equivalent 
standard coverage.
ii. Enhanced Alternative Coverage
    Section 423.104(g) of our proposed rule would permit PDP sponsors 
and MA organizations offering an MA-PD plan to provide qualified 
prescription drug coverage that includes supplemental benefits. Because 
the actuarial value of any prescription drug coverage benefit package 
that includes supplemental benefits would exceed that of standard 
coverage, such coverage must always be alternative drug coverage as 
described in section II.C.2.b of this preamble. Thus, we refer to any 
Part D benefit package that includes supplemental benefits as 
``enhanced alternative coverage.''
    Enhanced alternative coverage would include basic prescription drug 
coverage and supplemental benefits. The requirements for the 
supplemental benefits that may be included in enhanced alternative 
coverage are found in section 1860D-2(a)(2) of the Act and Sec.  
423.104(g)(1)(ii) of our proposed rule. These supplemental benefits 
would supplement basic prescription drug coverage, providing for a 
package of benefits that exceeds the actuarial value of defined 
standard coverage. Supplemental benefits could consist of:
     Reductions in cost-sharing (for example, a reduction in 
the deductible, a reduction in the coinsurance percentage or copayments 
applicable to covered Part D drugs obtained between the annual 
deductible and the initial coverage limit, or an increase in the 
initial coverage limit described in Sec.  423.104(e)(2), provided these 
reductions in cost-sharing increase the actuarial value of the benefits 
provided above the actuarial value of basic prescription drug 
coverage); and/or
     Coverage of drugs that are specifically excluded as 
covered Part D drugs under section 1860D-2(e)(2)(A) of the Act and 
Sec.  423.100 of our proposed rule.
    We propose interpreting ``value'' to mean the total value as 
described in section 1860D-2(c)(1)(A) of the Act. We request comments 
on this interpretation.
    Under section 1860D-2(a)(2)(B) of the Act, and proposed in Sec.  
423.104(g)(2), a PDP sponsor would not be permitted to offer a 
prescription drug plan that provided enhanced alternative coverage in a 
particular service area unless it also offered a plan that provided 
only basic prescription drug coverage in that same area. Section 1860D-
2(a)(3) of the Act defines basic prescription drug coverage as either--
    (a) Standard prescription drug coverage (as described in proposed 
Sec.  423.104(e) and in section II.C.2.a of this preamble) with access 
to negotiated prices; or
    (b) Basic alternative drug coverage (as described in Sec.  423.100 
and section II.C.2.b.i of this preamble) with access to negotiated 
prices.
    Similarly, as provided under section 1860D-21(a)(1)(A) and codified 
in Sec.  423.104(g)(3)(i) of our proposed rule, beginning on January 1, 
2006, an MA organization could not offer an MA coordinated care plan, 
as defined in 42 CFR 422.4 of our proposed rule and section 
1851(a)(2)(A) of the Act, in a service area unless that plan, or 
another MA plan offered by the same organization in the same service 
area, includes required prescription drug coverage. As defined in Sec.  
423.100, required prescription drug coverage, for the purposes of an MA 
organization

[[Page 46654]]

offering an MA-PD plan, would include either: (1) Basic prescription 
drug coverage, or (2) enhanced alternative coverage, provided there is 
no MA monthly supplemental beneficiary premium applied under the plan. 
Such enhanced alternative coverage could be provided without a monthly 
supplemental beneficiary premium only if a plan applied a credit 
against the otherwise applicable premium of rebate dollars available 
under section 1854(b)(1)(C) of the Act. Rebate dollars represent the 
dollars available for supplemental (and other) benefits when an MA 
plan's risk-adjusted non-drug bid is under the risk-adjusted non-drug 
monthly benchmark amount. In other words, to the extent that an MA-PD 
plan chose to provide enhanced alternative coverage for no additional 
premium through the application of rebate dollars, such enhanced 
alternative coverage would constitute required coverage for the 
purposes of meeting the requirement in section 1860D-21(a)(1)(A) of the 
Act.
    This provision is similar in intent to the restrictions on the 
offering of enhanced alternative coverage by PDP sponsors found in 
Sec.  423.104(g)(2) of our proposed rule. As previously mentioned, PDP 
sponsors are required to offer at least one plan offering basic 
prescription drug coverage in all areas they serve in order to offer 
any plan that enhances or supplements that basic coverage. The 
objective of both of these requirements is to assure that PDP sponsors 
and MA PD organizations offer at least one option for Part D coverage 
for a premium at the cost of basic prescription drug coverage.
    As a note of clarification, provided a PDP sponsor offers at least 
one plan in a service area that provides basic prescription drug 
coverage only, it can offer as many plans that offer enhanced 
alternative coverage as it wishes. Similarly, an MA organization that 
offers at least one MA-PD plan that meets the aforementioned test of 
providing required prescription drug coverage is free to offer plans 
that provide other types of enhanced alternative coverage for which 
they can charge a monthly supplemental beneficiary premium, as well as 
plans that offer no qualified prescription drug coverage.
    As provided under section 1860D-21(a)(1)(B)(i) of the Act and 
codified in our proposed rule at Sec.  423.104(g)(3)(ii)(A), an MA 
organization could not offer prescription drug coverage (other than 
that required under Parts A and B of Medicare) to enrollees of an MSA 
plan. Under section 1860D-21(a)(1)(B)(ii) and Sec.  
423.104(g)(3)(ii)(B) of our proposed rule, an MA organization also 
could not offer prescription drug coverage (other than that required 
under Parts A and B of Medicare) under another type of MA plan--
including a private fee-for-service plan--unless the drug coverage it 
provided under that MA plan consisted of qualified prescription drug 
coverage and met our requirements regarding required prescription drug 
coverage as articulated previously in this preamble section.
c. Negotiated Prices
    Section 1860D-2(d)(1) of the Act requires, as implemented under 
Sec.  423.104(h) of our proposed rule, that a PDP sponsor or MA 
organization offering an MA-PD plan provide beneficiaries with access 
to negotiated prices for covered Part D drugs. As required by section 
1860D-2(d)(1)(B) of the Act, negotiated prices would have to take into 
account negotiated price concessions for covered Part D drugs such as 
discounts, direct or indirect subsidies, rebates, and direct or 
indirect remunerations, and would include any applicable dispensing 
fees. Access to negotiated prices would have to be provided even when 
no benefits would otherwise be payable on behalf of an enrollee due to 
the application of a deductible, the initial coverage limit, or other 
cost-sharing. We are interpreting the reference to the lack of payable 
benefits due to the application of the initial coverage limit as 
referring to that portion of covered Part D drug expenditures between 
the initial coverage limit and the out-of-pocket threshold. In that 
expenditure range, a beneficiary enrolled in standard prescription drug 
coverage would be responsible for 100 percent cost-sharing, and the 
plan would pay no benefits. We are also interpreting the phrase ``or 
other cost-sharing'' as a reference to plan designs that may include, 
as a part of their formulary design, access to negotiated prices on 
certain drugs but at a tier within their formulary in which the plan 
would pay no benefits and the beneficiary would be responsible for 100 
percent cost-sharing (in other words, a negotiated price would be 
available and the drug would be on the plan's formulary, but the 
beneficiary would be responsible for 100 percent of that drug's 
negotiated price).
    As required under section 1860D-2(d)(1)(C) of the Act, prices 
negotiated with manufacturers for: (1) Covered Part D drugs by either a 
prescription drug plan or an MA-PD plan; or (2) a qualified retiree 
prescription drug plan, as described in Sec.  423.882 of our proposed 
regulation on the Medicare retiree drug subsidy program, with respect 
to covered Part D drugs provided on behalf of part D eligible 
individuals would not be taken into account in making ``best price'' 
determinations under the Medicaid program. Under current Medicaid best 
price policy, the largest discount a pharmaceutical manufacturer 
negotiates in the private market must be passed along to the Medicaid 
program; however, prices negotiated with manufacturers for covered Part 
D drugs would not be factored into these calculations as provided under 
Sec.  423.104(h)(2) of our proposed rule.
    Section 423.104(h)(3) would require, as stated in the provisions of 
section 1860D-2(d)(2) of the Act, that PDP sponsors offering a 
prescription drug plan and MA organizations offering an MA-PD plan 
disclose to us all aggregate negotiated price concessions--including 
discounts, direct or indirect subsidies, and direct or indirect 
remunerations--they obtain from each pharmaceutical manufacturer that 
are passed through to the Medicare program in the form of lower 
subsidies or to beneficiaries in the form of: (1) Lower monthly 
beneficiary premiums, and/or (2) lower covered Part D drug prices at 
the point of sale. We note that plans may fulfill this requirement 
through the data submission requirements articulated in proposed Sec.  
423.336(c)(1) and Sec.  423.343(c)(1) and discussed in further detail 
in section II.G.4 of this preamble. In other words, we should be able 
to determine the proportion of total aggregate price concessions that 
are passed through to either the Medicare program or to beneficiaries 
based on the cost data plans would be required to submit to CMS.
    As provided under section 1860D-2(d)(2) of the Act and Sec.  
423.104(h)(3)(ii) of our proposed rule, information on negotiated 
prices reported to CMS for the purposes of ascertaining the level of 
pass-through would be protected under the confidentiality provisions 
applicable to Medicaid pricing data under section 1927(b)(3)(D) of the 
Act. We note, however, that these confidentiality protections would not 
preclude audit and evaluation of negotiated price concession 
information by the HHS Office of the Inspector General (OIG) and, in 
fact, that such audits and evaluations may be necessary for carrying 
out the requirements of section 1860D-4(d)(1) of the Act.
    We would specify in operational guidance the format and frequency 
of these reports. As discussed in section II.G.4 of this preamble, we 
are proposing to require plans to ensure that price concessions are 
accounted for separately

[[Page 46655]]

from any fair market value administrative fees pharmaceutical 
manufacturers may pay PDP sponsors or MA organizations. For a more 
detailed discussion of data submission requirements, please refer to 
section II.G.4 of this preamble.
    As provided under section 1860D-2(d)(3) of the Act and codified in 
Sec.  423.104(h)(4) of our proposed rule, we would be authorized to 
conduct periodic audits--either directly or through contracts with 
other organizations--of the financial statements and records of PDP 
sponsors and MA organizations pertaining to the prescription drug plans 
and MA-PD plans they offer. As required in section 1860D-2(d)(3) of the 
Act, this auditing would be performed with the ultimate goal of 
protecting the Medicare program against fraud and abuse, as well as 
ensuring proper disclosures and accounting under Part D. Section 
423.504(d) of our proposed rule includes additional requirements with 
respect to auditing of PDP sponsors as a safeguard against fraud and 
abuse. These fraud and abuse protections incorporate those protections 
applicable to MA organizations under section 1857(d)(2)(B) of the Act 
and are discussed in detail in section II.K.6.a of this preamble.
3. Establishment of Prescription Drug Plan Service Areas (Sec.  
423.112)
    Section 1860D-11(a)(1) of the Act requires that a prescription drug 
plan's service area encompass an entire PDP region, as established by 
us under Sec.  423.112(b), and Sec.  423.112(a) of our proposed rule 
codifies that requirement. However, as provided under Sec.  423.112(e) 
of our proposed rule, a prescription drug plan can be offered in more 
than one PDP region (provided the plan encompasses the entire PDP 
region for each region where offered), as well as nationally.
    Section 1860D-11(a)(2) of the Act provides us with the authority to 
establish PDP regions, and such PDP regions must be established in a 
manner that is consistent with the establishment of MA regions under 42 
CFR 422.445 of our proposed rule. Section 1860D-11(a)(2)(B) stipulates 
that PDP regions must be, to the extent practicable, consistent with MA 
regions as established under section 1858(a)(2) of the Act. As provided 
under Sec.  423.112(b)(2), however, if we determine that access to Part 
D benefits would be improved by establishing PDP regions that are 
different than MA regions, we may establish PDP regions that vary from 
MA regions. Section 423.112(d) of our proposed rule would allow us to 
revise the PDP regions we establish as necessary.
    In accordance with section 1860D-14(a)(3)(F) of the Act, residents 
of United States territories are not eligible for the Part D subsidies 
otherwise provided to low-income individuals. Such territorial 
residents, however, would be eligible for financial assistance for 
prescription drug expenses under section 1935(e) of the Act. Note that 
a new section 1935 of the Act was added by section 103 of the Medicare 
Modernization Act (MMA) through a redesignation of the current section 
1935 as section 1936. The U.S. territories, unlike the 50 United States 
and the District of Columbia, may continue to receive federal Medicaid 
grants under section 1108 of the Act to compensate them for drug 
coverage provided to Part D eligible individuals under specific 
conditions. For this reason, section 1860D-11(a)(2)(C) of the Act and 
Sec.  423.112(c) of our proposed rule stipulate that CMS designate a 
separate PDP region (or regions) for the U.S. territories.
    We intend to initially designate both PDP and MA regions by January 
1, 2005. In accordance with section 1858(a)(2)(C)(i) of the Act, there 
will be between 10 and 50 PDP regions within the 50 States and the 
District of Columbia and at least one PDP region covering the United 
States territories. The PDP regions, like the MA regions, will become 
operational in January 2006.
    We conducted a public meeting on July 21, 2004, in order to obtain 
broad public comment on the methodology we should use in establishing 
both the PDP regions and MA regions for MA regional plans, which would 
operate as preferred provider organizations (PPOs). The information on 
that meeting is available at https://www.cms.hhs.gov/medicarereform/mmaregions. Using the feedback from that meeting and other research, we 
are considering a number of issues, including: how we should design PDP 
regions in order to ensure that all beneficiaries have access to 
prescription drug plans; how best to ensure access to prescription drug 
plans through the design of PDP regions that are the same as (or, if 
necessary, different than) MA regions; how to design a PDP region (or 
regions) in the U.S. territories; and how we can best discuss with the 
public the development of both the PDP and MA regions. Separate 
guidance on the designation of regions will be forthcoming.
    Whereas Sec.  423.112 provides that a prescription drug plan's 
service area must encompass one or more PDP regions, an MA-PD plan's 
service area would consist of either: (1) one or more MA regions (for a 
regional MA plan), or (2) one or more MA local areas (for a local MA 
plan). ``MA region'' is defined in 42 CFR 422.455(b) of our proposed 
rule as a region within the 50 States and the District of Columbia as 
established by CMS. As provided in Sec.  423.112(b)(2) of our proposed 
rule, we will attempt to establish PDP regions that coincide with MA 
regions to the extent practicable. ``Local MA area'' is defined in 42 
CFR 422.252 of our proposed rule as a payment area consisting of county 
or equivalent area that we specify.
4. Access to Covered Part D Drugs (Sec.  423.120)

a. Pharmacy Access Standards

    As required by section 1860D-4(b)(1)(C) of the Act, prescription 
drug plans and MA-PD plans would be required to secure the 
participation in their pharmacy networks of a sufficient number of 
pharmacies that dispense drugs directly to patients (other than by mail 
order) to ensure convenient access to covered Part D drugs by plan 
enrollees. To achieve that goal, we are authorized to establish access 
rules that are no less favorable to enrollees than rules for convenient 
access established in the statement of work solicitation 
(MDA906-03-R-0002) by the Department of Defense (DoD) on March 
13, 2003, for purposes of the TRICARE Retail Pharmacy program. 
Consistent with the TRICARE standards, Sec.  423.120(a)(1) of our 
proposed rule would require that prescription drug plans and MA-PD 
plans establish pharmacy networks in which:
     In urban areas, at least 90 percent of Medicare 
beneficiaries in the plan's service area, on average, live within 2 
miles of a retail pharmacy participating in the prescription drug 
plan's or MA-PD plan's network;
     In suburban areas, at least 90 percent of Medicare 
beneficiaries in the plan's service areas, on average, live within 5 
miles of a retail pharmacy participating in the prescription drug 
plan's or MA-PD plan's network; and
     In rural areas, at least 70 percent of Medicare 
beneficiaries in the plan's service area, on average, live within 15 
miles of a retail pharmacy participating in the prescription drug 
plan's or MA-PD plan's network.
    For the purposes of meeting these access standards, as also 
provided in DoD's statement of work of solicitation MDA906-03-
R-0002--
     Urban would be defined as a five-digit ZIP Code in which 
the population

[[Page 46656]]

density is greater than 3,000 persons per square mile;
     Suburban would be defined as a five-digit ZIP Code in 
which the population density is between 1,000 and 3,000 persons per 
square mile; and
     Rural would be defined as a five-digit ZIP Code in which 
the population density is less than 1,000 persons per square mile.
    We are interpreting the access standard under Sec.  423.120(a)(1) 
such that a prescription drug plan or regional MA-PD plan would have to 
meet or exceed the access standards across each region in which it 
operates, and a local-MA-PD plan would have to meet or exceed the 
access standards in its local service area. In other words, a 
prescription drug plan or regional MA-PD that operates in a multi-
region or national service area could not meet the access standards 
proposed in Sec.  423.120(a)(1) by applying them across the entire 
geographic area serviced by the plan; instead, it would have to meet 
the standards in each region of its multi-region or national service 
area. We believe that such an interpretation maximizes plan flexibility 
while assuring the best possible access to pharmacies for Part D 
enrollees, and we request comments on our proposed approach.
    While prescription drug plans and MA-PD plans would not be 
precluded from including non-retail pharmacies (for example, 
institution-based pharmacies) in their networks under our proposed 
rule, we interpret the access requirements in section 1860D-4(b)(1)(C) 
of the Act as requiring prescription drug plans and MA-PD plans to 
count only retail pharmacies as part of their networks for the purpose 
of meeting the access standard in Sec.  423.120(a)(1). We would 
consider a retail pharmacy to be any licensed pharmacy from which 
covered Part D enrollees could purchase a covered Part D drug without 
being required to receive medical services related to that particular 
covered Part D drug from a provider or institution affiliated with that 
pharmacy. In other words, prescription drug plans and MA-PD plans 
could--and would be encouraged to--include non-retail pharmacies (for 
example, hospital and clinic pharmacies) in their networks; however, 
given the limited populations served by such non-retail pharmacies, 
plans could not count these pharmacies toward our pharmacy access 
requirements.
    We recognize, however, that prescription drug plans and MA-PD plans 
operating in rural areas with high concentrations of American Indian/
Alaska Native (AI/AN) individuals may have a difficult time meeting our 
access standards if they cannot count pharmacies that are operated by 
the Indian Health Service, Indian tribes and tribal organizations, and 
urban Indian organizations (hereinafter referred to as ``I/T/U 
pharmacies'') toward their pharmacy access requirements. We are 
considering allowing prescription drug plans and MA-PD plans to count 
I/T/U pharmacies toward their network access requirements, provided: 
(1) Such pharmacies are under contract with the plan; and (2) it would 
be impossible or impracticable for the plan to meet the access standard 
in rural areas of its service area without the inclusion of an I/T/U 
pharmacy (or pharmacies) in that count because there is not a 
sufficient number of non-I/T/U pharmacies in those areas willing or 
able to contract with the PDP sponsor or MA organization in accordance 
with its terms and conditions. We invite comments on this proposed 
exception to our pharmacy access rules, including any impact it might 
have on pharmacy access for non-AI/AN Part D enrollees residing in 
those areas.
    Section 423.120(a)(1) of our proposed rule would not in any way 
preclude PDP sponsors or MA organizations offering an MA-PD plan from 
contracting with pharmacies outside their plans' service areas, 
provided that the plans meet the pharmacy access requirements within 
their service areas. Such a feature would be of particular benefit to 
beneficiaries who spend significant amounts of time outside their 
prescription drug plan's or MA-PD plan's service area (for example, 
``snowbirds'') and could make a particular prescription drug plan or 
MA-PD plan more attractive to them. In addition, the fact that 
beneficiaries would have access to network pharmacies outside their 
plan's service area would obviate the need for out-of-network access 
(discussed in greater detail in section II.C.5 of this preamble) to 
covered Part D drugs in many cases. Thus, contracting with pharmacies 
outside a plan's service area could ultimately represent a cost-savings 
both to plans and beneficiaries, particularly if a plan enrolls a high 
proportion of beneficiaries who regularly travel outside the plan's 
service area.
    Section 1860D-4(b)(1)(C)(iv) of the Act provides that, in 
establishing rules for convenient access to network pharmacies, we may 
include standards with respect to access to long-term care pharmacies 
for Part D enrollees who reside in skilled nursing facilities and 
nursing facilities (hereinafter referred to as ``long-term care 
facilities''), as well as for American Indian/Alaska Native (AI/AN) 
Part D enrollees who obtain their prescription drugs at I/T/U 
pharmacies. We recognize that given their specialized missions and the 
narrowly defined subsets of beneficiaries they serve, access to long-
term care and I/T/U pharmacies should be preserved. Such access would 
greatly enhance Part D benefits for enrollees in long-term care 
facilities, as well as for AI/AN enrollees.
    As discussed in section II.C.5 of this preamble, we expect that the 
out-of-network access requirement articulated in Sec.  423.124(a)(2) 
would assure access to covered Part D drugs provided by long-term care 
pharmacies for Part D enrollees residing in long-term care institutions 
that do not contract with their prescription drug plans or MA-PD plans. 
Since it is generally the case that long-term care facilities contract 
with a single long-term care pharmacy, Part D enrollees residing in a 
long-term care facility could not reasonably be expected to access 
their covered Part D drugs at another pharmacy if their facility's 
long-term care pharmacy is not part of their plan's network.
    However, we are also considering whether to use the authority 
provided under section 1860D-4(b)(1)(C)(iv) of the Act to require 
prescription drug plans and MA-PD plans to approach some or all long-
term care pharmacies in their service areas with at least the same 
terms available under their plans' standard pharmacy contracts. Given 
Federal nursing home regulations, nursing facilities contract with a 
long-term care pharmacy to provide prescription drugs and services to 
their residents. In the absence of direct collaboration between a plan 
and a Part D enrollee's long-term care pharmacy, it would be difficult 
for nursing facilities to meet Federal pharmacy management standards.
    We are concerned, however, that to the extent that we require plans 
to solicit long-term care pharmacies in their service areas to join 
their networks, plans may be forced to negotiate preferential 
contracting terms and conditions (relative to the terms they would 
offer any other pharmacy willing to participate in its network) with a 
number of long-term care pharmacies in order to meet our requirement.
    We also expect that long-term care pharmacies will be concerned 
about appropriate reimbursement for services (for example, clinical 
consultations, emergency medication access with 24-hour-a-day 
deliveries, specialized packaging, and IV and infusion therapies) that 
they currently provide long-term care facility residents. It is

[[Page 46657]]

possible that recognition of appropriate services would be addressed by 
provisions arranged by prescription drug plans and MA-PD plans and 
network pharmacies, with any resulting dispensing charges reflected in 
permissible dispensing fees. Section II.C.1 of this preamble discusses 
several options for defining the term ``dispensing fees.'' However, it 
is our goal to balance convenient access to long-term care pharmacies 
with appropriate payment for dispensing fees of efficient facilities. 
To the extent that we require plans to contract with long-term care 
pharmacies, it is our goal to assure that long-term care pharmacies 
charge reasonable dispensing fees to plans (and indirectly to CMS 
through the direct subsidy paid to prescription drug plans and MA-PD 
plans). We welcome comments regarding how to balance convenient access 
to long-term care pharmacies with appropriate payment to long-term care 
pharmacies under the provisions of the MMA.
    Alternatively, we would not require that plans contract with long-
term care pharmacies and would, instead, strongly encourage PDP 
sponsors and MA organizations offering MA-PD plans to negotiate with 
and include long-term care pharmacies in their plans' pharmacy 
networks. We seek public comment regarding the advantages and 
disadvantages of these two approaches.
    Similarly, we are considering two options for assuring access to I/
T/U pharmacies by AI/AN Part D enrollees per the provisions of section 
1860D-4(b)(1)(C)(iv) of the Act. There are currently 201 I/T/U 
pharmacies serving 107,000 senior and disabled AI/ANs in 27 States. In 
some areas, I/T/U pharmacies may be the only facilities capable of 
providing medication therapy management services to certain AI/AN 
beneficiaries due to language and cultural barriers. I/T/U pharmacies 
are unique in several different ways, including that they purchase 
drugs off the Federal Supply Schedule (FSS); can only serve AI/ANs; may 
have less experience than retail pharmacies (or none at all) with 
point-of-sale technology; are not typically well integrated into 
commercial pharmacy networks; generally stock a more limited range of 
drugs than would be required under a Part D formulary; and always waive 
co-pays.
    One approach to assuring access to I/T/U pharmacies under Part D 
would be to use our authority under Section 1860D-4(b)(1)(C)(iv) of the 
Act to require that PDP sponsors and MA organizations approach any I/T/
U pharmacies in their plan service areas with at least the same terms 
available under the plan's standard pharmacy contract. We are aware, 
however, that contracting with I/T/U pharmacies is potentially more 
complex than contracting with retail pharmacies given that there are a 
number of provisions in the standard contracts of commercial health 
plans that would likely need to be modified or deleted given statutory 
or regulatory restrictions to which I/T/U pharmacies are subject, as 
well as the particular circumstances of I/T/U pharmacies. Some examples 
of standard contract clauses that could be problematic for I/T/U 
pharmacies include:
     Prohibitions on waiving copays;
     Required provision of all drugs on a plan's drug 
formulary;
     Requirements that providers bill and/or receive funds 
electronically to participate in the network;
     Requirements that claims be submitted within a specific 
timeframe;
     Requirements that plans serve all patients without 
discrimination;
     Requirements that providers carry private malpractice 
insurance;
     Requirements that providers be licensed in the state in 
which they provide services; and
     Requirements that binding arbitration be used in the event 
that any dispute arises with regard to performance or interpretation of 
any terms of the agreement and the parties are unable to resolve the 
dispute in an informal fashion.

    We expect that, to the extent that we require plan inclusion of I/
T/U pharmacies in plan networks, we would provide plans with a model 
addendum to their standard contracts (should we require them) that 
would take the special circumstances of I/T/U pharmacies into account. 
Such an addendum could also be useful for facilitating the inclusion in 
prescription drug plan or MA-PD plan pharmacy networks of other types 
of pharmacies (Federally Qualified Health Centers, for example, which 
are subject to some of the same limitations described above for I/T/U 
pharmacies that make many standard contract clauses impracticable).
    A requirement that plans contract with I/T/U pharmacies could 
potentially expand plans' market share in areas with high 
concentrations of AI/ANs. Plans may also benefit from cost-savings as a 
result of doing business with I/T/U pharmacies given I/T/U pharmacies' 
heavy reliance on the dispensing of generic drugs. Also, given that 
IHS/tribal government subsidies of Part D cost-sharing on behalf of 
beneficiaries will not, as discussed in section II.C.2.a of this 
preamble, count toward incurred costs, most IHS beneficiaries would 
almost never incur costs above the out-of-pocket limit; this would 
likely provide plans with additional cost-savings. On the other hand, 
we recognize that there is some potential for increased administrative 
costs for prescription drug plans and MA-PD plans given the need to 
modify standard contracts (should we require them) and, given the 
limited electronic capabilities of most I/T/U pharmacies, the 
processing of paper claims. In addition, the AI/AN population is one 
with which commercial health plans have little, if any, experience. 
Given these potential administrative costs, we are reluctant to require 
contracts with I/T/U facilities if that requirement discourages PDP 
sponsors and MA organizations from offering plans in service areas with 
large concentrations of AI/ANs.
    Another option for assuring access to I/T/U pharmacies under Part D 
would be not to require that plans contract with I/T/U pharmacies and, 
instead, to strongly encourage PDP sponsors and MA organizations 
offering MA-PD plans to negotiate with and include I/T/U pharmacies in 
their plans' pharmacy networks. We are concerned, however, that--in the 
absence of a contracting requirement--plans may make assumptions 
regarding the administrative costs (whether real or perceived) of 
contracting with I/T/U pharmacies and may not actively solicit the 
inclusion of these pharmacies in their networks. It is our 
understanding that I/T/U pharmacies are not currently well integrated 
in commercial pharmacy networks. The lack of I/T/U pharmacies in Part D 
plan networks would render enrollment in Part D of little use to AI/AN 
beneficiaries who rely primarily on I/T/U facilities for their health 
care. We encourage comments regarding these two approaches, their 
advantages and disadvantages, and their ramifications for AI/AN 
enrollees who are eligible to enroll in Part D.
    As noted earlier, federally qualified health centers (FQHCs) and 
rural pharmacies face many of the same barriers to inclusion in 
commercial plan networks as do I/T/U pharmacies. Beneficiaries served 
by FQHCs and rural pharmacies are often served in those settings 
because of their financial and geographic circumstances. Plans may have 
to contract with these pharmacies in order to meet the access 
requirements in Sec.  423.120(a)(1) of our proposed rule--particularly 
in rural areas. However, to the extent that they are able to meet the 
access requirements without doing so, we are concerned about 
compromised access to network pharmacies by low-

[[Page 46658]]

income beneficiaries who rely on FQHC and rural pharmacies for their 
health care. We solicit comments on permissible ways for us to assure 
Part D enrollees' access to FQHC and rural pharmacies, among others.
    As stated above, we have proposed three options for defining 
``dispensing fees.'' Two of these options take into account some of the 
costs associated with administering infused covered Part D drugs to the 
beneficiary. Based on our research, most commercial health plans cover 
home infusion drugs and services under their medical benefits, given 
the cost-savings resulting from averted hospitalizations. However, 
because prescription drug plans do not offer a medical benefit under 
which to experience cost-savings, we do not believe that prescription 
drug plans would have an incentive to include home infusion pharmacies 
in their networks. We are considering using the authority in section 
1860D-4(b)(1)(C) of the Act to require that both MA-PD plans and 
prescription drug plans contract with a sufficient number of home 
infusion pharmacies in their service area to provide reasonable access 
for Part D enrollees. Such a requirement would be allowed under Section 
1860D-4(b)(1)(C) of the Act because the rules established with respect 
to convenient access to network pharmacies for Part D enrollees would 
be at least as favorable to enrollees as those used under the TRICARE 
Retail Pharmacy program. We seek public comment regarding the 
advantages and disadvantages of such an approach, how such a 
requirement could be structured, and any other issues we should 
consider.
    We recognize that some beneficiaries may prefer to obtain their 
prescription drugs from mail-order pharmacies. While prescription drug 
plans and MA-PD plans could not offer a mail-order-only option to their 
beneficiaries or count mail-order pharmacies as part of their networks 
for the purpose of meeting the access standard in Sec.  423.120(a)(1), 
prescription drug plans and MA-PD plans would be permitted, as provided 
under Sec.  423.120(a)(2), to offer a home delivery option via a mail-
order pharmacy. Any such home delivery option would be in addition to 
the retail pharmacies in a plan's network.
    As provided under section 1860D-21(c)(3) of the Act and codified in 
Sec.  423.120(a)(3)(i) of our proposed rule, we are authorized to waive 
the pharmacy access standards in Sec.  423.120(a)(1) in the case of an 
MA-PD plan that provides access (other than via mail order) to 
qualified prescription drug coverage through pharmacies owned and 
operated by the MA organization that offers the plan. However, in order 
for the pharmacy access standards to be waived, the MA-PD plan in 
question would be required to have a pharmacy network that, per our 
determination, provides comparable pharmacy access to its enrollees. We 
would evaluate whether such a plan's network provides comparable access 
to covered Part D drugs to its enrollees using the same considerations 
we currently use to evaluate MA plans' other provider networks under 42 
CFR 422.112 of our proposed rule.
    Similarly, Sec.  423.120(a)(3)(ii) would codify section 1860D-
21(d)(2) of the Act, which provides that if a private fee-for-service 
MA plan offering qualified prescription drug coverage provides coverage 
for drugs, including covered Part D drugs, purchased from all 
pharmacies--regardless of whether they are network pharmacies under 
contract with the MA plan, and provided that beneficiaries are not 
charged any cost-sharing above and beyond what they would be charged 
under standard prescription drug coverage--the pharmacy access 
requirements at Sec.  423.120(a)(1) would also be waived.
    As provided under section 1860D-4(b)(1)(A) of the Act and 
implemented in Sec.  423.120(a)(4)(i), PDP sponsors and MA 
organizations offering an MA-PD plan would be required to permit the 
participation in their plan networks of any pharmacy that was willing 
to accept the plan's terms and conditions. However, it is unreasonable 
to assume that a PDP sponsor or MA organization could establish a 
network using a uniform set of terms and conditions throughout a 
service area. Modification of contracting terms and conditions might be 
necessary, for example, to assure access in remote rural areas or for 
beneficiaries who obtain their drugs from long-term care pharmacies. 
Varying terms and conditions might also be required in order for the 
sponsor to provide a cost effective benefit through rebates and price 
concessions. The cost estimates for Part D assume that PDP sponsors and 
MA organizations offering an MA-PD plan would be able to achieve 
savings from retail prices through formulary and network design. Thus, 
the requirement at Sec.  423.120(a)(4)(i) of our proposed rule does not 
mandate a single set of terms and conditions for participation in a 
pharmacy network.
    We seek comment on whether, in order to guarantee that any pharmacy 
willing to meet a PDP sponsor's or MA organization's contracting terms 
and conditions could participate in a plan's pharmacy network, we 
should require that PDP sponsors and MA organizations offering an MA-PD 
plan make available to all pharmacies a standard contract for 
participation in their plans' networks. That requirement would not 
preclude PDP sponsors and MA organizations from negotiating terms and 
conditions different from those in the standard contract with a subset 
of pharmacies. These varying terms and conditions would therefore not 
have to be made available to all pharmacies. We note that, if required, 
it is our expectation that these standard contracts would require 
network pharmacies (except for pharmacies--long-term care, I/T/U, and 
rural pharmacies, for example--for which paper claims are the norm 
given technology access or coordination of benefits issues) to maintain 
systems to adjudicate drug claims at the point-of-sale.
    As stipulated under section 1860D-4(b)(1)(E) of the Act and Sec.  
423.120(a)(4)(ii) of our proposed rule, pharmacies could not be 
required to accept insurance risk as a condition of participation in a 
PDP sponsor's or MA organization's pharmacy network. As defined in 
Sec.  423.4, ``insurance risk'' in relation to a network pharmacy 
refers to risk of the type commonly assumed only by insurers licensed 
by a State. Insurance risk does not include payment variations designed 
to reflect performance-based measures of activities within the control 
of a pharmacy, such as formulary compliance and generic drug 
substitutions, nor does it include elements potentially in the control 
of the pharmacy (for example, labor costs, productivity).
    Section 423.120(a)(5) of our proposed rule, based on section 1860D-
4(b)(1)(B) of the Act, clarifies that a PDP sponsor or MA organization 
offering an MA-PD plan would have the option of reducing cost-sharing 
for its enrolled beneficiaries below the level that would otherwise 
apply for covered Part D drugs dispensed through network pharmacies. We 
interpret this provision as not restricting PDP sponsors and MA 
organizations offering MA-PD plans from varying cost-sharing not only 
based on type of drug or formulary tier, but also on a particular 
pharmacy's status within the plan's pharmacy network--in essence 
authorizing distinctions between ``preferred'' and ``non-preferred'' 
pharmacies. We believe that the statute allows these within network 
(preferred versus non-preferred pharmacy) distinctions to be made 
despite the ``any willing provider''

[[Page 46659]]

provision at Sec.  423.120(a)(4)(i) of our proposed rule.
    While these within network distinctions are allowed, the statute 
also requires that any such tiered cost-sharing arrangements in no way 
increase our payments to PDP sponsors or MA organizations. We are 
therefore proposing that tiered cost-sharing arrangements based on 
within-network distinctions could be included in plans' benefits 
subject to the same actuarial tests that apply for tiered cost-sharing 
structures based on formulary. Thus, a reduction in cost-sharing for 
preferred pharmacies could be offered through higher cost-sharing for 
non-preferred pharmacies or as alternative prescription drug coverage. 
For further discussion of actuarial equivalence, please see section 
II.F.4 of this preamble.
    We recognize the possibility that plans could effectively limit 
access in portions of their service areas by using the flexibility 
provided in Sec.  423.120(a)(5) of our proposed rule to create a 
within-network subset of preferred pharmacies. In other words, in 
designing its network, a plan could establish a differential between 
cost-sharing at preferred versus non-preferred pharmacies--while still 
meeting the access standards in Sec.  423.120(a)(1) of our proposed 
rule--that is so significant as to discourage enrollees in certain 
areas (rural areas or inner cities, for example) from enrolling in that 
plan. Our intent is to use the authority provided under section 1860D-
11(e)(2)(D) of the Act to review, as part of the bid negotiation 
process described in Sec.  423.272 of our proposed rule, the design of 
proposed prescription drug plan and MA-PD plan designs to ensure that 
they are not likely to substantially discourage enrollment by certain 
part D eligible individuals. Such a review would preclude the approval 
of bids submitted by plans that attempt to use strategies such as that 
outlined above to limit enrollment in portions of their service areas 
that are more difficult or costly to serve.
    We recognize that some beneficiaries may prefer to purchase their 
prescription drugs at a community pharmacy rather than through a mail-
order pharmacy and that community pharmacies typically dispense only 
30-day supplies of prescription drugs at a time. Section 1860D-
4(b)(1)(D) of the Act would require PDP sponsors and MA organizations 
offering an MA-PD plan to allow their enrollees to receive benefits at 
a network retail pharmacy instead of a network mail-order pharmacy, if 
they so choose. Such benefits could include an extended supply (for 
example, 45-day, 60-day, 90-day supply) of covered Part D drugs that is 
typically available only through a network mail-order pharmacy. 
However, because mail-order pharmacies are often able to provide lower 
prices to individuals than retail pharmacies, it is possible that the 
negotiated price for an extended supply (for example, a 90-day supply) 
of a covered Part D drug would be more costly at a network retail 
pharmacy than through the network mail-order pharmacy assigned to the 
enrollee by their prescription drug plan or MA-PD plan. Thus, as 
provided under Sec.  423.120(a)(6) of the proposed rule, a plan 
enrollee who chooses to obtain an extended supply of a covered Part D 
drug through a network retail pharmacy would be responsible for any 
differential between the network retail pharmacy's and the network 
mail-order pharmacy's negotiated price for that covered Part D drug. 
Since any such differential costs would be associated with benefits 
covered under a Part D plan, we seek comments on our proposal that this 
price differential be counted as an incurred cost against the annual 
out-of-pocket threshold consistent with the definition of ``incurred 
cost'' in Sec.  423.100. Under this approach, plans would be required 
to explicitly account for such price differentials in the actuarial 
valuation of their coinsurance in their bids. In addition, any such 
differential would also count toward the deductible for covered Part D 
expenditures between $0 and the plan's deductible.

b. Formulary Requirements

    To the extent that a PDP sponsor or MA organization uses a 
formulary to provide qualified prescription drug coverage to Part D 
enrollees, it would be required to meet the requirements of Sec.  
423.120(b)(1) and section 1860D-4(b)(3)(A) of the Act to use a 
pharmaceutical and therapeutic (P&T) committee to develop and review 
that formulary. As a note of clarification, we interpret the 
requirement at section 1860D-4(b)(3)(A) of the Act that a formulary be 
``developed and reviewed'' by a P&T committee as requiring that a P&T 
committee's decisions regarding the plan's formulary be binding on the 
plan. However, we request comments on this interpretation. In addition, 
it is our expectation that P&T committees will be involved in designing 
formulary tiers and any clinical programs implemented to encourage the 
use of preferred drugs (e.g., prior authorization, step therapy, 
generics programs).
    The majority of members comprising the P&T committee would be 
required to be practicing physicians and/or practicing pharmacists. In 
addition, at least one practicing pharmacist and one practicing 
physician member would have to be experts in the care of elderly and 
disabled individuals. However, we would also encourage that plans 
select P&T committee members representing various clinical specialties 
in order to ensure that all disease states are adequately considered in 
the development of plan formularies. Section 423.120(b)(1)(ii) of the 
proposed rule also provides that at least one practicing pharmacist and 
one practicing physician members on a plan's P&T committee be 
independent experts. We interpret the statutory language at section 
1860D-4(b)(3)(A)(ii) of the Act requiring certain members of the P&T 
committee to be ``independent and free of conflict with respect to the 
sponsor and plan'' to mean that such P&T committee members must have no 
stake, financial or otherwise, in formulary determinations. In other 
words, these individuals would be required to be independent and free 
of conflict with respect not only to a PDP sponsor and its prescription 
drug plan or an MA organization and its MA-PD plan, but also with 
respect to pharmaceutical manufacturers. In addition, we solicit public 
comment with respect to the appropriateness of strengthening the 
statutory requirement in section 1860D-4(b)(3)(A)(ii) of the Act by 
requiring, in our final regulations, that more than just one pharmacist 
and one physician on the P&T committee be independent and free of 
conflict.
    When developing and reviewing the formulary, the P&T committee 
would be required, under Sec.  423.120(b)(1)(iii) and in accordance 
with section 1860D-4(b)(3)(B) of the Act, to base clinical decisions on 
the strength of scientific evidence and standards of practice, 
including assessing peer-reviewed medical literature (for example, 
randomized clinical trials, pharmacoeconomic studies, outcomes research 
data, and such other information as the committee determined 
appropriate). We note that the Public Health Service has developed 
guidelines for the treatment of HIV disease and related opportunistic 
infections that may also be useful to plan's P&T committees; these 
guidelines can be found at http://www.aidsinfo.nih.gov/guidelines/. 
Pharmacoeconomic studies may be considered in clinical decision making 
by a P&T committee with respect to formulary development. It is our 
expectation, however, that any cost considerations will be balanced 
with

[[Page 46660]]

clinical considerations in the development and revision of a plan's 
formulary. The P&T committee would also take into account whether 
including a particular covered drug in the formulary (or in a 
particular formulary tier) had any therapeutic advantages in terms of 
safety and efficacy, per Sec.  423.120(b)(1)(iv) of our proposed rule. 
Section 423.120(b)(1)(v) of our proposed rule would require that any 
decisions made by the P&T committee regarding development or revision 
of a plan's formulary be documented in writing.
    As provided under section 1860D-4(b)(3)(C)(ii) of the Act, we will 
request the U.S. Pharmacopeia (USP) to develop a model set of 
guidelines that consists of a list of drug categories and classes that 
may be used by PDP sponsors and MA organizations to develop formularies 
for their qualified prescription drug coverage, including their 
therapeutic categories and classes. We expect that the model categories 
and classes developed by USP will be defined so that each includes at 
least one drug that is approved by the FDA for the indication(s) in the 
category or class. That is, no category or class would be created for 
which there is no FDA approved drug and which would therefore have to 
include a drug based on its ``off label'' indication. However, this 
would not preclude physicians and other prescribers from prescribing 
drugs for off label indications, though we strongly encourage 
prescribers to clearly document and justify off-label use in their Part 
D enrollees' clinical records. Additionally, the USP model guidelines 
would not preclude PDP sponsors or MA organizations from assigning an 
FDA approved drug to a category or class based on an off label use for 
that drug, provided the FDA has not made a determination that the drug 
is unsafe for that use. In addition to developing these initial model 
guidelines, the USP will revise its classification periodically to 
reflect changes in therapeutic uses of covered Part D drugs and any 
additions of new covered Part D drugs. As explained below, PDP sponsors 
and MA organizations will have some flexibility in developing 
formularies for prescription drug plans and MA-PD plans.
    We expect that the development of these guidelines will require USP 
to conduct outreach to beneficiary groups and major industries affected 
by the development of model guidelines. We specifically envision USP 
conducting multiple consultations and a public meeting with related 
health care industries and providers (including national 
representatives of pharmacies); Medicare physicians and other 
practitioners, including pharmacists; other provider groups, including 
long-term care providers; the managed care industry; the health 
insurance industry; pharmacy benefit managers (PBMs); and Medicare 
beneficiary advocacy groups). These consultations would be conducted 
with the goal of researching current best practices in formulary 
development and existing commercial and other standards (for example 
Medicaid, the Medicare Prescription Drug Discount Card), as well as 
obtaining informed recommendations concerning the development of the 
Part D model guidelines. The goal of the public meeting would be to 
solicit comments on a draft of the model guidelines, which would be 
developed on the basis of the aforementioned consultations, as well as 
USP's research and recommendations. As our work with USP gets underway, 
we will provide further detail on the USP classification in upcoming 
operational guidance to entities wishing to become PDP sponsors or MA 
organizations offering MA-PD plans. Also, we wish to make clear that 
any guidelines established by the USP are applicable only to Part D 
benefits. They do not require the Secretary to make any decisions or 
take any actions with regard to classifying or categorizing drugs for 
any purpose other than implementing the Part D benefit.
    Although the USP will develop guidelines, under section 1860D-
4(b)(3) of the Act PDP sponsors and MA organizations would have the 
flexibility to develop their own classification schemes. The USP 
listing would simply serve as a model set of guidelines. As specified 
in 1860D-11(e)(2)(D)(ii) of the Act, if the therapeutic classifications 
within a plan's formulary conform to the USP classification model, we 
could not determine, based on the formulary's therapeutic 
classifications, that the plan violates the provision at 1860D-
11(e)(2)(d)(i) of the Act and Sec.  423.272(b)(2) that prohibits the 
design of a plan and its benefits (including any formulary and tiered 
formulary structure) that substantially discourages enrollment by 
certain Part D eligible individuals. It is important to note, however, 
that even if a plan's formulary classifications conform to the USP 
classification model, its overall formulary design could still be found 
to substantially discourage enrollment by certain Part D individuals 
(for example, based on particular drugs selected for inclusion in the 
formulary and/or proposed cost-tiering structure). If, on the other 
hand, a PDP sponsor or MA organization offering an MA-PD plan designs 
its formulary using therapeutic classes and categories that vary from 
the USP classification model, CMS would evaluate the submitted 
formulary design to ensure that the proposed therapeutic classification 
system does not substantially discourage enrollment by certain Part D 
eligible individuals. We invite comments regarding standards and 
criteria that we could use to determine that a PDP sponsor or MA 
organization's formulary classification system that is not based on the 
model classification system does not in fact discriminate against 
certain classes of Part D eligible beneficiaries.
    Section 1860D-4(b)(3)(C) of the Act and Sec.  423.120(b)(2) require 
the inclusion of ``drugs'' in each therapeutic category and class of 
covered Part D drugs in a plan's formulary, although not necessarily 
all drugs within such categories and classes. We interpret this 
requirement to mean that a PDP sponsor or MA organization's formulary 
would be required to include at least two drugs within each therapeutic 
category and class of covered Part D drugs within the PDP sponsor or MA 
organization's formulary (unless there is only one drug in a particular 
therapeutic class or category, in which case the inclusion of only one 
drug would be required). Section 423.120(b)(2) of our proposed rule 
would also require that the drugs included in each therapeutic class or 
category include a variety of strengths and doses to the extent this is 
feasible. We believe that the inclusion of at least two drugs in each 
therapeutic class or category (except for those classes or categories 
that include only one drug) strikes an appropriate balance between 
providing plans with the necessary leverage to negotiate with 
manufacturers for significant discounts on covered Part D drugs and 
ensuring sufficient drug choice for beneficiaries. We note, however, 
that it is our expectation that plans' formularies will provide Part D 
enrollees a comprehensive benefit--one that covers an amount and 
variety of drugs sufficient to treat all disease states. In addition, 
given that discounts on commonly used generic drugs are typically made 
available to enrollees under current industry practice and produce 
cost-savings both for plans and enrollees, we expect that prescription 
drug plan and MA-PD plan formularies will include a wide range of 
generic drugs.
    As elaborated above, we will evaluate the formularies of plans 
using a classification system different from the USP model guidelines 
to ensure that the formulary does not discriminate against certain 
classes of beneficiaries. We also

[[Page 46661]]

intend to strictly enforce rules regarding plans' P&T committees, as 
described above, as well as coverage determination, reconsideration, 
and appeals processes, to ensure that Part D enrollees are able to 
access the drugs they need.
    Within the aforementioned parameters, it is certainly possible that 
a prescription drug plan or MA-PD plan could develop a formulary that 
employs a number of strategies--for example, financial incentives to 
encourage use of generics, tiered cost-sharing and other mechanisms 
that create strong incentives for manufacturers to negotiate favorable 
prices for covered Part D drugs, prior authorization procedures, 
therapeutic interchange, step therapy, and use of mail order--to 
produce cost-savings both for plans and for Medicare. While we are open 
to these types of strategies as a way to minimize costs for enrollees 
and for the Medicare program, it is possible that certain vulnerable 
populations (enrollees in long-term care facilities or those suffering 
from mental illness or chronic diseases such as AIDS, for example) may 
be negatively impacted financially if they do not have access to a wide 
range of drugs in certain therapeutic classes and categories. We seek 
comments on ways to balance plans' flexibility to use some of the 
mechanisms described above to maximize covered Part D drug discounts 
and lower enrollee premiums with the needs of certain special 
populations of Part D enrollees.
    One such population is Part D enrollees residing in long-term care 
facilities. Given the changes in Medicaid drug coverage introduced by 
the MMA, we believe it is particularly important to ensure that the 
drug needs of institutionalized Part D enrollees--most of whom are 
dually eligible for Medicare and Medicaid--are met. The 
institutionalized population is generally more sensitive to and less 
tolerant of many medications. Long-term care pharmacies typically 
provide an open formulary to prescribing physicians that allows 
immediate access to a wide variety of medications in many different 
dosages and delivery forms. We request comments regarding any special 
treatment (for example, offering certain classes of enrollees an 
alternative or open formulary that accounts for their unique medical 
needs, and/or special rules with respect to access to dosage forms that 
may be needed by these populations but not by other Part D enrollees), 
we should consider requiring of plans with respect to special 
populations, as well as suggestions regarding the particular special 
populations for whom we may want to make allowances.
    Under Sec.  423.120(b)(3) of our proposed rule and in accordance 
with section 1860D-4(b)(3)(C)(iii) of the Act, PDP sponsors and MA 
organizations could not change therapeutic categories and classes in a 
formulary other than at the beginning of a plan year, except as we 
would permit to take into account new therapeutic uses and newly 
approved covered Part D drugs. Section 423.120(b)(4) of our proposed 
rule specifies that, in accordance with section 1860D-4(b)(3)(F) of the 
Act, PDP sponsors and MA organizations offering MA-PD plans would 
periodically be required to evaluate and analyze treatment protocols 
and procedures related to their formularies to ensure that their plan 
members were receiving the best possible care for conditions related to 
their use of covered Part D drugs. We invite comments as to minimum 
timeframes for periodic evaluation and analysis of protocols and 
procedures related to a plan's formulary by PDP plans and MA 
organizations offering MA-PD plans (for example, quarterly, annually).
    In addition, section 1860D-4(b)(3)(E) of the Act requires that PDP 
sponsors and MA organizations provide ``appropriate notice'' to us, 
affected enrollees, authorized prescribers, pharmacists, and pharmacies 
regarding any decision to either: (1) Remove a drug from its formulary, 
or (2) make any change in the preferred or tiered cost-sharing status 
of a drug. Section 423.120(b)(5) would implement that requirement by 
defining appropriate notice as at least 30 days prior to such change 
taking effect during a given contract year. We interpret the statutory 
term ``affected enrollee'' as referring to a plan enrollee who is 
currently taking a covered Part D drug that is either being removed 
from a plan's formulary, or whose preferred or tiered cost-sharing 
status is changing. In other words, plans would not be required to 
notify all enrollees regarding formulary changes during a contract 
year--only those directly affected by changes with respect to a 
particular covered Part D drug. We note that plans would still be 
required to provide at least two drugs within each therapeutic category 
and class of covered Part D drugs within the PDP sponsor or MA 
organization's formulary (unless there is only one drug in a particular 
therapeutic class or category), even if they choose to remove a covered 
Part D drug from their formularies in the middle of a contract year. In 
addition, we refer the reader to section II.M.5 of this preamble, which 
discusses formulary exceptions procedures and may be important for 
enrollees of plans whose formularies change mid-year.
    We recognize that both current and prospective enrollees of a 
prescription drug plan or an MA-PD plan will need to have the most 
current formulary information by the time of the annual coordinated 
election period described in Sec.  423.36(b) in order to enroll in the 
Part D plan that best suits their particular covered Part D drug needs. 
To this end, and as provided under Sec.  423.120(b)(6) of our proposed 
rule, PDP sponsors and MA organizations would be prohibited from 
removing a covered Part D drug or from changing the preferred or tiered 
cost-sharing status of a covered Part D drug between the beginning of 
the annual coordinated election period described in Sec.  423.36(b)(2) 
and 30 days subsequent to the beginning of the contract year associated 
with that annual coordinated election period. We believe this 
requirement will prevent situations in which prescription drug plans or 
MA-PD plans change their formulary early in the contract year, without 
providing appropriate notice, as described in Sec.  423.120(b)(5), to 
new enrollees. Given that we are proposing that plans provide at least 
30 days notice to affected enrollees prior to making formulary changes, 
it seems reasonable to require, as we propose doing in Sec.  
423.120(b)(6), that all marketing materials distributed during the 
annual coordinated election period reflect the formulary a plan will 
offer at the beginning of the contract year for which it is enrolling 
Part D eligible individuals.
    As discussed in sections II.C.6.c and II.C.6.d of this preamble, 
PDP sponsors and MA organizations can get information regarding 
formulary changes to beneficiaries via an Internet Web site, as well as 
via explanations of benefits sent to enrollees who utilize their Part D 
benefits. However, other methods (for example, notification by mail) 
will have to be used to provide notice to CMS, all affected enrollees, 
authorized prescribers, pharmacists, and pharmacies about impending 
formulary changes.
    Each PDP sponsor and MA organization offering qualified 
prescription drug coverage would also be required to establish policies 
and procedures to educate and inform health care providers and 
enrollees about its formulary, according to the provisions of Sec.  
423.120(b)(7) and section 1860D-4(b)(3)(D) of the Act. As required 
under section 1860D-4(b)(3) of the Act, the requirements regarding the 
development and application of formularies discussed in this preamble 
section may

[[Page 46662]]

be met by a PDP sponsor or MA organization directly, or through 
contracts or other arrangements between a PDP sponsor or MA 
organization and another entity or entities.

c. Use of Standardized Technology

    In accordance with the requirements of section 1860D-4(b)(2)(A) of 
the Act, Sec.  423.120(c) of our proposed rule would require that PDP 
sponsors and MA organizations issue (and reissue, as appropriate) a 
card or other technology that enrollees could use to access negotiated 
prices for covered part D drugs. Section 1860D-4(b)(2)(B)(i) of the Act 
mandates that we develop, adopt, or recognize standards relating to a 
standardized format for a card or other technology for accessing 
negotiated prices to covered Part D drugs. These standards would be 
compatible with the administrative simplification requirements of Title 
XI of the Act and could be based on standards developed by a standard 
setting organization.
    As provided under section 1860D-4(b)(2)(B)(ii) of the Act, we will 
consult with the National Council for Prescription Drug Programs 
(NCPDP) and other standard setting organizations, as appropriate, to 
develop these standards. Given that NCPDP is recognized as the industry 
standard for current prescription drug programs, and we relied on its 
standards in developing requirements for discount card sponsors' cards 
under the Medicare Prescription Drug Discount Card and Transitional 
Assistance Program, we are proposing basing our card standards on 
NCPDP's ``Pharmacy ID Card Standard.'' This standard is based on the 
American National Standards Institute ANSI INCITS 284-1997 standard 
titled Identification Card--Health Care Identification Cards, which may 
be ordered through the Internet at http://www.ansi.org. We will provide 
further operational guidance regarding our standards for a card (or 
other technology) to entities wishing to become PDP sponsors or MA 
organizations in time for these entities to use the standards (and have 
their cards approved for use by us) beginning January 1, 2006. It is 
our intent, however, that these standards require that plans use 
something other than an enrollee's social security number as an 
identifier on their cards.
5. Special Rules for Access to Covered Part D Drugs at Out-of-Network 
Pharmacies (Sec.  423.124)
    Section 1860D-4(b)(1)(C)(iii) of the Act requires us to establish 
pharmacy access standards that include rules for adequate emergency 
access to covered Part D drugs by Part D enrollees. We reviewed the 
definition of an ``emergency medical condition'' (see Sec.  
422.113(b)(1)(i) of our proposed rule) under the MA program to 
determine whether the ``prudent layperson'' standard was an appropriate 
standard for ascertaining whether the need for a covered Part D drug 
constitutes an emergency. However, we do not believe that the 
definition of an emergency medical condition, or a variation thereof, 
is entirely appropriate to prescription drugs. To the extent that a 
physician (or other prescriber) prescribes a covered Part D drug, we 
consider that covered Part D drug to likely be medically necessary. The 
issue of urgency or emergency is difficult to determine from a clinical 
perspective, however.
    Given the inherent difficulties in establishing emergency access 
standards for covered Part D drugs, we propose to meet the requirements 
of section 1860D-4(b)(1)(C)(iii) by establishing a broader out-of-
network access requirement. As provided in Sec.  423.124(a) of our 
proposed rule, we would require that PDP sponsors and MA organizations 
offering MA-PD plans assure that their enrollees have adequate access 
to drugs dispensed at out-of-network pharmacies when they cannot 
reasonably be expected to obtain covered Part D drugs at a network 
pharmacy. We expect that out-of-network access would be guaranteed 
under at least the following four scenarios:
     In cases in which a Part D enrollee meets all of the 
following: is traveling outside his or her plan's service area; runs 
out of or loses his or her covered Part D drug(s) or becomes ill and 
needs a covered Part D drug; and cannot access a network pharmacy;
     In cases in which a Part D enrollee cannot obtain a 
covered Part D drug in a timely manner within his or her service area 
because, for example, there is no network pharmacy within a reasonable 
driving distance that provides 24-hour-a-day/7-day-per-week service;
     In cases in which a Part D enrollee resides in a long-term 
care facility and the contracted long-term care pharmacy does not 
participate in his or her plan's pharmacy network; and
     In cases in which a Part D enrollee must fill a 
prescription for a covered Part D drug, and that particular covered 
Part D drug (for example, an orphan drug or other specialty 
pharmaceutical typically shipped directly from manufacturers or special 
vendors) is not regularly stocked at accessible network retail or mail-
order pharmacies.
We believe that enrollees under the aforementioned circumstances could 
not reasonably be expected to access a network pharmacy and must 
therefore be assured access to an out-of-network pharmacy as provided 
under Sec.  423.124(a) of our proposed rule. We request comments on our 
proposed out-of-network access requirements.
    We are aware that routine access to out-of-network pharmacies by 
Part D enrollees may undermine a plan's cost-savings incentives. 
However, provided adequate access is assured under Sec.  423.124(a), 
PDP sponsors and MA organizations offering MA-PD plans would have some 
flexibility to design their out-of-network coverage policies. PDP 
sponsors and MA organizations offering MA-PD plans may therefore 
establish reasonable rules to assure that enrollees use out-of-network 
pharmacies appropriately. For example, PDP sponsors and MA 
organizations offering MA-PD plans could limit the amount of covered 
Part D drugs dispensed at an out-of-network pharmacy, require the use 
of mail order pharmacies as appropriate for extended out-of-area 
travel, and/or require a plan notification process for individuals who 
fill their prescriptions at out-of-network pharmacies.
    As a point of clarification, enrollees would not be permitted to 
access prescription drugs that were not considered covered Part D drugs 
due to application of the prescription drug plan's or MA-PD plan's 
formulary at an out-of-network pharmacy. Enrollees who require a 
covered Part D drug that is not on their prescription drug plan or MA-
PD plan's formulary would be required to use the coverage determination 
process described in Sec.  423.566 of our proposed rule.
    Both the enrollee and his or her prescription drug plan or MA-PD 
plan would be financially responsible for covered Part D drugs obtained 
at an out-of-network pharmacy as described in Sec.  423.124(a) of our 
proposed rule (in other words, when an enrollee cannot reasonably be 
expected to access his or her covered Part D drugs at a network 
pharmacy), though we note that paper claims may have to be filed and 
payment reconciled after the drug purchase instead of (as would be the 
case with most, if not all, network pharmacies), at the point of sale. 
Section 423.124(b)(1) of our proposed rule would require that the Part 
D enrollee be liable for any cost-sharing, including a deductible, that 
would have otherwise applied had the covered Part D drug been obtained 
at a network pharmacy. Such cost-sharing would be applied relative to 
the plan allowance for that

[[Page 46663]]

covered Part D drug, which we propose defining in Sec.  423.100 as the 
amount prescription drug plans and MA-PD plans use to determine their 
payment and Part D enrollees' cost-sharing for covered Part D drugs 
purchased at out-of-network pharmacies in accordance with the 
requirements of proposed Sec.  423.124(b). We request comments on how 
to further define the term ``plan allowance.'' Our understanding is 
that it is current industry practice to define the plan allowance as 
the lowest of the contractual discount offered to pharmacies in a 
plan's standard contract (as described above, we are soliciting public 
comment regarding whether we should require PDP sponsors and MA 
organizations to offer a standard contract to all pharmacies), maximum 
allowable cost (MAC), or the pharmacy's usual and customary price 
(described below).
    Thus, for example, if the beneficiary would have been liable for 25 
percent coinsurance at a network pharmacy, he or she would pay 25 
percent of the plan allowance for that covered Part D drug. If, on the 
other hand, the beneficiary would have been liable for a $10 copay at a 
network pharmacy, he or she would still pay $10 at the out-of-network 
pharmacy.
    In addition to this cost-sharing, and as provided under proposed 
Sec.  423.124(b)(2), the enrollee would be responsible for any 
difference in price between the out-of-network pharmacy's usual and 
customary (U&C) price and the plan allowance for that covered Part D 
drug. The term ``usual and customary price'' refers to the price that a 
pharmacy would charge a customer who does not have any form of 
prescription drug coverage. Thus, for example, if an out-of-network 
pharmacy's U&C price for a covered Part D drug were $100, the plan's 
allowable cost (including beneficiary cost-sharing) for that covered 
Part D drug were $90, and the negotiated price for the covered Part D 
drug at the beneficiary's network pharmacy were also $90, a beneficiary 
obtaining a drug at the out-of-network pharmacy would pay the cost-
sharing that would have otherwise applied at a network pharmacy (for 
example, 25 percent of the $90 plan allowance), plus the $10 
difference--a total of $32.50, in this case (compared to $22.50 at the 
network pharmacy). We request public comments regarding our definition 
of usual and customary price. We are concerned that, given our proposed 
out-of-network access policy, pharmacies may increase their U&C prices 
to increase their total reimbursement. This would be prejudicial not 
only to beneficiaries in need of out-of-network access, but also to 
uninsured individuals purchasing drugs at retail pharmacies, and we 
seek feedback on permissible ways to prevent such an outcome.
    When an enrollee purchases a covered Part D drug at an out-of-
network pharmacy consistent with Sec.  423.124(a) of our proposed rule, 
the cost-sharing he or she pays relative to the plan allowance ($22.50 
in the example above) counts as an incurred cost against his or her 
annual out-of-pocket threshold because such out-of-network access to a 
covered part D drug is a covered benefit under those circumstances. As 
with the price differential that a beneficiary could incur by 
purchasing an extended supply (for example, 90-day) of covered Part D 
drugs purchased at a retail pharmacy rather than a mail-order pharmacy 
(discussed in section II.C.4.a of this preamble), the price 
differential between out-of-network pharmacies' U&C costs and the plan 
allowance would also be counted as an incurred cost against a 
beneficiary's annual out-of-pocket threshold. We seek comments on our 
proposal that this price differential be counted as an incurred cost 
against the out-of-pocket threshold consistent with the definition of 
``incurred cost'' in Sec.  423.100 of the proposed rule. Under this 
approach, plans would be required to explicitly account for such price 
differentials in the actuarial valuation of their coinsurance in their 
bids. In addition, any such differential would also count toward the 
deductible for covered Part D expenditures between $0 and the plan's 
deductible.
    The plan in the example above would be responsible for payment of 
the plan allowance for the covered Part D drug minus the applicable 
beneficiary cost-sharing--$67.50, in this case--which is the same 
amount as the plan would have paid for that covered Part D drug at the 
network pharmacy. Given our proposed rules regarding financial 
responsibility for out-of-network access to covered Part D drugs, plans 
would in effect be financially held harmless for out-of-network use by 
their enrollees under Sec.  423.124(a) of our proposed rule. We believe 
this is necessary in order to curb unnecessary use of out-of-network 
pharmacies and to ensure that plans can achieve cost-savings for both 
beneficiaries and the Medicare program. We welcome public comments 
regarding our proposed payment rules for covered Part D drugs obtained 
at out-of-network pharmacies when enrollees cannot reasonably obtain 
those drugs at a network pharmacy.
6. Dissemination of Plan Information (Sec.  423.128)
    Section 423.128 of our proposed rule would establish beneficiary 
protection requirements concerning the dissemination of Part D 
information by PDP sponsors and MA organizations to enrollees in, and 
individuals eligible to enroll in, a prescription drug plan or MA-PD 
plan. Part D information disseminated by PDP sponsors and MA 
organizations to current or prospective Part D enrollees would 
constitute marketing materials, as described in Sec.  423.50(b) of the 
proposed rule, and must be approved by us. For more information 
regarding the approval of marketing materials, please refer to section 
II.B.9 of this preamble).
    As explained in greater detail below, we note that--with the 
exception of the drug-specific information dissemination requirements--
many of the requirements of Sec.  423.128 of the proposed rule 
duplicate information dissemination requirements contained in Sec.  
422.111 of our proposed rule that are applicable to all MA plans, 
including MA-PD plans. We have proposed applying the requirements of 
Sec.  423.128 to MA-PD plans to ensure that Part D eligible enrollees 
have access to comparable drug-specific information from both 
prescription drug plans and MA-PD plans. We solicit comments on how 
best to coordinate the requirements of Sec.  423.128 and Sec.  422.111 
of our proposed rule for MA-PD plans.

a. Content of Plan Description

    Sections 423.128(a) and (b) of our proposed rule complies with the 
stipulation in section 1860D-4(a)(1) of the Act that requirements for 
the dissemination of Part D information be similar to the information 
dissemination requirements for MA organizations under section 
1852(c)(1) of the Act and as interpreted in Sec.  422.111(b) of our 
proposed rule.
    In order to ensure that individuals who are either eligible for, or 
enrolled in, a plan offering qualified prescription drug coverage 
receive the information they need to make informed choices about their 
Part D coverage options, PDP sponsors and MA organizations offering an 
MA-PD plan would be required to disclose, to each enrollee in a plan 
offering qualified prescription drug coverage, a detailed description 
of that plan. This description would be provided in a clear, accurate, 
and standardized form at the time of enrollment and annually, at a 
minimum, after enrollment. The information provided would be similar to 
the information MA plans must disclose to

[[Page 46664]]

their enrollees under Sec.  422.111(b) of our proposed rule. The plan 
description would include information about:
     The service area;
     Benefits offered, including information on cost-sharing 
requirements (for example, tiered or other copayment level applicable 
to a drug or class of drugs, deductibles, coinsurance), cost-sharing 
requirements for subsidy eligible individuals, and how a beneficiary 
may obtain further information about those cost-sharing requirements;
     How any formulary used by the plan works, the process for 
obtaining an exception to a prescription drug plan's or MA-PD plan's 
tiered cost-sharing structure, and how to obtain a copy of the 
formulary as well as information about formulary changes;
     Access to network pharmacies;
     Out-of-network coverage provided by the plan;
     Grievance, coverage determination, exceptions, 
reconsideration, and appeals procedures;
     A description of the plan's quality assurance program, 
including the medication therapy management program required under 
Sec.  423.153(d) of our proposed rule; and
     Disenrollment rights and responsibilities.

b. Disclosure of Information Upon Request

    In addition, according to section 1860D-4(a)(2) of the Act and as 
codified in Sec.  423.128(c) of our proposed rule, a beneficiary who is 
eligible to enroll in a PDP sponsor's prescription drug plan or an MA 
organization's MA-PD plan would have the right to obtain, upon request, 
more detailed plan information. This information would be similar to 
that which MA organizations are required to disclose to their enrollees 
upon request under sections 1852(c)(2)(A), (B), and (C) of the Act and 
42 CFR 422.111(c) and (f) of our proposed rule, and would include:
     General coverage information (for example, enrollment 
procedures; grievance, coverage determination, reconsideration, 
exceptions, and appeals procedural rights; the potential for the PDP 
sponsor or MA organization contract termination or service area 
reduction; benefits; premiums; formulary; service area; and quality and 
performance indicators);
     The procedures the organization would use to control 
utilization of services and expenditures;
     The number of disputes and their disposition in the 
aggregate; and
     The financial condition of the PDP sponsor or MA 
organization.

c. Provision of Specific Information

    As required under section 1860D-4(a)(3) of the Act and Sec.  
423.128(d) of our proposed rule, PDP sponsors and MA organizations 
offering an MA-PD plan would be required to have in place a mechanism 
for providing, on a timely basis, specific information to current and 
prospective enrollees upon request. Such mechanisms would include:
     A toll-free customer call center;
     An Internet Web site; and
     Responses in writing upon beneficiary request.
    As provided in Sec.  423.128(d)(1)(i) and (ii) of our proposed 
rule, plans' customer call centers would be required to be open during 
usual business hours and provide customer telephone service, including 
to pharmacists, in accordance with standard business practices. We 
strongly recommend, however, that plans provide some sort of 24-hour-a-
day/7 day-a-week access to their toll-free customer call centers in 
order to provide timely responses to time-sensitive questions (for 
example, on out-of-network pharmacy access) and request comments on 
whether we should require the more stringent 24-hour-a-day/7-day-a-week 
standard in our final regulations.
    In addition, we are proposing requiring that plans maintain Web 
sites as one means of disseminating information to current and 
prospective Part D enrollees. The Internet has proved to be an 
inexpensive and widely available source of information on health plans. 
Almost all Federal Employees Health Benefits (FEHB) plans, most large 
employer plans, and almost all managed care organizations maintain 
websites for the convenience of enrollees. Such Web sites typically 
contain information on drug formularies, preferred providers, plan 
access and emergency procedures, claims procedures, and a wide array of 
other useful information. Health plans have found that up-to-date 
formulary and provider information can be conveyed to enrollees far 
more quickly, reliably, and inexpensively via Internet than through 
traditional paper processes. Survey evidence shows that roughly half of 
the elderly routinely use the Internet. Even those who do not have 
direct access usually have friends or family who can assist them in 
obtaining information from the Internet. Libraries and senior support 
and counseling groups are almost always able to provide Internet 
Assistance. Thus, a great number of Medicare beneficiaries could 
benefit from the existence of prescription drug plan and MA-PD plan Web 
sites.
    As provided in Sec.  423.128(d)(2)(i) of our proposed rule, PDP 
sponsors and MA organizations offering MA-PD plans would be required to 
include the detailed plan description information described in section 
II.C.6.a of this preamble. In addition, per Sec. Sec.  
423.128(d)(2)(ii) and (iii) of our proposed rule, plans would have to 
post current versions of their formularies, update those formularies at 
least weekly, and use the website as one mechanism to provide notice 
(at least 30 days in advance, as discussed in section C.4.b of this 
preamble) of upcoming formulary changes, including the removal of 
covered Part D drugs from a formulary or changes to the tiered or 
preferred status of covered Part D drugs. Plan websites would have to 
be available both to current and prospective Part D enrollees. We note 
that plans would continue to be required to make information available 
to Part D eligible individuals in written formats as is currently the 
case for MA plans, and the provision of plan information via the 
Internet would simply be one additional mechanism for plans to 
communicate with enrollees and potential enrollees.
    Finally, prescription drug plans and MA-PD plans would be required 
to respond to beneficiary requests for specific information in writing, 
upon request. This requirement is codified in Sec.  423.128(d)(3) of 
our proposed rule.

d. Claims Information

    In accordance with the requirements of section 1860D-(4)(a)(4) of 
the Act, and as codified in Sec.  423.128(e) of our proposed rule, PDP 
sponsors would furnish to enrollees who receive covered Part D drugs an 
explanation of benefits. Explanations of benefits would be required to 
be written in a form easily understandable to beneficiaries.
    As provided in Sec. Sec.  423.128(e)(1)-(5) of our proposed rule, 
plans' explanations of benefits would have to include:
     A listing of the item or service for which payment was 
made, as well as the amount of such payment for each item or service;
     A notice of the individual's right to request an itemized 
statement;
     Information regarding the cumulative, year-to-date amount 
of benefits provided relative to the deductible, the initial coverage 
limit, and the annual out-of-pocket threshold for that year;
     A beneficiary's cumulative, year-to-date total of incurred 
costs (to the extent practicable); and
     Information about any applicable formulary changes.

[[Page 46665]]

    We would require, under Sec.  423.128(e)(6) of our proposed rule, 
that an explanation of benefits be provided at least monthly for those 
utilizing their prescription drug benefits in a given month. This 
proposed requirement is consistent with our policy regarding the 
Medicare Summary Notice, which is provided monthly for beneficiaries 
with Part A or Part B utilization. It is also consistent with the 
standards followed by banking and other financial organizations, which 
provide their clients with monthly statements provided there is 
activity on their accounts.
    A PDP sponsor or MA organization offering an MA-PD plan could 
provide the notice of benefits electronically in cases in which a 
beneficiary elected to receive notices in that form. If technically 
feasible, a PDP sponsor or MA organization could also provide the 
notice of benefits at the point of sale; this would allow the PDP 
sponsor or MA organization to provide enrollees with additional 
information (for example, this could facilitate the provision of 
information regarding the availability of lower-cost generic 
availability required under Sec.  423.132 of the proposed rule).
7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs 
(Sec.  423.132)
    Under Sec.  423.132(a) of our proposed rule, which codifies the 
requirements of section 1860D-4(k)(1) of the Act, PDP sponsors offering 
a prescription drug plan and MA organizations offering an MA-PD plan 
would be required to ensure that pharmacies inform enrollees of any 
differential between the price of a covered Part D drug to an enrollee 
and the price of the lowest priced generic version of that drug and 
available under the plan at that pharmacy. Under Sec.  423.132(b) of 
our proposed rule, this information would have to be provided at the 
time the plan enrollee purchases the drug, or in the case of drugs 
purchased by mail order, at the time of delivery of that drug. 
Disclosure of this information would not be necessary, however, if the 
particular covered Part D drug purchased by an enrollee was the lowest-
priced generic version of that drug available at a particular pharmacy.
    As provided under section 1860D-4(k)(2)(B) of the Act and Sec.  
423.132(c) of our proposed rule, we are permitted to waive the 
requirement that information on differential prices between a covered 
Part D drug and generic equivalent covered Part D drugs be made 
available to prescription drug plan enrollees at the point of sale (or 
at the time of delivery of a drug purchased through a mail-order 
pharmacy). Accordingly, we are proposing waiving the requirement in 
Sec.  423.132(a) that information on lowest-priced generic drug 
equivalents be provided to enrollees for covered Part D drugs purchased 
by prescription drug plan and MA-PD plan enrollees when those covered 
Part D drugs are purchased at:
     Any pharmacy, when the individual is enrolled in an MA 
private fee-for-service plan that offers qualified prescription drug 
coverage and provides plan enrollees with access to covered Part D 
drugs dispensed at all pharmacies, without regard to whether they are 
contracted network pharmacies, and does not charge additional cost-
sharing for access to covered Part D drugs dispensed at all pharmacies;
     Out-of-network pharmacies;
     I/T/U network pharmacies; and
     Network pharmacies located in any of the U.S. territories 
(American Samoa, the Commonwealth of the Northern Mariana Islands, 
Guam, Puerto Rico, and the Virgin Islands).
    Section 1860D-21(d)(2) of the Act specifically requires us to waive 
the public disclosure requirement for private fee-for-service MA plans 
meeting the criteria described above. Section 423.132(c)(1) of our 
proposed rule implements this waiver for private fee-for-service MA 
plans that meet those criteria.
    Our rationale for proposing waiver of the public disclosure 
requirement for out-of-network pharmacies, as provided under Sec.  
423.132(c)(2) of our proposed rule, is that such a requirement 
necessitates a contract between a PDP sponsor or MA organization and a 
pharmacy. Since, by definition, out-of-network pharmacies are not under 
contract with a PDP sponsor or an MA organization, complying with the 
public disclosure requirement would be impracticable.
    We also propose waiving the requirement in Sec.  423.132(a) when 
prescription drug plan enrollees obtain covered Part D drugs in I/T/U 
pharmacies, as provided under Sec.  423.132(c)(3) of our proposed rule. 
Because I/T/U pharmacies do not charge American Indians/Alaska Natives 
(AI/ANs) for drugs obtained at I/T/U pharmacies, AI/ANs obtaining drugs 
from these pharmacies would not benefit from the provision of 
information about covered Part D drug price differentials. Furthermore, 
because I/T/U pharmacies generally only stock the generic versions of 
brand name drugs, AI/ANs obtaining drugs from these pharmacies would 
already be receiving a generic equivalent of any brand name part D drug 
prescribed to them.
    We believe it is appropriate to waive the public disclosure 
requirement for PDP sponsors when covered Part D drugs are provided in 
network pharmacies located in the territories given that few PBMs and 
health plans currently have contractual relationships with retail 
pharmacies in the territories. Our goal in waiving this requirement, as 
provided in Sec.  423.132(c)(4) of our proposed rule, would be to 
reduce the administrative complexity of PDP sponsors and MA 
organizations' contracts with participating retail pharmacies in the 
territories, which we believe would enhance organizations' willingness 
to offer qualified prescription drug coverage in the territories. 
However, mail order drugs sent to residents of the territories would be 
required to include information about the price differential between a 
covered Part D drug and its lowest-priced generic version in the same 
manner as such information would be provided to Part D enrollees in the 
50 States and District of Columbia who obtain mail order drugs under 
Part D.
    Finally, as provided in Sec.  423.132(c)(5) of our proposed rule, 
we propose waiving the public disclosure requirement in Sec.  
423.132(a) under such circumstances as we deem to be impossible or 
impracticable. We request comments on the appropriateness of the 
circumstances we have proposed for waiver of the requirements in Sec.  
423.132(c), as well as any additional circumstances we may wish to 
consider. We note that a similar public disclosure requirement was 
waived for endorsed discount card sponsors under the Medicare 
Prescription Drug Discount Card (42 CFR 403 and 408) for covered 
discount card drugs dispensed under several of the same circumstances 
as those described above.
    In Sec.  423.132(d)(1) of our proposed rule, we propose waiving the 
requirement that information on differential prices between a covered 
Part D drug and generic equivalent covered Part D drugs be made 
available to prescription drug plan and MA-PD plan enrollees at the 
point of sale when prescription drug plan enrollees obtain covered Part 
D drugs in long-term care pharmacies. Long-term care pharmacies 
generally provide drugs directly to the skilled nursing facilities and 
nursing facilities where the patient resides, not directly to the 
patient, under a medical benefit. They also engage in a significant 
coordination of benefits effort that would require that at least some 
claims be processed off-line, and not in real time. Given the manner in 
which long-term care pharmacies provide prescription drugs to residents 
of long-

[[Page 46666]]

term care facilities, as well as the way in which they process claims, 
it would be impracticable for these pharmacies to provide beneficiaries 
with information regarding covered Part D drug price differentials at 
the point of sale. Although long-term care network pharmacies would be 
exempt from the requirement that information about lower-priced generic 
alternatives be provided at the point of sale, they would not be exempt 
from the public disclosure requirement in Sec.  423.132(a) altogether. 
We request comments regarding appropriate standards with regard to the 
timing of such disclosure by long-term care pharmacies to the 
institutionalized Part D enrollees they service. We note, as well, that 
under Sec.  423.132(d)(2) of our proposed rule, we may modify the 
timing of the public disclosure requirement under such other 
circumstances as we deem compliance with that requirement to be 
impossible or impracticable.
8. Privacy, Confidentiality, and Accuracy of Enrollee Records (Sec.  
423.136)
    To the extent that the prescription drug plan offered by a PDP 
sponsor maintains medical records or other health information regarding 
Part D enrollees, Sec.  423.136 of our proposed rule would require the 
PDP sponsor to meet the same requirements regarding confidentiality and 
accuracy of enrollee records as MA organizations offering MA plans must 
currently meet under 42 CFR 422.118, according to the stipulations of 
section 1860D-4(i) of the Act. PDP sponsors would therefore be required 
to--
     Abide by all Federal and State laws regarding 
confidentiality and disclosure of medical records or other health and 
enrollment information, including the Health Insurance Portability and 
Accountability Act (HIPAA) of 1996 and the privacy rule promulgated 
under HIPAA;
     Ensure that medical information is released only in 
accordance with applicable Federal or State law;
     Maintain the records and information in an accurate and 
timely manner; and
     Ensure timely access by enrollees to records and 
information pertaining to them.
    Prescription drug plans would be considered covered entities under 
the HIPAA Privacy Rule because they meet the definition of ``health 
plan,'' as described in 45 CFR 160.103. The HHS Office for Civil Rights 
(OCR) is responsible for implementing and enforcing the HIPAA Privacy 
Rule. OCR has authority to investigate complaints, to conduct 
compliance reviews, and to impose civil money penalties for HIPAA 
Privacy Rules violations. Thus, any violations by an endorsed sponsor 
with respect to its obligations under the Privacy Rule as a covered 
entity are subject to such enforcement by OCR. OCR maintains a Web site 
with frequently asked questions and other compliance guidance at http://hhs.gov/ocr/hipaa.

D. Cost Control and Quality Improvement Requirements for Prescription 
Drug Benefit Plans

1. Overview (Sec.  423.150)
    Subpart D of part 423 implements provisions included in sections 
1860D-4(c), 1860D-4(d), 1860D-4(e), 1860D-4(j), and 1860D-21(d)(3) of 
the Act and sections 102(b) and 109 of Title I of the MMA. This subpart 
sets forth the following requirements:
     Cost and Utilization Management Programs, Quality 
Assurance Programs, Medication Therapy Management Programs (MTMP), and 
Programs to control fraud, abuse, and waste for PDP sponsors and MA 
Organizations offering MA-PD plans that offer qualified prescription 
drug coverage;
     CMS consumer satisfaction surveys of PDP and MA-PD plan 
enrollees.
     Electronic prescription programs.
     Compliance deemed on the basis of accreditation.
     Accreditation organizations.
     Procedures for the approval of accreditation as a basis 
for deeming compliance.
2. Cost and Utilization Management, Quality Assurance, Medication 
Therapy Management, and Programs To Control Fraud, Abuse, and Waste 
(Sec.  423.153)
    Section 423.153(a) of our proposed rule would require each PDP 
sponsor or MA Organization offering a MA-PD plan that provides 
qualified prescription drug coverage under a prescription drug plan to 
establish a cost-effective drug utilization management program, a 
quality assurance program, a MTMP, and a program to control fraud, 
abuse, and waste as described in Sec. Sec.  423.153(b), 423.153(c), 
423.153(d), and 423.153(e), respectively.
    We have combined these requirements into one section of the 
proposed regulation because each of these requirements would impact the 
quality and cost of care provided to beneficiaries. Our intent is to 
ensure that the prescription drug benefit would be provided using state 
of the art cost management and quality assurance systems. We also 
understand the overlapping nature of these requirements and that 
provisions under one requirement might complement another requirement. 
For example, drug utilization management early-refill edits used to 
prevent stockpiling of medications could also identify potential 
medication misuse by patients.
    Although these requirements are similar in their underlying goals, 
they can also be quite different. For example, drug utilization 
management and quality assurance systems are generally considered to be 
population based, while medication therapy management involves 
targeted, direct patient care.
    While we understand that some members of industry use various 
quality assurance measures and systems for controlling utilization and 
reducing medication errors, less information is available regarding 
medication therapy management. Medication therapy management has been 
used to describe a broad range of professional activities and 
responsibilities. We are familiar with state Medicaid programs (for 
example, Wisconsin, Mississippi) paying for cognitive services as part 
of their prescription drug benefit, but we have less information about 
current similar practices in the private sector. Therefore, our 
regulatory approach for utilization management, quality assurance, and 
controlling fraud, abuse, and waste will be different than our approach 
for medication therapy management. We particularly ask for comments on 
this section of the proposed regulation.
    In general, and within the parameters described later in this 
preamble and in regulation, PDP sponsors and MA Organizations offering 
MA-PD plans would have flexibility to design drug utilization 
management programs, quality assurance measures and systems, MTMPs, and 
programs designed to control fraud, abuse, and waste.

a. Cost Effective Drug Utilization Management

    Section 423.153(b) of our proposed rule would require each PDP 
sponsor or MA Organization offering a MA-PD plan that provides 
qualified prescription drug coverage under a prescription drug plan to 
provide a cost-effective drug utilization management program. The 
program would include incentives to reduce costs when medically 
appropriate, such as through the use of multiple source drugs as 
defined in section 1927(k)(7)(A)(i) of the Act. For example, plans 
could utilize different dispensing fees that would encourage the use of 
these multiple source drugs as opposed to more expensive single source 
drugs. This should not be

[[Page 46667]]

confused with the practice of ``switching'' one branded drug product 
with another similar branded drug product, commonly referred to as 
``therapeutic substitution.'' Therapeutic substitution would always 
require explicit prescriber notification and approval.
    We believe that a cost-effective drug utilization management 
program could also employ the use of prior authorization, step therapy, 
tiered cost-sharing, and other tools to manage utilization. We are 
aware that these are tools commonly used today to manage pharmacy 
benefit costs for many commercial and State programs. We believe that 
the competitive bidding and premium setting processes, combined with 
the requirements for transparency and information availability, provide 
powerful incentives for plans to innovate and adopt the best techniques 
available. We invite comment on whether there are industry standards 
for cost effective drug utilization management and whether CMS should 
adopt any of these standards for PDPs and MA-PDs.
    Although we have not included proposed regulations, we are 
considering for the final rule a requirement that these tools should be 
under the direction and oversight of a Pharmacy and Therapeutics 
Committee to ensure an appropriate balance between clinical efficacy 
and cost effectiveness. We seek comments on this issue. We also seek 
comments on requiring the direct involvement of a Pharmacy and 
Therapeutics Committee not only with cost containment measures, but 
also with other areas of quality assurance and medication therapy 
management. Again, although we have not included proposed regulations 
requiring this standard, we are considering this standard for our final 
rule.
    In addition, appropriate drug utilization management programs would 
have policies and systems in place to assist in preventing 
overutilization and underutilization of prescribed medications. PDP 
sponsors and MA Organizations offering MA-PD plans must inform 
enrollees of program requirements and procedures in order to prevent 
unintended interruption in drug therapy. For example, enrollees would 
be made aware of how to proceed if special circumstances require their 
prescriptions to be refilled before the targeted refill date.

b. Quality Assurance

    Section 423.153(c) of our proposed rule would require each PDP 
sponsor or MA Organization offering a MA-PD plan that provides 
qualified prescription drug coverage under a prescription drug plan to 
provide a quality assurance program. That program would include quality 
assurance measures and systems for (1) reducing medication errors, (2) 
reducing adverse drug interactions, and (3) improving medication use.
    We are proposing that quality assurance programs include 
requirements for drug utilization review, patient counseling, and 
patient information record-keeping. We believe these requirements would 
generally need to comply with section 4401 of the Omnibus 
Reconciliation Act of 1990 as codified in 42 CFR 456.705 and section 
1927(g)(2)(A) of the Act, and we are considering such specific 
requirements for the final rule. Although these regulations were 
written specifically for the Medicaid population, we understand that 
they describe currently accepted standards for contemporary pharmacy 
practice and our intent is to require plans to continue to comply with 
contemporary standards. We solicit comment on whether the Medicaid 
standards are in fact industry standards, whether they are appropriate 
standards for part D, and if they are, how they should be adapted for 
use in part D. Therefore, we have chosen not to add further 
specification in the regulation text. We also understand that some 
members of industry use additional quality assurance measures and 
systems. We invite comments on whether there are industry standards, 
above and beyond those mentioned above, that we might adopt. 
Furthermore, PDP sponsors and MA Organizations offering MA-PD plans 
will be required to have systems and measures established to ensure 
that network pharmacy providers are complying with their quality 
assurance requirements. We are requesting comments on the costs and 
challenges associated with these systems and measures.
    The elements that are currently viewed as desirable for quality 
assurance systems are--(1) electronic prescribing (which will become a 
requirement in the future as discussed later in this preamble); (2) 
clinical decision support systems; (3) educational interventions, which 
could be provided by QIOs or could rely on other mechanisms; (4) bar 
codes; (5) adverse event reporting systems; and (6) provider and 
patient education. We do not expect PDPs and MA-PD plans to adopt all 
of these elements. However, we expect substantial innovation and rapid 
development of improved quality assurance systems in the new 
competitive and transparent market being created by the new Part D 
benefit. We invite comments on which, if any, elements of a quality 
assurance system should be contained in our program requirements. We 
are particularly interested in best practices in quality assurance, 
costs and benefits associated with each element, the challenges 
involved in implementing quality assurance measures and systems, types 
of data useful for reducing medication errors, associated costs and 
challenges with collecting this data, and how this data could be best 
communicated to providers and beneficiaries to improve medication use.
    We note that the MMA does not define or explain the term 
``medication error.'' Nevertheless, we believe a common definition is 
important. In the future, we may require quality reporting that 
includes error rates. We could use this information to evaluate plans. 
In addition, we may publish this information for enrollees to use when 
comparing and choosing their individual plans. Therefore, we 
particularly invite comments on how we could evaluate PDPs and MA-PDs 
based on the types of quality assurance measures and systems they have 
in place, how error rates can be used to compare and evaluate plans, 
and how this information could best be provided to beneficiaries to 
assist them in making their choices among plans.
    Medication error reduction programs and requirements have been 
discussed in many venues and various definitions of ``medication 
error'' have been used. For example, in its proposed rule requiring bar 
codes on most human drug products, the Food and Drug Administration 
adopted the following definition of a medication error:

    Any preventable event that may cause or lead to inappropriate 
medication use or patient harm while the medication is in the 
control of the healthcare professional, patient, or consumer. Such 
events may be related to professional practice; healthcare products, 
procedures, and systems, including prescribing; order communication; 
product labeling, packaging, and nomenclature; compounding; 
dispensing; distribution; administration; education; monitoring; and 
use. (See 68 FR 12500 (March 14, 2003)).

    This definition of ``medication error'' is identical to that used 
by the National Coordinating Council for Medication Error Reporting and 
Prevention (NCC MERP). (See National Coordinating Council for 
Medication Error Reporting and Prevention, ``What is a Medication 
Error?'' (Undated)).
    We are citing this definition in this preamble as one that we would 
use initially in interpretive guidance. We believe that this definition 
could be

[[Page 46668]]

applied to, and include, adverse drug events and interactions as they 
pertain to quality assurance. As the state of industry practice 
evolves, we may, from time to time, update this definition by manual 
issuance. We invite comments on this definition.

c. Medication Therapy Management Programs

    Section 1860D-4(c)(1)(C) of the Act requires PDP sponsors and MA 
organizations offering MA-PD plans to establish a MTMP, and Sec.  
423.153(d) would codify that requirement. As stated earlier, neither 
we, nor many private insurers, have extensive experience requiring or 
reimbursing for MTMPs. As a result, we seek comments on what 
requirements and/or guidelines for MTMPs should be formulated in our 
regulation. In this section of the preamble, we are providing a broad 
overview of the types of activities that a PDP sponsor or MA 
organization offering a MA-PD plan could provide as part of a MTMP. We 
also discuss various options for determining which beneficiaries might 
qualify as ``targeted individuals'' and what types of clinicians might 
provide MTMP services. We plan to conduct further research and seek 
comments before establishing requirements with respect to MTMPs. We are 
interested in current MTMP best practices, essential components of 
MTMPs, and which quality assurance requirements, if any, should be 
included in MTMPs. We are also interested in measures and information 
on effective MTMP services that could be publicized and used by 
beneficiaries who wish to use these services. We are particularly 
interested in the most effective steps to make valuable, proven MTMP 
services available to beneficiaries to improve health care quality and 
reduce costs. We are mindful of the importance of stimulating the 
evolution of the most appropriate and efficient form of MTMPs, without 
stifling innovation or prematurely locking-in specific attributes.
    The description of a MTMP in section 1860D-4(c)(2) of the Act would 
allow for plans to establish a broad range of additional services. The 
purpose of a MTMP is to provide services that will optimize therapeutic 
outcomes for targeted beneficiaries. Specific services to be provided 
under a MTMP would be distinct from those required for dispensing 
medication. Medication therapy management services would be 
reimbursable when adopted by a plan and only when provided to targeted 
beneficiaries as defined in Sec.  423.153(2) of our proposed rule and 
discussed later in this preamble.
    Section 1860D(4)(c)(2)(B) of the Act states that MTMPs may include 
elements designed to promote (for targeted beneficiaries):
     Enhanced enrollee understanding--through beneficiary 
education counseling, and other means--that promotes the appropriate 
use of medications and reduces the risk of potentially adverse events 
associated with the use of medications.
     Increased enrollee adherence to prescription medication 
regimens (for example, through medication refill reminders, special 
packaging, and other compliance programs and other appropriate means).
     Detection of adverse drug events and patterns of overuse 
and underuse of prescription drugs.
    In order to promote these elements and optimize therapeutic 
outcomes for targeted beneficiaries, we envision MTMPs potentially 
spanning a range of services, from simple to complex. In addition to 
those mentioned in the statute, services could include, but not be 
limited to, performing patient health status assessments, formulating 
prescription drug treatment plans, managing high cost ``specialty'' 
medications, evaluating and monitoring patient response to drug 
therapy, providing education and training, coordinating medication 
therapy with other care management services, and participating in 
State-approved collaborative drug therapy management. We would also 
anticipate that these services could be offered as components of more 
coordinated disease management programs, but would not expect provision 
of these services to be limited to such programs.
    In addition to MTMPs providing for different types of services, we 
would also anticipate the need for different levels of service based on 
the individual requirements of targeted beneficiaries. For example, one 
beneficiary may require only a fifteen-minute phone consultation, while 
another would be better served by a one-hour in-person visit with the 
pharmacist. The level of service should be determined by time and 
resources required to accommodate the specific needs of the individual 
beneficiary. Therefore, we would anticipate that a MTMP would include 
policies and procedures for ensuring targeted beneficiary access to the 
appropriate types and levels of service offered by the particular PDP 
or MA-PD plan.
    Within this broad framework, we believe that PDP sponsors and MA 
Organizations offering MA-PD plans can customize their MTMPs and that a 
competitive market supported by useful information on MTMP services 
will provide the best mechanism for establishing optimal MTMPs. We 
believe that MTMPs can lead to improved overall health for individuals, 
while at the same time decreasing overall healthcare costs resulting 
from improper medication use and adverse drug events. We may provide a 
mechanism for plans to demonstrate the types of services, levels of 
service, and quality outcomes associated with their MTMPs to further 
aid beneficiaries with choosing the plan that will best meet their 
needs.
    In addition, as provided in Sec.  423.153(d)(3), a MTMP, as adopted 
by a plan, would have to be developed in cooperation with licensed 
practicing pharmacists and physicians.
    Beyond these broad parameters for a MTMP, there are several issues 
to consider as we provide additional guidance to PDP sponsors and MA 
organizations. First, we consider MTMPs to be administrative activities 
similar to quality assurance drug utilization review or measures to 
control fraud, abuse and waste. Like these other quality improvement 
services intrinsic to the drug plan, MTMP services would not involve 
direct beneficiary cost-sharing and Part D enrollees would not be 
required to pay separate fees for these services (although the cost 
could be reflected in the premium rate). The cost of a MTMP is 
considered an administrative cost incident to appropriate drug therapy 
and, therefore, not an additional benefit. Nevertheless, unlike the 
general quality assurance and fraud, abuse, and waste control 
requirements, MTMP services can be limited to targeted beneficiaries. 
To the extent that MTMPs reduce drug spending by more than their costs, 
they have the potential to lower overall Part D costs. To the extent 
that MTMP services lower overall medical costs for beneficiaries with 
chronic illnesses, we also seek comment on how to integrate MTMP 
services and financial incentives into the Medicare Chronic Care 
Improvement program (section 721 of the Act).
    Second, section 1860D4(c)(2)(A)(ii) of the Act requires that MTMP 
services be provided only for targeted individuals. In other words, not 
all members of a plan would be entitled to receive these services. As 
provided under Sec.  423.153(d)(2), ``targeted beneficiaries'' would be 
plan enrollees who have multiple chronic diseases, are taking multiple 
Part D covered drugs, and are likely to incur annual costs that exceed 
a certain level that we determine. We

[[Page 46669]]

invite comments on how we should provide guidance to drug plans in 
defining ``multiple chronic diseases'' and ``multiple covered Part D 
drugs'' for the purposes of determining which Part D enrollees would 
qualify for MTMP services, or whether such determinations are best left 
to the plans as part of their benefit design.
    While the statute states that CMS sets the level of annual costs 
that must be incurred by a beneficiary to qualify for the receipt of 
MTMP services, our preferred policy is to delegate this function to the 
private drug plans, as they would be able to evaluate their patients 
with greater specificity and information. We request comments on this 
policy as both a policy and legal matter. We believe that, given 
current evidence, the level of annual costs that must be incurred by a 
beneficiary to qualify for the receipt of MTMP services should be 
determined by the drug plan. We do not think there is sufficient 
evidence at this point to specify a threshold of annual drug costs to 
be used for targeting these services to particular Part D enrollees. 
However, we seek comments on what guidance we could provide to plans to 
ensure these services are targeted in the most efficient manner and to 
the most appropriate beneficiaries.
    In addition, we are concerned about the method that plans should 
use to determine the costs that enrollees are ``likely to incur'' to 
ascertain whether they qualify as targeted beneficiaries. Once plans 
have historical data on specific patients, determining how to target 
such services should become easier and more effective. For example, 
based on their previous experience with providing prescription drug 
services, plans could qualify enrollees for MTMP services based on 
whether the enrollees have multiple chronic diseases and whether they 
are using multiple drugs. As they develop more experience with their 
Medicare enrollees, past medication history might become another useful 
guide.
    We believe that plans would benefit from additional guidance on 
interpreting the level above which a beneficiary's incurred costs would 
qualify him or her for MTMP services. We invite comments on all the 
disease, drug, and cost issues that we should consider in further 
refining the definition of a targeted beneficiary for receipt of MTMP 
services.
    Another issue to be considered relates to which clinicians would be 
providing MTMP services and the method for providing those services. 
Section 1860D-4(c)(2)(A)(i) of the Act specifically states that a 
pharmacist may furnish MTMP services. While we believe that pharmacists 
will be the primary providers of these services, MTMPs could also 
include other qualified health care professionals as providers of 
services. The individual needs of the targeted beneficiary should 
determine the appropriate provider and setting for MTMP services. For 
example, consultant pharmacists will likely provide services to 
beneficiaries in long-term care facilities; retail pharmacists could 
provide those same services to ambulatory beneficiaries.
    Furthermore, we believe beneficiary choice and on-going 
beneficiary-provider relationships should play a role in determining 
the best provider for MTMP services. Improved therapeutic outcomes 
through MTMP services will frequently require active beneficiary, or 
caregiver, participation. While population based quality assurance and 
cost control measures might adequately be served by impersonal 
telephone services, we believe that telephone services are only one 
mode of providing medication therapy management services. Active 
beneficiary participation and consistent delivery of quality MTMP 
services will require developing and maintaining on-going beneficiary-
provider relationships. Therefore, to the extent that these services 
are adopted by plans in their MTMPs, we would expect the range of 
services offered to reflect this important component and maximize 
beneficiary participation by considering beneficiary preference and 
existing beneficiary-provider relationships in determining the 
appropriate provider and setting for delivery of MTMP services.
    Section 1860D-4 (c)(2)(E) of the Act states that in establishing 
fees for pharmacists or others providing MTMP services, to the extent 
that these services are adopted by a plan in its MTMP, a PDP sponsor 
must take into account the resources and time associated with 
implementing the MTMP. Section 423.153(d)(5) codifies that requirement. 
We propose to implement this requirement as follows:
    (1) First, we would expect potential PDP sponsors to describe, as 
part of their applications, their plan to consider the resources used 
and the time required to implement their MTMP in establishing fees for 
pharmacists and others providing services under the MTMPs.
    (2) Second, in the event that we receive complaints that a PDP 
sponsor is not paying pharmacists or others in accordance with the fees 
discussed in the application for the MTMP it has elected to adopt, we 
would investigate further.
    While section 1860D-4(c)(2)(E) of the Act specifies that the time 
and resources necessary to implement the MTMP must be taken into 
account when establishing fees, it does not specify how these fees 
should be paid. We believe that fees associated with provision of 
medication therapy management services are separate and distinct from 
dispensing fees discussed in section Sec.  423.100 of the preamble for 
this proposed regulation. Although section 1860D-4(c)(2)(E) of the Act 
states that PDP sponsors must disclose to the Secretary the amount of 
``any such management or dispensing fees'', it merely governs 
disclosure and does not require that MTMP be included in the dispensing 
fee (indeed the Act distinguishes management fees from dispensing fees 
that are part of individual prescriptions).
    Therefore, costs associated with MTMPs, including these management 
fees, are included as part of the general administrative overhead costs 
in the plan bid. For purposes of evaluating the administrative 
component of a PDP's bid, we will ask a PDP sponsor or MA organization 
to disclose the fees it pays to pharmacists or others, including an 
explanation of those fees attributable to MTMP services. The fee 
information provided to us under this authority would be protected 
under the confidentiality provisions of section 1927(b)(3)(D) of the 
Act. Under those provisions, we would be prohibited from disclosing the 
specific fees in a manner that links the fees to the particular 
pharmacy or other provider providing the MTMP services--except to the 
extent necessary to administer the Part D program, to permit the 
Comptroller General to review the information, or to permit the 
Director of the Congressional Budget Office to review the information. 
If we were to discover situations in which plans systematically did not 
pay the fees described in their applications--and, if those errors were 
not corrected upon notification, we might, at our discretion, employ 
the broad ranges of intermediate sanctions or termination provisions 
available under subparts K and O of the regulations.
    While we expect to perform the due diligence described above 
through application review and potentially following up on any 
complaints we do not believe we have the authority to mandate that PDP 
sponsors or MA organizations pay pharmacists or other providers a 
certain amount for MTMP services. We also would not adjudicate any 
specific disputes between PDP sponsors or MA organizations and 
pharmacists or other providers

[[Page 46670]]

regarding the specific fees due for MTMP services.
    Finally, as specified in section 1860D-4(c)(2)(D) of the Act, we 
are required to establish guidelines that MTMPs operated by PDP 
sponsors are coordinated with the ``chronic care improvement program'' 
(CCIP) under section 1807 of the Act. The CCIP is a new program 
established by section 721 of the MMA, which added a new section, 
section 1807, to the Act. The new section 1807 creates a method for us 
to assist beneficiaries with multiple chronic conditions in managing 
their care. The program is targeted only to beneficiaries in original 
fee-for-service Medicare--not beneficiaries enrolled in MA plans. 
Therefore, we anticipate that our guidelines will be targeted toward 
PDP sponsors and not to MA organizations that offer MA-PD plans. As 
stated above, the CCIP is a new program. By statute, the first 
agreements under that program with chronic care improvement 
organizations should be entered into within 12 months of the MMA's date 
of enactment. On April 23, 2004, we published in the Federal Register 
(69 FR 22065-22079), the solicitation for the CCIP program. Because the 
program has not yet been established, however, we cannot provide a 
great deal of guidance at this time regarding how the MTMPs under Part 
D would coordinate with the CCIP. We are concerned with the possibility 
of beneficiaries receiving duplicative services. We seek comments on 
how MTMP services provided through CCIP can be effectively coordinated 
with MTMP services provided by PDPs. There are several different ways 
that communication could take place so that a beneficiary enrolled in 
both the CCIP and a PDP receives efficient assistance with managing 
their chronic diseases. For example, the CCIP might collect information 
at intake, obtain a beneficiary information release, and inform the PDP 
of enrollment. An alternate approach is for us to use the enrollment 
files from the two programs to communicate to the respective parties. 
We invite comments on this issue and these proposed options. We may 
provide further interpretive guidance on coordination with the CCIP 
once the section 1807 agreements are finalized and the new program is 
in place. We invite comments from interested parties relating to 
specific key issues that should be addressed in this guidance.

d. Fraud, Abuse and Waste

    Section 423.153(e) of our proposed rule would require PDP sponsors 
and MA Organizations offering MA-PD plans that provide qualified 
prescription drug coverage under a prescription drug plan to provide a 
program to control fraud, abuse, and waste. These requirements overlap 
to some extent with those in subpart K of this regulation, but cover 
somewhat different territory.
    We would expect these plans, as prudent purchasers, to implement 
programs to control their expenditures. We would be interested in 
comments on the following discussion as to possible requirements in 
this area over and above the incentives operating in at risk plans. We 
would also like comments on the value added from requiring plans to 
develop comprehensive performance standards for use in evaluating 
internal processes that would appropriately and efficiently research, 
identify, monitor, and take immediate action to mitigate fraud, abuse, 
and waste. Fraud, abuse, and waste apply not only to both the PDPs and 
MA-PDs and their staffs, but also to the PBMs, pharmacies, physicians, 
and other providers that they deal with. For instance, PDPs and MA-PDs 
need to determine whether or not physicians are illegally prescribing 
narcotics. In addition to available appropriate data that might be 
supplied by us, the plans could develop and utilize methods such as 
data analysis, record audit of PBMs, pharmacies, physicians, and other 
providers, DUR (note these DURs overlap with those described 
previously, but these focus on those related to fraud, abuse, and 
waste), and methods used to consider and resolve disputes related to 
pharmacies, physicians', and other provider's dissatisfaction to ensure 
the integrity of all entities (government, beneficiary, PDP sponsor, 
PBMs, pharmacies, physicians, and other providers).
    One area of concern is inappropriate switching of prescriptions by 
a PDP or MA-PD plan without consulting a prescribing physician. For 
instance, switching from brand to generic may be appropriate, but 
switching brands, e.g. Lipitor to Zocor, may not without consultation.
    We also seek comments on the appropriateness, value and need for 
requiring the plans to test program integrity analytic tools for 
effectiveness, efficiency, and adaptability to the Medicare Benefit 
environment. For example, one approach could require the plans to 
provide any of the following in periodic reports: (1) Summary of data 
analysis activities, (2) resources, (3) tools, or (4) trend analysis. 
Alternatively, the plans could be required to develop their strategy 
and propose what each plan determines to be the best approach for 
detecting and deterring fraud and abuse. Furthermore, the plans could 
be asked to demonstrate that the agreed upon activities and outcomes 
that the plans achieve are in relation to priorities established by us. 
We seek comments on the likely value of these requirements. We also 
seek comments on the implementation, scope, and operation of an 
effective and robust fraud, abuse, and waste control program for plan 
sponsors.

e. Exception for Private Fee for Service Plans

    Section 423.153(f) of our proposed rule would implement section 
1860D-421(d)(3) of the Act by exempting private fee-for-service MA 
plans that offer qualified prescription drug coverage from the 
requirement to establish a drug utilization management program and a 
MTMP; however, these private fee-for-service MA plans would still be 
required to establish a quality assurance program and program to 
control fraud, abuse and waste as described in Sec.  423.153(c) and 
Sec.  423.153(e), respectively.
3. Consumer Satisfaction Surveys (Sec.  423.156)
    Under Sec.  423.156, we would conduct consumer satisfaction surveys 
among enrollees of PDPs and MA Organizations offering MA-PD plans in 
order to provide comparative information about qualified prescription 
drug coverage to enrollees as part of our information dissemination 
efforts. Section 1860D-4(d) of the Act specifies that these surveys be 
conducted in a manner similar to that in which they are currently 
conducted under Sec.  422.152(b) (that is, annually) for MA plans by 
using the Consumer Assessment of Health Plans (CAHPS). We believe a 
CAHPS-like instrument (or perhaps a modification of CAHPS for MA 
Organizations offering MA-PD plans) will most likely be the vehicle 
used to collect this information. As we have done in the past in 
developing surveys of Medicare beneficiaries in various settings, we 
will work with the Agency for Healthcare Research and Quality (AHRQ) to 
develop a survey measuring the experience of beneficiaries with their 
qualified prescription drug coverage, a sampling strategy, and an 
implementation strategy. We will provide further information regarding 
this survey as it is developed.
4. Electronic Prescription Program (Sec.  423.159)
    Section 1860D-4(e) of the Act contains provisions for electronic 
prescription programs. The statute

[[Page 46671]]

contains specific provisions on when voluntary initial standards may be 
adopted (not later than September 1, 2005), and when final standards 
should be published (not later than April 1, 2008) and then effective 
(not later than 1 year after the date of promulgation of final 
standards).
    The statute requires the National Committee on Vital and Health 
Statistics (NCVHS) to develop recommendations, in consultation with a 
specific group of constituencies, for possible adoption by the 
Secretary according to the schedule set forth above. Those 
constituencies include physicians, hospitals, pharmacists and 
pharmacies, PBMs, State boards of pharmacy and medicine, Federal 
agencies and other electronic prescribing experts for uniform 
standards. The law also requires a pilot project once the Secretary has 
adopted or announced the initial standards. The pilot will run from 
January 2006 through December of that year, and it will be completed 
prior to the promulgation of the final standards. The law further 
states that a pilot is not needed if there is already adequate industry 
experience with whatever standards the Secretary is planning to adopt.
    To fulfill the statute's responsibilities, the NCVHS' Subcommittee 
on Standards and Security has already held two public hearings on 
issues related to e-prescribing. The hearings on March 30 and 31, 2004, 
and May 25, 26, and 27, 2004 included testimony from e-prescribing 
networks, providers, software vendors, and industry experts on patient 
safety and drug knowledge databases. National electronic prescribing 
studies were also presented. In order to further refine their 
recommendations to the Secretary, the NCVHS Subcommittee on Standards 
and Security will continue to hold additional hearings on the state-of-
the-art of electronic prescribing including testimony from a broad 
representation of stake holders in July, August and September 2004. 
Readers interested the NCVHS' hearing schedule for e-prescribing 
standards, testimony presented at the hearings and standards 
recommendations should consult the NCVHS Web site at http:/
www.ncvhs.hhs.gov/.
    Many in the industry urge us to move expeditiously to establish 
electronic prescribing standards. However, the statute intentionally 
provided for a deliberative process by directing the NCVHS to study, 
select and recommend electronic prescribing standards. Any comments 
received in response to this proposed rule will be considered along 
with the NCVHS' recommendations in the development of the proposed rule 
on the electronic prescribing standards. We are particularly interested 
in comments that help us identify consensus or reach consensus on e-
prescribing standards ahead of the statutory time frame, and to help us 
identify and evaluate industry experience based on pilot programs 
engaged in e-prescribing activities in 2004 and 2005.
    To ensure that our regulations are as comprehensive as possible, we 
have included language at Sec.  423.159(a) that would require PDP 
sponsors and MA Organizations offering MA-PD plans to have the capacity 
to support e-prescribing programs in accordance with the final e-
prescribing standards established by the Secretary, including any 
standards that are established before the drug benefit begins in 2006. 
In addition, once final standards are set, any prescriptions that are 
transmitted electronically under the Part D drug benefit for Medicare 
beneficiaries will have to conform to those standards. Aside from PDP 
and MA-PD plans having the capacity to support final e-prescribing 
standards, there is, however, no requirement that prescriptions be 
written or transmitted electronically (by for example physicians or 
pharmacies). Until e-prescribing standards are effective, of course, 
our regulations at Sec.  423.159(a) also will not be in effect.
    Although there is no requirement that physicians write 
prescriptions electronically, our regulations state that PDP sponsors 
and MA Organizations offering MA-PD plans who participate in the Part D 
program must be able to support the final e-prescribing program as 
specified in section 1860D-4(e)(2) of the Act. The statutory language 
is quite specific that e-prescribing will not just be used for a 
physician to send a prescription to a pharmacy, but also will transmit 
data that can only be supported by the PDP sponsor or MA organization 
offering an MA-PD plan. For example, the e-prescribing program is 
intended to ensure that pharmacies receive electronic information on 
the drugs included on the PDP's or MA-PD's formulary, any tiering of 
the formulary, the patient's medical history, the possibility of any 
adverse drug-interactions (based on other prescriptions the patient is 
already taking) and the availability of lower-priced, alternative 
prescriptions. Since the PDP sponsor or MA organization offering an MA-
PD plan will most likely be the warehouse for all this information, 
without participation of the PDP sponsors or MA Organizations offering 
MA-PD plans, the e-prescribing program would not be able to provide the 
results the Congress intended. In addition, if plans do not have this 
program, beneficiaries participating in those plans would not benefit 
from the patient safety aspects of the program. Also, under section 
1860D-12(b)(3)(D) of the Act, we have the authority to add additional 
contract terms to the PDP and MA-PD contracts.
    While PDP sponsors and MA Organizations offering MA-PD plans will 
be required to support the final e-prescribing standards issued by us, 
they will not be required to support the pilot standards, which are 
voluntary under section 1860D 4(e)(4)(C) of the Act. Therefore, only 
those entities that participate in a pilot testing of certain e-
prescribing standards will be required to implement an e-prescribing 
program using the initial standards adopted by the Secretary. Others in 
the health care industry will not be required to use the initial 
standards at the time they are issued, but will be encouraged to do so.
    Finally, we note that the pilot test specified in the MMA is not 
required if there is adequate industry experience with the standards. 
In that case, the Secretary may propose them as final standards in a 
proposed rule, thereby expediting a portion of the standards adoptions 
process. Therefore, to the extent we determine, after consultation with 
affected standard setting organizations and industry users, that there 
already is adequate industry experience with certain standards, we may 
propose to finalize those standards through notice and comment 
rulemaking even if we have not completed the pilot testing of other 
standards so that a portion of the standards adoptions process could be 
expedited. We seek comments on the desirability of this strategy, 
including any concerns about potential unintended consequences.
    In order to facilitate electronic prescribing by a PDP or MA-PD 
sponsor, we invite public comment on additional steps to spur adoption 
of electronic prescribing, overcome implementation challenges, and 
improve Medicare operations. For example, we have added regulations at 
Sec.  423.159(b) of this proposed rule that would allow an MA-PD plan 
to provide a separate or differential payment to a participating 
physician who prescribes covered Part D drugs in accordance with 
electronic prescription standards. (Note that this provision only 
applies to MA-PD plans and not to PDPs.) Section 102(b) of the MMA 
makes it clear that this differential payment may occur when a 
participating physician prescribes drugs in accordance with an

[[Page 46672]]

electronic prescription drug program that meets standards established 
under section 1860D-4(e) of the Act. These differential payments are to 
reward physicians for using electronic prescriptions rather than 
handwritten ones. These payments would not be used to encourage 
physicians to prescribe more frequently or inappropriately steer their 
use of particular drugs. Since the standards established under section 
1860D-4(e) of the Act include the initial, voluntary standards, which 
may be tested on a pilot basis as early as January 1, 2006, we believe 
the differential payments envisioned by section 102 of the MMA may 
occur as early as January 1, 2006 (for physicians who prescribe in 
accordance with the standards adopted by the Secretary in September 
2005). We believe the fact that section 102 of MMA has an effective 
date of January 1, 2006, supports this determination. Differential 
payments, at the MA organization's discretion, could take into 
consideration the cost to the physician in implementing the program and 
could be increased for participating physicians who use e-prescribing 
to significantly increase--
    (1) Formulary compliance where medically appropriate;
    (2) Use of lower cost, therapeutically equivalent alternatives;
    (3) Reductions in adverse drug interactions as evidenced by 
appropriate use of drug interaction checking functions in electronic 
prescribing; and
    (4) Efficiencies in filling and refilling prescriptions through 
reduced administrative costs.
    The additional or increased payments made to the physicians could 
be structured in the same manner as fees for services under Sec.  
423.153(d) of this proposed rule. We have not provided a great deal of 
specificity in our regulations regarding how the differential payments 
may be structured because we believe the MA Organizations offering MA-
PD plans should have discretion in structuring these added payments, if 
any.
    We note that any payments must be in compliance with other Federal 
and State laws, including ``the physician self-referral prohibition at 
section 1877 of the Act'' and the Federal anti-kickback provisions at 
section 1128B(b) of the Act. We are soliciting the public's view of the 
application of these legal authorities to the differential payments 
described in this section. We will share any comments regarding the 
anti-kickback statute with the Office of Inspector General.
    We also seek comment on measures of MA-PD plan quality related to 
the use of e-prescribing, and other MA-PD quality measures that reflect 
effective e-prescribing systems. The use of electronic prescribing 
shows promise for improving Medicare operations by reducing costs in 
the administration of the Part D drug benefit and in the use of 
prescription drugs, for example promoting generic drug use and creating 
timely interface with formularies supported by up-to-date evidence. 
Likewise, it has the potential to improve the quality of the care 
provided to Medicare beneficiaries through the therapeutic monitoring 
of allergies and adverse events. Yet, implementing electronic 
prescribing effectively poses a number of challenges. While electronic 
prescribing is gradually gaining acceptance by health care providers, 
fewer than 10 percent of U.S. doctors currently engage in the practice. 
The adoption rate is particularly low among solo practitioners, those 
in rural areas, and certain medical specialties. The electronic 
prescribing process and the technology that enables it must be cost 
effective, the systems must be fast and easy to use, and alerts and 
other data passed backed to the prescriber must demonstrate value. We 
invite comments on these challenges and on possible Federal activities 
that would promote the effective use of e-prescribing by providers, 
including publishing best practices, and making technical information 
on e-prescribing products available. In addition receptivity to the use 
of electronic prescribing by consumers is not well understood 
especially among the elderly and disadvantaged populations. We seek 
additional information on how those populations may view electronic 
prescribing and what step may be taken to get them to use this modality 
and, thus, take advantage of the safety and quality benefits it offers.
    We also invite comments on how to promote the use of electronic 
prescribing by providers, health plans and pharmacies and other 
entities involved in the provision and payment of health care to 
Medicare beneficiaries. Beyond the grants authorized in Sec.  
423.159(b) of this proposed rule, we invite comments on what incentives 
could be used to spur more widespread adoption, especially for early 
implementers. We also invite your comments on what educational efforts 
or data analyses might be undertaken to help health practitioners 
understand, or empirically confirm, and ultimately realize, the 
benefits of electronic prescribing. Lastly, we seek public input on the 
ways electronic prescribing can further reduce costs to the Medicare 
program and promote quality of care to beneficiaries.
5. Quality Improvement Organizations (QIO) Activities (Sec.  423.162)
    Section 109 of the MMA expands the work of QIOs to include Part C 
and Part D. This provision explicitly covers the full range of Part C 
organizations. QIOs are required to offer providers, practitioners, MA 
organizations, and PDP sponsors quality improvement assistance 
pertaining to health care services, including those related to 
prescription drug therapy. We plan to issue guidance on how QIOs can 
provide this assistance and would coordinate the activities of the QIOs 
with the quality related activities of other stakeholders.
    To fulfill this responsibility, QIOs would need access to data from 
the transactions between pharmacies and PDPs and MA-PD plans providing 
the Part D benefit. This data would be extracted from the claims data 
submitted to us. Although the agency is still developing plans for the 
QIO activities related to the Part D benefit, we expect that this data 
primarily from the NCPDP telecommunications format between pharmacies 
and plans will be used. The data would include payment-related 
information (that is, plan identification, beneficiary HIC, date 
prescription filled, NDC, quantity dispensed, ingredient cost, 
dispensing fee, and pharmacy zipcode) and additional items such as 
prescriber identifiers, pharmacy identifiers, dose, days supply, and 
other dispensing information. Potentially, the information gathered 
will be aggregated in our data warehouse, and then distributed to QIOs 
to fulfill their requirements for quality improvement as specified in 
their contracts and in response to requests.
    We have been consulting, on an individual, organization by 
organization basis, with representatives from pharmacy benefit 
managers, managed care organizations, programs that have monitored drug 
utilization, and others who have utilized pharmacy claims data. We 
welcome comments related to the collection and use of information for 
providing quality improvement assistance related to Part D.
    We are proposing that any information collected by the QIOs would 
be subject to confidentiality requirements in Part 480 of our 
regulations. For purposes of applying these confidentiality 
regulations, we are also proposing that MA organizations offering MA-PD 
plans and PDP sponsors fall within the definition of health care 
facilities. This means that

[[Page 46673]]

the confidentiality provisions in Part 480 of our regulations would 
apply to PDP sponsors and MA-PD plans in the same manner as they apply 
to institutions.
6. Treatment of Accreditation (Sec.  423.165, Sec.  423.168, and Sec.  
423.171)
    Section 1860D-4(j) of the Act requires that the provisions of 
section 1852(e)(4) of the Act relating to the treatment of 
accreditation will apply to PDP sponsors with respect to--(1) access to 
covered Part D drugs including the pharmacy access requirements and the 
use of standardized technology and formulary requirements; (2) quality 
assurance, drug utilization review, medication therapy management, and 
a program to control fraud, abuse and waste; and (3) confidentiality 
and accuracy of enrollee records. Thus, the requirements in Sec.  
423.165, Sec.  423.168, and Sec.  423.171 are similar to the 
requirements found in Sec.  422.156, Sec.  422.157, and Sec.  422.158 
for the MA program, except for subject areas that are deemed.
    A PDP sponsor may be deemed to meet the requirements that relate to 
access to covered Part D drugs; quality assurance, drug utilization 
review, medication therapy management, and a program to control fraud, 
abuse, and waste; and confidentiality and accuracy of enrollee records, 
if it is accredited and periodically reaccredited by a private national 
accrediting organization under a process that we have determined meets 
a process and standards that are no less stringent than our applicable 
requirements. National accreditation organizations are those entities 
that offer accreditation services that are available in every State to 
every organization wishing to obtain accreditation status. The process 
that we would use to deem compliance with PDP requirements would mirror 
the process used for deeming compliance with fee-for-service 
requirements and the MA program.
    Section 423.165 would provide the conditions under which a PDP 
sponsor may be deemed to meet our requirements permitted under 
paragraph (b) of this section. The first condition would be that the 
PDP plan be fully accredited (and periodically reaccredited) by a 
private, national accreditation organization that we approve. The 
second condition would be that the PDP organization be accredited using 
the standards that we approved for the purposes of assessing the PDP 
sponsors' compliance with Medicare requirements.
    Consistent with our approach in the MA program, we would analyze on 
a standard-by-standard basis whether an accreditation organization 
applies and enforces requirements no less stringent than those in part 
422 with respect to the standard at issue. We would determine the scope 
of the accreditation organization's approval (and, thus, the extent to 
which PDP organizations accredited by the organization are deemed to 
meet our requirements) based on a comparison of the accreditation 
organization's standards and its procedures for assessing compliance 
with our deemable requirements and our own decision-making standards. 
We would make those determinations on the basis of the application 
materials submitted by accreditation organizations seeking our approval 
in accordance with Sec.  423.168. We would also conduct surveys to 
validate the accreditation organization's enforcement on a standard-by-
standard basis.
    Section 423.165(d) would establish the obligations of deemed PDP 
sponsors. A PDP sponsor would have to submit to our surveys that are 
intended to validate an accreditation organization's process and 
authorize the accrediting organization to release to us a copy of its 
most current accreditation survey, together with any information 
related to the survey that we may require (including corrective action 
plans and summaries of our unmet requirements). These activities are 
part of our ongoing oversight strategy for ensuring that the 
accreditation organization applies and enforces its accreditation 
standards in a manner comparable to ours.
    Section 423.165(e) would address removal of deemed status. We would 
remove part or all of a PDP sponsor's deemed status if--
    (1) We determine, on the basis of our own survey or the results of 
the accreditation survey, that the PDP organization does not meet the 
Medicare requirements for which deemed status was granted.
    (2) We withdraw our approval of the accreditation organization that 
accredited the PDP organization; or
    (3) The PDP fails to meet the requirements of Sec.  423.165(d).
    Section 423.165(f), would explain that we retain the authority to 
initiate enforcement action against any PDP sponsor that we determine, 
on the basis of our own survey or the results of the accreditation 
survey, no longer meets the Medicare requirements for which deemed 
status was granted. We expect the accreditation organization to have a 
system in place for enforcing compliance with our standards (such as 
sanctions for motivating correction of deficiencies), but we cannot 
delegate to the accreditation organization the authority to impose the 
intermediate sanctions established by section 1860D-12 of the Act or 
termination of the PDP contract.
    Deeming applies only to our enforcement of this regulation, and 
neither our enforcement of this regulation nor accreditation by an 
accrediting body undercuts the Office for Civil Rights enforcement of 
the HIPAA privacy rule.
    Section 423.168 would discuss the 3 conditions for our approval of 
an accreditation organization. We could approve an accreditation 
organization if the organization applies and enforces standards for PDP 
sponsors that are at least as stringent as Medicare requirements and, 
if the organization complies with the application and reapplication 
procedures proposed in Sec.  423.171.
    Section 423.168(c) of our proposed rule would establish ongoing 
accreditation organization responsibilities. These responsibilities 
largely parallel those currently imposed upon accreditors under 
original Medicare. One exception is the proposed requirement that an 
accreditation organization notify us in writing within 3 days of 
identifying, with respect to an accredited PDP sponsor, a deficiency 
that poses immediate jeopardy to the PDP sponsor's enrollees or to the 
general public.
    Section 423.168(d) of our proposed rule would establish specific 
criteria and procedures for continuing oversight and for withdrawing 
approval of an accreditation organization. Oversight consists of 
equivalency review, validation review, and onsite observation.
    We could withdraw our approval of an accreditation organization at 
any time if we determine that deeming based on accreditation no longer 
guarantees that the PDP organization meets the Medicare requirements, 
that failure to meet those requirements could jeopardize the health or 
safety of Medicare enrollees or constitute a significant hazard to the 
public health, or that the accreditation organization has failed to 
meet its obligations under Sec.  423.165 through Sec.  423.171.
    Section 423.171 of our proposed rule would address the procedures 
for approval of accreditation as a basis for deeming compliance. As 
mentioned, the process that we would use to deem compliance with PDP 
requirements is virtually identical to the process that is being used 
for deeming compliance with fee-for-service requirements. One proposed 
requirement that would

[[Page 46674]]

appear in Sec.  423.171, and which also appears in regulations 
governing MA plans at Sec.  422.158(a)(11), but does not appear in 
regulations governing original Medicare, is the requirement that an 
accreditation organization applying for approval of deeming authority 
submit the name and address of each person with an ownership or control 
interest in the accreditation organization. This information would be 
used to determine whether the accreditation organization is controlled 
by the organizations it accredits for the purposes of Sec.  423.168. 
Section 423.171 would further provide for reconsideration of adverse 
determinations of accreditation applications.

F. Submission of Bids and Monthly Beneficiary Premiums: Determining 
Actuarial Valuation

1. Overview
    Subpart F would implement most of the provisions in sections 1860D-
11 and 1860D-13 of the Act, as well as sections 1860D-12(b)(2) (on 
limitation on entities offering fallback plans), 1860D-15(c)(2) (on 
geographic adjustment of the national average monthly bid amount), 
1860D-21(d) (on special rules for private fee-for-service (PFFS) 
plans), 1860D-21(e)(3) (on cost contractors), and 1860D-21(f)(3) (on 
PACE) of the Act. In this section we address submission, review, 
negotiation, and approval of bids for prescription drug plans and MA-PD 
plans; the calculation of the national average bid amount; and 
determination and collection of enrollee premiums. References to 42 CFR 
part 422 of our regulations are to the new MA rules.
    As discussed in subpart C, the statute provides a framework for the 
provision of subsidized prescription drug coverage. Within this 
framework, PDP sponsors and MA organizations have some flexibility to 
design coverage that is different from defined standard coverage to 
meet the needs of Part D-eligible Medicare beneficiaries. This 
framework plays a critical role in bid submissions, and the actuarial 
evaluation and approval of bids.
    As part of our discussion we specify the actuarial equivalency 
tests plan sponsors would have to meet when offering coverage other 
than defined standard coverage. Please note that the coverage 
definitions are discussed in detail in subpart C of the preamble. In 
order to determine actuarial equivalency, plan sponsors would compare 
their plans to the defined standard coverage baseline to assess the 
various tests of actuarial equivalency that we discuss in detail in the 
sections below.
2. Requirements for Submission of Bids and Related Information
    As provided under section 1860D-11(b) of the Act, each applicant to 
become a PDP sponsor or MA organization would be required to submit a 
bid for prescription drug coverage for each plan it intends to offer. 
Most bids would be expected to represent full risk plans, meaning that 
the prescription drug plan is not a limited risk plan or a fallback 
prescription drug plan, and is not asking for any modification of the 
statutory risk sharing arrangements. A bid from a full risk plan may be 
referred to as a full risk bid. PDP sponsors may choose to participate 
as limited risk plans, meaning that they provide basic prescription 
drug coverage and request a modification of risk level (as described in 
Sec.  423.265(d)) in its bid submitted for the plan. A bid with a 
modified level of risk is referred to as a limited risk bid. This term 
does not include a fallback prescription drug plan. A risk bid (whether 
full risk or limited risk) could not be accepted from any entity 
applying to become a PDP sponsor or MA organization offering an MA-PD 
plan that--(1) also submits a bid for the same year to act as a 
fallback plan; (2) will be offering a fallback plan in any region for 
the upcoming year; or (3) currently offers a fallback plan in the 
region for which they are submitting the bid. In determining whether an 
entity is barred from submitting a risk bid according to these rules, 
we would use, as our reference point, the calendar year that they are 
submitting their bids. For example, the limitation would work as 
follows:
    An applicant submitting a risk bid for sponsoring a PDP in 2009 
would be excluded from the risk bidding if it--
    (1) Also submits a bid to act as a fallback plan in 2009 (where 
2009 is the first year of a multi-year fallback contract);
    (2) Already is approved to act as a fallback in any PDP region for 
2009; or
    (3) Offers a fallback in 2008 for the same region for which they 
would be submitting their 2009 risk bid.
    This fallback prohibition also applies if an applicant (or related 
entity) acted as, or will act as a subcontractor to an entity offering 
a fallback plan. In other words, an entity would be treated as having 
submitted a bid under the fallback contracting process, and thus not be 
an eligible risk bidder, if that entity was acting as a subcontractor 
for an integral part of the drug benefit management activities of an 
eligible fallback entity. Thus, for example, if an applicant was a 
subcontractor to a fallback in 2008, it cannot submit a risk bid for 
the same region for 2009. Similarly, an applicant for a 2009 risk bid 
cannot include as its subcontractor an entity already approved or 
applying to act as a fallback plan for 2009. Because awards for 2006 
will not be known at the time the initial bids are due in 2005 (for 
contracts in 2006), any entity that bids as a fallback plan (or a 
subcontractor to a fallback plan) is barred from bidding as a non-
fallback plan in any and all regions for that year.
    Bids would be due to us no later than the first Monday in June for 
each plan to be offered in the subsequent calendar year. This date 
stems from the requirement in section 1860D-11(b) of the Act that bid 
data from potential PDP sponsors be submitted at the same time and in a 
similar manner as the information described in section 1854(a)(6) of 
the Act for MA plans. Since section 1854(a)(1) of the Act requires 
initial data to be submitted on the first Monday of June of each year 
after 2004, we have also incorporated this date into our regulations. 
In the case of MA-PD plans, the prescription drug bid would be a 
component of the unified MA bid described in Sec.  422.254(b)(1) with 
benefits beyond basic coverage (if any) incorporated into the 
supplemental benefits portion of the prescription drug benefit bid.
    We are clarifying that this bid would represent the expected 
monthly average cost (including reasonable administrative costs) to be 
incurred by the plan applicant for qualified prescription drug coverage 
in the applicable area for a Part D eligible individual with a national 
average risk profile for the factors described in section 1860D-
15(c)(1)(A) of the Act and in Sec.  423.329(b)(1) of this proposed 
rule. We plan to develop and publish the risk adjustment factors and 
identify the characteristics of an average individual no later than the 
date of the 45-day notice for the announcement of 2006 rates, which is 
February 18, 2005. Any modifications to these characteristics for 
subsequent years would be announced by the date of the annual 45-day 
notice. (For further discussion of prescription drug risk adjustment, 
see Subpart G of this preamble.) We are interested in providing 
information to potential bidders to help eliminate the uncertainty of 
drug trend for Medicare beneficiaries and in delaying the submission of 
pricing information as long as we can under the law and consistent with 
our need to inform beneficiaries. We solicit comment on

[[Page 46675]]

the nature of any additional information needed to prepare bids and 
suggestions for any other methods that the bid submission process could 
be structured to provide for later pricing data submission.
    The costs represented in each plan bid should be those for which 
the plan would actually be responsible. Given the structure of 
qualified prescription drug coverage, these costs would not include 
payments made by the enrollee for deductible, coinsurance (including 
100 percent coinsurance between the initial coverage limit and the out-
of-pocket threshold), copayments, or payments for the difference 
between a plan's allowance and an out-of-network pharmacy's usual and 
customary charge (as discussed in Sec.  423.124(b)). It also does not 
include costs reimbursed by us through the reinsurance subsidy. 
However, we require the separate identification, calculation, and 
reporting of costs assumed to be reimbursed by us through reinsurance. 
For standard coverage, defined or actuarial equivalent, these costs 
would include the plan's share of costs above the deductible and up to 
the initial coverage limit, as well as the plan's share of costs above 
the annual out-of-pocket limit. If enhanced alternative coverage is 
provided, the plan costs for supplemental benefits would be 
distinguished from those for basic coverage. The costs attributable 
only to basic coverage, once approved, are known as the standardized 
bid amount.
    In Sec.  423.265(c) we would require that, with the exception of 
potential employer group waivers under section 1860D-22(b) and 1857(i) 
of the Act, late enrollment penalties and low-income premium and cost 
sharing subsidies, the bid represents a uniform benefit package based 
upon a uniform level of premium and cost sharing among all 
beneficiaries enrolled in the plan. This means that all enrollees in a 
given PDP or MA-PD plan would be subject to the same cost sharing 
structure and would be charged the same premium for benefits the PDP 
sponsor or MA organization chose to offer.
    We note that while benefits are required to be uniform for all 
enrollees under the drug benefit, this is not the case for enrollees 
under a prescription drug discount card program. To avoid any confusion 
between these related programs, we would like to make this distinction 
clear. Because of the limited low-income assistance under the card 
program, card sponsors have been permitted to negotiate lower prices 
for low-income members. Also, in some cases there may be reduced cost 
sharing sponsored by manufacturers for low-income members after the 
$600 in transitional assistance is used that does not apply to other 
card members. Under the Part D prescription drug program, however, both 
the negotiated prices and the benefit structure would be the same for 
all enrollees in a given PDP or MA-PD plan. While the low-income 
subsidies will result in low-income beneficiaries' actual out-of-pocket 
costs being lower than for beneficiaries who do not qualify for this 
assistance, the benefit structure to which the subsidies apply is the 
same for all enrollees in a plan.
3. General CMS Guidelines for Actuarial Valuation of Prescription Drug 
Coverage
    As directed by section 1860D-11(c) of the Act, we would develop 
processes and methods using generally accepted actuarial principles and 
methodologies for determining the actuarial valuation of prescription 
drug coverage. Although we plan to provide additional information in 
the future in the form of interpretive guidance on these processes, we 
are currently considering the following processes and methods for 
calculating ``actuarial valuation'' and ``actuarial equivalence'' in 
the context of risk bids:
     Sponsors offering standard coverage with cost-sharing 
variants either to the 25 percent coinsurance (before the initial 
coverage limit) or the greater of 5 percent coinsurance or $2 generic/
preferred/$5 any other drug (after the out-of-pocket threshold is met) 
would be required to demonstrate the actuarial equivalence of their 
variations.
     Sponsors offering basic or enhanced alternative 
prescription drug coverage would be required to demonstrate that--
    + The actuarial value of total or gross plan coverage is at least 
equal to the actuarial value of total or gross coverage of the defined 
standard benefit.
    + The actuarial value of total coverage of their alternative is at 
least equal to the actuarial value of defined standard coverage;
    + The actuarial value of unsubsidized coverage of their alternative 
is at least equal to the actuarial value of the unsubsidized portion of 
defined standard coverage; and
    + The plan payout at the dollar value of the initial coverage limit 
under standard coverage, for individuals whose total spending exceeds 
that limit, is at least equal to that provided under defined standard 
coverage.
     All sponsors would determine the actuarial value of the 
defined standard benefit, either because it is--
    + Offered to the beneficiaries;
    + Used as a comparison for either of the following:
     Standard coverage with actuarially equivalent cost-sharing 
variants.
     Alternative coverage; or
    + Used to determine the basic component in enhanced alternative 
coverage.
     Sponsors that offer enhanced alternative coverage would 
also be required to determine the actuarial value of coverage beyond 
basic coverage.
     We anticipate that we would specify data sources, 
methodologies, assumptions, and other techniques in accordance with 
generally accepted actuarial principles as either recommended or 
required in further guidance. We would also specify the data elements 
(including format) to be sent to us for evaluation. We would then 
evaluate the analysis and assumptions for compliance and 
reasonableness. For example, we would evaluate the source, size, and 
timeframe of data on which assumptions are based, the demographic 
characteristics of enrollees, the distribution of risk levels, the 
average costs in each cost-sharing tier, and the update factors used, 
among other considerations.
     We would also have reported and separately identified 
administrative costs. Since the level of the bid will directly affect 
the premium paid by the beneficiary and the attractiveness of the plan, 
we expect that plans will have a strong incentive to keep 
administrative costs and return on investment at reasonable levels. Any 
review of administrative costs would likely focus primarily on outliers 
from the competitive range identified in the bids received. All 
proposals would contain a description of how certain costs (those 
related to appeals that result in payment for non-formulary drugs) are 
included in the calculations. Processes and methods for determining 
actuarial valuation would take into account the effect that providing 
actuarially equivalent standard coverage or alternative prescription 
drug coverage (rather than defined standard coverage) has on drug 
utilization. This includes utilization effects attributable to 
different benefit structures, such as from tiered cost sharing, as well 
as those attributable to supplemental benefits. The utilization effect 
of supplemental benefits on basic benefits would have to be loaded into 
the supplemental portion of the bid. In other words, since the 
existence of supplemental coverage would increase total average per 
capita spending, that increase over the average spending (if coverage 
were limited to basic coverage) would be included in the portion of the

[[Page 46676]]

bid attributable to supplemental coverage. Section 1860D-11(c)(1)(D) of 
the Act specifies ``the use of generally accepted actuarial principles 
and methodologies.'' We are interpreting this to require that a 
qualified actuary certify the plan's actuarial valuation (which may be 
prepared by others under his or her direction or review). Actuarial 
certification would give better assurance that the actuarial values in 
the bid were prepared in conformance with actuarial standards and 
methodologies.
     Section 1860D-11(c)(3)(B) of the Act specifies that PDP 
sponsors or MA organizations offering MA-PD plans may use qualified 
independent actuaries in certifying the actuarial values in their bids. 
(The actuarial valuation may be prepared by others under the direction 
or review of a qualified actuary). We interpret this provision as 
encouraging PDP sponsors and MA organizations that do not employ 
qualified actuaries, to use outside actuaries in their processes. We 
propose to specify that a qualified actuary is an individual who is a 
member of the American Academy of Actuaries because members of the 
Academy must meet not only educational and experience requirements, but 
also a code of professional conduct and standards of practice. These 
standards create a common ground for actuarial analysis. Furthermore, a 
member of the Academy is subject to its disciplinary action for 
violations of the code and standards. This same requirement is 
specified in the SCHIP legislation at section 2103(c)(4)(A) of the Act. 
Moreover, the National Association of Insurance Commissioners (NAIC) 
imposes significantly stricter requirements on actuaries preparing the 
financial statements of insurance companies.
4. Determining Actuarial Equivalency for Variants of Standard Coverage 
and for Alternative Coverage
    When considering the specific requirements for actuarial 
equivalence and valuation in the Act, we are aware that there is no 
official definition of actuarial equivalence. Moreover, the concept of 
actuarial equivalence is applied in multiple contexts. We must address 
actuarial equivalence requirements regarding cost sharing, expected 
benefits, and bid submissions. We plan to address the application of 
actuarial equivalence within these separate contexts in this discussion 
and in separate detailed guidance to the industry. Thus, we plan to use 
interpretive guidance to further explain the process and methodology 
for determining actuarial equivalence and valuation. The processes and 
methods for determining actuarial equivalence and valuation would be in 
keeping with generally accepted actuarial principles. We would require 
prospective PDP sponsors and MA organizations wishing to offer MA-PD 
plans to include all of the requirements discussed in the following 
sections in the information submitted with the bid, when applicable. 
The MMA contains some specific requirements for actuarial equivalence 
or valuation. These actuarial equivalence tests are discussed below.

a. Actuarial Equivalence as Applied to Actuarially Equivalent Standard 
Coverage--Cost-Sharing

    As required in section 1860D-2(b)(2)(A) of the Act, standard 
prescription drug coverage must have ``coinsurance for costs above the 
annual deductible * * * and up to the initial coverage limit that is 
equal to 25 percent; or is actuarially equivalent * * * to an average 
expected payment of 25 percent of such costs.'' We interpret this to 
mean that sponsors would be required to demonstrate that the actuarial 
value of their alternative cost-sharing as a percent of the actuarial 
value of both cost-sharing and plan payments for claims up to the 
initial coverage limit is the same percentage as for 25 percent 
coinsurance under defined standard coverage. In calculating these 
percentages, sponsors would reflect the utilization impacts of the two 
structures, but hold constant formulary (drug list), drug pricing 
(except to the extent that the plan incorporated differential pricing 
and cost sharing based on participation status within the plan's 
network), and the group whose utilization is modeled. This would allow 
plans to have variable co-payments or coinsurance, including tiered 
structures for preferred and non-preferred drugs, in the initial 
coverage interval as long as the actuarial equivalence test is met. As 
a simple example, a plan could have a tiered coinsurance benefit with 
coinsurance higher than 25 percent for brand name drugs and lower than 
25 percent for generics. Some beneficiaries with expenses between the 
deductible and the initial coverage limit would be expected to pay more 
than 25 percent, and others to pay less, depending on their usage of 
brand versus generic drugs. Overall, however, the total coinsurance 
would have to be actuarially equivalent to an average of 25 percent for 
all beneficiaries with expenses in this interval, even if the total 
expenditures beneath the initial coverage limit ($2,250 in 2006) are 
lower than would be expected under defined standard coverage (due to 
increased use of generics, for example).
    If sponsors wanted to provide a variant on defined standard cost 
sharing after the out-of-pocket threshold is met, an actuarial test 
similar to that described above for variants on the 25 percent 
coinsurance would apply. In this case, based on the group of 
individuals projected to exceed the out-of-pocket threshold, the 
sponsor would compute total cost sharing once the true out-of-pocket 
(TROOP) threshold has been met as a percentage of the sum of that cost 
sharing plus the comparable plan payout. This percentage would have to 
equal the percentage computed in the same manner using the defined 
standard benefit (that is, the greater of $2/$5 or 5 percent). We note 
that any variant in cost sharing could not lead to discrimination 
against certain beneficiaries, for example, by increasing the cost 
sharing of a drug used for a particular illness well above the cost 
sharing for other drugs.

b. Tests for Alternative Coverage

    As required by section 1860D-2(c) of the Act, sponsors offering 
alternative coverage, that is, benefit structures different from 
standard coverage, must satisfy five tests (three of the five are 
actuarial equivalency tests). As discussed in Subpart C, alternative 
coverage would include coverage actuarially equivalent to defined 
standard coverage (basic alternative coverage) or coverage that would 
include supplemental coverage (enhanced alternative coverage). All 
alternative coverage would have to meet all five of the coverage 
standards or tests discussed in section b.1-5 of this preamble. Tests 
one through three were established by the Congress to assure that 
alternative coverage would be at least actuarially equivalent to 
standard coverage. Tests four and five are additional tests imposed by 
the Congress through section 1860D-2(c) of the Act.
1. Test for Assuring at Least Equivalent Value of Total Coverage
    As required in section 1860D-2(c)(1)(A) of the Act, a plan could 
offer alternative prescription drug coverage as long as the actuarial 
value of total or gross coverage is at least equal to total or gross 
coverage provided under standard coverage. Based on a typical 
distribution of enrollee utilization, the average plan payout 
(including costs reimbursed by Medicare through the reinsurance 
subsidy) would have to be at least equal to the sponsor's estimate of 
the payout under defined standard coverage (holding various factors

[[Page 46677]]

constant as described above under section 4.a.).
    Alternative benefit structures, such as a decrease in the 
deductible with an increase in coinsurance below the initial coverage 
limit, or a lower initial coverage limit with a corresponding decrease 
in coinsurance, or a lower initial coverage limit with a corresponding 
decrease in deductible, could be accommodated as basic alternative 
coverage as long as the actuarial value of this coverage equaled that 
of defined standard coverage. Alternative structures could not increase 
the deductible or provide less than the protection offered against high 
out-of-pocket expenditures described in section 1860D-2(b)(4) of the 
Act. To the extent that the alternative coverage exceeds the value of 
defined standard coverage, the plan would be offering enhanced 
alternative coverage, that is, alternative coverage that includes 
supplemental benefits (as discussed in subpart C).
2. Test for Assuring Equivalent Unsubsidized Value of Coverage
    In section 1860D-2(c)(1)(B) of Act, a plan could offer alternative 
coverage as long as the unsubsidized value of coverage (the value of 
the coverage exceeding subsidy payments) is at least equal to the 
sponsor's estimate of unsubsidized value under defined standard 
coverage (holding various factors constant as described above section 
4.a.). We interpret the unsubsidized value of coverage to mean the 
value of the benefit attributable to the beneficiary share of the 
premium.
    There is a basic question about how this test could be applied 
during the plan review and approval process. In order to determine the 
unsubsidized value of coverage, one would have to know the projected 
reinsurance payments, and the value of the direct subsidy. While the 
projected reinsurance payments would be known at the time of the 
submission (since the actuarial value of the benefit is reduced by 
projected reinsurance payments to produce the bid), the value of the 
direct subsidy would not be known (since it would require computing the 
national weighted average bid and bids have not yet been approved). In 
the face of this problem, one approach could be to remove reinsurance 
payments as estimated by the sponsor and to use an estimate of the 
direct subsidy that we would provide. For instance, in the first year 
we might provide the estimate used for budgeting purposes, and in 
subsequent years, an estimate based on prior years' actual experience 
updated for trend. We are requesting comments on this approach.
    In trying to assess the impact of the test of total value (section 
1860D-2(c)(1)(A) of the Act) and the test of unsubsidized value 
(section 1860D-2(c)(1)(B) of the Act), we have been unable to identify 
an example of a plan meeting the first test but not the second. We are 
seeking comment with regard to this question.
3. Test for Assuring Standard Payment for Costs at Initial Coverage 
Limit
    Under section 1860D-2(c)(1)(C) of the Act, sponsors are to 
determine the average payout ``with respect to costs incurred that are 
equal to the initial coverage limit'' for ``an actuarially 
representative pattern of utilization.'' This projected payout is 
compared to a dollar amount that is equal to what defined standard 
coverage would pay for someone with costs equal to the initial coverage 
limit. Given the comparison, this raises the question of what 
represents ``an actuarially representative pattern of utilization.'' As 
with the other tests, we believe that it would be reasonable for plans 
to use either anticipated plan utilization or a typical utilization 
pattern based on the Medicare population. However, given the implicit 
comparison to payout under defined standard for someone with costs 
equal to the initial coverage limit, it would not be valid to include 
individuals with expenses below the value of the initial coverage 
limit. After excluding individuals with total expenses below the value 
of the initial coverage limit, the plan would compute the actuarial 
value of plan payout at the point where total expenses are equal to the 
initial coverage limit under standard coverage. Under this 
interpretation, a plan could offer alternative coverage as long as the 
coverage is designed to provide an actuarial value of plan payout that 
is equal to at least 75 percent of costs between the standard 
deductible and initial coverage limit ($1,500 in 2006). In other words, 
considering only plan enrollees with expected expenses greater than or 
equal to the dollar value of the standard initial coverage limit, the 
plan would have to demonstrate that the expected plan payout associated 
with expenses equal to that dollar value would be at least 75 percent 
of benefit costs between the deductible and initial coverage limit (75 
percent of $2,000 per beneficiary in CY 2006) including taking into 
account their expected behavioral response to the different benefit 
structure. This test, combined with the prohibition on increasing the 
deductible under alternative coverage (described below), would ensure 
that the benefit below the dollar level of the standard initial 
coverage limit is always actuarially equivalent to standard coverage. 
As a defined standard benefit it is not permissible to trade off 
benefits above the initial coverage limit for benefits below.
4. Test for Assuring the Deductible Does not Exceed the Standard 
Deductible.
    In keeping with the requirements of section 1860D-2(c)(2) of the 
Act, alternative coverage could not be structured so that the 
deductible is any higher than what it is in standard coverage ($250 in 
2006).
5. Test for Assuring the Same Protection Against High Out-of-Pocket 
Costs
    As specified by section 1860D-2(c)(3) of the Act, any alternative 
coverage must provide ``the coverage'' specified for costs above the 
catastrophic limit in standard coverage. We interpret this to mean that 
both enhanced and basic alternative coverage would have to offer at 
least the coverage available above the catastrophic limit through 
defined standard coverage. We would apply this test in the same way 
that we do for standard coverage with a variant of cost sharing above 
the catastrophic limit. That is, examining the group of individuals the 
sponsor projects would exceed the out-of-pocket threshold, total cost 
sharing once TROOP has been met, as a percentage of the sum of such 
cost sharing plus comparable plan payout, must be less than or equal to 
the percentage computed using the defined standard benefit (that is, 
the greater of $2/$5 or 5 percent). Again, we note that any variant in 
cost sharing could not lead to discrimination against certain 
beneficiaries, for example, by increasing the cost sharing of a drug 
used for a particular illness well above the cost sharing for other 
drugs.

c. Value of Qualified Coverage

    In accordance with section 1860D'11(b)(2)(B) of the Act, with the 
bid, each PDP sponsor and MA organization offering an MA-PD plan must 
submit the actuarial value of qualified coverage in the region for the 
Part D eligible individual with a national average risk profile for the 
factors described in section 1860D'15(c)(1)(A) of the Act. We interpret 
this to mean that the weighted average of the plan's expected risk-
standardized costs will represent the plan's cost for the theoretical 
national average-risk Part D individual. Any increase in costs 
attributable to increased utilization as the result of enhanced 
alternative coverage must be

[[Page 46678]]

excluded from this calculation. (Any alternative coverage that does not 
include supplemental coverage would be, by definition, actuarially 
equivalent to standard coverage. In this case, there is no need to make 
a further utilization adjustment since the test of actuarial 
equivalence for the 25 percent cost-sharing requirement has already 
taken into account utilization.) Any utilization effect that 
supplemental coverage has on the basic benefit should be priced into 
the supplemental portion of the bid.
5. Information Included With the Bid

a. Bid Format

    We have not yet determined the exact format for the bid submission 
and we would provide future guidance on these requirements. We believe 
that we would develop a fully automated process that would include 
electronic signatures for certifications of the actuarial analysis and 
the plan benefit package. Section 1860D-11(c)(1)(D) of the Act 
specifies ``the use of generally accepted actuarial principles and 
methodologies.'' We would require that an actuary (a member of the 
American Academy of Actuaries) certify the actuarial valuation, which 
may be prepared by others under his or her direction or review. 
Actuarial certification would give better assurance that the actuarial 
values in the bid were prepared in conformance with actuarial standards 
and methodologies. Section 1860D-11(c)(3)(B) of the Act permits use of 
outside qualified independent actuaries. We expect that plans would use 
outside actuaries, especially if they did not have qualified in-house 
actuaries.
    As provided in section 1860D-11(b)(3) of the Act, we would develop 
the bid submission format to facilitate the submission of bids for 
multiple regions and in all regions, and we would take this into 
account in process development. This approach would need to ensure that 
separate bids were provided for each region in order to calculate the 
national average monthly bid amount and any geographic adjustment 
required. Our overall approach would be to increase our flexibility to 
develop appropriate methodologies in response to program changes, while 
minimizing burden, rather than codifying these processes in regulation. 
We believe that we would have the authority to develop these 
methodologies through interpretive guidance because our regulations 
state that sponsors provide the actuarial value of their plans in 
accordance with generally accepted actuarial principles and 
methodologies.
    The information included with the bid should be sufficient for our 
review of the acceptability of a proposed plan based on actuarial 
principles and for negotiation of terms and conditions of an entity's 
participation in the provision of Part D benefits. As provided in 
section 1860D-11(b)(2) of Act and Sec.  423.265(d) of this proposed 
rule, the information that would accompany the bid submission would, at 
a minimum, include the following:
     Information on the prescription drug coverage to be 
provided, including the structure of the benefit, including 
deductibles, coinsurance (including any tiers), initial (or subsequent) 
coverage limits at which coinsurance levels change, and out-of-pocket 
thresholds. This would also include the plan's formulary and any drugs, 
or types of drugs, excluded from coverage, and all documents provided 
to beneficiaries explaining the benefit, including the Evidence of 
Coverage, and would be certified by an officer of the plan. We solicit 
comments on the best way to obtain clear information on what drugs are 
included in the formulary.
     The actuarial value of the qualified prescription drug 
coverage in the region for a beneficiary with a national average risk 
profile certified by a qualified actuary.
     The portion of the bid attributable to basic benefits.
     The portion of the bid attributable to supplemental 
benefits, if applicable.
     The actuarial basis for the portion of the bid 
attributable to basic coverage and to supplemental benefits, if 
applicable, certified by a qualified actuary.
     The assumptions regarding reinsurance subsidy payments.
     The assumptions regarding administrative expenses.
     The plan's service area and the plan's network of 
pharmacies serving that service area.
     (For PDP sponsors only) the level of risk assumed in the 
bid, including whether the sponsor requires a modification of risk 
level (see discussion below) and, if so, the extent of the 
modification. Although our procedures may subsequently seek this 
information, we may only review it to the extent that the initial 
submission of bids does not yield the statutory minimum number of full 
risk bidders in each region and area. Our goal in designing the bidding 
process will be to maximize the level of risk borne by contracting 
plans and to minimize the need for fallback plans, and we would welcome 
comments on facilitating risk bidding; and
     Any other information that we would require.

b. Risk Adjustment of Supplemental Premium

    The portion of the bid attributable to supplemental benefits 
represents the supplemental premium for a beneficiary with a national 
average risk profile. The payment process provided in section 1860D-15 
of the Act would only address risk adjustment of the basic portion of 
the bid, and there are no other provisions for risk adjusting the 
supplemental benefit portion of the bid. If not addressed, this would 
result in plans with average risk scores above 1.0 being under-
compensated by enrollees for supplemental benefits, and plans with 
average risk scores below 1.0 being over-compensated, as illustrated 
below.

                                Table F-1.--Supplemental Premium Risk Adjustment
----------------------------------------------------------------------------------------------------------------
                                                                      Plan  A         Plan  B         Plan  C
----------------------------------------------------------------------------------------------------------------
Plan Average Risk Profile.......................................            0.80            1.00            1.10
1.0 Supplemental Premium........................................             100             100             100
Supplemental Premium if Risk-Adjusted...........................              80             100             110
Over or (under) compensation....................................          $20.00           $0.00        $(10.00)
----------------------------------------------------------------------------------------------------------------

    Table F-1 illustrates the case of three equally efficient plans 
that each estimate the cost of the same supplemental benefits at $100. 
Plan B has an average risk profile, that is, the arithmetic average of 
the risk scores of all of its enrollees is equal to 1.0. Plan A and 
Plan C, however, have healthier and sicker than average risk pools, 
with enrollee risk scores averaging .80 and 1.10, respectively. Plan A 
only needs an average risk-adjusted premium of $80 to

[[Page 46679]]

meet the revenue requirements of providing those supplemental benefits 
to its healthier enrollees, but would receive $20 more on average from 
enrollees if it collects the whole $100 unadjusted premium. In 
contrast, Plan C needs to collect $10 more than it would receive from 
the unadjusted (1.0) premium to fully fund the expected needs of its 
sicker enrollees. Consequently, we are proposing to require additional 
information on the projected risk profiles of its projected enrollees 
for accurate valuation of the supplemental portion of the bid with the 
bid submission. We intend, through the negotiation process, to reach 
agreement on a supplemental premium based on the bid submission that 
would account for the risk profile of enrollees and, thus, meet the 
plan's revenue requirements. Our goal is to maintain a level playing 
field that would facilitate the fair competition envisioned in the MMA. 
Review and approval of this information is discussed in section F.3. of 
this preamble.

c. Modification of Risk in PDP Bids

    As provided under section 1860D-11(b)(2)(E) of Act and in Sec.  
423.265(d)(4), PDP sponsors may request a modification of certain risk 
sharing arrangements provided under section 1860D-15(e) of the Act, 
thus, becoming a limited risk plan. Modification of risk could include 
an increase in the Federal percentage assumed in the risk corridors or 
a decrease in the size of the risk corridors. Any modification of risk 
would have to apply to all PDP plans offered by a PDP sponsor in a 
region.
    Section 1860D-11(b)(2)(E)(i) of the Act states that modification of 
risk will not be available to MA-PD plans. Therefore, in discussing the 
possibility of including in the bid a request for a modification of 
risk, we include only PDP sponsors. Limited risk plans would only be 
accepted if the access requirements in section 1860D-3(a) of the Act 
could not otherwise be met through the approval of a sufficient number 
of full risk plans. These requirements call for at least two qualifying 
plans offered by different entities, one of which must be a stand-alone 
prescription drug plan. If other bidders meet these requirements, a bid 
from a limited risk plan could not be approved and might not be 
reviewed.
6. Review and Negotiation of Bid and Approval of Plans

a. Authority To Review Bids

    We would review the information filed by the PDP sponsor or MA 
organization in order to conduct negotiations on the terms and 
conditions proposed in the bid. The MMA grants use the authority to 
negotiate bids and benefits ``similar to'' the statutory authority 
given the Office of Personnel Management (OPM) in negotiating health 
benefits plans under the FEHBP program. We believe that the Congress 
used ``similar to'' in the statute because of the differences between 
the two programs. For example, while the OPM authority applies to level 
of benefits, standard Part D drug coverage is defined. With regard to 
rates, in some cases the context for FEHBP negotiations is not 
applicable to Part D. For example, the rates for community-rated plans 
under FEHBP are related to the rate the entity provides to similarly 
sized groups, and there is no comparable concept in Part D. Arguably 
the degree of competition among plans, and price signaling through 
premium and benefits, might be significantly greater in Part D than in 
FEHBP. Although these differences do exist there are also similarities. 
OPM is concerned about trend factors used to establish the premium for 
experience-rated plans, and we would have similar concerns about the 
reasonableness of a sponsor's trend assumptions. OPM is concerned about 
cost-sharing changes proposed by plans, and we would have similar 
concerns with regard to supplemental benefits. OPM wants to maintain 
high member satisfaction and ensure top quality service by plans, and 
we would have similar interests.
    Chapter 89 of title 5 U.S.C. gives OPM broad discretion to 
negotiate prices and levels of benefits. For example, 5 U.S.C. 8902(i) 
states that OPM may negotiate with carriers if it believes the rates 
charged do not ``reasonably and equitably'' reflect the cost of the 
benefits provided. In addition, rates may be determined ``on a basis 
which, in the judgment of the Office, is consistent with the lowest 
schedule of basic rates generally charged for new group health benefit 
plans issued to large employers.'' OPM is permitted to ensure that any 
adjustment in rates from one year to the next is consistent with the 
general practice of carriers which issue group health benefit plans to 
large employers. We interpret this to mean that we would have the 
authority not only to determine whether the bids submitted accurately 
reflect the costs of the plan, but also to determine whether the bids 
are in keeping with premiums charged in other insurance contexts. If 
bids increase at a rate higher than the premiums in the general 
insurance market (with appropriate adjustments for comparable 
populations), we may determine that further negotiations are needed. In 
addition, OPM has broad authority to negotiate the level of benefits, 
including the ability to prescribe ``reasonable minimum standards for 
health benefits plans.'' (See 5 U.S.C. 8902(c).) We are considering 
similar regulations to those used by OPM in 48 CFR Chapter 16 and are 
soliciting comments on this subject. To the maximum extent feasible and 
consistent with the appropriate discharge of our responsibilities, we 
prefer to rely on competition rather than negotiation.

b. Bid and Benefit Package Review

    We believe we have the authority to negotiate in four broad areas--
(1) administrative costs; (2) aggregate costs; (3) benefit structure; 
and, (4) plan management, if dissatisfied with some or all aspects of 
bid submissions. We would evaluate administrative costs for 
reasonableness in comparison to other bidders and in comparison to a 
PDP sponsor's other lines of business. We would examine aggregate costs 
to determine whether the revenue requirements for qualified 
prescription drug coverage are reasonable and equitable. We would be 
interested in steps that the sponsor is taking to control costs, such 
as through various programs to encourage use of generic drugs. We would 
examine and discuss any proposed benefit changes. Finally, we would 
discuss indicators and any identified issues with regard to plan 
management, such as customer service.
    In addition to the negotiation process, we would assure that bids 
and plan designs meet statutory and regulatory requirements. In 
general, we would examine bids to determine whether the bid meets the 
standard of providing qualified prescription drug coverage, as 
described in Sec.  423.104(b) of this proposed rule and in subpart C of 
this preamble. We would examine the actuarial analysis accompanying the 
bid to ensure that it has been prepared in accordance with our 
actuarial guidelines and properly certified. We would examine bids to 
determine whether the revenue requirements for qualified prescription 
drug coverage are accurate and reasonable, and that the requirements 
relating to actuarial determinations are met. We note that section 
1860D-11(e)(2)(c) of the Act requires that the portion of the bid 
attributable to basic prescription drug coverage must be supported by 
the actuarial bases and reasonably and equitably reflect revenue 
requirements for benefits provided under the plan, less the sum of the 
actuarial value of reinsurance payments. We would also

[[Page 46680]]

review the structure of premiums, deductibles, copayments, and 
coinsurance charged to beneficiaries and other features of the benefit 
plan design to ensure that it is not discriminatory. We would review 
cost sharing both above and below the out-of-pocket threshold with 
regard to its impact on groups of beneficiaries. We would also look to 
see that there is no differential impact on groups of beneficiaries by 
geographical location within the plan's region or service area 
attributable to different levels of cost sharing between preferred and 
non-preferred network providers.
    As required under section 1860D-11(e)(2)(D)(i) of the Act and in 
Sec.  423.272(b)(2), the structure of the benefit design (including 
cost sharing provisions and formulary design) must not be 
discriminatory; that is, it must not discourage enrollment by any Part 
D eligible enrollee on the basis of health status, including medical 
condition (related to mental as well as physical illness), claims 
experience, receipt of health care, medical history, genetic 
information, evidence of insurability, and disability. In general, this 
means that we would review benefit plans for features that, when 
applied, have differential impacts on beneficiaries with particular 
medical conditions. Factors we would consider in determining whether a 
benefit structure is discriminatory include, but are not limited to--
(1) the benefit design--including the initial coverage limit, the 
tiered cost-sharing, the use of categories and classes in a formulary, 
and the choice of drugs provided in each category. (For example, if the 
tiered cost-sharing for drugs used to treat HIV is much higher than the 
cost-sharing for other types of drugs, we would view this benefit 
structure to be discriminatory); (2) the use of any discriminatory 
limits such as 90-day limits or requirements for pre-authorization; and 
(3) supplemental benefits such as supplemental coverage of drugs that 
would encourage a healthier population to join the PDP. As provided in 
section 1860D-11(e)(2)(D)(ii) of the Act, plans using formulary designs 
based on categories and classes that are consistent with the guidelines 
established by the U.S.P. as discussed in subpart C, will be recognized 
as satisfying the non-discrimination design related to formulary 
structure as it pertains to categories and classes. However, adopting 
the USP model categories and classes would not prohibit us from 
reviewing other aspects, including the use of any limits or tiers, as 
discussed above.

c. Approval of the Supplemental Premium

    As provided under section 1860D-11(e)(2)(C)(ii) of the Act, we will 
determine that the portion of the bid attributable to supplemental 
benefits reasonably and equitably reflects the revenue requirements for 
that coverage under the plan. Unless the supplemental portion of the 
bid (which is paid by the enrollee in the form of the supplemental 
premium) is risk adjusted for the average level of risk among 
enrollees, plans with average risk scores above or below 1.0 would be 
over compensated or under compensated by enrollees for supplemental 
benefits. Therefore, on the basis of this authority, we are proposing 
to require additional information, consisting of estimates of the 
projected risk scores of the plan's enrollees in the subsequent year, 
to be submitted by each plan for purposes of negotiating the 
appropriate risk adjustment of the supplemental portion of the bid. We 
would review and negotiate that information, and would approve a 
uniform supplemental premium reflecting the average risk factor for the 
plan's expected enrollment.

d. Rebate Reallocation for MA-PD Plans

    The negotiation process for MA-PD plans could include the 
resubmission of modified benefit structures (other than changes in that 
portion of their supplemental benefits related to drugs) once we know 
the outcome of the national average monthly bid calculation and its 
impact on beneficiary premiums. Part D drug benefits, including 
benefits offered through supplemental Part D coverage) could not be 
changed during this process because any changes would have an impact on 
government reinsurance payments and, therefore, on the portion of the 
bid related to basic drug benefits. The MMA requires that all MA bid 
and benefit package submissions be provided to us no later than the 
first Monday in June. In the prescription drug program enrollee 
premiums must be based on a percentage of the national average monthly 
bid amount that can only be calculated once all bids have been 
received, if not actually approved. (While the enrollment weights are 
determined from the previous year's reference month, the bid amounts 
are not.) Therefore, the prescription drug portion of benefit packages 
submitted by MA-PD plans would be based on estimates of monthly 
beneficiary premiums. Some of these MA-PD plans would have allocated 
portions of their Part C rebates to buy-down of the Part D premium. 
Once the final national average monthly bid amount and the base 
beneficiary premium have been calculated, some of these rebate 
allocations in the bids could be either excessive or insufficient to 
achieve the desired premium level.
    Excessive rebate allocation would result in a portion of the rebate 
that is not provided to the beneficiary as required by law, since a 
premium of less than zero is not permitted. Compliance with the statute 
will require a reallocation of the excessive portion of the rebate 
credit back to other allowed uses of the Part C rebate, that is, to 
supplemental benefits (including reduced cost sharing other than cost 
sharing for Part D drugs) or to credits to the Part B or supplemental 
premiums. On the other hand, insufficient rebate allocation may result 
in minimal premiums that may be seen as burdensome by plans, enrollees, 
and the financial institutions managing electronic funds transfer.
    The statute does not address this situation, but section 1860D-11 
of the Act does grant us broad authority to negotiate the terms and 
conditions of the proposed bids and benefit plans. Our proposed 
regulatory approach would be to allow the negotiation process for MA-PD 
plans to include the resubmission of modified benefit structures once 
the outcome of the premium finalization process is known. MA-PD plans 
would be able to redistribute their Part C rebates to correct for the 
difference between the projected and final national average monthly bid 
amounts and to achieve the previously proposed level of Part D 
premiums. Under no circumstances could plans submit modified bids.
    For example, an MA-PD organization submitted its bid and benefit 
package based on the assumption that the levels of the national average 
monthly bid amount and its prescription drug standardized bid would 
result in a $35.00 monthly beneficiary premium for basic coverage, and 
that it would use $35.00 of its Part C rebate to completely buy down 
the Part D premium. If the national average monthly bid amount is 
determined to be higher than expected, the plan's bid would end up 
below the benchmark and its base beneficiary premium would be adjusted 
by subtracting the difference between the bid and national average 
monthly bid amount. Therefore, the plan's monthly beneficiary premium 
would be less than the projected premium, for instance, $34.00, and the 
$35.00 amount allocated

[[Page 46681]]

from the Part C rebate for Part D premium buy-down would be excessive. 
In that case, we would require the MA organization to amend its benefit 
package to reallocate the excessive $1.00 of the Part C rebate credit 
to additional supplemental benefits (other than for Part D drugs) or to 
Part B or supplemental premium credits. These adjustments would be 
mandatory in order to ensure that the entire amount of the rebate was 
provided to the beneficiary in some form.
    Under an alternative scenario, the national average monthly bid 
amount is determined to be lower than expected and the plan's bid ends 
up above the benchmark. In this case, the plan's base beneficiary 
premium would be adjusted by adding the difference between the bid and 
national average monthly bid amount. Therefore, the plan's monthly 
beneficiary premium would be higher than projected, for instance 
$36.00, and the $35.00 amount allocated from the Part C rebate for Part 
D premium buy-down would no longer be sufficient to eliminate the Part 
D premium as planned. In that case, we would allow the MA organization 
to amend its benefit package to reallocate an additional $1.00 of the 
Part C rebate credit from additional supplemental benefits (other than 
for Part D drugs) or from Part B or supplemental premium credits to 
eliminate the Part D premium. These adjustments would be optional since 
the Part C rebate has already been provided to the enrollee. We would 
not permit an MA organization to simply eliminate a minimal premium 
instead of reallocating the rebate because doing so would mean that the 
cost of providing the prescription drug benefit had been overstated. 
However, the MA organization could elect to charge the new increased 
premium and to amend its benefit package submission accordingly.

e. Private Sector Price Negotiation and Formulary Design

    The Act envisions that most price negotiation including discounts, 
rebates, or other direct or indirect subsidies or remunerations would 
take place between PDP sponsors or MA organizations (or their 
subcontractors) and pharmacies and pharmaceutical manufacturers. 
(Section 1860D-11(i) precludes CMS from interfering with negotiations 
between drug manufacturers and pharmacies, or PDP sponsors, or 
requiring a particular formulary or pricing structure.) In other words, 
price negotiation would be conducted by the private drug benefit 
managers and plans that are already familiar with negotiating prices of 
prescription drugs on a local, regional or national basis. Moreover, we 
expect that providing information on discounted drug prices to 
beneficiaries will encourage further competition on lower prices. 
Because beneficiaries will choose a drug plan based on drug prices and 
formulary coverage, the plans have strong incentives to negotiate lower 
prices on drugs that beneficiaries use--just as private benefit 
managers currently do on behalf of the Federal government, state 
governments, and employer and retiree plans. We expect that in addition 
to price levels for drugs, these negotiations will also include such 
terms as prohibitions on substitutions of drugs if the net result would 
be higher costs for patients or the plans. The nature of the 
negotiations that we propose to conduct with bidders is discussed later 
with respect to full-risk and limited-risk bids, and in subpart Q of 
this preamble with respect to fallback plans.
    We expect that the private negotiations between PDP sponsors and 
drug manufacturers would achieve comparable or better savings than 
direct negotiation between the government and manufacturers, as well as 
coverage options that better reflect beneficiary preferences. This 
expectation reflects the strong incentives to obtain low prices and 
pass on the savings to beneficiaries resulting from competition, 
relevant price and quality information, Medicare oversight, and 
beneficiary assistance in choosing a drug plan that meets their needs. 
This is similar to the conclusion of other analyses, for example, CBO's 
recent statement that ``Most single-source drugs face competition from 
other drugs that are therapeutic alternatives. CBO believes that there 
is little, if any, potential savings from negotiations involving those 
single-source drugs. We expect that risk-bearing private plans will 
have strong incentives to negotiate price discounts for such drugs and 
that the Secretary would not be able to negotiate prices that further 
reduce federal spending to a significant degree.'' In accordance with 
the Medicaid best price exemption provided under section 1860D-
2(d)(1)(c) of the Act and codified in Sec.  423.104(h)(2) of our 
proposed rule, drug plans may even be able to negotiate better prices 
than those paid under Medicaid. It also reflects Medicare's recent 
experience with drug price regulation for currently-covered drugs, in 
which regulated prices for many drugs have significantly exceeded 
market averages.
    By not allowing us to require any particular formulary, the statute 
ensures that the Pharmacy and Therapeutics committees of prescription 
drug plans and MA-PD plans have the flexibility to make changes in 
their classifications and lists of preferred drugs based on the most 
current evidence-based information (subject to the limitations of Sec.  
423.120(b)). We will evaluate plan formulary categories and classes in 
comparison to the model guidelines developed by U.S.P. In addition to 
evaluating any discriminatory features, as discussed above, we will 
evaluate the number of categories in formularies that do not meet the 
model guidelines and the choice of drugs available in those categories 
with respect to meeting the needs of the Medicare population. After the 
initial year of the program, we will also review the history of plan 
formulary appeals to identify issues with the plan's formulary. We will 
conduct additional research on evaluating formularies and drug benefit 
designs and we would welcome comments on evaluation. As noted 
previously, we may also review plan cost sharing (that is, tiers).

f. Bid Level Negotiation

    The FEHBP standard in 5 U.S.C. 8902(i) requires us to ascertain 
that the bid ``reasonably and equitably reflects the costs of benefits 
provided.'' In addition, we note that section 1860D-11(e)(2)(c) of the 
Act requires that the portion of the bid attributable to basic 
prescription drug coverage must ``reasonably and equitably'' reflect 
revenue requirements * * * for benefits provided under that plan, less 
the sum * * * of the actuarial value of reinsurance payments.'' 
Analogous to the manner in which FEHBP views its management 
responsibilities, we see this requirement as imposing the fiduciary 
responsibility to evaluate the appropriateness of the overall bid 
amount.
    In general, we expect to evaluate the reasonableness of bids 
submitted by at-risk plans by means of the actuarial valuation 
analysis. This would require evaluating the plan's assumptions 
regarding the expected distribution of costs, including average 
utilization and cost by drug coverage tier, for example, in the case of 
standard coverage--(1) those with no claims; (2) those with claims up 
to deductible; (3) those with claims between the deductible and the 
initial coverage limit; (4) those with claims between the initial 
coverage limit and the catastrophic limit; and (5) those with claims in 
excess of the catastrophic limit. We could test these assumptions for 
reasonableness through actuarial analysis and comparison to industry 
standards and other comparable bids. Bid negotiation could take the 
form of

[[Page 46682]]

negotiating changes upward or downward in the utilization and cost per 
script assumptions underlying the bid's actuarial basis. We ask for 
comment on the most effective and least burdensome way to obtain 
pricing and utilization data for use in our actuarial review, as well 
as comments on the broader issues discussed in this section.
    Arguably, appropriate assurance that plan bids reasonably and 
equitably reflect the revenue requirements associated with providing 
the Part D benefit requires knowing the final drug price levels the 
plans are paying that are implicit in their bids. Consequently, in 
addition to looking at final aggregate prices, if we found that a 
plan's data differed significantly from its peers without any 
indication as to the factors accounting for this result, we could also 
ask bidders to provide information about rebates and discounts they are 
receiving from manufacturers and others, in order to ensure that they 
are negotiating as vigorously as possible. Section 1860D-11(b)(1)(C) of 
the Act allows us to ask for necessary ``information on the bid''. In 
other words, we would be able to inquire as to the ``net cost'' of 
drugs since this is the key dollar value we would need to make accurate 
``apples to apples'' comparisons on drug prices between PDPs. Under 
this approach, if the particular bids appear to be unusually high (or 
low), we could go back to the bidders and request that they explain 
their pricing structure, the nature of their arrangements with 
manufacturers, and we might ask further questions and take further 
action to perform due diligence to ensure that there is no conflict of 
interest leading to higher bids. For instance, we would look at certain 
indicators, such as unit costs or growth rates in the bid amounts to 
see if they are in keeping with private market experience to the extent 
feasible for a comparable population (for example, retirees). (In this 
case, we would be using the authority in 5 U.S.C. 8902(i) to negotiate 
bids that are ``consistent with the group health benefit plans issued 
to large employers''.) If the overall bids were unjustifiably high, we 
would have the authority to negotiate the bids down to a level that is 
more in keeping with bids that a private market would provide. While 
there is not a private drug-only insurance market, we could look at the 
rates used in overall coverage or determine which part of such coverage 
is made up by drug coverage, and make appropriate adjustments for 
Medicare utilization differentials. We could exercise our authority to 
deny a bid if we do not believe that the bid and its underlying drug 
prices reflect market rates. Our strong expectation, however, is that 
we will be able to rely on the incentives provided by competitive 
bidding, and we would use our authority under this part only on the 
rare occasion we find that a plan's data differs significantly from its 
peers without any indication as to the factors accounting for this 
result.
    Under the previous M+C program, we permitted M+C organizations to 
waive premiums or to offer mid-year benefit enhancements to their 
benefit packages. However, in order to maintain the integrity of the 
bidding process, we believe that it is no longer appropriate to allow 
either MA organizations or PDP sponsors to waive premiums or offer mid-
year enhancements as they would be de facto adjustments to benefit 
packages for which bids were submitted earlier in the year. These 
adjustments would be de facto acknowledgement that the revenue 
requirements submitted by the plan were overstated. Allowing premium 
waivers or mid-year benefit enhancements would render the bid 
meaningless. Excessive amounts included in the bid will be subject to 
recovery by the government in the risk corridor calculations following 
the coverage year.
    Consequently, we are proposing to interpret the statutory 
provisions on competitive price negotiation as prohibiting us from 
setting a regulated price of any particular drug or imposing by 
regulation an average discount in the aggregate on any group of drugs 
(such as single-source brand-name drugs, multiple-source brand name 
drugs, or generic drugs), but as allowing justification of aggregate 
price levels for groups of drugs. In addition, we could, under the 
specific circumstances previously discussed, negotiate regarding the 
level of the overall risk bid. This approach would allow us to exercise 
the authority similar to FEHBP as visualized in the MMA to ensure that 
per capita rates charged ``reasonably and equitably'' reflect the cost 
of the benefits provided, and that beneficiaries receive the full 
benefits of vigorous price negotiation by their drug plans.

g. Approval of Plans

    After negotiations on the terms and conditions of the bid, we must 
approve or disapprove the bid. After negotiations, we would approve a 
plan only if--
     The plan is found to be in compliance with requirements 
specified in this regulation;
     The plan meets the actuarial valuation requirements; and
     The plan design does not discourage enrollment by certain 
eligible beneficiaries.
    In Sec.  423.272(c), we would approve limited risk plans only if 
fewer than two qualifying prescription drug plans offered by different 
entities, one of which must be offered by a stand-alone PDP sponsor, 
were submitted and approved in a region. We would approve only the 
minimum number of limited risk plans needed to meet these access 
requirements and would give priority to plans bearing the highest 
levels of risk; however, we may take into account the level of the bids 
submitted by these plans. Except as authorized under section 1860D-
11(g) of the Act and in Sec.  423.863 with regard to fallback plans, we 
would not, under any circumstances, approve a plan that elected to bear 
no risk or a minimal level of risk.

h. Special Rules for PFFS Plans

    As provided in section 1860D--21(d) of the Act, and codified in 
Sec.  423.272(d), PFFS plans that offer prescription drug coverage are 
exempt from review and negotiation (under sections 1860D-11(d) and 
(e)(2)(C)) of their prescription drug bids and premium amounts but are 
otherwise subject to all other requirements under this part, with the 
following exceptions. While we will not negotiate PFFS bids, those bids 
must meet the actuarial valuation requirements applicable to all risk 
bids. These plans are not required to negotiate discounted prices for 
prescription drugs. If they do negotiate, the proposed requirements 
under Sec.  423.104(h) related to negotiated prices would apply. If the 
plan provides coverage for drugs purchased from all pharmacies, without 
charging additional cost sharing, and without regard to whether they 
are participating pharmacies. Sec.  423.120(a) and Sec.  423.132 of 
this proposed rule (requiring certain network access standards and the 
disclosure of the availability of lower cost bioequivalent generic 
drugs) would not apply to the plan. PFFS plans are also exempt from 
drug utilization management program and medication therapy management 
program requirements.
    Finally, we note that section 1860D-21(d)(7) of the Act provides 
that costs incurred for off-formulary drugs will not be excluded in 
determining whether a beneficiary has reached the out-of-pocket 
threshold if a PFFS plan does not use a formulary. We believe that 
section 1860D-21(d)(7) is a tautology and simply states that PFFS plans 
without formularies, by definition, cannot have

[[Page 46683]]

non-formulary drugs to exclude from the out-of-pocket threshold 
calculation.
7. National Average Monthly Bid Amount
    In Sec.  423.279, we outline the calculation of the national 
average monthly bid amount. For each year, beginning in 2006, we would 
compute a national average bid based on approved bids in order to 
calculate the national base beneficiary premium. As a practical matter, 
we realize that we might need to calculate and announce the national 
average monthly bid amount before negotiations on all bids were 
completed in order to allow time for finalization of premiums and 
benefit packages. Therefore, we anticipate that we would identify a 
date by which the national average monthly bid amount would be 
published, and we would use the bids that had passed a certain level of 
approval as of that date as the basis for the calculation.
    As provided in section 1860D-13(a)(4)(A) of the Act, in computing 
the national average monthly bid amount, we would exclude bids 
submitted for MA private fee-for-service (PFFS) plans, specialized MA 
plans for special needs individuals, PACE programs under section 1894 
of the Act (pursuant to section 1860D-21(f) of Act) and reasonable cost 
reimbursement contracts under section 1876(h) of the Act (according to 
section 1860D-21(e) of the Act). The exclusion from the calculation of 
bids of PFFS, cost plans, specialized MA plans, and PACE suggests that 
they are different from, and not comparable to, the average bid in some 
way. We interpret this difference to be based solely on price levels 
because the legislation--
     Does not define any other basis for determining these 
bids;
     Continues to compare these bids to the national average 
bid amount to determine adjustments to enrollee premiums; and
     Provides for payments to such plans (including risk 
adjustment) in the same manner as to non-excluded plan types.
    Therefore, these excluded plan types would still submit bids on the 
same basis as all other plans, that is, the 1.0 risk prescription drug 
plan beneficiary, even though these bids are not included in the 
national average bid amount at this time.
    The national average bid amount would be equal to the weighted 
average of the standardized bid amounts for each PDP and for each MA-PD 
plan described in section 1851(a)(2)(A)(1) of the Act. The national 
average monthly bid amount would be a weighted average, with the 
weights being equal to the proportion of Part D eligible individuals 
enrolled in each respective plan in the reference month (as defined in 
Sec.  422.258(c)(1)). For calendar year (CY) 2006, we would determine 
the enrollment weights on the basis of assumptions that we would 
develop. One possible approach would be to use the following procedure 
to assign weights to individual bids for PDPs and MA-PD plans for CY 
2006:
     Obtain total Medicare enrollment by region, and enrollment 
in each (local) MA plan that offers a drug benefit by region. These 
enrollments would be as of a specific date, for example, March 31, 
2005.
     Assign each (local) MA-PD plan in each region a weight 
equal to its MA enrollment.
     Subtract the MA enrollment from the total Medicare 
enrollment for each region to arrive at the PDP-eligible enrollment.
     Divide the PDP-eligible enrollment for each region by the 
number of companies offering PDPs in each region to arrive at the 
weight for each company in each region.
     For each company in a region, divide the company weight by 
the number of plans offered by that company to arrive at the PDP 
weight.
     The regional average monthly bid amount would be 
calculated by weighting each plan's bid by its assigned weight.
     The national average monthly bid amount would be 
calculated by weighting each regional average monthly bid amount by the 
region's proportion of Part D eligible individuals (Medicare 
enrollment) and summing these products.
    Using this methodology, after subtracting MA enrollments, each 
company offering PDP(s) in a region gets equal weight. An exception 
might occur based on capacity limits indicated by MA-PD plans. This 
assumes that beneficiaries would select a company, and then select a 
plan from that company. It also dilutes the effect of any potential 
artificially high bids designed solely to increase the national average 
monthly bid amount. If a company offers multiple plans in a region, 
each plan gets an equal allocated share of its company's assigned 
weight.
    New MA-PDs would get a zero weight. This treatment is consistent 
with the weight assignment specified in the statute for subsequent 
years. Starting with the second year, all new plans would get zero 
weight because they have no prior year enrollment. We request comments 
on the ``unequal'' inclusion of plans in the calculation of the 
national average monthly bid. We note that many MA-PDs would operate in 
small geographic areas with small potential enrollment, and so we 
believe that the impact of this approach for new local MA-PDs is likely 
limited. We recognize, however, that this approach is perhaps more 
problematic related to the treatment of the new regional MA-PD plans, 
as these plans in a given region are likely to have larger enrollment 
than local MA-PD plans. This particular approach implicitly assigns 
persons in new MA-PD plans (both local and regional) to the PDP 
weights, hence giving potentially too much weight to the PDPs.
    Alternatively, assigning equal weights to PDPs and new MA-PD plans 
(even if limited to just the regional MA-PDs) could likely assign too 
much weight to the new regional MA-PD plans, which at least in 2006 are 
expected to have lower enrollment. Another possible alternative would 
be to base weights on regional MA-PD plan projections of enrollment, 
subject to our assessment of reasonableness of the estimates. In this 
approach we would use the proportion of projected enrollment for each 
plan as weights. However, particularly in the first year or so, 
projections may be quite inaccurate, leading to a distorted and 
unrepresentative benchmark. We welcome comments on these and other 
alternative approaches for how to weight bids in 2006.
    The assigned weights are price inelastic, that is, the recommended 
weight assignment methodology implies that price is not a factor in 
plan selection. In the absence of experience on which to base the 
relationship between price and plan choice in this population, and, 
therefore, on how many people would be expected to join each plan, we 
believe that the fairest method for 2006 is simply to assume an equal 
weight for each plan.
    In subsequent years, the weights for the weighted average would be 
calculated as a percentage with the numerator equal to the number of 
Part D eligible individuals enrolled in the plan in the reference month 
and the denominator equal to the total number of Part D eligible 
individuals enrolled in all plans (except for those plans whose bids 
are not include in the national average bid amount, as described above) 
in the reference month. It represents the proportion of the Part D 
eligible enrolled individuals in the plan. We would multiply the 
portion of each plan bid attributable to basic benefits by its 
proportion of total Part D enrolled individuals and sum each product to 
arrive at the national average monthly bid. In Sec.  423.279(c), we 
would also establish an appropriate methodology

[[Page 46684]]

for adjusting the national average monthly bid amount to take into 
account any significant differences in prices for covered Part D drugs 
among PDP regions. We welcome comments on the existence of regional 
price variation in drug prices and on any factors that could lead to 
that variation. As part of carrying out the Congress' requirement that 
our geographic adjustment methodology be ``appropriate,'' we believe 
the method would first require gathering data from PDPs and MA-PDs on 
regional drug prices. Therefore, we may not implement a geographic 
adjuster for the first few years of the program unless we have acquired 
sufficient information on pricing to accurately characterize that 
variation. If we were to determine that there is significant geographic 
variation in prices, we anticipate that we would announce the 
adjustment factors in advance of the bidding process for any year in 
which geographic adjustment would be applied to bids in the 
calculation. (This would be subject to notice and comment like any 
other change in payment methodology.) If we were to determine that 
there is only minimal price variation, we would not implement a 
geographic adjuster for the national average monthly bid calculation. 
Additionally, we would implement any geographic adjuster in a budget 
neutral manner to avoid a change in aggregate payments from the total 
amount that would have been paid if we had not applied an adjustment.
8. Rules Regarding Premiums
    In Sec.  423.286, we propose that the monthly beneficiary premium 
would be the result of the calculation of a national base beneficiary 
premium subject to certain adjustments. Congressional intent was to 
arrive at an average monthly beneficiary premium in CY 2006 
representing a certain percentage of the average total estimated 
benefit provided by the drug plans on a national basis (including 
benefits subject to Federal reinsurance subsidies). Taking into account 
that projected reinsurance subsidies are excluded from plan bids, the 
applicable percentage becomes approximately 32 percent, which is 
applied to the national average monthly bid amount.
    To determine the uniform plan premium, in Sec.  423.286(d), we 
would adjust the base beneficiary premium for certain plan 
characteristics including whether the plan's bid would be above or 
below the national average bid, and whether the plan offers 
supplemental benefits. (Since the bid has to be approved and premiums 
established for the entire year, we are interpreting the phrase ``if 
for a month'' in section 1860D'13(a)(1)(B)(i) of the Act and 
1860D'13(a)(1)(B) (ii) of the Act as referring to the beneficiary 
premium as a monthly amount.) The base premium is adjusted to reflect 
the full difference between the plan's standardized bid amount and the 
national average monthly bid amount (which may be adjusted for regional 
price differences). To the extent that the plan's standardized bid 
amount is below the national average monthly bid amount, the base 
premium is adjusted downward by the difference. To the extent that the 
plan's standardized bid amount is above the national average monthly 
bid amount, the base premium is adjusted upward by the difference. The 
base premium would also be adjusted by adding the premium amount 
approved after negotiations for risk adjustment of the supplemental 
benefits, if any (as discussed above). Table F-2 illustrates a 
calculation of the base beneficiary premium and the adjustment for the 
difference between the bid and the national average monthly bid amount.

                                        Table F-2.--Premium Illustration
----------------------------------------------------------------------------------------------------------------
              Benchmark                   Plans in region         Bids              Beneficiary premium
----------------------------------------------------------------------------------------------------------------
                                                                                                      Applicable
                                                                                                      percent of
                                                                            Amount by    Amount by      nat'l
 National average monthly bid amount           Plans            Approved    which bid    which bid     premium
                 \1\                                            plan bid     exceeds      is below      
                                                                                                      difference
----------------------------------------------------------------------------------------------------------------
                                      Plan 1................          125        14.00         0.00          $50
111.................................  Plan 2................          111         0.00         0.00           36
                                      Plan 3................          101         0.00      (10.00)           26



------------------------------------------------------------------------
 
------------------------------------------------------------------------
Est. Reinsurance Percentage......        21.25  (Assumed)
Applicable Percent =.............       0.3238  (25.5 /(100- 21.25)
Base Beneficiary Premium =.......        36.00  (111 * .3238) \2\
------------------------------------------------------------------------
\1\ A. Assumes no geographic adjustment.
\2\ B. Rounded to nearest dollar.

    The sum of the base beneficiary premium, the adjustment for 
difference between the bid and the national average bid, and the 
supplemental benefit premium would be the monthly beneficiary premium. 
The monthly beneficiary premium (except for any supplemental premium) 
would be eliminated or reduced for low-income subsidy-eligible 
individuals, as described in section 1860D-14 of the Act and Sec.  
423.780. (This adjustment reflects the fact that the government would 
pay all or a portion of the monthly beneficiary premium for subsidy-
eligible individuals.)
    In Sec.  423.286(d)(3), the monthly beneficiary premium would be 
increased for enrollees subject to the late enrollment penalty. The 
penalty amount for a Part D eligible individual for a continuous period 
of eligibility (as described in Sec.  423.46) would be the greater of 
an amount that we determine is actuarially sound for each uncovered 
month in the same continuous period of eligibility; or 1 percent of the 
base beneficiary premium for each uncovered month in that period. The 
beneficiary premium amount is cumulative which means that each month 
the beneficiary is subject to a penalty, the penalty accumulates. Once 
the beneficiary enrolls in Part D, that accumulated penalty would be 
added to their premium amount each month. So for example, if the 
penalty amount is $.36 per month in 2004, and is subject to 12 months 
of this penalty, the beneficiary would pay an additional $.36 * 12 or 
$4.32 per month for as long as they are enrolled in Part D. During the 
first several years of the program, we currently expect that we would 
specify

[[Page 46685]]

the penalty amount would be 1 percent of the base beneficiary premium 
per month. Once we have sufficient data on experience under the program 
with respect to individuals who enroll after their Initial Enrollment 
Periods, we will be able to determine the appropriate penalty amount, 
that is, either one percent or a greater amount to be adopted.
    We note that achieving very high (indeed, virtually universal) 
access to prescription drug coverage for beneficiaries who participate 
in Part D was a key Congressional consideration in enacting MMA. We 
would encourage comments from insurers, actuaries, and others with 
experience, data, or expertise in this area. We are particularly 
interested in receiving comments on the most appropriate level for the 
late enrollment penalty, the likelihood of whether a $.36 per month of 
delay penalty (that is, 1 percent for each month of delayed enrollment) 
constitutes an adequate safeguard against selection bias, and the 
importance of strongly encouraging widespread enrollment to maximize 
the affordability and stability of Part D premiums.''
    Except as provided with regard to any enrollment penalty, low-
income assistance, or employer group waivers under section 1857(i) and 
section 1860D-22(b) of the Act and Sec.  423.458(c) (as discussed in 
Subpart J of the preamble to our proposed rule), the monthly 
beneficiary premium for a prescription drug plan or MA-PD in a PDP 
region must be the same for all Part D eligible individuals enrolled in 
the plan. The monthly beneficiary premium charged under a fallback plan 
is discussed in Sec.  423.867 of our proposed rules and in Subpart Q of 
this preamble.
9. Collection of Monthly Beneficiary Premiums

a. Means of Collection

    In Sec.  423.293(a), the beneficiary would have the same options on 
the method for premium payments as under Part C. Section 1860D-13(c)(1) 
of the Act applies the provisions of section 1854(d) of the Act (as 
amended by the MMA) to Part D premium collection. The beneficiary would 
have the option of having the amount withheld from his or her social 
security benefit check similar to the way Part B premiums are withheld. 
Beneficiary premium payments could also be paid directly to the PDP 
sponsor or MA organization through an electronic funds transfer 
mechanism (for example, an automatic charge of an account at a 
financial institution or a credit or debit card account). We could 
specify other means of payment, including payment by an employer or 
under employer-based retiree health coverage (as defined in section 
1860D-22(c)(1) of the Act) on behalf of an employee or former employee 
(or dependent). All premium payments withheld from social security 
checks would be credited to the appropriate Trust Fund (or Account) and 
would be paid by us to the PDP sponsor or MA organization involved. 
Premiums from beneficiaries enrolled in fallback plans would not be 
collected by the plan. Instead, these premiums would be withheld from 
social security checks (or from other benefits as permitted under 
section 1840 of the Act). Beneficiaries who do not receive social 
security checks or otherwise have premiums deducted from other benefits 
or annuities would pay us directly. Failure to make premium payments 
could result in disenrollment as provided under section 1854(d)(1) of 
the Act and Sec.  423.44(d) of our proposed regulations.

b. Collection of Late Enrollment Penalties

    Concerning collection of the late enrollment penalty calculated 
under Sec.  423.286(d)(3), after the early years of the program we 
would estimate and specify the portion of the penalty that would be 
attributable to increased actuarial costs assumed by the PDP sponsor or 
MA organization (and not taken into account through risk adjustment 
provided under Sec.  423.329(b)(1) or through reinsurance payments 
under Sec.  423.329(c)) as a result of that late enrollment. When the 
premium is withheld from social security benefits, we would pay only 
the portion of the late enrollment penalty attributable to the 
increased actuarial costs to the PDP sponsor or MA organization. When 
the premium is paid directly to the plan, we would reduce payments 
otherwise made to the PDP sponsor or MA organization by an amount equal 
to the amount of the enrollment penalty not attributable to increased 
actuarial cost. (Fallback plans would not receive any enrollment 
penalties applicable to their enrollees because they are not at risk.)
    At least in the initial years of the program we do not anticipate 
paying plans additional funds related to late enrollment individuals. 
In the initial years there will not be a significant number of people 
who can have delayed enrollment for a significant period of time. 
Moreover, in the initial years of the program the risk corridors are 
more generous and afford more protection. Consequently we do not think 
it is necessary to provide a portion of the enrollment penalty to plans 
until experience indicates that actual risk has increased.

G. Payments to PDP Sponsors and MA Organizations Offering MA-PD Plans 
for All Medicare Beneficiaries for Qualified Prescription Drug Coverage

1. Overview (Sec.  423.301)
    Subpart G of part 423 implements section 1860D-15 and the 
deductible and cost sharing provisions of 1860D-14(a) of the Act. This 
section sets forth rules for the calculation and payment of CMS direct 
and reinsurance subsidies for prescription drug plans and MA-PD plans; 
the application of risk corridors and risk-sharing adjustments to 
payments; and retroactive adjustments and reconciliations to actual 
enrollment and interim payments. References to part 422 of our 
regulations are to the new MA rules published elsewhere in this issue 
of the Federal Register.
2. Definitions
    We propose definitions for a number of terms used in the 
computation of payments under this subpart, such as ``allowable 
reinsurance costs'', ``actually paid'' and ``coverage year'' in Sec.  
423.308 of our regulations, but discuss these separately in the 
appropriate sections of this preamble. We do this because these terms 
are complex and are best clarified in the context of the discussion of 
the pertinent provisions.
3. General Payment Provisions (Sec.  423.315)
    The payment provisions required by section 1860D-15 of the Act 
include 4 different payment mechanisms. The first payment mechanism 
involves monthly payments that (along with reinsurance subsidies) 
subsidize on average 74.5 percent of the value of the basic 
prescription drug benefit, thereby maintaining beneficiary premiums for 
basic coverage on average at 25.5 percent. The direct subsidy is 
determined based on a national bidding process. Sponsors who wish to 
offer plans submit bids based on the projected costs of an average 
beneficiary. After our review and approval, these bids become the basis 
for the direct subsidy that is equal to the plan's standardized bid, 
risk-adjusted for health status as provided in Sec.  423.329(b), minus 
the base beneficiary premium (as determined in Sec.  423.286(c) and as 
adjusted for any difference between the standardized plan bid and the 
national average monthly bid amount (as described under Sec.  
423.286(d)(1))). The risk-adjustment

[[Page 46686]]

applied to the bid compensates the plan for individual enrollee 
differences in health status from the average beneficiary and thus 
reduces the impact from any adverse risk selection. Further adjustments 
to the direct subsidy payments would be made to account for actual 
enrollment and updated health status information.
    The second and third payment mechanisms would substantially reduce 
the uncertainty and risk of participating in this new program. Since 
the Medicare prescription drug benefit is new, there is uncertainty 
surrounding the utilization, costs, and risk profiles (participation 
rates and characteristics) of potential enrollees. Federal reinsurance 
subsidies and risk corridor payment adjustments work along with the 
risk-adjustment included in the direct subsidy to substantially reduce 
the uncertainty and risk of participating in this new program. Through 
reinsurance subsidies, in which we act as the re-insurer, we would 
subsidize a large portion of any catastrophic expenses (defined as 
expenses over an individual's out-of-pocket limit) through a 
reinsurance subsidy. Through risk corridor arrangements, exposure to 
unexpected non-catastrophic expenses would be limited. These risk 
sharing arrangements are structured by the statute as symmetrical risk 
corridors, that is, agreements to share a portion of the losses or 
profits resulting from expenses above or below expected levels, 
respectively.
    Finally, according to section 1860D-14 of the Act, PDP sponsors and 
MA organizations would receive payments to cover certain premium, cost-
sharing, and extended coverage subsidies for low-income subsidy 
eligible individuals. With the exception of interim estimated payments 
of cost-sharing subsidies, these payments are discussed separately in 
subpart P of this preamble and in Sec.  423.780 of our proposed 
regulations.
    Certain payments would be exceptions to these general payment 
provisions. Under private fee-for-service (PFFS) plans, reinsurance 
would be calculated differently and risk sharing would not be 
available. Reinsurance subsidies and risk sharing would not be 
available for fallback plans, and are paid in accordance with 
contractual terms related to actual costs and management fees tied to 
performance measures.
4. Requirement for Disclosure of Information (Sec.  423.322)

a. Data Submission.

    As provided under sections 1860D-15(c)(1)(C), 1860D-15(d)(2) and 
1860D-15(f) of the Act and in Sec.  423.322 of our proposed 
regulations, we would condition program participation and payment upon 
the disclosure and provision of information needed to carry out the 
payment provisions. Such information would encompass the quantity, 
type, and costs of pharmaceutical prescriptions filled by enrollees 
that can be linked to individual enrollee data in our systems; that is, 
linked to the Medicare beneficiary identification number 
(HIC). We would appreciate comments on the content, format and 
optimal frequency of data feeds. We believe that more frequent feeds 
than annually (weekly, monthly, quarterly) would allow us to identify 
and resolve data issues and assist the various payment processes.
    We are evaluating our minimum data requirements with regard to 
prescription drug claims. Our goal would be to determine the least 
burdensome data submission requirements necessary to acquire the data 
needed for purposes of accurate payment and appropriate program 
oversight. Our view is that we will need at least the following data 
items for 100 percent of prescription drug claims for the processes 
discussed below:
     Beneficiary name (first, middle initial, last).
     Beneficiary HIC.
     Beneficiary birth-date.
     Eleven-digit NDC code.
     Quantity dispensed.
     Prescription drug cost before co-payment (ingredient cost, 
dispensing fee, sales tax amount).
     Beneficiary co-payment amount, and
     Date prescription filled.
    We assume that ingredient cost and dispensing fee reflect point of 
sale price concessions in accordance with purchase contracts between 
plans (or their agents, such as PBMs) and pharmacies, but do not 
reflect subsequent price concessions from manufacturers, such as 
rebates. We anticipate that we will need similar data on prescription 
drug claims for appropriate risk-adjustment, reconciliation of 
reinsurance subsidies, calculation of risk sharing payments or savings, 
and program auditing. Data will also be required for assessing and 
improving quality of care. We will welcome comments on the nature and 
format of data submission requirements for the following processes:
     Risk adjustment process would require 100 percent of drug 
claims in order to develop and calibrate the weights for the model for 
this new benefit. Consequently, PDP sponsors and MA organizations 
offering MA-PD plans would be required to submit 100 percent of 
prescription drug claims for Part D enrollees for the coverage year. 
Risk adjustment would require the submission of prescription drug agent 
identifying information, such as NDC codes and quantity, in order to 
allow the standardized pricing of benefits in the model. Because we 
would use standardized pricing, cost data on each prescription is not a 
requirement for risk adjustment, although it is needed for other 
purposes.
     The reinsurance subsidy payment process would require 100 
percent of claims for each enrollee for whom the plan claimed allowable 
reinsurance costs. (Although reconciliation of the reinsurance subsidy 
does not require NDC codes or quantities, it does require member, cost 
and date of service data.) All claims for enrollees with expenses in 
excess of the out-of-pocket limit would be necessary to verify that the 
costs were allowable because the totality and order in which the claims 
are incurred would define which claims would be eligible for 
reinsurance payments. While the start of reinsurance payments begins 
with claims after the out-of-pocket threshold has been reached, which 
is $5,100 in total spending (2006) for defined standard coverage, it 
may be associated with a higher dollar total spending amount under 
alternative coverage. Whatever the level, we would need to receive all 
claims by date of service including the amount of beneficiary cost 
sharing in order to determine the occurrence of the out-of-pocket 
threshold. Any plan-incurred costs for claims for supplemental benefits 
cannot be included in determining whether the out-of-pocket threshold 
has been met.
     The risk sharing process would require 100 percent of 
claims for all enrollees for the calculation of total allowable risk 
corridor costs. The plan would need to segregate costs attributable to 
supplemental benefits from those attributable to basic benefits since 
supplemental benefit costs are not subject to the risk corridor 
provisions. Again, all claims would be necessary to verify that the 
costs were allowable because the order in which the claims were 
incurred would help determine whether the claims were solely for basic 
coverage. For instance, a claim processed between a beneficiary's 
deductible and initial coverage limit (in standard coverage) would 
count towards risk sharing, but another claim (processed identically 
but immediately after the initial coverage limit has been reached) 
would not. Unlike the reinsurance subsidy, which is limited to

[[Page 46687]]

individuals with expenses in excess of the out-of-pocket threshold, 
risk sharing involves costs (net of discounts, chargebacks and rebates, 
and administrative costs) for all enrollees for basic coverage, but 
only those costs that are actually paid by the sponsor or organization. 
Because all plans participate in risk sharing, potentially all claims 
for all Part D enrollees in all plans must be reviewed. Like the 
reinsurance reconciliation, risk sharing does not require NDC codes or 
quantities, but does require member, cost, and date of service data.
     The program audit process would require at least a 
statistically valid random sample of all Part D drug claims. We believe 
that several points of reference including HIC, cost, date of 
service, and NDC code would be required for unique identification of 
individual claims in any random sample drawn from the population. If we 
receive 100 percent claims to support the payment processes, this 
sample could be drawn from our records. We believe it would be useful 
to obtain the prescribing physician's National Provider Identifier 
(NPI) number, as required by the administrative simplification 
provisions of HIPAA, in the elements of collected data for purposes of 
fraud control once it is available. Prior to May 2007 when the NPI is 
expected to be used, we would be interested in alternative means for 
identifying the physician prescriber.
    (Nothing in this data collection discussion should be construed as 
limiting OIG authority to conduct any audits and evaluations necessary 
for carrying out our proposed regulations.)

b. Allowable Costs

    Section 1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act and Sec.  
423.308 of our proposed regulations, specify that to determine 
``allowable costs'' for purposes of both the reinsurance and risk 
corridor payments, only the net costs actually paid after discounts, 
chargebacks, and average percentage rebates, as well as administrative 
costs, are to be counted. We encourage comments on appropriate 
methodologies and data sources that can be used in making these 
adjustments. For example, we would like to receive comments on how 
price concessions (discounts, chargebacks, rebates, or any other 
periodic financial remuneration) would be most accurately and 
efficiently applied to prescription drug claims data to satisfy this 
requirement. We would also be interested in any information or data on 
the effect on costs such adjustments can be expected to yield. We are 
particularly interested in how data would be appropriately allocated 
and applied to the reinsurance subsidy tied to individual expenses in 
excess of the out-of-pocket limit.
    We understand that much of the rebate accounting is not applied in 
the context of point of sale claims data, but rather in periodic 
accounting adjustments, and that rebates are frequently reported along 
with administrative fees paid by the manufacturer. We are concerned 
that these accounting practices would be incompatible with the need to 
report all price concessions for purposes of determining allowable 
reinsurance and risk corridor costs and we, therefore, are proposing to 
require that they be segregated. Moreover, we are proposing to require 
that any administrative fees paid to Part D plans be based on the fair 
market value of services rendered, and that any fees determined to be 
above or below fair market value would be considered additional price 
concessions.
    Due to the nature and timing of rebate accounting, we believe that 
this will require a form of step-down cost reporting in which rebates 
received at the aggregate level may be apportioned down to the level of 
plan enrollees incurring reinsurance expenses on a reasonable basis. 
Since Medicare beneficiaries would be expected to have higher per 
capita prescription drug utilization than other populations, we believe 
it would be appropriate to allocate rebates (and other similar price 
concessions) on the basis of percentage of dollars spent rather than of 
covered lives. Alternatively, one could create a ratio of total rebate 
amounts to total spending and reinsurance-related spending to total 
spending to derive the share of rebates to be allocated to reinsurance, 
and then adjust down the reinsurance amount. A similar ratio could be 
created for risk corridor spending. Another way that the current market 
expresses these relationships is in an average rebate per script value 
that could even be differentiated by brand versus generic rebates per 
script. In apportioning rebates and other financial remunerations to 
Medicare costs, we would look to ensure that plans appropriately take 
into account the distribution of claims between basic and supplemental 
benefits, and apportion price concessions in a proportionally accurate 
way.
    In whatever manner price concessions will be apportioned, plans 
must require and keep accurate records on all price concessions and 
ensure that these are clearly accounted for and segregated from 
administrative fees. All cost reporting would be subject to inspection 
and audit (including periodic audits) by us and the OIG. As stated 
below, to the extent either we or the OIG discover that a sponsor was 
overpaid for reinsurance or risk sharing (that is, the records do not 
support the payments made, or there is insufficient documentation to 
determine whether the payments are correct), we may recoup the 
overpayments. The reopening and overpayment provisions are discussed at 
the end of this part G.

c. Coverage Year

    In Sec.  423.308 we propose that the term ``coverage year'' would 
mean a calendar year in which covered Part D drugs are dispensed if the 
claim for such drugs (and payment on such claim) is made not later than 
3 months after the end of the year. In other words, drug claims paid 
past the close of the 3-month period would not be considered part of 
that coverage year (or the next), and would not be used to calculate 
that year's payments or in reconciling risk adjustment payments for the 
year.
    This limit would be imposed in order to provide timely closure for 
payment determination processes such as reinsurance, risk corridors and 
employer subsidies. While the period of 3 months would be significantly 
less than the fee-for-service Medicare medical claims standard of 18 
months, we believe that a shorter period is warranted due to the highly 
automated and point of sale nature of prescription drug claim 
processing. We understand that the vast majority of prescriptions are 
not filled without the claim being simultaneously processed and 
therefore, there is a much shorter claims lag to be considered. We 
believe that the number and value of drug claims that would potentially 
be missed would be immaterial, consisting primarily of paper claims. 
The 3-month close-out window would not limit the liability of the plan 
or its claims processing contractor for reimbursing any lagging claims, 
but would simply establish a timely cut-off for finalizing payments. 
Any rebates for the coverage year not reflected in the fourth quarter 
data (sent to close out the year) must be credited against future 
payments. Although we are closing the year for claims purposes, the 
plan must account for all rebates that occur throughout the coverage 
year and send us all the data.
    A shorter period would allow for payment processes that are 
dependent on the knowledge of total allowable costs for each coverage 
year to be concluded on approximately the same schedule as other 
reconciliations involving enrollment or risk adjustment data. On this 
schedule, calculations of

[[Page 46688]]

risk sharing could begin as soon as five to six months after the close 
of the payment year. If the claims submission standard were a longer 
period, final reconciliations would be significantly delayed. We are 
interested in receiving comments on this timetable, specifically 
whether we should adopt a shorter or longer period than 3 months, and 
including data with which to estimate the proportion and value of drug 
claims that could be excluded with a 3-month close-out window.
5. Determination of Payment (Sec.  423.329)

a. Direct Subsidies

    As directed in section 1860D-15(a)(1) of the Act and codified in 
Sec.  423.329(a), we would provide direct subsidies to PDP sponsors and 
MA organizations offering MA-PD plans. These subsidies would be in the 
form of advance monthly payments. Payments would be equal to the plan's 
standardized bid, risk adjusted for health status as provided in Sec.  
423.329(b), minus the base beneficiary premium (as determined in Sec.  
423.286(c) and adjusted for any difference between the standardized 
plan bid and the national average monthly bid amount (as described 
under Sec.  423.286(d)(1))). The standardized bid would be the portion 
of the plan's bid attributable to basic coverage. This portion would be 
risk-adjusted by multiplying by the prescription drug risk score 
attributable to each enrollee. Between the government direct subsidy 
and the adjusted base beneficiary premium, the plan would receive its 
entire risk-adjusted standardized bid in advance each month. Payment 
for supplemental benefits would come from enrollees in the form of 
additional premium. By statute, the sponsor must bear all risk for such 
supplemental benefits.
    We would note that a plan's total per capita payment could never 
exceed its bid, risk-adjusted for the beneficiary's health status. This 
would be the case even if the difference between the plan's bid and the 
national average monthly bid amount were greater than the beneficiary 
monthly premium, mathematically resulting in a ``negative premium'' 
amount. We do not believe that the statute envisions plan payments in 
excess of negotiated costs, since this would violate the revenue 
requirements provisions discussed in the Subpart F of this preamble.

b. Risk Adjustment

    In section 1860D-15(c)(1) of the Act, we are directed to develop 
and publish a prescription drug risk adjustment methodology taking into 
account the similar methodologies under Sec.  422.308(c)(1) to adjust 
payments to MA organizations for benefits under Part C on the basis of 
costs incurred under original Medicare. In Sec.  423.329(c) we propose 
to establish this risk adjustment methodology. We would develop and 
publish this risk adjustment methodology in the 45-day notice for the 
announcement of 2006 Medicare Advantage rates. Section 1860D-
15(c)(1)(D) of the Act requires us to publish the risk adjustment for 
Part D at the same time we publish risk adjustment factors under 
section 1853(b)(1)(B)(i)(II) of the Act. Because these risk adjustment 
factors under Part C can only be published after 45-day advance notice 
under section 1853(b)(2) of the Act, we would use the same notice 
procedures we use under Part C for risk adjustment. We believe this 
would promote consistency and uniformity in the process, and, 
especially for MA-PD plans, allow entities to review notices published 
on the same day for purposes of commenting on or learning about risk 
adjustment. As usual, the 45-day notice would solicit public comment on 
any change in proposed payment methodologies. We are expecting that 
this new prescription drug risk adjustment methodology would initially 
be based on the relationship of prescription drug utilization within 
the entire Medicare population to medical diagnoses, and that it would 
be applied at the individual beneficiary level. Our longer-term plan 
would be to refine the risk adjustment model to account for predictable 
risk based on both medical and drug claim data.
    Section 1860D-15(c)(1)(C) of the Act and Sec.  423.329(b)(3) of 
this proposed rule authorize us to specify and require the submission 
of data from PDP sponsors regarding drug claims that can be linked at 
the individual level to part A and part B data in a form and manner 
similar to the Medicare Advantage process provided in Sec.  422.310 and 
such other information as we determine necessary. Similarly, MA 
organizations that offer MA-PD plans must submit data regarding drug 
claims that can be linked at the individual level to other data that 
these organizations are required to submit to us. A primary 
requirement, therefore, would be claims linked to the Medicare 
beneficiary HIC. Other proposed data submission elements are 
discussed in section 3(a) of this part of the preamble. We may also be 
interested in linking this data to the plan level and would then 
require the inclusion of the PDP or Medicare Advantage plan identifier 
(H). We would use this data to further refine our prescription 
drug risk adjustment factors and methodology in order to make payments 
that accurately reflect plan risk.
    Any risk adjustment methodology we adopt should adequately account 
for low-income subsidy (LIS) individuals (and whether such individuals 
incur higher or lower-than average drug costs). Our risk adjustment 
methodology should provide neither an incentive nor a disincentive to 
enrolling LIS individuals, and we request comments on this concern and 
suggestions on how we might address this issue.
    Our particular concern is that a risk adjustment methodology, 
coupled with the statutory limitation restricting low-income subsidy 
(LIS) payments for premiums to amounts at or below the average, could 
systematically underpay plans with many LIS enrollees (assuming LIS 
enrollees have higher costs than average enrollees). If the risk-
adjustor fails to fully compensate for the higher costs associated with 
LIS recipients, an efficient plan that attracts a disproportionate 
share of LIS eligible individuals would experience higher costs to the 
extent the actual costs of the LIS beneficiaries are greater than the 
risk-adjustment compensation. Failing to discourage enrollment by LIS 
beneficiaries in 2006, the plan would experience higher than expected 
costs in that year and presumably be driven to reflect these higher 
costs (due to adverse selection, not efficiency) in its bid for 2007. 
In this hypothetical, plans would have a disincentive to attracting a 
disproportionate share of LIS beneficiaries. One possible solution 
would be to assure that the initial risk-adjustment system, which will 
be budget neutral across all Part D enrollees, does not undercompensate 
plans for enrolling LIS beneficiaries. In fact, to the extent that an 
initial risk-adjustor might at the margin tend to overcompensate for 
LIS beneficiaries, plans would have a strong incentive to 
disproportionately attract such beneficiaries. Plans could attract LIS 
beneficiaries both by designing features that would be attractive to 
such beneficiaries but also by bidding low. We would appreciate 
comments on this concern and suggestions on how we might address this 
potential problem.

c. Risk Adjustment Budget Neutrality

    In accordance with section 1860D-15(c)(1)(A) of the Act and Sec.  
423.329(b)(1), our risk adjustment methodology would be implemented in 
a budget-neutral manner. A requirement for budget neutrality assumes 
that there is a known budget. We interpret the statute to require that 
the risk

[[Page 46689]]

adjustment methodology must not result in a change in aggregate amounts 
payable in section 1860D-15(a)(1) of the Act, that is, the risk 
adjustment methodology must be ``budget neutral'' to some aggregate of 
direct subsidy payments made before risk adjustment. (Since direct 
subsidy payments are made only to full-risk or limited risk plans, this 
budget by definition would not include payments to fallback plans.)
    For comparison, in the current M+C (now Medicare Advantage) program 
the budget for risk-adjustment budget neutrality is defined to be the 
aggregate government payments made to plans under the 100 percent 
demographic payment system. Since the health-status-risk-adjustment 
methodology currently results in lower aggregate payments than the 
demographic methodology, M+C budget neutrality distributes among 
participating plans the difference between total payments under the 2 
methodologies via a factor that allocated the difference in the same 
proportion as the allocation of risk-adjusted payments. However, there 
is no corresponding predetermined limit to aggregate payments in Title 
I, that is, to the aggregate government direct subsidy payments made 
before risk adjustment, so there is no amount to use as a basis for 
comparison in determining budget neutrality.
    In the M+C program, the reason for the difference between the total 
payments under the demographic methodology and total payments under 
health status risk adjustment is that the average health status of 
enrollees in M+C is different than the average health status for the 
program as a whole (that is, M+C plus original Medicare). In Part D, 
there is no equivalent to original Medicare since beneficiary access 
subsidized coverage through enrollment in private plans. The Part D 
risk adjustment system would be based on these enrollees. Since there 
is no group of beneficiaries outside the system like there is under 
Part C, total payments with and without risk adjustment are always 
equal or budget neutral. Therefore, we believe that risk adjustment as 
applied to Part D benefits should be budget neutral to the risk of the 
individuals who actually enroll without any additional adjustment. We 
would appreciate comments on this approach.

d. Reinsurance Subsidies

i. Allowable Reinsurance Costs
    As provided in section 1860D-15(e) of the Act and Sec.  423.329(c), 
we would reduce the risk of participating in this new program by 
providing reinsurance subsidies. Subsidies would be limited to 80 
percent of allowable reinsurance costs for drug costs incurred after an 
enrollee has reached the annual out-of-pocket threshold. The annual 
out-of-pocket threshold would be $3,600 in 2006. Under standard 
coverage this corresponds to total gross covered prescription drug 
costs of $5,100, and would be increased annually as provided in section 
1860D-2(b)(4)(B)(i)(II) of the Act and 1860D-2(b)(4)(B)(ii) (with 
regard to rounding).
    In meeting the various actuarial tests required of alternative 
coverage, there could be instances where a sponsor wanting to provide 
basic alternative coverage would have to enhance plan benefits in order 
to meet the test of equal total actuarial value relative to defined 
standard coverage. This could occur with the use of a tiered co-pay 
benefit structure that could shift utilization to a cheaper set of 
drugs, thus allowing plans to lower cost sharing to achieve the same 
total dollar value as defined standard coverage. In these instances, 
since cost sharing is reduced relative to defined standard coverage, 
the out-of-pocket threshold would be associated with a higher total 
drug costs than the $5,100 under standard coverage in 2006. For 
sponsors offering enhanced alternative coverage, the out-of-pocket 
threshold would also be associated with higher total drug spending. In 
this instance, however, it would be due to fact that the plan's 
supplemental benefits would be displacing part of the cost sharing that 
enrollees would otherwise have incurred.
    Allowable reinsurance costs are a subset of gross covered 
prescription drug costs. Gross covered prescription drug costs are 
those costs incurred under the plan, excluding administrative costs, 
but including costs related to the dispensing of covered Part D drugs 
during the year and costs relating to the deductible. These costs are 
determined whether paid by the individual or under the plan, and 
regardless of whether the coverage under the plan exceeds basic 
prescription drug coverage. Allowable reinsurance costs, on the other 
hand, are the subset of these costs that are attributable solely to 
basic or standard benefits and that are actually paid by the sponsor or 
organization or by (or on behalf of) an enrollee under the plan. 
Actually paid--means that these costs must be net of any discounts, 
chargebacks, and average percentage rebates, and would exclude any 
amounts not actually incurred by the sponsor. The reinsurance payments 
are then calculated by determining the portion of allowable reinsurance 
costs that are incurred after the enrollee has reached the out-of-
pocket threshold ($3,600 out of pocket in 2006). The reinsurance 
subsidy would provide 80 percent of such excess amount.
ii. Payment of Reinsurance Subsidy
    Since allowable reinsurance costs can only be fully known after all 
costs have been incurred for the payment year, we would propose to make 
payments on an incurred basis to assist PDP sponsors and MA 
organizations with cash flow. Under Sec.  423.329(c)(2)(i), we would 
provide for payments of reinsurance amounts based on plan actual 
reinsurance-eligible allowable costs with a one-month lag period. In 
other words, no payments would be made until enrollees reached the true 
out-of-pocket threshold. This would require timely submission of drug 
claim data. In this approach rebates would be recognized in the month 
after they were received and would be offset against the previous 
month's actual costs.
    Alternatively, we could consider payments of reinsurance amounts on 
a monthly prospective basis based on the reinsurance assumptions 
submitted and negotiated with each plan's approved bid. We would take 
these assumptions into account in developing either a plan-specific or 
program-wide approach. We note that any program-wide approach involving 
some kind of average of the amounts included in the bids would have to 
adjust for the fact that plans providing enhanced alternative benefits 
would incur lower reinsurance costs. We are also aware that allowable 
reinsurance costs would be predominantly incurred in the latter parts 
of the coverage year and are considering the most appropriate 
methodology for distributing interim payments. One possible approach 
would require the submission of a schedule of the estimated timing of 
incurred allowable reinsurance costs along with the bid. For example, 
we might take schedules from each plan or we could propose an 
incremental schedule (X% of the total in January, Y% in February, 
etc.). We are aware that the prospective payment of estimated costs 
would create an incentive to overstate reinsurance, however, and are 
interested in ensuring that payments are not excessive. Since equal 
payments would be most compatible with our systems, in the first two 
years of the program (and for the first two years of new plans 
thereafter) we could also consider another approach paying \1/12\th of 
the net present value of estimated allowable reinsurance costs in each 
month of the coverage year. The net

[[Page 46690]]

present value would be calculated on the basis of all estimated 
reinsurance payments due at the end of the year and discounted by the 
most recently available rate for one-year Treasury bills. We would 
welcome comments on these approaches and on the appropriate treatment 
of interest in such a system.
    For subsequent years of the program, we could consider an approach 
of paying \1/12\th of the two-year prior year's actual expenses. Such 
an approach would need to be trended forward by an appropriate index to 
account for expected growth in plan costs. In other words, in 2008 the 
interim payments would be based on actual reconciled reinsurance 
payments for 2006 trended forward by an estimated two-year growth 
factor. Regardless of which process we used for making reinsurance 
payments, as discussed below, if, at the end of the year, the data 
demonstrates the sponsor was overpaid through the interim payments--or 
if there is insufficient evidence to support the reinsurance payments 
claimed--we would recover the overpayments either through a lump sum 
recovery or by reducing future payments during the coverage year. 
Similarly, if the data demonstrates that the sponsor was underpaid, we 
would pay the sponsor.
iii. Adjustments to Reflect the True Out-of-Pocket Threshold
    The statute provides that the reinsurance subsidy would be paid 
only for the plan's share of individual expenses in excess of an 
enrollee's true out-of-pocket (TrOOP) threshold. As indicated above, if 
the PDP sponsor offers enhanced alternative coverage or an MA-PD plan 
offers benefits beyond basic coverage as part of its supplemental 
benefits, the plan's spending for these benefits would not count toward 
the TrOOP threshold. Since benefits beyond basic coverage reduce cost 
sharing that would otherwise be incurred, they shift the effective 
prescription drug catastrophic limit beyond the associated total 
spending under the standard benefit ($5,100 in 2006) and raise the 
effective reinsurance attachment point at the same time.
    In addition, to the extent that plan cost sharing is paid or 
reimbursed by secondary insurance coverage or otherwise, that cost 
sharing does not count toward the out-of-pocket threshold. 
Beneficiaries are required to report the existence of secondary 
coverage or other types of coverage we identify and plans must identify 
these payments and ensure that true out-of-pocket spending is accounted 
for accurately in claims processing. This is more fully discussed in 
subpart C and subpart J of this preamble.
iv. Adjustments for the Insurance Effect of Supplemental Coverage
    Supplemental benefits increase the level of total drug spending 
after which reinsurance payments begin (reinsurance attachment point). 
Assuming 2 identical groups of enrollees with respect to utilization, 
one enrolled in enhanced alternative coverage and one in defined 
standard coverage, the total allowable reinsurance costs for the group 
with standard coverage would be greater than for the group with 
enhanced alternative coverage. Thus, one might hold that the 
differences in benefit packages are accounted for without the need for 
further adjustment. If one would examine average total spending for 
both groups, however, one would find that the average spending under 
enhanced alternative coverage would be greater than the average under 
defined standard coverage because of the impact of the insurance effect 
(or ``moral hazard'', that is, the tendency of increased coverage 
resulting in increased utilization due to decreased financial stake in 
the costs associated with utilization). All other things being equal, 
this higher total spending would result in higher allowable reinsurance 
costs than would otherwise occur if the total spending under enhanced 
alternative coverage were comparable to that under standard coverage.
    We are therefore proposing (in the definition of allowable 
reinsurance costs) to adjust allowable reinsurance costs to reflect the 
impact of this induced utilization. We would make this adjustment to 
comply with the requirement in section 1860D-15(b)(2) of the Act that 
in no case shall the allowable reinsurance costs exceed the costs 
``that would have been paid under the plan if the * * * coverage * * * 
were standard prescription drug coverage''. We are looking for comments 
on whether this adjustment should be made and how best to adjust the 
experience of PDPs with enhanced alternative coverage or MA-PD plans 
offering supplemental coverage to account for the insurance effect.
v. Reinsurance Subsidies to Private Fee-For-Service Plans
    As provided under section 1860D-21(d)(4) of the Act and proposed in 
Sec.  423.329(c)(3), we would base reinsurance payments for PFFS plans 
on an alternative methodology. Rather than negotiating reinsurance 
assumptions submitted with the PFFS plan bid or otherwise adjusting for 
potential price level differences between PFFS and other MA 
organization bids, we would estimate the amount of reinsurance payments 
that would be payable if the plan were an MA-PD plan described in 
section 1851(a)(2)(A)(i) of the Act. In doing so we would take into 
account the average reinsurance payments made under Sec.  423.329(c)(2) 
for basic benefits for populations of similar risk under such MA-PD 
plans. Estimated payments would not be subject to any reconciliation 
process to compare the amounts paid to the actual allowable reinsurance 
expenses, and would not allow for payment recoveries in the event that 
actual allowable reinsurance costs exceed payments.
6. Low-Income Cost-Sharing Subsidy Interim Payments
    As provided under section 1860D-14 of the Act and in Sec.  423.780 
of our proposed regulations, CMS will provide additional assistance for 
certain low-income beneficiaries in the form of premium, deductible and 
cost-sharing subsidies. Since actual expenses incurred by these low-
income beneficiaries can only be fully known after all costs have been 
incurred for the payment year, we would propose to make estimated 
payments on an interim basis to assist PDP sponsors and MA 
organizations with cash flow. Under Sec.  423.329(d)(2)(i), we would 
provide for interim payments of low-income deductible and cost-sharing 
amounts on a monthly prospective basis based on estimates of low-income 
cost sharing submitted and negotiated with each plan's approved bid. 
Like the possible option of reinsurance subsidy interim payments 
discussed above, a decision on whether these assumptions would be taken 
into account in developing a plan-specific or program-wide approach has 
yet to be determined.
    We are aware that low-income cost sharing would not necessarily be 
incurred evenly throughout the coverage year and are considering the 
most appropriate methodology for distributing interim payments. Since 
equal payments would be most compatible with our systems, in the first 
two years of the program (and for the first two years of new plans 
thereafter) we are considering an approach paying \1/12\th of the net 
present value of estimated low-income cost sharing in each month of the 
coverage year. The net present value would be calculated on the basis 
of all estimated costs due at the end of the year and discounted by the 
most recently available rate for one-year Treasury bills. An 
alternative approach would require the submission of a schedule of the 
estimated timing of

[[Page 46691]]

incurred low-income cost sharing along with the plan bid. For example, 
we might take schedules from each plan or we could propose an 
incremental schedule (X% of the total in January, Y% in February, 
etc.). We are aware that the prospective payment of estimated costs 
creates an incentive to overstate low-income cost sharing, and are 
interested in ensuring that our interim payments are not excessive. We 
would welcome comments on these approaches and on the appropriate 
treatment of interest in any methodology. For subsequent years of the 
program, we are considering an approach of paying \1/12\th of the two-
year prior year's actual expenses. Such an approach would need to be 
trended forward by an appropriate index to account for expected growth 
in plan costs. In other words, in 2008 the interim payments would be 
based on actual reconciled low-income cost sharing subsidy payments for 
2006 trended forward by an estimated two-year growth factor. Again, any 
reconciliation at the end of the year would need to be based on the 
sponsor providing adequate information in order to determine the 
subsidy amounts for the year. If the sponsor could not provide such 
information, interim payments would be recovered. In addition, the low-
income payments would be subject to the same inspection and audit 
provisions applying to the other payments made under section 1860D-15 
of the Act.
7. Risk Sharing Arrangements

a. Risk Sharing Methodology and the Target Amount

    As provided under section 1860D-15(e) of the Act and proposed in 
Sec.  423.336, we would establish risk corridors. Risk-sharing payments 
would limit exposure to unexpected expenses not already included in the 
reinsurance subsidy or taken into account through risk adjustment. 
These would be structured as symmetrical risk corridors that are 
agreements to share a portion of the losses or profits resulting from 
expenses for basic benefits either above or below expected levels, 
respectively. However, plans would always be at full financial risk for 
all spending on supplemental drug coverage. In addition, in accordance 
with section 1860D-21(d)(5) of the Act and section 1860D-15(g) of the 
Act, the risk sharing provisions are not available to PFFS and fallback 
plans.
    The expected level of expenses for basic benefits included in the 
standardized bid is known as the ``target amount''. The target amount 
for any plan would be equal to the total amount of direct subsidy 
payments from us, and premium payments from enrollees to that plan for 
the year based upon the risk-adjusted standardized bid amount, less the 
administrative expenses and return on investment assumed in the 
standardized bid. Since the standardized bid is the portion of the 
accepted bid amount attributable to basic prescription drug coverage, 
the target amount can be thought of as ``prepayments'' of prescription 
drug expense for basic benefits. The standardized bid has also taken 
into account (and excludes) any utilization effects of offering 
supplemental coverage. The objective of risk sharing would be to 
compare total actual incurred prescription drug expenses to the 
prepayments, to compute the difference, and to reimburse or recover a 
portion of the difference.
    In Sec.  423.336(a)(2)(A), we would establish risk corridors, 
defined as specified risk percentages above and below the target 
amount. For instance, in Sec.  423.336(a)(2)(ii), for 2006 and 2007, 
the first risk corridor is defined as 2.5 percent above the target 
amount and the second as 5 percent above the target amount. This means 
that, for 2006 and 2007, the first risk corridor is between 100 percent 
and 102.5 percent of the target amount and the second risk corridor is 
between 102.5 percent and 105 percent of the target amount. A third 
risk corridor is above 105 percent of the target amount.
    The term, symmetrical risk corridors--means that the same size 
corridors exist below the target amount as above it. The actual upper 
or lower limits of each corridor equal the target amount plus or minus 
the product of the risk percentage times the target amount, as 
illustrated in Table G-1. Since these risk corridors would be 
symmetrical, plans with adjusted allowable costs below the 1st 
threshold lower limit would have to share the savings with the 
government.

b. Allowable Risk Corridor Costs

    The costs applicable to the computation of risk sharing are known 
as allowable risk corridor costs. These costs are defined in section 
1860D-15(e)(1)(B) of the Act and proposed in Sec.  423.308 as the part 
of costs for covered Part D drugs that are only attributable to basic 
benefits. Allowable risk corridor costs cannot include costs 
attributable to benefits outside the basic benefit. We would interpret 
this as both the actual differences in benefits structure and the 
insurance effect of supplemental coverage on basic coverage. In section 
1860D-15(e)(1)(B) of the Act, reference is made to section 1860D-
11(c)(2) of the Act that provides for a utilization adjustment using as 
its reference point standard prescription drug coverage. We are 
interpreting this to mean the statutorily defined standard prescription 
drug coverage described in Subpart C. Also, allowable risk corridor 
costs must actually be paid by the sponsor or organization under the 
plan and must be net of any chargebacks, discounts or average 
percentage rebates. The allowable risk corridor costs also do not 
include any administrative expenses of the sponsor or organization. 
(Administrative expenses would not include costs directly related to 
dispensing of Part D drugs during the year.) Note that unlike allowable 
reinsurance costs, allowable risk corridor costs do not include any 
amount paid by the enrollee. In Sec.  423.336(a)(1), we propose that 
allowable risk corridor costs must be adjusted in accordance with 
section 1860D-15(e)(1)(A) of the Act, by subtracting expenses 
reimbursed through other separate payments. Thus, reinsurance payments 
made under Sec.  423.329(c)(2) and the non-premium low-income subsidy 
payments made under Sec.  423.782 [in Subpart P] of these proposed 
regulations to the sponsor of the plan for the year must be subtracted. 
The PDP sponsor or MA organization would already have received 
compensation for these costs, and thus they do not fall within the 
construct of risk corridors that are directed at limiting exposure to 
unexpected expenses.
    If adjusted allowable risk corridor costs exceed the prepayments by 
a certain amount, we would reimburse a percentage of the difference to 
help plans with a portion of the unanticipated expenses associated with 
their drug coverage. On the other hand, if prepayments exceed adjusted 
allowable risk corridor costs, we would reduce future payments or 
otherwise recover a percentage of the difference to reduce the impact 
on the Trust Fund of excessive bids.

[[Page 46692]]



                   Table G-1. Illustration of Risk Sharing Arrangements for Hypothetical Plan
----------------------------------------------------------------------------------------------------------------
                      A. Assumptions in bid                               Actual costs for basic benefit
----------------------------------------------------------------------------------------------------------------
                                               PMPM       Totals                       PMPM           Totals
----------------------------------------------------------------------------------------------------------------
Enrollees...............................  ..............  10,000  ..............  ..............  ..............
           (Subsidy-eligible)             ..............    0     ..............  ..............  ..............
Avg. Payment............................         114.00   ......  ..............  ..............  ..............
Premium.................................          30.60   ......  ..............  ..............  ..............
Avg. Direct Subsidy.....................          83.40   ......  ..............  ..............  ..............
Admin...................................          17.00   ......  ..............  ..............  ..............
Est. Allowable Cost.....................          97.00   970,00  ..............          100.00       1,000,000
                                                            0
Reinsurance Cost........................           0.00   ......  ..............  ..............  ..............
Total Premiums..........................  ..............  306,00  ..............  ..............  ..............
                                                            0
Total Direct Subsidy....................  ..............  834,00  ..............  ..............  ..............
                                                            0
Less Total Admin........................  ..............  (170,0  ..............  ..............  ..............
                                                          00)
Target Amount...........................  ..............  970,00  ..............  ..............  ..............
                                                            0
----------------------------------------------------------------------------------------------------------------


 
                                                                                            Allowable
        B. Risk corridor limits          Risk  Corridor   C. Threshold   Risk sharing %    costs minus   Payment
                                             limit %                                        threshold     change
----------------------------------------------------------------------------------------------------------------
2nd upper limit........................           .050       1,018,500              80%  ..............  .......
1st upper limit........................           .025         994,250              50%           5,750  +2,875
Target Amount..........................           .000         970,000               0%  ..............  .......
1st lower limit........................          (.025)        945,750            (50%)  ..............  .......
2nd lower limit........................          (.050)        921,500            (80%)  ..............  .......
----------------------------------------------------------------------------------------------------------------

    In Table G-1, a hypothetical plan with average payments of $114 
per-member-per-month (PMPM), based on expected prescription drug costs 
of $97 PMPM, actually incurs costs equal to $100 PMPM. In this 
simplified example there are no reinsurance or low-income subsidies. 
The actual incurred costs are compared to the ``prepayment'' included 
in the risk-adjusted standardized bid (in this case the target amount 
of $970,000) by looking at the risk corridors in which they fall. The 
risk corridors have been calculated based on the target amount plus or 
minus the risk percentages associated with each risk corridor limit. 
For instance the 1st upper limit is defined as the target amount 
($970,000) plus 2.5 percent of the target amount ($24,250), so the 1st 
upper limit is calculated to be $994,250. The actual allowable costs of 
$1,000,000 fall between the 1st upper limit and the 2nd upper limit, so 
the costs eligible for risk sharing is the difference between the 
allowable costs ($1,000,000) and the 1st threshold upper limit 
($994,250), or $5,750. Since the amount of risk sharing in this 
corridor is set at 50 percent, the actual change in payment due to risk 
sharing is 50 percent of $5,750, or an additional $2,875.
    As mentioned above, in order to arrive at a value for actual risk 
corridor costs that can be appropriately compared to the target amount, 
allowable risk corridor costs would be adjusted to remove expenses 
reimbursed through total reinsurance payments and non-premium low-
income subsidy payments. The statute indicates that allowable risk 
corridor costs should be reduced by reinsurance payments and by the 
subsidy payments for low-income individuals. The subsidy payments for 
low-income individuals under section 1860D-14 of the Act include 
subsidies for both premium and for cost sharing. We are proposing to 
interpret ``the total subsidy payments made under section 1860D-14'' 
under section 1860D15(e)(1)(A)(ii)(II) of the Act in the context of 
``costs incurred by the sponsor or organization'' in the definition of 
allowable risk corridor costs. Since premiums are not a cost, we 
propose to limit our interpretation of ``the total subsidy payments'' 
to payments related to cost sharing.
    In proposing this interpretation, we note that when adjusted 
allowable risk corridor costs are calculated by subtracting only non-
premium subsidies, as we are proposing to do, the results are the same 
as for an identical plan without any subsidy-eligible individuals. 
However, if the adjusted allowable risk corridor costs are calculated 
by subtracting total low-income subsidies (that is, for premiums, cost 
sharing and coverage above the initial coverage limit), the risk 
sharing calculation results in lower recouped costs on the part of the 
plan and a different outcome from that in a plan without subsidy-
eligible individuals. Since there should be no difference in these 
amounts, the calculation subtracting only non-premium subsidies must be 
the appropriate one. We believe that to do otherwise would result in a 
major disincentive for PDP and MA-PD plans to enroll individuals 
eligible for the low-income subsidies, and we do not believe that this 
would be the logical outcome that was intended by the statute. We would 
welcome comments on our interpretation.

c. Changes in Risk Corridor Limits and Percentages (Sec.  423.336(a) 
and (Sec.  423.336(b))

    The risk corridors and the percentage of risk to be shared would be 
set at certain levels for 2006 and 2007 with flexibility for us to 
increase the risk sharing percentage if bids, and therefore target 
amounts, are off during the early years of the program by a certain 
percentage set by the statute in section 1860D-15(e)(2)(B)(iii) of the 
Act. During 2006 and 2007, plans would be at full risk for adjusted 
allowable risk corridor costs within 2.5 percent above or below the 
target. Plans with adjusted allowable costs above 102.5 percent of the 
target would receive increased payments. If their costs were between 
102.5 percent of the target (1st threshold upper limit) and at or below 
105 percent of the target (2nd threshold upper limit), they would be at 
risk for 25 percent of the increased amount; that is, their additional 
payments would equal 75 percent of adjusted allowable costs for 
spending in this range. If their costs were above 105 percent of the 
target they would be at risk for 25 percent of the costs between the 
first and second threshold upper limits and 20 percent of the costs 
above that amount. That is, their additional payments would equal 75 
percent of the difference between the first and second

[[Page 46693]]

threshold upper limits and 80 percent of the adjusted allowable costs 
over the second threshold upper limit. Conversely, if plan spending 
fell below the 97.5 percent of target, plans would share the savings 
with the government. They would have to refund 75 percent of the 
savings for any costs less than 97.5 percent of the target amount but 
at or above 95 percent of the target level, and 80 percent of any 
savings below 95 percent of the target.
    In Sec.  423.336(b)(2)(iii) the program will cover a higher 
percentage of the risk for costs between the 1st and 2nd upper 
threshold limits would apply in 2006 and 2007 if we were to determine 
that (1) 60 percent of prescription drug plans and MA-PD plans have 
adjusted allowable costs that are more than the first threshold upper 
limit for the year; and (2) these plans represent at least 60 percent 
of beneficiaries enrolled in such plans. In this case, additional 
payments to plans would increase from 75 percent to 90 percent of 
adjusted allowable costs between the first and second upper threshold 
limits. Conversely, there would be no change in savings shared with the 
government if costs fell below 97.5 percent of the target level.
    For 2008-2011, the risk corridors and the percentage of risk to be 
shared would be modified so that PDP and MA-PD sponsors would assume an 
increased level of risk. Plans would be at full risk for drug spending 
within 5 percent above or below the target level. Plans would be at 
risk for 50 percent of spending exceeding 105 percent and at or below 
110 percent of the target level. Additionally, they would be at risk 
for 20 percent of any spending exceeding 110 percent of the target 
level. Payments would be increased by 50 percent of adjusted allowable 
costs exceeding the first threshold upper limit and up to the second 
threshold upper limit and 80 percent for any additional costs exceeding 
the second threshold upper limit. Conversely, if plan spending fell 
below the target, plans would share the savings with the government. 
They would have to refund 50 percent of the savings if costs fell 
between 95 percent and 90 percent of the target level, and 80 percent 
of any amounts below 90 percent of the target.
    For years after 2011, we would establish the risk threshold 
percentage as deemed necessary to create incentives for plans to enter 
the market. The only required parameters would be that the first 
threshold risk percentage could not be less than 5 percent and the 
second threshold risk percentage could not be less than 10 percent of 
the target amount.

d. Risk Sharing Payments or Recoveries

    As proposed in Sec.  423.336(c), we will make payments or recover 
savings after a coverage year after obtaining all of the information 
necessary to determine the amount of payment. In Sec.  423.336(c)(1) we 
are proposing that within six months of the end of a coverage year, the 
PDP sponsor or MA organization offering a MA-PD plan would provide us 
with the information necessary to calculate the risk sharing as 
discussed in section 3(a) of this part of the preamble. This would 
include prior final reconciliation of reinsurance and low-income 
subsidies since allowable risk corridor costs must be reduced by the 
total reinsurance payments and non-premium low-income subsidies for the 
year. Once this information has been received, under Sec.  
423.336(c)(2) we would either make lump-sum payments or adjust monthly 
payments in the following payment year based on the relationship of the 
plan's adjusted allowable risk corridor costs to the predetermined risk 
corridor thresholds in the coverage year. We would not make payment if 
we did not receive the necessary information from the PDP sponsor or MA 
organization. In addition, as stated, below, we are considering certain 
corrective actions to recoup risk-sharing payments, in the event of 
lack of information.
8. Retroactive Adjustments and Reconciliation (Sec.  423.343)
    In Sec.  423.343(a) and Sec.  423.343(b) we propose to make 
retroactive adjustments to the aggregate monthly payments to a PDP or 
MA-PD for any difference between the actual number and characteristics, 
including health status, of enrollees and the number and 
characteristics on which we had based the organization's advance 
monthly payments. Reconciliation of actual payments made would be done 
as needed. In order for total payments to be properly accounted for in 
all steps, the order of reconciliation processes would be first, 
enrollment; second, risk adjustment; third, low-income cost sharing; 
fourth, reinsurance; and finally, risk sharing.
    Under Sec.  423.343(c) and (d), we would provide for a final 
reconciliation process to compare the payments for reinsurance 
subsidies and low-income cost-sharing subsidies made during the 
coverage year to actual allowable reinsurance expenses and low-income 
cost sharing and to make additional payments or payment recoveries 
accordingly. The form and manner in which actual allowable reinsurance 
costs would be submitted for reconciliation has yet to be determined. 
We are proposing that PDP sponsors and MA organizations offering a MA-
PD plan would provide us with the information necessary to finalize 
reinsurance payments as discussed in section 3(a) of this part of the 
preamble within six months of the end of a coverage year. Once complete 
data were received for a coverage year, we would compare 80 percent of 
the allowable reinsurance costs attributable to that portion of gross 
covered prescription drug costs incurred in the coverage year after an 
individual has incurred costs that exceed the annual out-of-pocket 
threshold to the monthly reinsurance payments and compute the 
difference. We would then either make lump-sum payments or adjust 
monthly payments throughout the remainder of the payment year following 
the coverage year to pay out or recover this difference.
    If an entity did not provide us with sufficient documentation for 
us to reconcile payments, we would reconcile by recovering payments for 
which the entity lacked documentation. For example, if CMS makes 
interim payments during the year for the low-income subsidy, but at the 
end of the year, the PDP sponsor or MA organization cannot provide 
documentation demonstrating the amounts of beneficiary cost-sharing, 
the reconciliation process would involve recouping the interim payments 
for such subsidy. The need to provide sufficient documentation to 
support final payment determinations applies even in the event of a 
change of ownership. Thus, new owners of a PDP sponsor or MA 
organization would be responsible for obtaining the documentation 
necessary to support payment, and the reconciliation process would be 
used to recover any payments for which the new owner lacked 
documentation. We believe this authority stems from the direction of 
the Congress that each PDP sponsor and MA-PD organization ``provide the 
Secretary with such information as the Secretary determines is 
necessary to carry out this section,'' (section 1860D-15(f)(1)(A) of 
the Act) and that ``payments under this section * * * are conditioned 
upon the furnishing to the Secretary in a form and manner specified by 
the Secretary, of such information as may be required to carry out this 
section,'' (section 1860D-15(d)(2)(A)of the Act)).
    We also request comment on the remedy that should be imposed in the 
event a PDP sponsor or MA organization offering an MA-PD plan fails to 
provide us with adequate information regarding risk-sharing 
arrangements. In the case of

[[Page 46694]]

risk corridor costs, the organization or sponsor may owe the government 
money if, for example, prepayments exceed adjusted allowable risk 
corridor costs. In this case, failure to provide information could 
result in a shortfall to the government, since the entity would not 
have the information necessary for the Secretary to establish the 
proper amount owed. Although we have not proposed regulations on this 
issue, some of the remedies we are considering for the final rule are: 
(1) Assume that the sponsor's or organization's adjusted allowable risk 
corridor costs are 50% of the target amount; (2) assume that the 
sponsor's or organization's adjusted allowable risk corridor costs are 
the same percentage of the target amount as the mean (or median) 
percentage achieved by all PDPs or MA-PDs whose costs are lower than 
the target amount; (3) assume that the sponsor's or organization's 
adjusted allowable risk corridor costs are the same percentage of the 
target amount as the mean (or median) percentage achieved by all PDPs 
or MA-PDs (whose costs are both higher and lower than the target 
amount). We use a 50% threshold for option (a) because we believe this 
threshold would constitute a lower limit; and it would be unlikely for 
any organization or sponsor to have costs lower than 50% of their total 
payments. We request comments on these options, as well as proposals of 
other options that would allow us to recoup risk-sharing payments in 
the event a sponsor fails to provide us the adequate information 
necessary to determine appropriate risk-sharing payments.
9. Reopening (423.346)
    Finally, we believe that the provision in 1860D-15(f)(1) of the Act 
providing the Secretary with the right to inspect and audit any books 
and records of a PDP sponsor or MA organization regarding costs 
provided to the Secretary would not be meaningful, if upon finding 
mistakes pursuant to such audits, the Secretary were not able to reopen 
final determinations made on payment. In addition, we believe that 
sections 1870 and 1871 of the Act provide us with the authority to 
reopen final determinations of payment to PDP sponsors and MA 
organizations. Therefore, we propose in this rule to include reopening 
provisions patterned after those used in Medicare claims reopening, 
found in Part 405 of the regulations, subparts G and H. Including 
reopening provisions would allow CMS to ensure that the discovery of 
any overpayments or underpayments could be rectified. Under our 
proposed provisions, reopening could occur for any reason within one 
year of the final determination of payment, within four years for good 
cause, or at any time when there is fraud or similar fault. CMS could 
initiate a reopening on its own, or a sponsor or organization could 
request reopening, but such requests would be at the discretion of CMS. 
The Supreme Court has determined that in the context of reopening cost 
reports, a fiscal intermediary's decision not to reopen a final 
determination is not subject to judicial review, see Your Home Visiting 
Nurse Services, Inc. v. Shalala, 525 U.S. 449, 456 (1999), and we 
believe the same reasoning would apply in the context of Part D.
    Good cause would be interpreted in the same manner as in Part 405 
(see Medicare Carriers Manual section 12100). Thus, good cause would 
exist, if (a) new and material evidence, not readily available at the 
time of the determination, is furnished; (b) There is an error on the 
face of the evidence on which such determination or decision is based; 
or, (c) There is a clerical error in determination. In order to meet 
the standard under (a) the evidence could not have been available at 
the time the determination was made. A clerical error constitutes such 
errors as computational mistakes or inaccurate coding. An error on the 
face of the evidence exists if it is clear based upon the evidence that 
was before CMS when it reached its initial determination that the 
initial determination is erroneous. Thus, for example, good cause would 
exist in cases where it is clear from the files that rebates or 
administrative costs were not appropriately accounted for, where 
computation errors had been made, where a sponsor or organization 
included non-Part D drugs in their calculations, where individuals not 
enrolled in the plan were included in calculating payment, and in 
similar situations. Reopening could occur at any time in cases of fraud 
or similar fault, such as in cases where the sponsor or organization 
knew or should have known that they were claiming erroneous Medicare 
payment amounts.

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

1. Overview
    In our proposed regulation at Sec.  423.401 we would implement the 
requirements of section 1860D-12(a) of the Act that address licensing, 
the assumption of financial risk for unsubsidized coverage and solvency 
requirements for unlicensed sponsors or sponsors who are not licensed 
in all States in the region in which it wants to offer a PDP. The 
provisions of this section specify that a sponsor of a PDP must be 
organized and licensed under State law as a risk bearing entity 
eligible to offer health insurance or health benefits coverage in each 
State that it offers a PDP. However, as required by section 1860D-
12(a)(1) of the Act, we have provided in our proposed regulations at 
Sec.  423.410 for a waiver of the State licensure requirement for the 
reasons and under the conditions set forth under section 1860D-12(c) of 
the Act. In addition, under the requirements of section 1860D-12(a) of 
the Act, to the extent an entity is at risk, it must assume financial 
risk on a prospective basis for covered benefits that are not covered 
by reinsurance. The PDP sponsor can obtain insurance or make other 
arrangements for the cost of coverage provided to enrollees to the 
extent that the sponsor is at risk for providing the coverage.
    In Sec.  423.420, we specify that sponsors that have been granted a 
waiver by us or those operating in States that do not have licensing 
requirements for PDPs must maintain reasonable financial solvency and 
capital adequacy. We intend to develop these reasonable standards 
through guidance, after consulting with the National Association of 
Insurance Commissioners (NAIC), as required by statute. The guidance 
would be issued by January 1, 2005. Although we believe these standards 
would be interpretive guidance, we are interested in receiving comments 
on the issue. In addition, as noted in Sec.  423.410, we would 
establish an application and certification process for waiver 
applicants.
    We expect that the development of solvency standards for purposes 
of PDP sponsors under Part D will be less complex than the situation 
presented to us by the development of solvency standards for provider-
sponsored organizations (PSOs) under the Balanced Budget Act of 1997. 
(PDP sponsors in contrast to PSOs are fairly straightforward insurance 
risk models whereas the PSO situation involved having to consider such 
issues as the role that physical plant assets played in establishing 
solvency standards.) Although drug only plans are not a common product 
in the insurance market today, there are other single lines of business 
plans licensed by States (for example, dental plans, behavioral mental 
health plans) that can provide some possible models.
    We also have experience from determining solvency standards for 
federally qualified health maintenance organizations under Title XIII 
of the Public Health Service Act and competitive medical plans under

[[Page 46695]]

Section 1876 of the Social Security Act. In addition, we are aware that 
the solvency standards have been applied to at least two drug-only 
plans (Medica and PacifiCare) and believe that these could also provide 
a model for the licensing of the entities. However, we believe that 
these two products are lines of business operated under a current 
insurance license, and therefore, our greatest concern would be how to 
go about developing standards for organizations that may have 
experience managing a drug benefit but have not had any experience as 
risk bearing entities and/or are not structured as risk-bearing 
entities. We would welcome comments regarding this issue.
    Factors which may be considered in discussions with the NAIC 
include the ability of an organization to maintain assets greater than 
total unsubordinated liabilities and the ability of the organization to 
generate a surplus on a consistent basis as demonstrated by history or 
an acceptable financial plan.
2. Waiver To Expand Choice
a. Overview
    In our regulations at Sec.  423.410 we would implement the 
provisions of section 1860D-12(c) of the Act that address waiver of 
certain requirements to expand choice. Generally, section 1860D-12(c) 
of the Act specifies that in order to expand access to prescription 
drug plans, we may waive the State licensure requirement under 
circumstances similar to those permitted under Part C for provider-
sponsored organizations, as described in section 1855(a) of the Act. 
However, we note that the States would be expressly preempted from 
regulating in all areas except licensure and solvency (see section 
1860D-12(g) of the Act and Sec.  423.440). Additional requirements 
referenced under section 1855(a) of the Act such as State consumer 
protection and quality standards, do not apply to and are not 
incorporated in these regulations
b. Waiver When State Imposes Certain More Stringent Standards
    Section 1860D-12(c) of the Act provides that a prospective PDP 
sponsor may request a waiver from State licensure requirements from us 
under the waiver provisions at section 1855(a)(2)(B), 1855(a)(2)(C) and 
1855(a)(2)(D). Because the Congress directed us to use many of the same 
grounds for approving a waiver as used pursuant to Sec.  1855(a)(2)(B), 
Sec.  1855(a)(2)(C), and Sec.  1855(a)(2)(D), We have adopted the 
regulatory provisions in proposed Sec.  422.372. Thus, our regulation 
at Sec.  423.410(c)(1) would use the same standard used in Sec.  
422.372(b)(1) and allows a waiver when the State has failed to complete 
action on a licensing application within 90 days of receipt of a 
substantially complete application.

c. Distinct Waivers

    Proposed Sec.  423.410(c)(2) uses the same standards as used in 
Sec.  422.372(b)(2) for determining when a State has denied an 
application based on discriminatory treatment. The regulation provides 
that the following activities may also constitute a basis for us to 
waive State licensure requirements: (1) The State denies an application 
based on requirements that are not generally applicable to PDP sponsors 
or other entities engaged in a similar business or (2) the State 
requires as a condition of licensure that the PDP sponsor offer any 
product or plan other than a prescription drug plan.
    Section 423.410(c)(3) of our proposed regulations, addresses denial 
of an application based on application of different solvency 
requirements--when a State imposes solvency requirements that are more 
stringent than the solvency standards that would be established by us 
under Sec.  423.420. In addition, a waiver may be granted if the State 
imposes procedures or standards relating to solvency that are different 
from the solvency requirements established by us. CMS will utilize a 
waiver application process similar to that used under its federally 
waivered PSO program in which the waiver applicant will be required to 
submit certain documents that would indicate that the State is imposing 
procedures or standards relating to solvency that are different from 
CMS standards. CMS would utilize this documentation in its waiver 
determination process.
    In our regulations at Sec.  423.410(c)(4), we would implement 
section 1860D-12(c)(2)(A)(ii) of the Act, which provides that we may 
grant a waiver when a State imposes requirements other than those 
required under Federal law.
    Section 1860D-12(c)(2)(B) of the Act also establishes special rules 
for the approval of a waiver by us. We propose to implement these 
special rules at Sec.  423.410(d) and (e) of these regulations. The 
special rules allow that we will grant a waiver when a State does not 
have any licensing process for PDP sponsors. Also, even if a State does 
have a licensing process for years beginning before January 1, 2008, a 
waiver will be granted if the PDP sponsor merely submits its completed 
application for licensure to the State. The PDP sponsor seeking a 
waiver will submit a waiver application indicating its understanding of 
State law which CMS will confirm through contacts with the State 
regulator.

d. Relationship of Waiver to State Regulation

    The statute requires, at section 1860D-12(c)(3) of the Act, that 
the waivers granted under the provisions of section 1855 of the Act 
must also meet the conditions of approval established at section 
1855(a)(2)(E), 1855(a)(2)(F) and 1855(a)(2)(G) of the Act. Accordingly, 
we would implement the applicable waiver requirements from section 
1855(a)(2)(E) and 1855(a)(2)(F) that relate to licensure or solvency in 
the regulations at Sec.  423.410(f)(1) through Sec.  423.410(f)(3).
    Section 423.410(f)(1) of our proposed regulations establishes that 
except in States without a licensing process for PDP sponsors and 
except in the case of regional plan waivers described in Sec.  423.410 
(b), a waiver only applies to a specific State, is effective for 36 
months and cannot be renewed. We propose to implement section 
1855(a)(2)(F) of the Act at Sec.  423.410(f)(2) where we specify our 
requirement concerning prompt action on applications. This requirement 
would establish that we would grant or deny a waiver application under 
this section within 60 days after we determine that a substantially 
complete waiver application has been filed. A substantially complete 
application would have to clearly demonstrate and document a PDP 
sponsor's eligibility for a waiver. In addition, section 1860D-12(c)(3) 
of the Act establishes that if a State does not have a licensing 
requirement for PDP sponsors, then the requirements of section 
1855(a)(2)(E)(i) and section 1855(a)(2)(E)(ii) do not apply. We propose 
to implement these provisions at Sec.  423.410(f)(3) where we would 
establish that if a State does not have a licensing process for PDP 
sponsors, we would approve a waiver for a PDP sponsor that meets our 
solvency standards and that this waiver would not be time limited.
    With respect to section 1855(a)(2)(E)(i) of the Act, we believe 
that the most reasonable interpretation of this provision is that when 
a PDP sponsor is granted a waiver (because the State does not have a 
PDP sponsor licensing process), one waiver that we grant can be applied 
to all States in which there are no PDP sponsor licensing requirements. 
However, the waiver granted on the basis that a State does not have a 
licensing process cannot be applied in a State that does have a

[[Page 46696]]

PDP sponsor licensing process. In a State that may have denied 
licensure to the entity in question, one of the other bases for 
approving a waiver may be applicable. In addition, a waiver granted for 
other reasons such as failure to act on an application on a timely 
basis, or denial based on discriminatory treatment will apply only to 
the States in question and not other States.
    We would implement the regional plan waiver rule provided at 
section 1860D-12(c)(1)(B) of the Act in the regulations at Sec.  
423.410(b) of our proposed rule. This allows us to use the proposed 
waiver authority at section 1858(d) of the Act--Temporary Waiver of 
State Licensure Requirement for the licensing of PDPs. This temporary 
waiver would be available in the event a prospective PDP sponsor 
proposes that its prescription drug plan would cover a multi-State 
region, but is not yet licensed in all of the States. (Under those 
circumstances, we can waive the State licensure requirement until the 
State has completed processing of the application.) In the interim, the 
PDP sponsor would be required to comply with the solvency standards 
established by us. In the event the State ultimately denies the 
application, we can extend the waiver through the contract year as we 
deem appropriate to provide for transition.
3. Preemption of State Laws and Prohibition of Premium Taxes
    Section 1860D-12(g) of the Act incorporates section 1856(b)(3) of 
the Act which states: ``the standards established under this part shall 
supersede any State law or regulation (other than State licensing laws 
or State laws relating to plan solvency) for MA organizations under 
this part.'' Accordingly, we specify in our proposed regulations that 
to the extent there are Federal standards, those standards supersede 
any State Law. For purposes of this section, with the exceptions of 
State licensing laws or State laws related to plan solvency, State laws 
do not apply to prescription drug plans and PDP sponsors.
    We do not believe, however, that the language in 1856(b)(3) means 
that each and every State requirement applying to PDP sponsors would 
now become null and void. In areas where we have neither the expertise 
nor the authority to regulate, we do not believe that State laws would 
be superseded or preempted. For example, State environmental laws, laws 
governing private contracting relationships, tort law, labor law, civil 
rights laws, and similar areas of law would, we believe, continue in 
effect and PDP sponsors in such States would continue to be subject to 
such State laws. Rather, our Federal standards would merely preempt the 
State laws in the areas where Congress intended us to regulate-such as 
the rules governing pharmacy access, formulary requirements for 
prescription drug plans, and marketing standards governing the 
information disseminated to beneficiaries by PDP sponsors. We believe 
this interpretation of our preemption authority is in keeping with 
principles of Federalism, and Executive Order 13132 on Federalism, 
which requires us to construe preemption statutes narrowly.
    By the same token, in areas where Congress specifically stated that 
State law would not be preempted--that is, State licensing laws and 
State laws related to plan solvency--we would construe the preemption 
exception narrowly, and only view the exception as applying to true 
licensing or solvency requirements. By this we mean that if a State 
conditioned licensing on a PDP sponsor meeting requirements in an area 
we also regulate outside of licensure or solvency, then such condition 
could not be viewed as a ``licensing'' law and would not be excepted 
from preemption. For example, if a State conditioned licensure on a PDP 
sponsor adhering to the State's guidelines for prescription drug plan 
marketing materials, we would not view the marketing guidelines as a 
licensure requirement and we would still view the Federal marketing 
rules as preempting the State requirements.
    Additionally, in accordance with the incorporation of section 
1854(g) of the Act into section 1860D-12(g) of the Act, States are 
expressly prohibited from imposing a premium, or similar type of tax, 
on premiums paid by us to prescription drug plans or PDP sponsors, on 
premiums applicable to Medicare enrollees of the prescription drug 
plans under Part F, or on any other payments made by us to PDP sponsors 
under subpart G of the regulations,--including the direct subsidy, 
reinsurance payments and risk corridor payments.

J. Coordination Under Part D Plans With Other Prescription Drug 
Coverage

1. Overview and Terminology
    We propose in subpart J of part 423 to implement sections 1860D-
2(a)(4), 1860D-2(b)(4)(C), 1860D-2(b)(4)(D), 1860D-11(j), 1860D-21(c), 
1860D-22(b), 1860D-23(a), 1860D-3(b), 1860D-23(c), 1860D-24(a), 1860D-
24(b), and 1860D-24(c) of the Act that were added by section 101 of the 
MMA. We provide a brief summary of each of these provisions. Following 
this overview we provide a more detailed discussion of how we propose 
implementing each of these statutory provisions in this subpart.
    We propose to implement section 1860D-21(c) of the Act at Sec.  
423.458 of the proposed rule and explain that the requirements of Part 
D generally apply under Part C for prescription drug coverage offered 
by MA-PD plans although certain waivers are available. We propose to 
implement section 1860D-22(b) of the Act at our proposed Sec.  
423.458(c) that provides employer group waiver authority for 
prescription drug plans.
    We outline options that we have identified related to the data-
exchange that will be necessary between both State pharmaceutical 
assistance programs and other insurers and Part D plans in order to 
accurately apply incurred costs to appropriate Part D enrollee records. 
For purposes of this subpart, provisions in the statute that address 
coordination requirements generally apply in a similar manner to both 
State pharmaceutical assistance programs and other drug plans and to 
both prescription drug plans and MA-PD plans. The main difference 
between coordination requirements related to SPAPs and other drug plans 
is that we are prohibited from charging user fees to SPAPs. On the 
other hand, Part D plans may impose fees only related to the cost of 
coordination on both SPAPs and other drug plans.
    We propose to implement section 1860D-11(j) of the Act at Sec.  
423.464(a) of the proposed rule and require sponsors of Part D plans to 
coordinate with State pharmaceutical assistance programs and other 
prescription drug plans. In this section we specify the other plans 
with which Part D plans must coordinate benefits in accordance with 
section 1860D-24(b) of the Act and define State Pharmaceutical 
Assistance Programs, in accordance with section 1860D-23(b) of the Act.

a. Part D Plans

    Wherever we mention or reference ``Part D plans'' we mean any or 
all of ``MA-PD plans, prescription drug plans (PDPs) and fallback 
prescription drug plans''. Likewise, the term ``Part D plan sponsor'' 
refers to MA organizations offering MA-PD plans, PDP sponsors, and 
eligible fallback entities offering fallback plans. If a statement or 
reference applies exclusively to a specific type of plan, we use that 
exact term to limit the reference.

[[Page 46697]]

b. Employer-sponsored Group Prescription Drug Plan

    Section 1860D-22(b) applies to ``employment-based retiree health 
coverage'' that is defined under section 1860D-22(c)(1) of the Act. 
This term means coverage for individuals (or their spouses and 
dependents) under a group health plan based on their status as retired 
participants. We use the term ``employer-sponsored group prescription 
drug plan'' to mean a prescription drug plan under a contract between a 
PDP sponsor and employers, labor organizations, or the trustees of 
funds established by one or more employers or labor organizations to 
furnish prescription drug benefits under employment-based retiree 
health coverage.

c. State Pharmaceutical Assistance Program

    A State Pharmaceutical Assistance Program is a program operated by 
or under contract with a State for purposes of this part if it: (1) 
Provides financial assistance for the purchase or provision of 
supplemental prescription drug coverage or benefits on behalf of Part D 
eligible individuals; (2) provides assistance to Part D eligible 
individuals in all Part D plans without discriminating based upon the 
Part D plan in which an individual enrolls; (3) meets the benefit 
coordination requirements specified in this part; and (4) does not 
change or affect the primary payor status of a Part D plan. Since an 
SPAP cannot discriminate under the Part D plans with respect to either 
eligibility or the amount of assistance provided, in accordance with 
section 1860D-23(b)(2) of the Act and in our proposed rule at Sec.  
423.464(e)(1)(ii), to the extent that a program does discriminate it 
cannot, by definition, be considered an SPAP. A non-conforming State 
program that did discriminate in either of these ways (eligibility or 
amount of assistance provided) would not meet the definition of a State 
Pharmaceutical Assistance Program.
    We are interpreting the non-discrimination language to mean that 
SPAPs, if they offer premium assistance or supplemental assistance on 
Part D cost sharing, must offer equal assistance by all PDPs or MA-PD 
plans available in the State and may not steer beneficiaries to one 
plan or another through benefit design or otherwise. State programs 
cannot, for example, use the threat of withholding SPAP enrollees to 
negotiate coverage, premium or formulary changes with PDPs or MA-PD 
plans. Violations of the non-discrimination rule will jeopardize the 
program's special status with respect to true out-of-pocket costs. That 
is, a State program that discriminates does not qualify under the 
definition of an SPAP, and consequently, its contributions to cost 
sharing do not count toward the out-of-pocket limit.
    Section 1860D-23(b) of the Act also provides that an SPAP is a 
State program that provides financial assistance for the purchase or 
provision of prescription drugs, and we interpret this to mean that it 
provides that assistance with State funds. Therefore, the definition of 
SPAP would exclude State Medicaid programs, section 1115 demonstration 
programs, and any program where program funding is from Federal grants, 
awards, contracts, entitlement programs, or other Federal sources of 
funding. (We would clarify that this does not exclude some Federal 
administrative funding or incidental Federal monies.)
    For purposes of this part, we are proposing that a Pharmacy Plus 
demonstration waiver under section 1115 of the Act shall not be 
considered a State pharmaceutical assistance program. Pharmacy Plus 
waivers are granted to allow states to treat these individuals as 
Medicaid eligible for the purposes of receiving drugs and primary care 
services. Expenditures for these limited services receive federal 
matching payments in the same manner as do services for full benefit 
Medicaid beneficiaries. We do not believe that these waivers, having 
expenditures that are federally matched in this manner, should be 
considered SPAPs as the effect of this would be to allow federally 
matched payments to be used to meet an out of pocket expense to gain 
further payments from the Federal Medicare program.
2. Application of Part D Rules to MA-PD Plans on and After January 1, 
2006 (Sec.  423.458)
    In accordance with section 1860D-21(c)(1) of the Act, and as 
provided under proposed Sec.  423.458(a), the provisions of Part D 
apply under Part C to prescription drug coverage provided by an MA-PD 
in lieu of other Part C provisions that would apply to such coverage, 
unless otherwise provided. As permitted under section 1860D-21(c)(2) of 
the Act, we will waive Part D provisions to the extent that we 
determine they duplicate, or conflict with, provisions under Part C, or 
as necessary in order to improve coordination of Part D benefits with 
the Part C program. For instance, under section 1860D-21(c)(3) of the 
Act, we will waive the pharmacy network access requirements as 
described at Sec.  423.120(a)(3) of the proposed rule in the case of an 
MA-PD plan that provides access (other than through mail'order 
pharmacies) to qualified prescription drug coverage through pharmacies 
owned and operated by the MA organization if we determine that the 
organization's pharmacy network is sufficient to provide comparable 
access for enrollees under the plan. As discussed in other parts of 
this preamble, Part D rules generally apply to section 1876 cost HMOs/
CMPs and PACE organizations in the same or in a similar manner as the 
rules apply to MA-PD local plans. The waiver provision under section 
1860D-21(c)(2) of the Act applicable to MA-PD plans similarly extends 
to section 1876 cost HMOs/CMPs and PACE organizations. We provide for 
this waiver authority for cost HMOs/CMPs and PACE organizations by 
adding a paragraph (d) to section 423.458 of our proposed rule.
    In reviewing requested waivers we will follow a process similar to 
the process we initially established under the M+C program related to 
the employer group waiver authority provided in section 1857(i) of the 
Act and codified in regulation at Sec.  422.106(c). Under Sec.  
422.106(c), MA organizations could submit written requests to our 
permission to waive requirements that hinder the design of or offering 
of MA plans to employers. We would make approved waivers available to 
all similarly situated MA organizations that meet the conditions of the 
waiver. Accordingly, we will use a similar approach to the one we 
established under Sec.  422.106(c) in implementing our authority to 
waive those Part D provisions that can be shown to (1) duplicate or 
conflict with Part C requirements or (2) should be waived in order to 
improve coordination of the benefits provided under Parts C and D of 
Medicare. However, we will not, under our waiver authority, waive Part 
D rules that are specifically directed to MA-PDs or to the Part C 
program. We ask for your comments on both the process we propose for 
authorizing additional waivers under this section and for what 
additional waivers should, or should not, be permitted under this 
waiver authority.
3. Application to PACE Plans
    Section 1860D-21(f) of the Act indicates that Part D provisions 
shall apply to PACE organizations in a manner that is similar to those 
of an MA-PD local plan and that a PACE organization may be deemed to be 
an MA-PD local plan. As discussed in detail in Subpart T, PACE 
organizations

[[Page 46698]]

would not be deemed as MA-PD plans but would be treated in a manner 
that is similar to MA-PD plans for purposes of payment. Proposed Sec.  
423.458(d) establishes regulatory authority for CMS to waive Part D 
provisions for PACE organizations and indicates that PACE organizations 
may request waivers from CMS. Because many of the Part D requirements 
duplicate, conflict with, or inhibit coordination of existing PACE 
requirements, we anticipate a significant number of waivers would 
necessary for PACE organizations. We are concerned about the potential 
burden this would place on PACE organizations and propose to include a 
provision that would allow for CMS to identify all Part D provisions 
requiring waivers and waive these provisions on behalf of PACE 
organizations. In other words, we are considering a special rule for 
PACE organizations that would automatically apply the waivers granted 
in the final rule (see discussion in subpart T of this preamble) 
without a plan-specific application process.
    We would like to receive comments on this proposed approach and on 
any other related suggestions for minimizing burden on PACE plans.
4. Application to Employer Groups

a. Employer Group Waivers

    Section 1860D-22(b) of the Act extends the waiver authority that is 
provided for MA organizations related to Part C by section 1857(i) of 
the Act and implemented at Sec.  422.106(c) to prescription drug plans 
related to Part D. This waiver authority is intended to provide 
prescription drug plans an opportunity, similar to the opportunity 
afforded MA organizations under Part C, to furnish Part D benefits to 
participants or beneficiaries of employment-based retiree health 
coverage sponsored by employers and labor organizations in the most 
efficient and effective manner possible. Section 1860D-21(b) of the Act 
specifically authorizes prescription drug plans to establish separate 
premium amounts for Part D enrollees who are participants or 
beneficiaries of employment-based retiree health coverage sponsored by 
employers and labor organizations. It also contemplates separate Part D 
plans for participants and beneficiaries of such employment-based 
retiree health coverage. In administering this waiver, we propose to 
follow the template first established at Sec.  422.106(c) that we 
created under Part C to implement the waiver authority under section 
1857(i) of the Act.
    While we discuss coordination of Part D coverage with employment-
based retiree health coverage at some length later in this part, we 
believe it is important to include a brief discussion here on the Part 
D waivers that we specifically would not permit related to employer 
group retiree coverage under the authority provided in section 1860D-
22(b) of the Act. Although the statute permits ``* * * in relation to 
employers, including authorizing the establishment of separate premium 
amounts for enrollees in a prescription drug plan * * *'' we interpret 
``separate premium amounts'' to mean the amount of premium the retiree 
or the enrollee pays. Under the MA program many employer groups 
subsidize the premiums that would otherwise be payable by their 
retirees through partial or full payment or subsidization of the MA 
plan premiums on their members' behalf. We believe that a similar 
practice related to PDP Part D plan premiums would be permissible and 
find support in section 1860D-22(a)(6)(B) of the Act. Alternatively, we 
do not believe that the statutorily defined Part D premium could be 
different for employees or retirees than it is for individuals enrolled 
in the same PDP plan. Thus, the combined Part D premium contributed by 
the employee or retiree and the employer group would need to be 
identical to the premium charged to an individual enrolled in the same 
PDP plan. These principles apply to waiver requests by MA-PD plans 
under section 1857(i) of the Act.
    Generally, we also would not permit waivers that directly increase 
Medicare spending. For example, a section 1860D-22(b) waiver would not 
be permitted that had the effect of changing the definition (in Subpart 
C of our proposed rules) for incurred costs (which are defined for 
purposes of calculating the true out-of-pocket threshold--TrOOP). An 
alternative example of a waiver we would not permit would be a waiver 
that would increase the premium subsidy. We also note that section 
1860D-22(b) applies to ``prescription drug plans,'' not non-Part D 
plans that ``wrap around'' or supplement the benefits provided under, 
the PDP. Consequently, section 1860D-22(b) of the Act would not apply 
to a request to waive rules under this Part that effect an employer-
sponsored non-Part D plan that wraps around a Part D plan, including 
the TrOOP rules. The exclusion of costs paid by group health plans from 
TROOP is irrelevant when the group health plan is itself a part D plan 
(in other words, the exclusion applies when the group health plan pays 
costs not otherwise covered under the part D plan).
    We invite comment on the process we propose for authorizing 
additional waivers that prescription drug plan sponsors can request 
under this section. We also ask for comment on the manner in which 
additional waivers should be permitted and what additional waivers, if 
any, we should not allow.

b. Employer Options

    The enactment of Title I of the MMA has provided sponsors of 
retiree prescription drug plans with multiple options for providing 
drug coverage to their retirees. For the benefit of the employers and 
unions, we discuss these options. We believe the availability of these 
various options will make it easier for sponsors to continue to assist 
their retirees in having access to high-quality prescription drug 
coverage.
    Generally, employers and unions who offer drug benefits to their 
retirees (and their dependents) who are eligible for Medicare Part D 
may do so as follows:
    1. Provide prescription drug coverage through employment-based 
retiree health coverage. If those coverage is at least actuarially 
equivalent to the standard prescription drug coverage under Part D, the 
sponsor is eligible for a special Federal subsidy for each individual 
enrolled in the sponsor's employment-based retiree health coverage who 
is eligible for Part D but elects not to enroll in Part D, directly 
reducing the cost of providing a high-quality drug benefit. It is 
important to note that employers can still make arrangements with 
Medicare Advantage organizations to offer a Medicare Advantage (MA) 
only plan without the Part D benefit, but then still take the retiree 
drug subsidy and through a separate private contract with the MA 
organization arrange for an employer-sponsored retiree drug benefit 
that is not subject to the application of the true out-of-pocket 
provision and retains the employer's flexibility to design a benefit 
that is at least equivalent to the Part D benefit.
    2. Provide prescription drug coverage that supplements, or ``wraps-
around,'' the coverage offered under the PDP or MA-PD plans in which 
the retirees (and their dependents) enroll. For example, this option 
would permit beneficiaries who receive retiree coverage from employers 
who provide some financial assistance, but not enough to qualify for 
the retiree drug subsidy, to supplement the new drug benefit subsidy 
from Medicare with their existing employer assistance and thereby 
receive more generous coverage than they have now.
    3. Subsidize the monthly beneficiary premium for whatever PDP or 
MA-PD plan in which the employer or union's

[[Page 46699]]

retirees (and their dependents) elect to enroll.
    4. Provide a prescription drug plan (PDP) or Medicare Advantage-
prescription drug plan (MA-PD plan) either under contract with a PDP 
sponsor or Medicare Advantage (MA) organization or by directly 
sponsoring a PDP or an MA-PD plan. This plan may consist of enhanced 
alternative coverage (as defined under proposed Sec.  423.104(g)), or 
drug coverage that is more generous than that offered under the 
standard prescription drug coverage under Part D (as defined under 
proposed Sec.  423.104(e)). Medicare would subsidize the cost of this 
coverage through direct and reinsurance subsidies (as calculated under 
proposed Sec.  423.329(a)(1) and (2)). At its option, the employer or 
union may elect to subsidize the monthly beneficiary premium (as 
calculated under proposed Sec.  423.286). Many employers already have 
arrangements with Medicare Advantage plans and we expect that this will 
continue, as well as new arrangements being established.
    The first option is the subject of subpart R of this preamble. The 
latter three options, all of which involve the employer or union's 
retirees (and their dependents) enrolling in Part D, are discussed in 
this subpart.
    We note that if employers or unions elect to sponsor enhanced 
alternative coverage under Part D or to provide supplemental coverage 
that wraps around Part D, either election will have an impact on when 
its retirees (and their dependents) are eligible for the additional 
Medicare subsidies for catastrophic drug coverage. By delaying the 
provision of government-financed catastrophic coverage, these plans 
would lower the cost of Part D to the Federal government by lowering 
our reinsurance payments while preventing beneficiaries from facing any 
gaps in coverage. As discussed in Subpart C, individuals enrolled in a 
PDP or MA-PD plan are eligible for Medicare subsidies on top of their 
employer subsidies for catastrophic drug coverage after they incur out-
of-pocket drug costs in the amount specified under proposed Sec.  
423.104(e)(5)(iii). Under the reinsurance provisions discussed in 
subpart G, Medicare would reimburse PDP sponsors and MA organizations 
offering MA-PD plans 80 percent of their gross costs for providing this 
catastrophic coverage (excluding administrative costs and net of 
discounts, rebates, and similar price concessions). Only drug costs 
paid by a Part D enrollee, or on behalf of a Part D enrollee by another 
person, would count toward the annual out-of-pocket threshold, with the 
exception of amounts reimbursed by insurance or otherwise, a group 
health plan, or another third-party payment arrangement. We refer to 
those drug expenditures that count toward the out-of-pocket threshold 
as ``true out-of-pocket (TrOOP) expenditures.''
    Under these rules, employers and unions who provide retirees (and 
their dependents) enhanced alternative coverage or wrap-around coverage 
in effect push out the total drug spending that triggers the Medicare 
subsidy for catastrophic coverage, since participants in the plan will 
have lower cost-sharing, and thus have lower out of-pocket costs. This 
approach limits the ``crowd-out'' of employer contributions by the new 
Medicare subsidy, resulting in more comprehensive coverage at a lower 
cost to the Federal government by lowering reinsurance payments.
    When an employer or union elects to provide a PDP or MA-PD plan 
under contract with the PDP or MA-PD sponsor, the PDP sponsor, under 
proposed Sec.  423.458(c), or the MA organization, under 42 CFR 
422.106(c), may submit written requests to us for permission to waive 
requirements under Part D that hinder the design of or offering of PDP 
or MA-PD plans to employers. We believe these waivers will help 
efficient administration and integration of their enhanced Part D 
coverage with other retiree health benefits offered by the sponsor. For 
example, the PDP sponsor or MA organization could request permission to 
restrict enrollment in its PDP or MA-PD plan to the sponsor's retirees 
(and their dependents) and offer a benefit that resembles or enhances 
the sponsor's existing coverage. We encourage employers and unions to 
carefully review each option and determine which one is most beneficial 
to it and its retirees (and their dependents). The variety of options 
gives employers many ways to retain and enhance drug coverage for their 
retirees, and we seek comment on how we can use all of these subsidized 
options to maximize enhancements in retiree coverage.

c. Implications for Beneficiaries

    For beneficiaries, the significance of the above discussion, as 
well as of the earlier discussion (in subpart C) of incurred costs that 
count toward the true out-of-pocket threshold, is that these rules 
would lead to new options for drug coverage. All Medicare Part D 
coverage would at a minimum provide basic coverage, funded with a 
generous Federal subsidy that did not exist before. In addition, there 
would be a number of ways in which some beneficiaries can get access to 
more comprehensive benefits, such as filling in any coinsurance 
requirements in coverage in whole or in part. Such access will be 
dependent on individual eligibility for other subsidies or coverage, 
and individual willingness to continue to pay for enhancements in their 
coverage, such as:
     If they are eligible for a more comprehensive retiree 
health benefits policy sponsored by their former employer, their 
retiree plan sponsor may qualify for a subsidy payment.
     If they have limited income, they may be eligible for Part 
D low-income subsidies of premium and cost sharing through a Part D 
plan.
     They may be eligible for financial assistance through a 
State Pharmaceutical Assistance Program that can pay for an enrollee's 
cost sharing and still have these payments count toward the out-of-
pocket limit.
     They may qualify for charitable assistance from bona fide 
non-profit charities that can also pay for an enrollee's cost sharing 
and still have these payments count toward the out-of-pocket limit.
     They may have access to a PDP or MA-PD (through either 
individual enrollment or employer group enrollment) that offers an 
enhanced alternative prescription drug plan for an additional premium. 
In this case, either the plan sponsor and/or the beneficiary must bear 
some of the drug costs that would otherwise have been subsidized by 
Part D reinsurance subsidies. While they would consequently not receive 
the additional subsidy until they reached a higher level of drug 
expenditures, the substantial savings in drug costs as a result of the 
highly subsidized, standard drug benefit would permit such coverage to 
be financed while still saving money for the beneficiary and the plan 
sponsor.
5. Medicare Secondary Payer Procedures
    Section 1860D-2(a)(4) of the Act extends the Medicare secondary 
payer (MSP) procedures applicable to MA organizations under section 
1852(a)(4) of the Act and 42 CFR 422.108 to PDP sponsors. Section 
1852(a)(4) of the Act provides that an MA organization may charge or 
authorize a provider to seek reimbursement for services from a 
beneficiary or third parties to the extent that Medicare is made a 
secondary payer under section 1862(b)(2) of the Act. Accordingly, under 
Sec.  423.462 of this proposed rule, PDP sponsors would be required to 
follow the same rules as MA organizations regarding:

[[Page 46700]]

     Their responsibilities under MSP procedures;
     Collection of payment from insurers, group health plans 
and large group health plans, the enrollee, or other entities for 
covered Part D drugs; and
     The interaction of MSP rules with State laws.
    Because Medicare would not pay for covered Part D drugs to the 
extent that there is a third party that is to be the primary payer 
under the provisions of section 1862(b)(2) of the Act and 42 CFR part 
411, PDP sponsors must, for each prescription drug plan: (1) identify 
payers that are primary to Medicare under section 1862(b)(2) of the Act 
and 42 CFR part 411, (2) determine the amounts payable by those payers, 
and (3) coordinate their benefits to plan enrollees with the benefits 
of the primary payers.
    The PDP sponsor may charge other individuals or entities for 
covered Part D drugs for which Medicare is not the primary payer. If an 
enrollee receives from a PDP sponsor covered Part D drugs that are also 
covered under State or Federal workers' compensation, no-fault 
insurance, or any liability insurance policy or plan, including a self-
insured plan, the PDP sponsor may charge the insurance carrier, the 
employer, any other entity that is liable for payment for the covered 
Part D drugs under section 1862(b) of the Act and 42 CFR part 411, or 
the prescription drug plan enrollee, to the extent that he or she has 
been paid by the carrier, employer, or entity for covered Part D drugs.
    When Medicare, and thus a Part D plan, is secondary to other 
payers, beneficiary costs incurred for covered Part D drugs would not 
be considered ``covered'' costs under the Part D plan. Consequently, 
these costs would be excluded from a beneficiary's incurred costs, as 
described in section II.C.2.a of this preamble and would not count as 
incurred costs against the annual deductible or the out-of-pocket 
threshold.
    When Medicare is a secondary payer to employer coverage in the case 
of certain working Medicare beneficiaries, a PDP sponsor may charge a 
group health plan (GHP) or large group health plan (LGHP) for covered 
Part D drugs it furnishes to a Medicare enrollee who is also covered 
under the GHP/LGHP, and may charge the Medicare enrollee to the extent 
that he or she has been paid by the GHP/LGHP.
    Because Medicare Part D coverage is a Federal program operated 
under Federal rules, State laws do not--and should not--apply, with the 
exception of State laws regarding licensing or related to plan solvency 
or as otherwise provided by statute or regulation. Given the 
requirement in section 1860D-2(a)(4) of the Act that we extend MSP 
procedures applicable to MA organizations to PDP sponsors, PDP sponsors 
would also be permitted, under section 1852(a)(4) of the Act, to fully 
recover from liable third parties according to section 1862(b)(2) of 
the Act. In accordance with section 1860D-12(g) of the Act that extends 
the State preemption provisions under section 1856(b)(3) to Part D, 
under Sec.  423.462 of our proposed rule that mirrors Sec.  422.108(f), 
States would be prohibited from exercising authority over prescription 
drug plans in any area governed by Medicare Part D (including our 
regulations under chapter 423) other than State licensing laws and 
State laws relating to plan solvency. This is consistent with specific 
preemption authority now provided by section 1856(b)(3) of the Act with 
respect to MA organizations.
6. Coordination Of Benefits With Other Providers Of Prescription Drug 
Coverage
    Section 1860D-23(a) of the Act authorizes us to establish 
procedures and requirements to promote the effective coordination of 
benefits between a Part D plan and a State Pharmaceutical Assistance 
Program with respect to payment of premiums and coverage, and payment 
for supplemental prescription drug benefits. We are to establish 
procedures and requirements before July 1, 2005, to ensure effective 
coordination. In developing these procedures and requirements, we are 
to consult with State pharmaceutical assistance programs, prescription 
drug plan sponsors, MA organizations, States, pharmaceutical benefit 
managers, employers, data processing experts, pharmacists, 
pharmaceutical manufacturers, and other experts. In addition, as 
specified at section 1860D-24(a) of the Act and implemented in this 
section of the regulations, we will apply the coordination requirements 
for State pharmaceutical assistance programs to other prescription drug 
plans including Medicaid (including a plan operating under a waiver 
under section 1115 of the Act), group health plans, the Federal 
employees health benefits plan, military coverage (including TRICARE), 
and other coverage that we specify. Under section 1860D-23(c)(1) of the 
Act, coordination between State pharmaceutical assistance programs and 
Part D plans does not change or affect the primary payor status of a 
Part D plan with respect to a State pharmaceutical assistance program. 
Nor does it affect the primary or secondary payment position of the 
Part D plan related to the payments made by other plans providing 
prescription drug coverage. Under the requirements of section 1860D-
11(j) of the Act, Part D plan sponsors will not be permitted to impose 
fees on SPAPs or other plans providing prescription drug coverage that 
are unrelated to the costs of that coordination.
    The elements to be coordinated would include enrollment file 
sharing, claims processing, payment of premiums for both basic and 
supplemental drug benefits, third-party reimbursement of out-of-pocket 
costs, application of protection against high out-of-pocket 
expenditures (defined in section 1860D-2(b)(4) of the Act), and other 
administrative processes and requirements that we specify. Enrollment 
file sharing might include information such as beneficiary name, date 
of birth, health insurance claim number, sex, name and address of 
benefit administrator, insured's identification number, electronic 
transaction routing information (RxBin, RxPCN, RxGRP), group number, 
patient relationship, and coverage effective dates. Claims processing 
information might include collecting information similar in nature to 
that currently contained in a Medicare provider Remittance Advice 
statement. Information must be sufficient to successfully link with 
enrollment files and in order to allow Part D plans to make a correct 
determination of true out-of-pocket (TrOOP) expenditures on the part of 
beneficiaries.
    On rare occasions Part D plans would also be required to coordinate 
benefits with other Part D plans. In the event that a beneficiary 
disenrolled from one plan mid-year and enrolled in another, the two 
plans would be required to exchange information sufficient to allow the 
beneficiaries' claims to be processed as if there had been no break in 
enrollment. Specifically, the second plan would need to obtain the 
enrollee's claim data and adjust its claims processing system 
accumulators to reflect that a certain level of expenditures and out-
of-pocket costs had already been incurred in order that the correct 
sequence of claims processing could be maintained. This is not to say 
that the second plan could claim the first plan's costs as their own 
allowable costs, but that their systems would process future claims as 
if the earlier costs had been incurred by the second plan. We solicit 
comments on any other issues that may be involved in

[[Page 46701]]

coordination of benefits between Part D plans.
    We may impose user fees for the transmittal of information 
necessary for benefit coordination related to third party reimbursement 
(other than by a SPAP) of Part D enrollees' costs for covered Part D 
drugs. Please see our later discussion on options we are considering 
related to coordination of benefits under the Part D program and also 
the critical nature of securing accurate and timely information for 
purposes of the TrOOP calculation. As we mention in that discussion, 
the statute permits us to impose user fees on the employer (or other 
third party) plan, but not on SPAPs under any method of operation, for 
the transmittal of benefit coordination information under Part D. 
Section 1860D-24(a)(3) of the Act specifically provides authority for 
imposing user fees under Part D similar to the authority under section 
1842(h)(3)(B) of the Act for collection of user fees (otherwise known 
as ``claim-based cross-over fees'') under fee-for-service coordination 
with Medicare supplemental policies. However, we are also provided 
authority to retain a portion of these users fees to offset costs we 
incur for determining whether enrollee out-of-pocket costs are being 
reimbursed by third parties and for alerting Part D plans when, in 
fact, they are being reimbursed.
    As we also later discuss in this preamble, any user fees, if 
collected, would not be assessed until the benefit is implemented in 
2006. Before that time, we will fund the development and implementation 
of coordination of benefit requirements. We will also fund the 
development and implementation of a system to assist in the 
coordination of benefits--if and when it is determined that our 
development of the system is the appropriate option. We request comment 
on the method we should employ in imposing user fees and especially 
concerning whether it would be advisable to impose user fees on a 
monthly or quarterly basis based on the volume of data exchanged, and 
whether we should require electronic payment of user fees.
    In section 1860D-24(c)(1) of the Act, a Part D plan sponsor may 
continue to use cost management tools (including differential payments) 
when administering benefits. This could include cost management tools 
related to managing supplemental benefits financed by a State 
pharmaceutical assistance program or another plan providing 
prescription drug coverage offered through a Part D plan. However, we 
believe that the intent of the statute at section 1860D-24(c)(1) of the 
Act is clear in allowing Part D plans to continue to use cost 
management tools (such as tiered or differential cost sharing) even if 
an SPAP or other drug plan provides wrap-around or supplemental 
coverage for individuals enrolled in the Part D plan. We solicit 
comment on how we can ensure that wrap-around coverage offered by SPAPs 
and other insurers does not undermine or eliminate the cost management 
tools established by Part D plans. We also request comment on the most 
effective way to administer this provision without creating undue 
administrative burden on either Part D plans or the SPAPs and other 
insurers that might choose to provide wrap-around coverage for eligible 
individuals.

a. Coordination With SPAPs

    The statute envisions a closer coordination of benefits between 
SPAPs and Medicare drug plans. For example, as provided in Sec.  1860D-
23(c) and in Sec.  423.464(e)(3), a Part D enrollment card may also be 
used to access benefits under an SPAP, and the SPAP's emblem may be 
used on the card. Additionally, payments for beneficiary cost sharing 
made by an SPAP may be counted toward the incurred costs that count in 
the calculation of the true out-of-pocket (TrOOP) threshold in 
providing protection against catastrophic costs as provided in Sec.  
1860D-2(b)(4)(C)(ii) and in Sec.  423.464(e)(2) of this proposed rule. 
SPAPs have filled a significant gap in prescription drug coverage for 
many Medicare beneficiaries in the absence of a Medicare drug benefit. 
Now that so many States are involved and so many beneficiaries have 
relationships with these programs, it will be important to ensure that 
coordination between Medicare Part D and SPAPs occurs as efficiently 
and effectively as possible. However, section 1860D-23(c)(5) of the Act 
provides that nothing in the statute should be construed to require 
that a State Pharmaceutical Assistance Program coordinate or provide 
financial assistance with respect to any Part D plan.
    For purposes of this part, we are proposing that a Pharmacy Plus 
demonstration waiver program under section 1115 of the Act not be 
considered an SPAP. We grant Pharmacy Plus waivers that allow States to 
treat individuals participating in these waiver programs as Medicaid 
eligible only for the purpose of receiving prescription drug and 
primary care services. We do not believe that Pharmacy Plus waiver 
programs should be considered SPAPs. The statute makes a clear 
distinction between SPAPs, defined in section 1860D-23(b) of the Act, 
and the Medicaid program (which includes State plans operating under 
Title XIX of the Act as well as State plans operating under a waiver 
under section 1115 of the Act) described in section 1860D-24(b)(1) of 
the Act. In so far as the Pharmacy Plus waiver programs operate under 
1115 waivers, they are considered part of the Medicaid program and thus 
are not considered SPAPs. This distinction is important for purposes of 
the application of TrOOP. Section 1860D-2(b)(4)(C)(ii) of the Act is 
clear in allowing only a person, CMS, or an SPAP to make payments that 
will count toward TrOOP for an individual Part D enrollee. In so far as 
beneficiary cost sharing is reimbursed under Title XIX of the Act, 
including a waiver operating under section 1115 of the Act, or through 
any other mechanism including public assistance, it cannot be counted 
toward TrOOP. However, since the MMA allows states to use state-only 
SPAP funds to assist beneficiaries with out-of-pocket expenditures, 
States would be better off using their current contributions to wrap 
around the Federal Medicare Part D benefit than in continuing their 
Pharmacy Plus programs.
    Medicare Part D plans may coordinate with SPAPs in a number of ways 
including accepting premiums for basic Part D or enhanced alternative 
coverage; accepting a lump sum per capita payment from the State for 
enrollee coverage through Part D plans; and coordinating on a claim-
specific basis when Part D plan pays first and the SPAP is the 
secondary payor. All data exchanges between SPAPs and Part D plans are 
to be consistent with applicable privacy laws, in order to ensure the 
confidentiality of individually identifiable beneficiary information. 
In accordance with section 1860D-23(c)(2) of the Act, and in order to 
help coordination between State pharmacy assistance programs and Part D 
plans, a single card may be used to access benefits under both Part D 
and State pharmacy assistance programs. These cards may contain an 
emblem or symbol indicating that a connection between the two programs 
exists. We do not know how SPAPs will actually choose to coordinate 
with Medicare drug plans, and we welcome comment in this regard--
particularly from States. We would like to better understand what SPAPs 
plan to do in 2006 relative to Part D interaction (such as in payment 
of premiums or claim-specific wrap-around), and how Medicare can assist 
State preferences in this regard. Our goal is to make the coordination 
of benefits process as functional for the

[[Page 46702]]

beneficiary, pharmacy, and States as possible.
    We assume that some SPAPS will pay Part D plans' premiums on behalf 
of enrollees. For SPAPs that choose to wrap-around coverage rather than 
paying premiums, we propose to include SPAP information in a 
coordination of benefits system described below. In this way, 
pharmacies will know that a claim should be sent to the SPAP following 
adjudication by the Part D plan.
    We request comment on this proposed approach, including the 
feasibility of the approach for SPAPs and the ease of administration 
for pharmacies. We also request comment on whether or not SPAPs that 
choose to coordinate benefits on a wrap-around basis should be required 
to provide feedback on how much of the remainder of the claim they have 
actually paid. Since SPAP payments count as true out-of-pocket spending 
toward catastrophic coverage, the Part D plans could simply assume that 
any amounts not paid by the Part D plan and sent to an SPAP for 
reimbursement would count toward calculating TrOOP. We are concerned 
that we may need information from SPAPs to determine more precisely the 
SPAP contribution or payment. But we are also mindful of systems 
implications for States and would appreciate comments in this regard, 
particularly from SPAPs.

b. Coordination With Other Prescription Drug Coverage

    Other plans providing prescription drug coverage that Part D plans 
would need to coordinate with are any of the following (1) Medicaid 
programs (including a State plan operated under a waiver under section 
1115 of the Act); (2) Group health plans, as defined in Sec.  411.101; 
(3) FEHBP; (4) Military Coverage (including TRICARE) under chapter 55 
of title 10 of the United States Code; and (5) other prescription drug 
coverage as we specify. We discuss coordination issues in detail in 
sections (d) and (e), below.
    There is a relatively limited applicability of coordination of 
benefits between Part D plans and State Medicaid programs under the 
statute. The drugs that must be excluded from Medicare coverage are, 
with limited exception, drugs that may also be excluded from Medicaid 
coverage under section 1927(d)(2) of the Act. We anticipate that there 
may be situations involving State Medicaid programs that choose to 
continue coverage of a drug that is excluded from Medicare Part D 
coverage. For example, States may wish to continue coverage for 
barbiturates, benzodiazepines, or prescription vitamins. In these 
situations, a Part D plan providing primary coverage would need to 
coordinate this coverage with a State on behalf of a dually eligible 
beneficiary. We request public comment on other situations that may 
involve benefit coordination between States and Part D plans (other 
than situations where the State is acting as an employer). In general, 
we invite comment on the other administrative processes and 
requirements that we might identify in order to help coordination 
between Part D of Medicare and other prescription drug plans.

c. Coordination of Benefits

    Sections 1860D-23(a)(1) and 1860D-24(a)(1) of the Act require that, 
by July, 1, 2005, we establish requirements for coordination of 
benefits between Part D plans and SPAPs and other insurers including 
Medicaid programs, group health plans, the Federal Employees Health 
Benefits Plan (FEHBP), military coverage (including TRICARE), and other 
coverage we may specify at a later date. As discussed previously, the 
elements that are to be coordinated must include: Enrollment file 
sharing; claims processing and payment; application of the protection 
against high out-of-pocket expenditures (by tracking TrOOP and the 
annual out-of-pocket threshold); and, other processes we specify.
    We envision a system of information sharing between Medicare, Part 
D plans, SPAPs, group health plans, insurers, and other third-party 
arrangements. Our goal is that the design and implementation of a Part 
D coordination of benefits system enable pharmacies to obtain 
information about secondary insurers as well as the correct billing 
order. Ideally, we would anticipate that a pharmacy would query the 
system and be provided with information it can use to bill all the 
insurers involved in the correct order, as well as ascertaining and 
applying the correct TrOOP calculation in order to assess the correct 
beneficiary co-payment at the point of service. Since prescription drug 
benefits are administered at the point of sale, coordinating insurance 
coverage at the point of sale is a technical communications challenge. 
In the case of administering a drug benefit, the goal is that the 
beneficiary pays the correct coinsurance or co-payment at the point of 
sale and that the pharmacy is subsequently reimbursed the correct 
amount from the other source or sources. Unlike coordination of 
benefits under Medicare when data is exchanged in only a single 
direction (from Medicare to the employer or other insurer), 
coordination of benefits for beneficiaries enrolled in Part D plans 
must include a reliable feedback loop of paid claims data from the 
employer, union or other insurer back to the Part D plan for purposes 
of tracking TrOOP. Additionally, given the real-time claims environment 
for pharmacy benefits, the feedback would ideally be in real-time so 
that beneficiary liability (if any) can be known at the point of sale, 
the correct insurer pays the correct share of the total drug cost, and 
the TrOOP calculation can be updated as quickly and accurately as 
possible. This suggests the need for an organized system to share, 
update, and push data back and forth between pharmacy benefit managers 
and pharmacies. This will be further discussed in the section on 
tracking true out-of-pocket (TrOOP) costs, below.
    As mentioned above, under section 1860D-23(c)(1) of the Act, 
coordination between State pharmaceutical assistance programs and Part 
D plans does not change or affect the primary payor status of a Part D 
plan with respect to a State pharmaceutical assistance program. Nor 
does it affect the primary or secondary payment position of the Part D 
plan related to the payments made by other plans providing prescription 
drug coverage. Part B of Medicare has historically included limited 
coverage of certain outpatient prescription drugs. Part A of Medicare 
covers prescription drugs more extensively, but only when an individual 
is an inpatient in a Medicare-certified facility receiving Medicare-
covered inpatient care. In additional circumstances, for instance when 
a person has elected Medicare hospice coverage, prescription drugs are 
also covered under original Medicare.
    The new statutory definition of a covered Part D drug excludes 
drugs covered and paid for under Part A or Part B of Medicare for a 
given individual. Section 1860D-2(e)(2)(B) of the Act provides that a 
drug that would otherwise be a covered Part D drug will not be so 
considered if payment for the drug as so prescribed and dispensed or 
administered is available under Parts A or B for that individual. This 
language indicates that the Congress was aware that some drugs could 
qualify for payment under Part A or B in some circumstances, and Part D 
in other circumstances, depending on setting of dispensing or 
administration. This means, for example, that if a form of 
administration of a drug is covered under Part B in a region when 
injected incident to a physician office visit, that drug administered 
in that manner in that setting cannot meet the definition

[[Page 46703]]

of a covered Part D drug. However, that same drug can be covered under 
Part D when picked up at a retail pharmacy to be self-administered by 
the patient. For another example, in certain instances a drug could be 
covered under Part B at certain times and under Part D at other times. 
Many patients, for instance, take their medicines at specific times 
throughout the day. If these patients receive a service in a hospital 
outpatient department and remain in the hospital for several hours of 
post surgery observation, he/she may receive one or more doses from the 
hospital pharmacy. This medication would be considered part of their 
Part B service and covered under the hospital OPD payment.
    We note that individuals can elect Part D of Medicare if they are 
entitled to Part A or enrolled in Part B. This means that individuals 
with only Part A or only Part B will still have access to Part D. 
Although most Medicare beneficiaries have both Parts A and B, there are 
nearly 2 million Medicare beneficiaries who have only Part A, while 
there are approximately 500,000 Medicare beneficiaries who have only 
Part B. We interpret the definition of covered Part D drug to exclude 
coverage under Part D for drugs otherwise covered and available under 
Parts A or B for individuals who choose not to enroll in either 
program. We interpret the words ``payment is available'' to mean that 
payment would be available to any individual who could sign up for A or 
B, regardless of whether they are actually enrolled. All individuals 
who are entitled to premium-free Part A are eligible to enroll in Part 
B. This includes individuals who are entitled to Part A based on age, 
disability, and ESRD. All individuals who are entitled to Part B only 
are age 65 and, in almost all instances, not eligible for premium-free 
Part A. However, they are eligible to buy into Part A for a premium. 
Thus, for all Part D individuals, Part A drugs and Part B drugs are 
``available'' if they choose to pay the appropriate premiums. 
Consequently, Part D would not be required to pay for drugs covered 
under Parts A and B on the basis of a Part D eligible individual's 
status with regard to Parts A and B. In addition, we believe that the 
phrase ``for that individual'' in Sec.  1860D-2(e)(2)(B) of the Act is 
intended to capture the fact that under local medical review policies, 
a drug that might be covered under Part B for an individual in one area 
of the country may not be covered under Part B in another area of the 
country. Thus, what is covered ``under Part B for that individual'' may 
be different in different geographic regions. The result of these 
interpretations would be that any drug covered under A or B could not 
be covered under D, whether it was covered for that individual or not.
    We would wish to ensure that Part D coverage coordination works 
seamlessly for beneficiaries with Parts A and B of Medicare, and that 
beneficiaries do not lose Medicare coverage otherwise available to them 
due to unforeseen difficulties encountered in the coordination process. 
This is a critical consideration for effective and efficient 
coordination between the original Medicare program and the new coverage 
provided under Part D. Specific options concerning coordination of 
benefit procedures that we are considering are outlined below.
    Pharmacy-dispensed drugs covered by Part B (for instance, DME 
drugs, immunosuppressive drugs, and oral anti-cancer drugs) are not 
reimbursed unless the pharmacy has a Medicare supplier number; thus, a 
beneficiary could lose Part B coverage by filling a prescription at the 
wrong pharmacy. (We recognized this problem in the interim final rule 
on the discount card program and stated that, for drugs potentially 
covered by Part B, ``non-Medicare participating pharmacies should refer 
the beneficiary to a participating pharmacy.'' See 68 FR 69840, 69852). 
To reduce this risk, we are proposing to--
    1. Encourage Part D plans to enroll pharmacies with Medicare 
supplier numbers in their networks;
    2. Encourage Part D plans to inform beneficiaries whether their 
network pharmacies have a Medicare supplier number, and explain why 
this is important when filling prescriptions for drugs potentially 
covered by Part B; and
    3. Develop educational materials reminding pharmacies without 
Medicare supplier numbers that they must refund any payments collected 
from beneficiaries enrolled in Part B for Part B drugs unless they 
first notify the beneficiary (through an advanced beneficiary notice 
(ABN)) that Medicare likely will deny the claim.
    Statutory ``refund requirements'' apply to claims for ``medical 
equipment and supplies'' that Medicare denies because the supplier 
lacked a supplier number, unless--
    1. The beneficiary signed an ABN notifying him or her that Medicare 
would deny payment, and agreed to be personally responsible for 
payment; or
    2. The supplier did not know and could not reasonably have known 
that Medicare would deny payment.
    For this purpose, coverage of medical equipment and supplies 
includes durable medical equipment (DME), certain drugs and other 
supplies necessary for use of an infusion pump, oral immunosuppressive 
drugs and anti-cancer drugs, and ``such other items as the Secretary 
may determine.'' (See the Medicare Claims Processing Manual, Chapter 
30, sections 150.1.3 and 150.1.5.) Suppliers are presumed to know that 
Medicare will not pay for medical equipment and supplies furnished by a 
supplier that lacks a supplier number. (See section Sec.  150.5.4 of 
Chapter 30 of the Medicare Claims Processing Manual.) We are 
considering whether a drug denied Part B coverage for this reason 
should become a covered Part D drug, and the claim should thus be 
processed under Part D, and would like to receive comments on the 
relative likelihood of this occurrence and on alternative means of 
addressing such circumstances.
    We are also considering whether a drug denied Part B coverage for 
any other reason should become a covered Part D drug. For instance, we 
believe that a drug denied Part B coverage and payment for therapeutic 
inappropriateness, drug-disease contraindication, incorrect drug 
dosage, duration of drug treatment or for similar reasons related to 
medical necessity should not be considered a covered Part D drug. 
Rather, we believe that such a denial or non-coverage decision under 
Part B, while appealable under Part B, would not cause the drug to 
become a covered Part D drug. We welcome comment in this area.
    For drugs potentially covered by Part B that are dispensed by a 
pharmacy that is a Medicare supplier, we are considering the 
development of automatic cross-over procedures. That is, we are 
considering requiring that: (1) The pharmacy submit the claim to the 
appropriate Part B carrier; and (2) the carrier, if it denies the 
claim, submit the claim automatically to the PDP (or its claims 
processing agent) through which the beneficiary has Part D coverage. 
This assumes that the beneficiary receives Part D through a PDP. For 
beneficiaries enrolled in MA-PD plans, coordination of benefits will 
generally occur internally within the MA organization. (Similar cross-
over procedures are used today in connection with dual-eligibles--
individuals entitled to both Medicare and Medicaid and related to 
coordination between Medicare and Medicare supplemental insurers.)
    We also believe that similar cross-over procedures for any 
physician-administered drugs that may be covered under Part B or Part D 
will need to be developed. This would involve: (1) The physician 
submitting the claim to the appropriate Medicare carrier; and (2) the

[[Page 46704]]

carrier automatically submitting the claim to the Part D plan (or its 
claims processing agent) if it denies payment under Part B. We 
particularly welcome comment on the feasibility of these proposed Part 
D and Part B coordination of benefits proposals and welcome suggestions 
on other methods or procedures that might be more efficient or better 
suited to coordination of prescription drug benefits.
    Another type of coordination of benefits occurs when Medicare pays 
secondary to another insurance (MSP). Medicare currently pays secondary 
when payment has been made or can reasonably be expected to be made by 
another party such as workers compensation, automobile insurance, a 
liability insurance policy, or another health insurance policy (for 
example, when a beneficiary's spouse has primary insurance through 
their employment). Beneficiaries provide information, when available, 
regarding third party coverage as part of the initial enrollment 
questionnaire. Medicare also attempts to identify additional situations 
in which Medicare should pay secondary, and when we believe this is the 
case we follow up with employer plans for information. We do not 
anticipate significant changes to this mechanism, except that Medicare 
will now, in relatively limited circumstances, pay secondary for a Part 
D beneficiary who has other insurance. We do not know how many 
beneficiaries with employer-sponsored insurance that is the primary 
payor to Medicare will enroll in Part D. We do know that approximately 
two-thirds of individuals with primary employer-sponsored insurance do 
voluntarily pay for Part B coverage. We request public comment on the 
likelihood that beneficiaries with primary employer-sponsored insurance 
will elect Part D. We believe that the number of instances where 
automobile, workers' compensation or liability insurance will be paying 
primary on behalf of Part D enrollees will be relatively small. So, 
generally, we believe that most instances of coordination of benefits 
of under Part D will occur when Medicare is primary and another insurer 
is secondary.

d. Collection of Data on Third Party Coverage

    Section 1860D-2(b)(4)(D)(i) of the Act authorizes us to establish 
procedures for determining whether a beneficiary's Part D out-of-pocket 
costs are actually reimbursed by a group health plan, insurance or 
otherwise, or another third-party arrangement. These procedures provide 
for--
     Determining whether costs for a Part D enrollee are being 
reimbursed through insurance or otherwise, a group health plan, or 
other third-party arrangement; and Alerting Part D plans in which 
beneficiaries are enrolled about reimbursement of prescription drug 
costs they receive through insurance or otherwise, a group health plan, 
or other third party arrangement.
     Section 1860D-2(b)(4)(D)(ii) of the Act permits Part D 
plans to request information on third party insurance from 
beneficiaries. We would expect Part D plans to update Medicare records 
based on the information provided by beneficiaries to reflect changes 
in coverage, including the primary or secondary status of such coverage 
relative to Medicare. As discussed in the subpart B preamble, 
beneficiaries who materially misrepresent (as defined in standards and 
processes we propose to establish in Sec.  423.108(b)(4)(iv) of the 
proposed rule) information on third parties may be disenrolled from any 
Part D plan for a period specified by CMS and may also be subject to 
late enrollment penalties upon enrollment in another plan.
    In the current Medicare fee-for-service claims processing 
environment, coordination of benefits when Medicare is the primary 
payor and another insurer is secondary (for example, employer-based 
retiree insurance, Medicaid, or Medigap) is performed as a convenience 
to the beneficiary and employer plan (coordination of benefits is 
required by statute for claims involving Medigap plans) and is 
voluntary on the part of the employer plans. The coordination of so-
called ``cross-over'' claims is a one-way communication of claims 
information from Medicare to the secondary plan. This ``cross-over'' 
does not occur in real time. Instead, Medicare communicates with 
employer plans on a batch basis, and claims information may not reach 
the secondary insurer until weeks after the covered service is 
rendered. Coordination of benefits is, nonetheless, a valuable service 
to employers and Medicaid since these payors get an electronic claim 
that has already been subjected to claims edits and on which Medicare 
has already paid its portion. As a matter of fact, the service is so 
cost effective that employers willingly pay Medicare for the ``cross-
over'' service. We have agreements with numerous employers purchasing 
``cross-over'' data. In 2004 Medicare expects approximately 550 million 
Part A and Part B claims to ``cross-over'' to a secondary insurers 
including Medigap, Medicaid, employers, other insurers, and third party 
administrators providing wrap-around coverage.
    Section 1860D-2(b)(4)(D)(i) of the Act authorizes us to establish 
procedures for determining if costs for Part D enrollees are reimbursed 
by other payors, and for alerting Part D plans about such arrangements. 
This provision could be read to mean that we only have to determine the 
presence of alternative coverage and merely has to alert Part D plans 
of such. However, it could also be read to mean that we have to 
determine if specific claim costs have been reimbursed by alternative 
coverage. In contrast, section 1860D-24(a) of the Act directs us to 
establish requirements for Part D plans to coordinate benefits with 
other payors in the same manner as we are directed to coordinate Part D 
benefits with SPAPs. This provision could mean that the responsibility 
for coordination of benefits lies with the Part D plans. However, 
section 1860D-24(c)(2) of the Act provides that the requirements of 
section 1860D-24 shall not affect the application of procedures 
established under section 1860D-2(b)(4)(D) of the Act. This arguably 
preserves the flexibility CMS has under the later section to impose 
requirements on alternative coverage arrangements. In addition, section 
1871 of the Act generally authorizes us to prescribe such regulations 
as may be necessary to carry out administration of the insurance 
programs under title XVIII of the Act that now includes Part D.
    We assume that employer and union plans may respond to the new 
Medicare prescription drug benefit in a number of ways. We expect that 
many of the employers and unions that currently provide supplemental 
drug coverage to their retirees will opt to pay premiums to Part D plan 
sponsors. In today's Medicare Advantage market, the most prevalent 
model is one that employers and unions pay premiums to MA 
organizations. We expect this model to continue to have wide appeal 
under Part D. In the case of the PDP market, while many employers and 
unions may choose to pay premiums to PDPs for Part D for their 
retirees, others may choose to coordinate benefits with PDPs. In 
general, employers and unions that continue to offer assistance to 
Medicare-eligible retirees will either (1) provide qualified coverage 
of prescription drugs in such a way that retiree-beneficiaries do not 
need to enroll in Part D of Medicare, in which case the employer may 
qualify for a Federal subsidy under section 1860D-22(a) of the Act; or 
(2) provide assistance that requires retiree-beneficiaries to enroll in 
Part D (either by paying Part D basic or supplemental

[[Page 46705]]

premiums); or (3) provide supplemental (``wrap-around'') benefits 
through alternative secondary coverage. The last option has 
implications for coordination of benefits between Part D plans and 
employer/union-sponsored retiree drug coverage, and in particular, on 
the accurate processing of claims with respect to the out-of-pocket 
threshold.

e. Tracking True Out-of-Pocket (TrOOP) Costs

    As we discuss in the preamble to subpart C of this rule, section 
1860D-2(b)(4)(C) of the Act provides that beneficiary costs for covered 
Part D drugs are only considered incurred when those costs are incurred 
by a Part D enrollee for covered part D drugs covered under (or treated 
as covered under) a Part D plan that are not paid for under the Part D 
plan due to the application of any annual deductible or other cost-
sharing rules for covered part D drugs prior to the Part D enrollee 
satisfying the out-of-pocket threshold under proposed Sec.  
423.104(e)(5)(iii), including any price differential for which the Part 
D enrollee is responsible under proposed Sec.  423.120(a)(6) and Sec.  
423.124(b)(2). Further, section 1860D-2(b)(4)(C)(ii) of the Act 
provides that costs shall be treated as incurred by a Part D eligible 
individual only when they are paid by another person (such as a family 
member, on behalf of the individual) and the individual (or other 
person) is not reimbursed by insurance or otherwise, a group health 
plan, or other third-party arrangements, with the exception of amounts 
reimbursed by a SPAP or under the low-income subsidy provided for under 
proposed Sec.  423.782. We refer to beneficiary expenditures for 
covered Part D drugs meeting these requirements as ``true out-of-pocket 
costs'', or TrOOP. We are considering a number of options for 
facilitating the exchange of data needed to track TrOOP, and will 
discuss alternatives around both mandatory versus voluntary reporting 
of claim and out-of-pocket costs, and centralized versus distributed 
responsibility for tracking the information in the extended discussion, 
below.
    The case in which the employer or union arranges wrap-around 
coverage through a third party administrator or insurer other than 
through a Part D plan in which the retiree-beneficiary is enrolled is 
the potentially complex and challenging to administer, especially given 
the true out-of-pocket costs (TrOOP) requirements. The degree of 
difficulty in making coordination of benefits work with respect to 
wrap-around coverage is related to the ability of plans to efficiently 
coordinate insurance coverage at the point of sale. We cannot estimate 
the number of employer/labor plans that might choose to wrap-around 
prescription drug coverage other than through a Part D plan. We welcome 
comment that would help us estimate the scope and impact of such 
coverage, as well as the impact on the operational capabilities of 
plans (and their subcontractors).
    Medicare Part D plans will need to be particularly involved with 
employer/union plans that wrap-around Part D coverage due to the 
implications such wrap-around coverage has for administering TrOOP 
maximums. Payments made on behalf of a beneficiary by a third party 
(such as by employer/labor-sponsored supplemental prescription drug 
coverage) are not considered incurred costs and, therefore, do not 
count in the TrOOP calculation. Thus, employer/labor-sponsored wrap-
around coverage effectively pushes out the total spending ``attachment 
point'' or starting point at which protection from high out-of-pocket 
beneficiary expenditures begins.
    As discussed in subpart G of this preamble, although Part D plans 
will receive reinsurance payments from us for a portion of the costs 
they incur for prescription drug coverage provided to beneficiaries 
after the true out-of-pocket threshold has been met, Part D plans will 
also bear ``risk'' for a portion of the costs they incur above the 
threshold. The critical nature of the TrOOP calculation makes 
coordination of benefits under the Part D program of vital interest to 
all parties. Both CMS and Part D plans must know how much an employer/
union-based plan or other plan pays on a prescription drug claim 
following adjudication of that claim by the Part D plan. Likewise, 
beneficiaries have a vested interest in the TrOOP calculation due to 
the financial relief they receive after meeting the annual out-of-
pocket threshold.
    Responsibility for tracking TrOOP costs is somewhat unclear. On the 
one hand, the government is given authority to establish procedures for 
tracking TrOOP costs. For instance, as we discuss later in this 
preamble section and as we propose to codify in regulation at Sec.  
423.464(c), section 1860D-24(a)(3) of the Act authorizes us to impose 
user fees for disseminating information necessary for benefit 
coordination. On the other hand, responsibility for obtaining and 
applying the necessary information to prescription drug claims is 
assigned to the Part D plan sponsors. It is of great importance to 
establish clear responsibilities for TrOOP tracking and calculation 
processes in regulation in order to ensure that qualified beneficiaries 
receive appropriate coverage once they have met the out-of-pocket cost 
limit.
    There is sufficient ambiguity in the statutory language to support 
a proposal to mandate that group health plans, insurers, and otherwise, 
and other third-party arrangements provide claims data for Part D 
enrollees to us for purposes of administering TrOOP. Exercising such 
authority would not be in violation of HIPAA confidentiality 
requirements. However, exercising such authority would impose 
administrative burden on group health plans, insurers, and otherwise, 
and other third-party arrangements that provide coverage or 
reimbursement of health care expenses to Medicare Part D beneficiaries. 
Moreover, mandatory reporting of enrollment file and claims data will 
not be sufficient, in and of itself, to capture all forms of enrollee 
cost-sharing reimbursement.
    For instance, if the third party reporting of claims payments and 
reimbursements are strictly voluntary, serious challenges to 
implementing a system for tracking TrOOP will continue to exist. A 
voluntary system would be incomplete and all payors that rely on 
voluntarily reported data would need to have back-up procedures for 
accounting for initially unreported data. A voluntary system would also 
leave CMS and Part D plans open to criticism that the data is 
incomplete and that benefits paid out based on TrOOP calculations are 
inaccurate. However, group health plans, insurers and otherwise, and 
other third-party arrangements might prefer a voluntary system.
    By way of comparison, the current (voluntary) Medicare Secondary 
Payor (MSP) program achieves $4.5 billion in savings. This means that 
there is some compliance with the provisions even though there is no 
mandatory insurer-reporting requirement. However, under the MSP 
provisions there are enforcement provisions. There are tax penalties 
for non-compliance with the MSP rules. In addition, there is a mandated 
reporting of some information through the IRS/SSA/CMS data match 
project that obtains tax and spousal information from the IRS and SSA. 
Our contractor then sends the employer a questionnaire concerning the 
identified Medicare beneficiary or spouse of a beneficiary to determine 
if there is coverage that is primary to Medicare. Failure to complete 
the questionnaire can result in the imposition of a Civil Monetary 
Penalty. However, even with these enforcement provisions, it is 
estimated that Medicare is still losing millions of dollars where 
employer

[[Page 46706]]

plans should be primary. Payments made by plans primary to Medicare 
under the Medicare Secondary Payer provisions 1862(b) would not count 
against the TrOOP.
    In the cross-over area discussed previously in this section of the 
preamble, we are more successful, but there are still numerous payers 
who do not have cross-over agreements with us. So although there is 
substantial participation related to cross-over claims, there is also 
significant room for improvement. In the context of the current 
discussion, the issue is primarily that the sending of paid claims data 
to us for its use in the TrOOP calculation will be an added 
administrative cost on third-party payers, which (without explicit 
reporting requirements in the statute or an even an enforcement 
mechanism) may lead to lower compliance.
    We are considering the following options for operationalizing the 
data exchange related to the Part D coordination of benefits system and 
TrOOP accounting:
    Option 1: The PDPs and MA-PD plans would be solely responsible for 
tracking TrOOP costs. This option places the entire responsibility for 
tracking TrOOP costs with the PDPs and MA-PD plans. As part of their 
overall benefit management responsibility they would be responsible for 
establishing the systems infrastructure and ensuring that all data 
points are reporting timely and accurate data about beneficiaries' Part 
D costs. Each PDP and MA-PD plan must establish arrangements with all 
payers for enrollment file sharing and claims payment information 
exchanges. This coordination applies equally to plans that are primary 
or secondary payer to Medicare. Under this scenario, any payer who had 
a beneficiary on behalf of whom they expected to make either a primary 
or secondary payment to Medicare Part D would need to be able to (1) 
identify the Part D plan in which the beneficiary was enrolled, (2) 
establish the telecommunications links; (3) transmit enrollment 
information to the specific PDP or MA-PD plan in which their covered 
individual is enrolled, and (4) transmit claims payment data to the PDP 
or MA-PD each time a claim was paid which may need to be included in 
the TrOOP calculation. Data collected by a PDP or MA-PD plan would be 
annotated to the Medicare Beneficiary Database and be available to 
pharmacies for the purposes of proper billing.
    Option 2: We would procure a TrOOP facilitation contractor to 
establish a single point of contact between payers, primary or 
secondary. Under this scenario, we would procure a TrOOP facilitation 
contractor based on a strategy of voluntary compliance, similar to the 
existing MSP coordination of benefits model. We would procure a 
contractor to receive enrollment and claims payment information from 
all plans primary and secondary to Medicare. This would establish a 
single point of contact between the Medicare program and employers, 
State Pharmacy Assistance Programs, as well as primary and secondary 
payers for enrollment and claims payment information.
    Under this single point of contact option, a payer primary or 
secondary to a Part D plan would be required to send an enrollment file 
to the TrOOP facilitation contractor (a contractor procured by us). The 
TrOOP facilitation contractor would match the payer enrollment 
information to Medicare enrollment records and update the Medicare 
Beneficiary Database with the information. The other payer enrollment 
file information would also be used the TrOOP facilitation contractor 
to match claims payment data which would also be submitted to the TrOOP 
facilitation contractor. Once a claim was matched against the 
enrollment data, the TrOOP facilitation contractor would aggregate the 
claim records files by Part D plan and transmit the information. The 
PDP or MA-PD plan would be responsible for using the data in applying 
the TrOOP and applying other TrOOP requirements such as the application 
of a formulary.
    PDPs and MA-PD plans would also request information about other 
coverage during the enrollment process and could add change or delete 
information input into the system by the TrOOP facilitation contractor. 
We can use existing fee-for-service coordination of benefits processes 
to implement many of the processes needed to implement these 
provisions. Information concerning primary and secondary plans would be 
shared with and PDPs and MA-PD plans, as well as annotated in the 
Medicare common working file/Medicare Beneficiary Database to enhance 
pharmacy billing and beneficiary customer service.
    Under either option, we would enter into voluntary data sharing 
agreements with employers/unions and other plans to participate in a 
shared system. The same mechanism would accept information provided 
directly by Part D plans, SPAPs, group health plans, FEHBP, military 
plans, and other insurance or payors as we may specify.
    We are committed to ensuring that claims are processed 
appropriately under Part D. Therefore, to foster proper billing and 
coordination of benefits we are also considering the establishment of 
the Medicare beneficiary eligibility and other coverage query system 
using the HIPAA 270/271 eligibility query. Information collected under 
this section for the purpose of TrOOP application would be available to 
be queried by pharmacies to facilitate proper billing. We are concerned 
that with the significant expansion of health care options available to 
beneficiaries that providing information to pharmacies about Medicare 
and other coverage is essential to facilitate proper claims processing. 
We are requesting comments concerning the development of this system.
    In either event, the system(s) would need to be operational by 
January 1, 2006. Note that user fees might be imposed on third-party 
payers (but not on SPAPs) for the transmittal of information under 
either model. Were responsibility to reside solely with Part D plans to 
develop and operate a coordination of benefits system or systems 
(without a defined role for us in such development and operation), the 
statute would still permit imposition and collection of user fees. 
Please see our preamble discussion on user fees earlier in this 
preamble related to proposed Sec.  423.464(c).
    We could propose (with or without mandatory reporting by insurers) 
placing requirements on Part D plans and enrollees that would 
facilitate private market arrangements to report the data. We are 
considering mandating that beneficiaries enrolling in Part D plans 
provide third-party payment information and consent for release of data 
held by third parties as part of their enrollment application and which 
could be validated through a HIPAA-compliant beneficiary ``release'' or 
authorization. For instance, if we were to clearly require that all 
Part D plans coordinate benefits and that all Part D enrollees provide 
consent for release of third-party data on their Part D enrollment 
forms, the Part D plans would have the authority to implement inter-
plan reporting mechanisms in order to coordinate benefits. However, 
back-up procedures would still be necessary to capture expense 
reimbursements made outside prescription drug claim processing systems 
as, for instance, by HRA administrators. Thus, although the statute is 
unclear as to which entity should have primary responsibility for 
tracking TrOOP costs (CMS or the Part D plans), to facilitate the 
accurate calculation of TrOOP we could do this either through reliance 
on data collection provisions in section 1860D-15(c)(1)(C) of the Act, 
or in reliance on

[[Page 46707]]

our authority to collect information related to contracting in section 
1860D-12(b)(3)(D) of the Act that incorporates into Part D section 
1857(e) of the Act, allowing the contract to require the contracting 
organization to provide to us the information as we decide necessary 
and appropriate. However, section 911(c)(2) of the MMA strictly forbids 
matches of data between Medicare contractors and us to identify MSP 
situations. The fact that the MMA is silent with regard to matches or 
data exchanges for the purposes of Part D TrOOP cost administration 
could be taken in different ways. One way to read the statute would be 
that the omission was intentional and the Congress specifically 
intended for the type of exception not to be applicable for TrOOP. 
However, an equally good case could be made that TrOOP administration 
procedures were to be defined by us and therefore the spirit of the 
provision contained in 911(c)(2) should be considered as it applies to 
TrOOP.
    We ask for comment on these options and are seeking input on the 
best means to ensure an efficient and effective coordination of 
benefits related to the Part D Medicare program. We are also interested 
in discussion of other temporary or phased-in approaches that may be 
necessary or advisable given the short timeframe between publication of 
the final rule and program implementation. Under any of the scenarios 
presented it is clear that the ultimate responsibility for calculating 
TrOOP belongs to the Part D plan. The only issues are what role in 
facilitating TrOOP tracking CMS should have, if at all.
    It is important to note that the sequencing of primary and 
secondary insurance claims will be a critical issue for tracking TrOOP 
costs. If, for example, a secondary plan does not provide feedback to 
the system in real time, it is possible that the TrOOP cost information 
the Part D plan has access to may not be entirely up to date at any 
given time. Also, if a paper claim is submitted after the fact to the 
Part D plan or supplemental insurer (due to an appeal reversal, for 
instance), the TrOOP calculation would not be up to date in real time 
at the point of service. Another complicating factor in the sequencing 
of claims is cancelled prescriptions. Generally, a claim is adjudicated 
when a prescription is filled. If the prescription is not picked up, 
and is eventually cancelled, the claim needs to be cancelled. If, in 
the meantime, other claims have been adjudicated, the sequencing is 
thrown off by the cancelled prescription, potentially disrupting the 
calculation of the initial deductible and TrOOP, and making 
coordinating benefits and tracking TrOOP costs more difficult.
    Ideally, we would prefer that the system actually coordinate the 
adjudication of claims and provide real-time claims processing across 
multiple insurers, but we do not believe that such a complex and unique 
system could be operational by January 1, 2006. And, as previously 
mentioned, we do not have statutory authority to enforce a mandatory 
reporting requirement that employers, group health plans, other 
insurance or third-party arrangements participate in such a system. We 
believe, however, that the type of voluntary system we envision would 
provide information sufficient to permit the coordination of benefits 
that the statute requires and that beneficiaries and pharmacies desire. 
In any case, the goal would be to minimize the prevalence of paper 
claims submitted post point of service. In addition, we request public 
comment on methods for Part D plans to receive information from 
beneficiaries or others regarding payment made by entities that do not 
participate in this coordination of benefits system, since there is no 
requirement that third-party payers participate in this voluntary 
system.
    We anticipate that the majority of employers, group health plans 
and other third-party payment arrangements would participate in a 
voluntary system since they would receive a clean claim from the 
pharmacy that has already been adjudicated by the Part D plan. In 
return for the clean claim, we would request that third-party payers 
provide information back to the coordination of benefits system 
regarding how much they paid on the claim for purposes of calculating 
the TrOOP under Part D. We anticipate that there will be times that the 
information in the system is not consistent with what the beneficiary 
informs the pharmacy is the most current state of insurance. We request 
comment and relevant information (if any exists from current market 
practices) on how these situations should be resolved under Part D at 
the point of sale.

K. Proposed Application Procedures and Contracts With PDP Sponsors

(If you choose to comment on issues in this section, please include the 
caption ``Subpart K--Proposed Application Procedures and Contracts with 
PDP Sponsors'' at the beginning of your comments.)
1. Overview
    Subpart K of proposed part 423, would implement provisions 
established by sections 1860D-12(b)(1), 1860D-12(b)(3)(A), 1860D-
12(b)(3)(B), 1860D-12(b)(3)(C), 1860D-12(b)(3)(D) and 1860D-12(b)(3)(F) 
of the Act that relate to contract requirements for PDP sponsors. The 
proposed provisions in this rule would address conditions necessary to 
contract with Medicare as a PDP sponsor, as well as contract 
requirements and termination procedures that would apply to Medicare-
contracting PDP sponsors.
2. Background
    Section 1860D-12(b)(1) of the Act provides that an entity seeking 
to participate in the Medicare program as a PDP sponsor must enter into 
a contract with us for that offering. The contract may cover more than 
one prescription drug plan in a region or across multiple regions and 
would require the PDP sponsor to adhere to all applicable requirements 
and standards included in Part D of Title XVIII of the Act and our 
provisions at proposed part 423, as well as the terms and conditions 
for payments described in regulation and the statute. While the 
provisions discussed in proposed subpart K would, in general, also 
apply to ``fallback plans'', eligibility limitations and contract 
requirements for applicants that have offered or are offering 
``fallback plans'' are discussed in proposed subpart Q of this 
preamble.
    Section 1860D-12(b)(3) of the Act states that certain MA 
contracting provisions in the Act should be applied to contracts with 
PDP sponsors in the same manner that they apply to contracts with MA 
organizations. Therefore, it is our intent to apply, where applicable, 
the contracting provisions used for MA organizations to contracts with 
PDP sponsors. The contracting provisions in this proposed rule are, for 
the most part, the current MA contract requirements with some changes 
made to accommodate the differences between MA and PDP sponsors and to 
implement specific changes mandated in the Act. However, we realize 
that the programmatic differences between this proposed rule and the 
existing MA contracting provisions will require changes. We are 
studying this issue, requesting comments and planning to implement the 
appropriate changes in the final rule.
    We discuss the following five requirements in this subpart:
     Protection against fraud and abuse (proposed Sec.  
423.504(d));

[[Page 46708]]

     Contract provisions (proposed Sec.  423.505);
     Effective date and term of contract (proposed Sec.  
423.506);
     Procedures for non-renewal (proposed Sec.  423.507) and 
termination (proposed Sec.  423.508 through Sec.  423.510); and
     Minimum enrollment (proposed Sec.  423.512).
    The sixth requirement (intermediate sanctions) identified in 
section 1860D-12(b)(3) of the Act is discussed in more detail in 
proposed subpart O of this preamble.
    In addition, section 1860D-12(b)(3)(D) of the Act incorporates 
section 1857(e) of the Act, which provides the Secretary the authority 
to include in the contract ``such other terms and conditions not 
inconsistent with this part * * * as the Secretary may find necessary 
and appropriate.'' Since the contracting aspects of the proposed MA and 
PDP programs are quite similar, as are the procedures and requirements, 
we need to support their contracts. We propose to apply the provisions 
of part 422 to PDP sponsor contractors and applicant organizations, 
with few exceptions, in proposed subpart K. In some cases it was 
necessary to make changes to accommodate differences between MA and PDP 
sponsors, for example, application timeframes, payment, provider 
contract requirements, and certifications. We have noted these changes 
where they occur throughout the preamble.
    We are interested in receiving comments on the contracting 
provisions of this rule. We are interested in receiving comments on 
provisions that should not be applied, and whether for PDPs there are 
other contracting considerations that are not addressed in these MA 
contract provisions. Specific issues on which we seek comment include: 
the type of business transactions which should be reported to CMS, the 
proposed required administrative and management arrangements, how these 
provisions should be applied to large companies with multiple business 
units, and the record maintenance requirements.
    Maintenance of a single application and evaluation procedure, and a 
single set of contract requirements for both the MA and PDP programs 
would bring simplicity, consistency, and reduced administrative burden 
for those entities that are managing both programs. The requirements at 
proposed Sec.  423.501 through Sec.  423.516 would be similar to the 
requirements in Sec.  422.500 through Sec.  422.524. A summary of our 
proposed provisions are discussed below.
3. Definitions
    In proposed Sec.  423.501, we would define contract-related terms 
that would be limited to use in this proposed subpart. These 
definitions would be almost the same as those in Sec.  422.500 for 
application to the MA program except in cases where the MA definition 
is inapplicable--such as in definitions that reference hospitals or 
hospital services. Of particular note are the proposed terms ``first 
tier'' and ``downstream'' entity because a PDP sponsor may often 
accomplish its responsibilities under its Medicare contract by 
contracting with these entities. For purposes of this proposed subpart 
the following definitions would apply:
    Business transaction would mean any of the following kinds of 
transactions:
    (a) Sale, exchange, or lease of property.
    (b) Loan of money or extension of credit.
    (c) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (1) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (2) Health services furnished to the PDP sponsor's enrollees by 
pharmacies and other providers, and by PDP sponsor staff, medical 
groups, or independent practice associations, or by any combination of 
those entities.
    Significant business transaction would mean any business 
transaction or series of transactions of the kind specified above in 
the definition of ``business transaction'' that, during any fiscal year 
of the PDP sponsor, have a total value that exceeds $25,000 or 5 
percent of the PDP sponsor's total operating expenses, whichever is 
less.
    Downstream entity would mean a party that enters into a written 
arrangement below the level of the PDP sponsor's contract with the 
``first tier'' entity. These written arrangements would continue down 
to the level of the ultimate provider of both health and administrative 
services. Usually in the context of the drug benefit the ultimate 
provider would be the pharmacist but it might also include other 
entities, such as an organization providing medication therapy 
management.
    First tier entity would mean any party that enters into a written 
arrangement with a PDP sponsor or contract applicant to provide 
administrative services or health services for a Medicare eligible 
individual under Part D.
    Party in interest would mean the following:
    (a) Any director, officer, partner, or employee responsible for 
management or administration of a PDP sponsor.
    (b) Any person who is directly or indirectly the beneficial owner 
of more than 5 percent of the organization's equity; or the beneficial 
owner of a mortgage, deed of trust, note, or other interest secured by 
and valuing more than 5 percent of the organization.
    (c) In the case of a PDP sponsor organized as a nonprofit 
corporation, an incorporator or member of such corporation under 
applicable State corporation law.
    (d) Any entity in which a person described in paragraphs (a), (b), 
or (c) of this definition--
    (1) Is an officer, director, or partner; or
    (2) Has the kind of interest described in paragraphs (a), (b), or 
(c) of this definition.
    (e) Any person that directly or indirectly controls, is controlled 
by, or is under common control with the PDP sponsor.
    (f) Any spouse, child, or parent of an individual described in 
paragraphs (a), (b), or (c) of this definition.
    Related entity would mean any entity that is related to the PDP 
sponsor by common ownership or control and--
    (a) Performs some of the PDP sponsor's management functions under 
contract or delegation;
    (b) Furnishes services to Medicare enrollees under an oral or 
written agreement; or
    (c) Leases real property or sells materials to the PDP sponsor at a 
cost of more than $2,500 during a contract period.
4. Proposed Application Requirements
    Under proposed Sec.  423.502, in order to obtain a determination on 
whether it meets the requirements to become a PDP sponsor, an entity, 
or an individual authorized to act for the entity (the applicant), 
would be required to complete and submit a certified application in the 
form and manner required by us. In addition to the application, the 
entity or individual authorized to act for the entity would be required 
to submit 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 as 
described in proposed subpart I of this proposed part; or submit a 
Federal waiver as described in proposed subpart I of this proposed 
part. The authorized individual would be required to describe 
thoroughly how the entity would meet the proposed

[[Page 46709]]

requirements described in this proposed part.
    We would be responsible for determining whether an entity is 
qualified to be a PDP sponsor and if that entity meets the proposed 
requirements of part 423. Also, in this proposed section, we would 
specify that an applicant that submits material that he or she believes 
would be 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), 
would have to label the material ``privileged'' and include an 
explanation of the applicability of an exception described in 45 CFR 
part 5.
    Current fallback plans, entities that bid to be fallback plans, 
and, in some circumstances, entities that served as fallback plans the 
prior year would not be eligible to apply as a PDP sponsor. (See 
proposed subparts F and Q of this preamble for details on proposed 
``fallback plans''.)
5. Proposed Evaluation and Determination Procedures For Applications To 
Be A Sponsor
    Proposed Sec.  423.503 would establish procedures for us to 
evaluate and determine an entity's application for a contract as a PDP 
sponsor. These provisions mostly mirror the provisions applicable to MA 
specified at 42 CFR 422.502. This evaluation and determination of the 
application would be done on the basis of information contained in the 
application itself and any additional information that we would obtain 
through on-site visits, publicly available information, and any other 
appropriate procedures.
    If the application is incomplete, we would notify the contract 
applicant, and we propose to allow 10 days from the date of the notice 
for the contract applicant to furnish the missing information. After 
evaluating all relevant information, we would determine if the contract 
applicant's application meets the applicable requirements of proposed 
Sec.  423.504. We note that the MA provision in Sec.  422.502(a)(2) 
currently provides a 30-day window for the MA program to furnish 
missing information. We believe a 10-day period is necessary for the 
Part D program because of the June bidding deadline specified at Sec.  
423.265(b). An organization would need to apply as close to the first 
of the year as possible in order to have its contract approved before 
submitting bids. Once a contract is approved, an organization is not 
required to reapply each year. See Sec.  423.506(c) for renewal of 
contract information.
    If a PDP sponsor, MA organization, or Medicare cost plan fails to 
comply with the terms of a previous year's contract with us under Title 
XVIII of the Act, or fails to complete a corrective action plan during 
the term of the contract, we may deny an application from a contract 
applicant based on the contract applicant's failure to comply with that 
prior contract with us even if the contract applicant meets all of the 
current proposed requirements.
    We would notify each applicant that applies for a contract as a PDP 
sponsor under this part, of its determination on the application and 
the basis for the determination. The determination may be one of the 
following:
     Approval of application. If we approve the application, we 
would give written notice to the contract applicant, indicating that it 
meets the requirements for a contract as a PDP sponsor.
     Intent to deny. If we find that the contract applicant 
does not appear to meet the requirements for a PDP sponsor contract, we 
would give the contract applicant ``notice of intent to deny'' the 
application for a PDP contract and a summary of the basis for this 
preliminary finding. Within 10 days from the date of the notice, the 
contract applicant would have to respond in writing to the issues or 
other matters that would be the basis for our preliminary finding and 
would have to revise its application to remedy any defects we identify. 
We note that the MA provision in Sec.  422.502(e)(2) currently provides 
a 60-day window for the MA program to remedy any defects we identify. 
We believe a 10-day period is necessary for the Part D program because 
of the June bidding deadline specified at Sec.  423.265(b). An 
organization needs to apply as close to the first of the year as 
possible in order to have its contract approved prior to submitting a 
bid.
    If we deny an application, written notice would be given to the 
contract applicant that would indicate the following:
     That the contract applicant does not meet the contract 
requirements under Part D of Title XVIII of the Act.
     The reasons why the contract applicant does not meet the 
contract requirements.
     The contract applicant's right to request reconsideration 
in accordance with the proposed procedures specified in proposed Sec.  
423.645.
    This proposed section would also establish oversight of a PDP 
sponsor's continued compliance with the proposed requirements for a PDP 
sponsor. If a PDP sponsor fails to meet those proposed requirements, we 
would terminate the contract in accordance with proposed Sec.  423.509 
of this proposed rule.
6. General Provisions
    Proposed Sec.  423.504 would specify the general provisions that 
would apply to PDP sponsor contracts. Again, for the most part, we 
would adopt the provisions that already apply to MA organizations 
through the regulations at 42 CFR 422.501. We have recently proposed 
changes to the compliance program requirements for MA organizations at 
42 CFR 422.501(b)(3)(vi)(G) to include provisions that would require MA 
organizations to report misconduct it believes may violate various 
criminal, civil or administrative authorities. These self-reporting 
requirements are identified below in the discussion of the elements of 
a PDP compliance program. We have based the compliance program 
requirements for PDP sponsors on these new and recently proposed MA 
requirements. 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. Subject to the provisions at 
proposed Sec.  423.265(a)(1), in subpart F--Submission of bid, we are 
proposing that in order to enroll beneficiaries in any prescription 
drug plan it offers and be paid on behalf of Medicare beneficiaries 
enrolled in those plans, a PDP sponsor would have to enter into a 
contract with us. The contract could cover more than one prescription 
drug plan.
    In accordance with those regulations, we also propose that any 
entity seeking to contract as a PDP sponsor would be required to meet 
the following conditions:
     Complete an application as described in proposed Sec.  
423.502.
     Be organized and licensed under State law as a risk 
bearing entity eligible to offer health insurance or health benefits 
coverage in each State in which it offers a prescription drug plan, or 
have secured a Federal waiver, as

[[Page 46710]]

described in proposed subpart I of this preamble.
     Meet the proposed minimum enrollment requirements of 
proposed Sec.  423.512(a) unless waived under proposed Sec.  
423.512(b).
     Have administrative and management arrangements 
satisfactory to us that could be demonstrated by at least the 
following:
    + A policy making body that would exercise oversight and control 
over the PDP sponsor's policies and personnel that would ensure that 
management actions would be in the best interest of the organization 
and its enrollees.
    + Personnel and systems that would be sufficient for the PDP 
sponsor to organize, implement, control, and evaluate financial and 
marketing activities, the furnishing of prescription drug services, the 
quality assurance, medication therapy management, and drug-utilization 
management programs, and the administrative and management aspects of 
the organization.
    + At a minimum, an executive manager whose appointment and removal 
would be under the control of the policy making body.
    + A fidelity bond or bonds, procured and maintained by the PDP 
sponsor, in an amount fixed by its policymaking body, but not less than 
$100,000 per individual, that would cover each officer and employee 
entrusted with the handling of its funds. The bond may have reasonable 
deductibles, based upon the financial strength of the PDP sponsor.
    + Insurance policies or other arrangements, secured and maintained 
by the PDP sponsor and approved by us, that would insure the PDP 
sponsor against losses arising from professional liability claims, 
fire, theft, fraud, embezzlement, and other casualty risks.
    + A compliance plan that would consist of the following:
    - Written policies, procedures, and standards of conduct 
articulating the organization's commitment to comply with all 
applicable Federal and State standards.
    - The designation of a compliance officer and compliance committee 
accountable to senior management.
    - Effective training and education between the compliance officer 
and organization employees.
    - Effective lines of communication between the compliance officer 
and the organization's employees.
    - Enforcement of standards through well-publicized disciplinary 
guidelines.
    - Procedures for internal monitoring and auditing.
    - Procedures for ensuring prompt response to detected offenses and 
development of corrective action initiatives relating to the 
organization's contract as a PDP sponsor.
    - If the PDP sponsor discovers from any source evidence of 
misconduct related to payment or delivery of prescription drug items or 
services under the contract, it must conduct a timely, reasonable 
inquiry into that misconduct;
    - If, after reasonable inquiry, the PDP sponsor 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 sections 1128A and 1857 (as 
incorporated through section 1860D-12) of the Act), or related statutes 
enforced by the HHS Office of Inspector General, the report must be 
made to that Office.
    - 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.
    The PDP sponsor's contract must not have been non-renewed under 
proposed Sec.  422.507 within the past 2 years, unless--
    + During the 6-month period beginning on the date the organization 
notified us 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 PDP sponsor payments in the payment area or areas 
at issue; or
    + We have otherwise determined that circumstances warrant special 
consideration.
    Section 1860D-4(b)(1)(A) of the Act assures pharmacy access by 
requiring a PDP sponsor to permit the participation of any pharmacy 
that meets the terms and conditions under the plan. Based on this 
requirement, we are considering adding the following language to the 
contract provisions: The PDP sponsor would agree to have a standard 
contract with reasonable and relevant terms and conditions of 
participation whereby any willing pharmacy may access the standard 
contract and participate as a network pharmacy. We are interested in 
public comment on the inclusion of such a provision.
    Section 1857(c)(5) of the Act, which is incorporated by section 
1860D-12(b)(3)(B) of the Act, authorizes us to exercise the authority 
granted to the Secretary under Part D of Title XVIII without regard to 
provisions of the statute or regulations that we determine to be 
inconsistent with the furtherance of the purpose of Title XVIII of the 
Act. Based on this authority, we propose to provide, in proposed Sec.  
423.504(c) (Contracting authority), that we may enter into contracts 
under this proposed subpart without regard to Federal and Departmental 
acquisition regulations set forth in title 48 of the CFR. We note that 
some of the Federal Acquisition Regulation (FAR) provisions may apply 
to ``fallback plans''. (See proposed subparts F and Q for any 
contracting provisions unique to fallback plans.)
    In proposed Sec.  423.504(d) (Protection against fraud and 
beneficiary protections), we set forth the proposed requirements that 
we would have in place to protect against fraud and abuse in our PDP 
sponsor contracts. As directed by the statute, these are the same 
requirements as those in sections 1857(d)(1) and (d)(2) of the Act. The 
proposed requirements are as follows:
     We would annually audit the financial records (including, 
but not limited to, data relating to Medicare utilization, costs, 
reinsurance cost, low-income subsidy payments, and risk corridor cost) 
of at least one-third of the PDP sponsors, including fallback plans, 
offering prescription drug plans. We welcome comments on whether 
fallback plans, because of the payment arrangements, require a 
different audit approach, possibly more frequent. The Comptroller 
General would monitor these auditing activities.
     Each contract under this proposed section would be 
required to provide that we, or any person or organization designated 
by us, would have the right to--
    + Inspect or otherwise evaluate the quality, appropriateness, and 
timeliness of services performed under the PDP sponsor's contract;
    + Inspect or otherwise evaluate the facilities of the organization 
when there is reasonable evidence of some need for such inspection; and
    + Audit and inspect any books, contracts, and records of the PDP 
sponsor that pertain to the ability of the organization or its first 
tier or downstream providers to bear the risk of potential financial 
losses; or services performed or determinations of amounts payable 
under the contract.
    Section 1860D-12(b) of the Act allows contracts with PDP sponsors 
to cover more than one prescription drug plan. At proposed Sec.  
423.504(e) (Severability of contracts), we are proposing that the 
contract would provide, upon our

[[Page 46711]]

request, that the contract could be amended to exclude any State-
licensed entity, or a PDP plan specified by us; and a separate contract 
for any excluded plan or entity would be deemed to be in place when 
such a request is made.
7. Contract Provisions
    Section 1860D-12(b)(3)(D) of the Act requires that provisions of 
section 1857(e) of the Act relating to additional contract terms of MA 
contracts would apply in the same manner to PDP sponsors. Section 
1857(e) of the Act allows that the contract would contain other terms 
and conditions not inconsistent with Part D of the Act, including 
requiring the organization to provide us with the information that we 
may find necessary and appropriate. The additional contract provisions 
for the MA program are adopted for use in this proposed rule with 
modifications as necessary to accommodate differences between the MA 
program and the prescription drug program. Elsewhere in this preamble, 
we have also identified additional contract terms that would apply 
uniformly to both MA organizations offering MA-PDs and PDP sponsors 
(see, for example, subpart D discussing e-prescribing). In proposed 
Sec.  423.505 (Contract provisions), we would require the contract 
between the PDP sponsor and us to contain the provisions specified in 
proposed Sec.  423.505(b). The following is a summary of the proposed 
additional contract provisions that reflect any changes from the MA 
contract provisions:
     Specific Provisions.
    In proposed Sec.  423.505(b), we would list the specific provisions 
that would be contained in the contract between the PDP sponsor and us. 
Changes were made from the MA provisions to accommodate the different 
bidding and payment system for PDP sponsors. The PDP sponsor would be 
required to agree to comply with the following proposed provisions:
    + All the applicable proposed requirements and proposed conditions 
set forth in this proposed part and in general proposed instructions.
    + To accept new enrollments, make enrollments effective, process 
voluntary disenrollments, and limit involuntary disenrollments, as 
provided in proposed subpart B of this proposed part.
    + To comply with the proposed prohibition in proposed Sec.  
423.34(a) on discrimination in beneficiary enrollment.
    + To provide the basic benefits as proposed under proposed Sec.  
423.108 and, to the extent applicable, supplemental benefits proposed 
under proposed Sec.  423.112.
    + To disclose information to beneficiaries in the manner and the 
form prescribed by us under proposed Sec.  423.128.
    + To operate quality assurance, cost and utilization management, 
medication therapy management, and fraud, abuse and waste programs as 
proposed under proposed subpart D of this proposed part.
    + To comply with all proposed requirements in proposed subpart M of 
this proposed part governing coverage determinations, grievances, and 
appeals.
    + To comply with the proposed reporting requirements in proposed 
Sec.  423.514 and the proposed requirements in proposed Sec.  
423.329(b)(3) of proposed subpart G for submitting drug claims and 
related information to us for its use in risk adjustment calculations;
    + Each contract under this proposed part would provide that--
    - The PDP sponsor offering a prescription drug plan would be 
required to provide us with the information as we determine is 
necessary to carry out proposed payment provisions in proposed subpart 
G of this proposed part; and
    - We would have the right, as applied under section 1860D-
12(b)(3)(C) of the Act and in accordance with section 1857(d)(2)(B) of 
the Act, to inspect and audit any books, contracts, and records of a 
PDP sponsor or MA organization that pertain to the information 
regarding costs provided to us under proposed Sec.  423.504(d)(2)(iii) 
of this proposed section.
    + To be paid under the contract in accordance with the proposed 
payment rules in proposed subpart G of this proposed part.
    + To submit its bid, including all required information on 
premiums, benefits, and cost-sharing, by the proposed due date, as 
provided in proposed subpart F of this proposed part.
    + That its contract could possibly not be renewed or could be 
terminated in accordance with this proposed subpart and proposed 
subpart N of this proposed part.
    + To comply with the proposed confidentiality and proposed enrollee 
record accuracy requirements described in proposed Sec.  423.136.
    + To comply with State Law and preemption by Federal Law 
requirements described in proposed subpart I of this proposed part.
    + To comply with the proposed coordination requirements with plans 
and programs that provide prescription drug coverage as described in 
proposed subpart J of this proposed part.
    + To provide benefits by means of point of service systems to 
adjudicate drug claims, except where necessary to provide access in 
underserved areas, I/T/U pharmacies (as defined in proposed Sec.  
423.100), and long-term care pharmacies.
     Communication with CMS.
    In proposed Sec.  423.505(c), we would require the PDP sponsor to 
have the capacity to communicate with us electronically in the manner 
we specify.
     Maintenance of records.
    In proposed Sec.  423.505(d), we are proposing to detail the 
proposed requirements for record maintenance and retention, which would 
be unchanged from the MA regulations. We would require PDP sponsors to 
maintain books, records, documents, and other evidence of accounting 
procedures and practices for a period of 6 years so as not to 
prematurely foreclose our ability to pursue fraudulent or other abusive 
activities. The other evidence of accounting procedures and practices 
would have to be sufficient to do the following:
    + Accommodate periodic auditing of the financial records (including 
data related to Medicare utilization, costs, and computation of the bid 
of PDP sponsors).
    + Enable us to inspect or otherwise evaluate the quality, 
appropriateness and timeliness of services performed under the 
contract, and the facilities of the organization.
    + Enable us to audit and inspect any books and records of the PDP 
sponsor that pertain to the ability of the organization to bear the 
risk of potential financial losses, or to services performed or 
determinations of amounts payable under the contract.
    + Properly reflect all direct and indirect costs claimed to have 
been incurred and used in the preparation of the PDP sponsor's bid and 
necessary for the calculation of gross covered prescription drug costs, 
allowable reinsurance costs and allowable risk corridor costs (as 
defined in proposed Sec.  423.308).
    + Establish the basis for the components, assumptions and analysis 
used by the PDP in determining the actuarial valuation of standard, 
basic alternative, or enhanced alternative coverage offered in 
accordance with our guidelines described in proposed Sec.  
423.265(b)(3).
    We would also require the PDP sponsor to include at least records 
of the following:

[[Page 46712]]

    + Ownership and operation of the PDP sponsor's financial, medical, 
and other record keeping systems.
    + Financial statements for the current contract period and 6 prior 
periods.
    + Federal income tax or informational returns for the current 
contract period and six prior periods.
    + Asset acquisition, lease, sale, or other action.
    + Agreements, contracts, and subcontracts.
    + Franchise, marketing, and management agreements.
    + Matters pertaining to costs of operations.
    + Amounts of income received by source and payment.
    + Cash flow statements.
    + Any financial reports filed with other Federal programs or State 
authorities.
    + All prescription drug claims for the current contract period and 
6 prior periods.
    + All price concessions for the current contract period and 6 prior 
periods accounted for separately from other administrative fees. This 
includes concessions offered by manufacturers to PDP sponsors.
     Access to Facilities and Records.
    In proposed Sec.  423.505(e), the PDP sponsor would be required to 
agree to the same access to facilities and records as under the MA 
program. The PDP sponsor would be required to agree to the following:
    + HHS, the Comptroller General, or their designee could evaluate, 
through inspection or other means--
    - The quality, appropriateness, and timeliness of services 
furnished to Medicare enrollees under the contract;
    - The facilities of the PDP sponsor; and
    - The enrollment and disenrollment records for the current contract 
period and six prior periods.
    + HHS, the Comptroller General, or their designees could audit, 
evaluate, or inspect any books, contracts, medical records, patient 
care documentation, and other records of the PDP sponsor, related 
entity(s), contractor(s), subcontractor(s), or its transferee that 
pertain to any aspect of services performed, reconciliation of benefit 
liabilities, and determination of amounts payable under the contract, 
or as the Secretary may deem necessary to enforce the contract.
    + The PDP sponsor would have to agree to make available, for the 
purposes specified in this section, its premises, physical facilities 
and equipment, records relating to its Medicare enrollees, and any 
additional relevant information that we could require.
    + 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--
    - We determine there is a special need to retain a particular 
record or group of records for a longer period and notify the PDP 
sponsor at least 30 days before the normal disposition date;
    - There is a termination, dispute, or allegation of fraud or 
similar fault by the PDP sponsor, in which case the retention may be 
extended to 6 years from the date of any resulting final resolution of 
the termination, dispute, or fraud or similar fault; or
    - We determine that there is a reasonable possibility of fraud, in 
which case we may inspect, evaluate, and audit the PDP sponsor at any 
time.
     Disclosure of Information.
    Under proposed Sec.  423.505(f), the PDP sponsor would be required 
to agree to submit to us certified financial information that would 
have to include the information, as we could require, that would 
demonstrate that the organization has a fiscally sound operation. The 
certified financial information would include the information, as we 
could require, pertaining to the disclosure of ownership and control of 
the PDP sponsor. Also, the certification would include all information 
that would be necessary for us to administer and evaluate the program 
and to simultaneously establish and facilitate a process for current 
and prospective beneficiaries to exercise choice in obtaining 
prescription drug coverage. This information would include, but would 
not be limited to--
    + The benefits that would be covered under a prescription drug 
plan;
    + The PDP monthly basic beneficiary premium and PDP monthly 
supplemental beneficiary premium, if any, for the plan;
    + The service area of each plan;
    + Plan quality and performance indicators for the benefits under 
the plan including--
    - Disenrollment rates for Medicare enrollees electing to receive 
benefits through the plan for the previous 2 years;
    - Information on Medicare enrollee satisfaction;
    - The recent records regarding compliance of the plan with 
requirements of this part, as determined by us; and
    - Other information determined by us to be necessary to assist 
beneficiaries in making an informed choice regarding PDP plans;
    + Information about beneficiary appeals and their disposition;
    + Information regarding all formal actions, reviews, findings, or 
other similar actions by States, other regulatory bodies, or any other 
certifying or accrediting organization; and
    + Any other information deemed necessary to CMS for the 
administration or evaluation of the Medicare program.
    The PDP sponsor would also be required to disclose all 
informational requirements to its enrollees, under proposed Sec.  
423.128(b) and, upon an enrollee's request, the financial disclosure 
information required under proposed Sec.  423.128(c)(4). (See proposed 
subpart C of this proposed part.)
     Proposed Beneficiary Financial Protections.
    Under proposed Sec.  423.505(g), the PDP sponsor would be required 
to adopt and maintain arrangements satisfactory to us to protect its 
enrollees from incurring liability (that is, as a result of an 
organization's insolvency or other financial difficulties) for payment 
of any fees that would be the legal obligation of the PDP sponsor. The 
beneficiary financial protection provisions would remain unchanged from 
the MA program. To meet this proposed requirement, the PDP sponsor 
would have to ensure that all contractual or other written arrangements 
prohibit the organization's contracting agents from holding any 
beneficiary enrollee liable for payment of any such fees; and the PDP 
sponsor would have to indemnify the beneficiary enrollee for payment of 
any fees that would be the legal obligation of the PDP sponsor for 
covered prescription drugs furnished by non-contracting pharmacists, or 
that would not have otherwise entered into an agreement with the PDP 
sponsor, to provide services to the organization's beneficiary 
enrollees.
    To meet these proposed requirements of this proposed section, other 
than the proposed provider contract requirements discussed above, the 
PDP sponsor would use contractual arrangements; insurance acceptable to 
us; financial reserves acceptable to us; or any other arrangement 
acceptable to us.
     Proposed Requirements of Other Laws and Regulations.
    One of the requirements we have incorporated from the existing MA 
rules is the requirement that plans comply with all Federal, State and 
local laws and regulations (see proposed Sec.  422.505(h)). We have 
updated the list to include HIPAA Administrative and Simplification 
rules. Proposed

[[Page 46713]]

Sec.  423.505(h) would require the PDP sponsor to comply with--
    + Title VI of the Civil Rights Act of 1964 as implemented by 
regulations at 45 CFR part 84.
    + The Age Discrimination Act of 1975 as implemented by regulations 
at 45 CFR part 91.
    + The Rehabilitation Act of 1973.
    + The Americans with Disabilities Act.
    + HIPAA Administrative Simplification rules at 45 CFR Parts 160, 
162, and 164
    + Other laws applicable to recipients of Federal funds.
    + All other applicable laws and rules.
    PDP sponsors receiving Federal payments under PDP sponsor 
contracts, and related entities, contractors, and subcontractors paid 
by a PDP sponsor to fulfill its obligations under its contract with us, 
would be subject to certain laws that are applicable to individuals and 
entities receiving Federal funds. PDP sponsors would be required to 
inform all related entities, contractors and subcontractors that 
payments they receive would be, in whole or in part, from Federal 
funds. These proposed provisions would remain unchanged from the MA 
program.
     Proposed Requirements for PDP Sponsor Relationship with 
Related Entities, Contractors, and Subcontractors.
    In proposed Sec.  423.505(i), notwithstanding any relationship(s) 
that the PDP sponsor may have with related entities, contractors, or 
subcontractors, the PDP sponsor would maintain ultimate responsibility 
for adhering to and otherwise fully complying with all terms and 
conditions of its contract with us. The PDP sponsor would have to agree 
to require all related entities, contractors, or subcontractors that 
provide Part D items or services (including administrative services) to 
agree that--
    + The Department of Health and Human Services (HHS), the 
Comptroller General, or their designees would have the right to 
inspect, evaluate, and audit any pertinent contracts, books, documents, 
papers, and records of the related entity(s), contractor(s), or 
subcontractor(s) involving transactions related to our contract with 
the PDP sponsor; and
    + HHS', the Comptroller General's, or their designee's right to 
inspect, evaluate, and audit any pertinent information for any 
particular contract period should exist through 6 years from the final 
date of the contract period or from the date of completion of any 
audit, whichever is later.
    This proposed section would also require all contracts or written 
arrangements between PDP sponsors and providers, related entities, 
contractors, subcontractors, ``first tier'', and ``downstream'' 
entities that provide Part D items or services (including 
administrative services) to contain the specified proposed provisions. 
These proposed provisions would remain unchanged from the MA program.
     Proposed Additional Contract Terms.
    In proposed Sec.  423.505(j), the PDP sponsor would agree to 
include, in the contract, other terms and conditions as we may find 
necessary and appropriate in order to implement proposed requirements 
in this proposed part.
     Severability of Contracts.
    In proposed Sec.  423.505(k), the PDP sponsor would have to agree 
to include in the contract a severability provision that would 
establish that, upon our request, the contract would be amended to 
exclude any State-licensed entity, or PDP sponsor specified by us; and 
a separate contract for any excluded plan or entity would be deemed to 
be in place when the request is made.
     Certification of Data that Determines Payment.
    In proposed Sec.  423.505(l), we would require, as a condition of 
receiving a monthly payment under proposed subpart G of this proposed 
part, the PDP sponsor to agree that its chief executive officer (CEO), 
chief financial officer (CFO), or an individual delegated the authority 
to sign on behalf of one of these officers, and who reports directly to 
the officer, would request payment under the contract on a document 
that certifies (based on best knowledge, information, and belief) the 
accuracy, completeness, and truthfulness of all data related to 
payment. The data could include specified enrollment information, 
claims data, bid submission data, and other data that we specify. We 
recommend that PDP sponsors collect such certifications from their 
downstream partners to support their best knowledge, information and 
belief in signing their own certifications. In addition, we propose a 
certification for when PDP sponsors submit updated drug pricing data to 
CMS for beneficiary enrollment purposes.
    The CEO, CFO, or an individual delegated the authority to sign on 
behalf of one of these officers, and who reports directly to the 
officer, would be required to certify (based on best knowledge, 
information, and belief) that each enrollee for whom the organization 
would request payment is validly enrolled in a program offered by the 
organization and the information relied upon by us in determining 
payment) is accurate, complete, and truthful.
    The CEO, CFO, or an individual delegated with the authority to sign 
on behalf of one of these officers, and who reports directly to the 
officer, would be required to certify (based on best knowledge, 
information, and belief) that the claims data it would submit under 
proposed Sec.  423.329(b)(3) are accurate, complete, and truthful. If 
the claims data are generated by a related entity, contractor, or 
subcontractor of a PDP sponsor, the entity, contractor, or 
subcontractor would be required to similarly certify (based on best 
knowledge, information, and belief) the accuracy, completeness, and 
truthfulness of the data. The PDP sponsor or related entity, 
contractor, or subcontractor would acknowledge that the claims data 
would be used for the purpose of obtaining Federal reimbursement.
    The CEO, CFO, or an individual delegated the authority to sign on 
behalf of one of these officers, and who reports directly to the 
officer, would be required to certify (based on best knowledge, 
information, and belief) that the information in its bid submission and 
assumptions related to projected reinsurance and low income cost 
sharing subsidies is accurate, complete, truthful, and fully conforms 
to the requirements specified in proposed Sec.  423.265. The CEO, CFO, 
or an individual delegated the authority to sign on behalf of one of 
these officers, and who reports directly to the officer, must certify 
(based on best knowledge, information, and belief) that the information 
provided for purposes of supporting allowable costs, as defined in 
Sec.  423.308, is accurate, complete, truthful, and fully conforms to 
the requirements in Sec.  423.336(c) and Sec.  423.343(c).
    The CEO, CFO, or an individual delegated the authority to sign on 
behalf of one of these officers, and who reports directly to the 
officer, must certify (based on best knowledge, information, and 
belief) that the information provided for purposes of price comparison 
is accurate, complete, and truthful.
8. Effective Date and Term of Contract
    Section 1860D-12(b)(3)(B) of the Act provides that we include the 
contract period and effectiveness requirements that are included in 
section 1857(c) of the Act. Proposed Sec.  423.506 would provide that 
contracts be effective on the date specified in the contract, and that 
the contracts would be for a term of 12 months. The contract period for 
a fallback plan is specified in

[[Page 46714]]

Sec.  423.871(b). In addition, contracts could be renewed from year to 
year, but only in the event that we inform the PDP sponsor that a 
renewal is authorized and only if the PDP sponsor does not provide us 
with a notice of intention not to renew. We do not require an 
application process for contract renewals. Because of the need for us 
to establish a national average monthly bid amount from approved bids 
in order to calculate the base beneficiary premiums, we propose to not 
allow a PDP contract to be effective at any time other than the first 
of the year. These proposed provisions would be similar to the MA 
provisions in Sec.  422.505.
9. Non-Renewal of Contract
    Section 1860D-12(b)(3)(F) of the Act requires that the provisions 
of section 1857(h) of the Act relating to procedures for termination 
(or non-renewal) of MA contracts would apply to PDP sponsors with 
respect to determinations and appeals. A non-renewal would be different 
from a termination in that either the PDP or us chooses to end the 
contract by following the proposed provisions described below.
    In proposed Sec.  423.507, we are proposing that a PDP sponsor 
could elect not to renew its contract with us as of the end of the term 
of the contract for any reason, provided it would notify us in writing 
by the first Monday of June in the year in which the contract would 
end. The PDP sponsor would also have to notify each Medicare enrollee, 
at least 90 days before the date on which the nonrenewal is effective. 
This notice would have to include a written description of alternatives 
available for obtaining Medicare prescription drug services within the 
PDP region, including MA-PDs, and other PDPs, and would have to receive 
our approval. The general public would also have to be notified at 
least 90 days before the end of the current calendar year, by 
publishing a notice in one or more newspapers of general circulation in 
each community or county located in the PDP sponsor's service area.
    If a PDP sponsor chooses to non-renew a contract as described in 
proposed Sec.  423.507(a)(3), we would not enter into a contract with 
the organization for 2 years unless there are special circumstances 
that warrant special consideration, as determined by CMS.
    For purposes of this section, we could elect not to authorize 
renewal of a contract for any of the reasons listed in proposed Sec.  
423.509(a), which would also permit us to terminate the contract, or if 
the PDP sponsor commits any of the acts in proposed Sec.  423.752 that 
supports the imposition of intermediate sanctions or civil money 
penalties under proposed Sec.  423.750 of proposed Subpart O.
    We would provide notice of our decision whether to authorize 
renewal of the contract to the PDP sponsor by May 1 of the contract 
year. If we decide not to authorize a renewal of the contract, we would 
provide notice to the PDP sponsor's Medicare enrollees by mail at least 
90 days before the end of the current calendar year. We would also 
notify the general public at least 90 days before the end of the 
current calendar year, by publishing a notice in one or more newspapers 
of general circulation in each community or county located in the PDP 
sponsor's service area. We would give the PDP sponsor written notice of 
its right to appeal the decision not to renew in accordance with 
proposed Sec.  423.642(b).
10. Modification or Termination of Contract by Mutual Consent
    In proposed Sec.  423.508, we are proposing that a contract could 
be modified or terminated at any time by written mutual consent. If the 
contract is terminated by mutual consent, the PDP sponsor would have to 
provide notice to its Medicare enrollees and the general public as 
provided in proposed Sec.  423.507. If the contract is modified by 
mutual consent, the PDP sponsor would be required to notify its 
Medicare enrollees of any changes that we determine are appropriate for 
notification within timeframes specified by us. This proposed section 
would remain unchanged from the MA program.
11. Termination of Contract by CMS
    In proposed Sec.  423.509, we may terminate a contract with the PDP 
sponsor for any of the following reasons:
     The PDP sponsor fails substantially to carry out the terms 
of its contract with us (proposed Sec.  423.509(a)(1)).
     The PDP sponsor carries out its contract with us in a 
manner that would be inconsistent with the effective and efficient 
implementation of this proposed part (proposed Sec.  423.509(a)(2)).
     We determine that the PDP sponsor no longer meets the 
proposed requirements of this proposed part for being a contracting 
organization (proposed Sec.  423.509(a)(3)).
     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 
(proposed Sec.  423.509(a)(4)).
     The PDP sponsor experiences financial difficulties so 
severe that its ability to provide necessary prescription drug coverage 
is impaired to the point of posing an imminent and serious risk to the 
health of its enrollees, or otherwise fails to make services available 
to the extent that a risk to health exists (proposed Sec.  
423.509(a)(5)).
     The PDP sponsor substantially fails to comply with the 
requirements in proposed subpart M of this proposed part relating to 
grievances and appeals (proposed Sec.  423.509(a)(6)).
     The PDP sponsor fails to provide us with valid risk 
adjustment, reinsurance and risk corridor related data as required 
under proposed Sec.  423.329 (proposed Sec.  423.509(a)(7)).
     The PDP sponsor substantially fails to comply with the 
proposed service access requirements in proposed Sec.  423.120 
(proposed Sec.  423.509(a)(8))
     The PDP sponsor substantially fails to comply with the 
proposed marketing requirements in proposed Sec.  423.128 (proposed 
Sec.  423.509(a)(9)).
     The PDP sponsor substantially fails to comply with the 
coordination with plans and programs that provide prescription drug 
coverage as described in proposed subpart J of this proposed part 
(proposed Sec.  423.509(a)(10)).
     The PDP sponsor substantially fails to comply with the 
proposed cost and utilization management, proposed quality improvement, 
proposed medication therapy management, and fraud, abuse and waste 
program requirements as described in proposed subpart D of this 
proposed part (proposed Sec.  423.509(a)(11)).
    If we decide to terminate a contract for reasons other than the 
grounds described above in proposed Sec.  423.509(a)(4) or (a)(5), we 
would notify the PDP sponsor in writing 90 days before the intended 
date of the termination. The PDP sponsor would then notify its Medicare 
enrollees of the termination by mail at least 30 days before the 
effective date of the termination. The PDP sponsor would also notify 
the general public of the termination at least 30 days before the 
effective date of the termination by publishing a notice in one or more 
newspapers of general circulation in each community or county located 
in the PDP sponsor's service area.
    We propose adding Sec.  423.509(a)(4) as a reason for immediate 
termination without corrective action. If we have credible evidence 
that a PDP sponsor committed or participated in false, fraudulent, or 
abusive activities affecting the Medicare program, we may

[[Page 46715]]

determine that providing the sponsor with additional time to submit a 
corrective action plan would only expose beneficiaries to a plan we 
have already determined engaged in fraudulent or abusive behavior. 
Therefore, we propose to terminate the contract as soon as possible in 
order to protect the beneficiaries enrolled with the affected sponsor 
as well as the Medicare trust fund.
    For terminations based on violations described in proposed Sec.  
423.509(a)(4) or Sec.  423.509(a)(5), we would notify the PDP sponsor 
in writing that its contract has been terminated effective the date of 
the termination decision by us. If termination is effective in the 
middle of a month, we would have the right to recover the prorated 
share of the prospective monthly payments made to the PDP sponsor 
covering the period of the month following the contract termination.
    We would also notify the PDP sponsor's Medicare enrollees in 
writing of our decision to terminate the PDP sponsor's contract. This 
notice would occur no later than 30 days after we notify the plan of 
our decision to terminate the contract. We would also simultaneously 
inform the Medicare enrollees of alternative options for obtaining 
prescription drug coverage, including alternative PDP and MA-PDs in a 
similar geographic area. We would notify the general public of the 
termination no later than 30 days after notifying the plan of our 
decision to terminate the contract. This notice would be published in 
one or more newspapers of general circulation in each community or 
county located in the PDP sponsor's service area.
    Before terminating a contract for reasons other than the grounds 
specified in proposed Sec.  423.509(a)(4) or Sec.  423.509(a)(5), we 
would provide the PDP sponsor with reasonable opportunity to develop 
and receive our approval of a corrective action plan to correct the 
deficiencies that are the basis of the proposed termination. If a 
contract is terminated based on Sec.  423.509(a)(4) or Sec.  
423.509(a)(5), the PDP sponsor would not be given the opportunity to 
submit a corrective action plan. If we decide to terminate a contract, 
we would send written notice to the PDP sponsor informing it of its 
termination appeal rights in accordance with proposed Sec.  423.642 of 
this proposed part.
12. Termination of Contract by the PDP Sponsor
    In proposed Sec.  423.510, we are proposing that the PDP sponsor 
may terminate its contract if we fail to substantially carry out the 
terms of the contract. The PDP sponsor would be required to give 
advance notice as follows:
     To us, at least 90 days before the intended date of 
termination. This notice would have to specify the reasons why the PDP 
sponsor is requesting contract termination.
     To its Medicare enrollees, at least 60 days before the 
termination effective date. This notice would have to include a written 
description of alternatives available for obtaining Medicare drug 
services within the services area, including alternative PDPs, MA-PDs, 
and original Medicare and would have to receive our approval.
     To the general public at least 60 days before the 
termination effective date by publishing a notice approved by us in one 
or more newspapers of general circulation in each community or county 
located in the PDP sponsor's geographic area.
    The effective date of the termination would be determined by us and 
is at least 90 days after the date we receive the PDP sponsor's notice 
of intent to terminate. Our liability for payment to the PDP sponsor 
would end as of the first day of the month after the last month for 
which the contract is in effect. We would not enter into an agreement 
with an organization that has terminated its contract within the 
preceding 2 years unless there are circumstances that warrant special 
consideration, as determined by us. This proposed section would remain 
unchanged from the MA program.
13. Proposed Minimum Enrollment Requirements
    Section 1860D-12(b)(3)(A) of the Act applies the minimum enrollment 
requirements of section 1857(b)(1) and section 1857(b)(3) of the Act to 
Part D of the Act. However, the statute also gives the Secretary the 
authority to increase the minimum number of enrollees as the Secretary 
deems appropriate. In proposed Sec.  423.512, we are proposing to 
retain the minimum enrollment requirements used for the MA program and 
that appear in section 1857(b)(1) of the Act. Our rationale for 
retaining the MA minimum enrollment level is to avoid conflicts that 
could occur if we adopted a higher minimum for Part D, which could 
imply that MA plans that could not meet the higher Part D standard 
would be unable to offer a drug benefit as required by law. In reality, 
we expect that stand-alone PDPs would have enrollments that far exceed 
these minimum levels. We are interested in receiving comments on 
whether these numbers should be increased for PDP sponsors. We are also 
interested in receiving comments on whether the 1,500 standard, which 
was directed at local MA organizations, has applicability in the 
context of PDPs. Thus, our regulations would provide that, in general, 
the Secretary would not enter into a contract with a prospective PDP 
sponsor, unless the organization has at least 5,000 individuals who are 
enrolled for the purpose of receiving prescription drug benefits from 
the organization. Another option would be for the prospective PDP 
sponsor to have a minimum enrollment number of 1,500 individuals if the 
organization primarily serves individuals residing outside of urbanized 
areas. Urban area is defined in Sec.  412.62(f) as essentially 
including MSAs and NECMAs as defined by OMB. The PDP sponsor would be 
required to maintain a minimum enrollment as discussed in this proposed 
section, however, as directed by section 1860D-12(b)(3)(A)(ii) of the 
Act, the proposed minimum enrollment requirements would be waived for 
any PDP sponsor in its first contract year in a region.
14. Proposed Reporting Requirements
    In proposed Sec.  423.514, we would require each PDP sponsor to 
have an effective procedure to develop, compile, evaluate, and report 
to us, to its enrollees, and to the general public, at the times and in 
the manner that we require statistics indicating the following:
     The cost of its operations;
     The patterns of utilization of its services;
     The availability, accessibility, acceptability of its 
services;
     Information demonstrating that the PDP sponsor has a 
fiscally sound operation; and
     Other information that we may require;
    This proposed section would also contain proposed provisions for 
each PDP sponsor to report significant business transactions to us 
annually, within 120 days of the end of its fiscal year (unless for 
good cause shown, we authorize an extension of time). The information 
provided to us, would have to contain a description of significant 
business transactions as defined in proposed Sec.  423.501 between the 
PDP sponsor and a party in interest. For those transactions, the PDP 
sponsor would be required to show that the costs of the transactions do 
not exceed the costs that would be incurred if these transactions were 
with someone who is not a party in interest; or if they do exceed, a 
justification that the higher costs are consistent with prudent

[[Page 46716]]

management and fiscal soundness requirements.
    For purposes of this proposed section, the PDP sponsor would be 
required to produce a combined financial statement for itself and a 
party of interest if 35 percent or more of the costs of operation of 
the PDP sponsor go to a party in interest or 35 percent or more of the 
revenue of a party in interest is from the PDP sponsor. We would 
require the combined financial statements to include the following 
information:
     The display, in separate columns, of the financial 
information for the PDP sponsor and each of the parties in interest.
     The elimination of inter-entity transactions in the 
consolidated column.
     The examination of statements by an independent auditor in 
accordance with generally accepted accounting principles and include 
appropriate opinions and notes.
    Upon written request from a PDP sponsor showing good cause, we 
could waive the proposed requirement that the organization's combined 
financial statement include the financial information discussed above 
for a particular entity.
    In this proposed section, for any employees' health benefits plan 
that includes a PDP sponsor in its offerings, the PDP sponsor would be 
required to furnish, upon request, the information the plan needs to 
fulfill its reporting and disclosure obligations (for the particular 
PDP sponsor) under the Employee Retirement Income Security Act of 1974 
(ERISA). The PDP sponsor would also be required to furnish the 
information to the employer or the employer's designee, or to the plan 
administrator, as the term ``administrator'' is defined in ERISA. This 
proposed section would also require each PDP sponsor organization to 
notify us of any loans or other special financial arrangements it makes 
with contractors, subcontractors and related entities and each PDP 
sponsor would be required to make the information reported to us under 
this proposed section available to its enrollees upon reasonable 
request. These provisions would remain unchanged from the MA 
regulations.
15. Proposed Prohibition of Midyear Implementation of Significant New 
Regulatory Requirements
    In proposed Sec.  423.516, we propose that we may not implement, 
other than at the beginning of a calendar year, provisions under this 
proposed section that would impose new, significant regulatory 
requirements on a PDP sponsor or a prescription drug plan.

L. Effect of Change of Ownership or Leasing of Facilities During the 
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 the Term of Contract'' at the beginning of your 
comments.)
1. Overview
    Proposed Subpart L of proposed part 423 would describe the impact 
that a PDP sponsor organization's ``change of ownership'' (CHOW) or 
leasing of facilities during the term of its contract would have on the 
status of the organization's contractual relationship with us, as well 
as required procedures to be followed by a contracting PDP sponsor to 
effect a CHOW.
2. Provisions
    In developing the proposed provisions for this proposed subpart as 
it relates to PDP sponsor organizations, we reviewed the experience 
that MA contractors and we have had under the provisions of subpart L 
of Part 422. A single set of CHOW requirements for both MA and PDP 
contractors would simplify management, assure consistency, and reduce 
administrative burden for those entities that are managing both 
programs. To that end, as a starting point we are proposing that the 
requirements in proposed Sec. Sec.  423.551, 423.552, and 423.553, of 
this proposed rule, for the PDP sponsor, would be essentially the same 
as the requirements found in Sec. Sec.  422.550, 422.552 and 422.553 
for the MA program. Those proposed requirements and procedures are 
summarized in section 3, below.
    Since the impact of a change of ownership on a PDP sponsor's 
contract with us would be similar to its effect on an MA organization's 
contract, we believe that the two sets of requirements should be 
similar. However, we are considering the modification of existing 
change of ownership provisions in both rules 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 could 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 a PDP's facilities.
3. Proposed General Provisions
    In proposed Sec.  423.551(a), we would present the three situations 
that constitute CHOW in the context of proposed subpart L. We would 
state that--
     The removal, addition, or substitution of a partner, 
unless the partners expressly agree otherwise as permitted by 
applicable State law, constitutes a CHOW;
     Transfer of substantially all the assets of the sponsor to 
another party constitutes a change of ownership; and
     The merger of the PDP sponsor's corporation into another 
corporation, or the consolidation of the PDP sponsor's organization 
with one or more other corporations, resulting in a new corporate body, 
constitutes a CHOW.
    We note that Sec.  422.551(a)(2) if carried over from the MA rule 
would provide that a change of ownership occurs whenever there is a 
``[t]ransfer of title and property to another party * * *'' This 
provision would seem to apply to any transfer no matter how small and, 
read literally, would include a partial transfer of the employer's 
assets such as a spin off or the sale of a single facility or operating 
division of the employer. Combined with the absolute assignment rule of 
(d), this has the potential to lead to absurd results. Therefore, in 
our proposed rule, we would change Sec.  423.551(a)(2) to include only 
asset sales that are essentially transfers of the entire business 
enterprise. We request comments on situations where a sponsor transfers 
to another party substantial assets, but less than substantially all of 
its assets. In such comments, please describe the different scenarios 
that might develop under such circumstances, especially the extent to 
which benefits covered by the agreement might reasonably be expected to 
be provided by the old or new owner and the best approach for either 
transferring, issuing, or reissuing sponsor agreements.''
    The proposed exception to the three provisions discussed above 
would be that a transfer of corporate stock or the merger of another 
corporation into the PDP sponsor's organization, with the PDP sponsor 
organization surviving, would not usually constitute a CHOW.
    Proposed Sec.  423.551(c) of this proposed section, would require a 
PDP sponsor that has a Medicare contract in effect under proposed Sec.  
423.502 of proposed Subpart K and is considering or negotiating a CHOW, 
to notify us at least 60 days before the anticipated effective date of 
the change. The PDP

[[Page 46717]]

sponsor would also be required to provide updated financial information 
and a discussion of the financial and solvency impact of the CHOW on 
the surviving organization.
    In this proposed section we would also state that if the PDP 
sponsor fails to give us the required notice in a timely manner, it 
would continue to be liable for payments that we make to it on behalf 
of Medicare enrollees after the date of the CHOW.
    Proposed Sec.  423.551(d) would define a novation agreement, the 
legal vehicle that we would use to recognize the new owner of a PDP 
sponsor organization's corporation, as the successor in interest to the 
Medicare contract. For this proposed rule, a novation agreement would 
be an agreement among the current owner of the PDP sponsor, the 
prospective new owner, and us. This agreement would have to be signed 
by all three parties and, to be effective, contain the proposed 
provisions at proposed Sec.  423.552. The agreement would also have to 
allow us to recognize the new owner as the successor in interest to the 
current owner's Medicare contract. The new owner has to be sure to get 
adequate data to substantiate claims for reimbursement from the 
previous owner, because the new owner would be responsible at the time 
of the reconciliation process.
    Proposed Sec.  423.551(e) would detail the consequences of a CHOW 
that occurs without a novation agreement. Under this proposed section, 
if there is not a novation agreement, the existing Medicare contract 
would become invalid and, if the new owner wanted to participate in the 
Medicare program as a PDP sponsor, it would have to apply for, and 
enter into a contract in accordance with proposed subpart K of this 
proposed part.
4. Proposed Novation Agreement Requirements
    Proposed Sec.  423.552(a) would provide the three conditions that 
should be met for our approval of a novation agreement. Consistent with 
our approach in the MA program, we are proposing that the first 
condition would be for the PDP sponsor to give us notice, at least 60 
days before the effective date of the CHOW. That notice would also 
include updated financial information and a discussion of the financial 
and solvency impact of the CHOW on the surviving organization. If 
notice were not timely, the contractor would continue to be liable for 
payments that we make to it on behalf of Medicare enrollees after the 
date of ``CHOW'' as described in proposed Sec.  423.551(c)(2). The 
second proposed condition would be that the PDP sponsor would submit 
three signed copies of the novation agreement that contains the 
proposed provisions specified in proposed Sec.  423.552(b) to us at 
least 30 days before the proposed CHOW date, and one copy of other 
relevant documents required by us. The final condition would be our 
determination after reviewing a novation agreement concerning the 
following:
     The proposed new owner is in fact a successor in interest 
to the contract.
     Recognition of the new owner as a successor in interest of 
the Medicare program.
     The successor organization meets the requirements to 
qualify as a PDP sponsor under proposed subpart K.
    Proposed Sec.  423.552(b) would identify the four required 
provisions of a properly constituted novation agreement. In this 
proposed section, we would require the agreement to state that the new 
owner would assume all obligations under the Medicare contract and the 
previous owner would be required to waive its right to reimbursement 
for covered services furnished during the rest of the current contract 
period. The previous owner would also be required to guarantee 
performance of the contract by the new owner during the contract 
period, or post a performance bond that is satisfactory to us. The last 
condition would require the previous owner to agree to make its books, 
records, and other necessary information available to the new owner and 
to us to permit an accurate determination of costs for the final 
settlement of the contract period. We would have to be able to 
recognize the new owner as the successor in interest to the current 
owner's Medicare contract and the novation agreement would be 
effective, once signed by all three relevant parties.
5. Effect of Leasing of a PDP Sponsor's Facilities
    Proposed Sec.  423.553 would address provisions related to when a 
PDP sponsor leases its facilities to another party and its PDP sponsor 
contract with us. Specifically, we are proposing that if a PDP sponsor 
leases all or part of its facilities to another entity, the other 
entity would not acquire PDP sponsor status under section 1860D-12(b) 
of the Act. If a PDP sponsor leases all of its facilities to another 
entity, its Medicare contract would terminate. If the other entity 
wants to participate in the Medicare program as a PDP sponsor, it would 
be required to apply for and enter into a contract in accordance with 
proposed Sec.  423.502. If the PDP sponsor leases part of its 
facilities to another entity, its contract with us would remain in 
effect while we survey the PDP sponsor to determine whether it 
continues to be in compliance with the applicable proposed requirements 
and qualifying conditions specified in proposed Subpart K of this part.

M. Grievances, Coverage, Reconsiderations, and Appeals

(If you choose to comment on issues in this section, please include the 
caption ``Subpart M--Grievances, Coverage Determinations, 
Reconsiderations, and Appeals'' at the beginning of your comments.)
1. Introduction
    Proposed subpart M of part 423 would implement sections 1860D-4(f), 
1860D-4(g), and 1860D-4(h) of the Act, which set forth the procedures 
PDP sponsors must follow with regard to grievances, coverage 
determinations, and appeals.
    Under section 1860D-4(f) of the Act, a PDP sponsor must provide 
meaningful procedures for hearing and resolving grievances between the 
sponsor (including any entity or individual through which the sponsor 
provides covered benefits) and enrollees.
    Section 1860D-4(g) of the MMA addresses the procedures for coverage 
determinations and redeterminations of PDP sponsors. In general, the 
MMA requires that a PDP sponsor's procedures meet the same requirements 
as those that apply to MA organizations (under paragraphs (1) through 
(3) of section 1852(g)) of the Act for organization determinations and 
redeterminations. This includes the same timeframes for making these 
determinations and redeterminations, including the requirements for 
expedited procedures when the standard timeframes could seriously 
jeopardize an enrollee's life, health, or ability to regain maximum 
function. In addition, section 1860D-4(g)(2) of the Act specifies that 
if a PDP sponsor has tiered cost sharing for formulary drugs, it must 
establish an exceptions process. Under the exceptions process, 
consistent with guidelines established by the Secretary, a nonpreferred 
drug could be covered under the terms applicable for preferred drugs if 
the prescribing physician determines that the preferred drug for 
treatment of the same condition either would not be as effective for 
the individual or would have adverse effects for the individual, or 
both.
    Section 1860D-4(h) of the Act addresses appeals of a PDP sponsor's 
coverage determinations and redeterminations. Here, the MMA requires 
that the PDP sponsors follow

[[Page 46718]]

appeals requirements that are similar to those applicable to MA 
organizations under paragraphs (4) and (5) of section 1852(g) of the 
Act (regarding independent review entity (IRE) review and ALJ hearings, 
respectively). As a result, in our regulations at Sec.  423.612(b), we 
propose to require a 60-day timeframe for requesting an appeal, which 
has been a long-standing requirement throughout the entire Medicare 
managed care appeals process. To the extent the proposed requirements 
differ from the MA rules, we discuss these differences below. In 
addition, section 1860D-4(h)(2) of the Act specifies that appeals, 
involving coverage of a covered part D drug that is not on a PDP's 
formulary, are permissible only if the prescribing physician determines 
that all covered Part D drugs, on any tier of the formulary for 
treatment of the same condition, would not be as effective for the 
individual as the nonformulary drug, would have adverse effects on the 
individual, or both. The proposed regulations needed to implement the 
above provisions are discussed below.
2. General Provisions (Sec.  423.560 Through Sec.  423.562)
    Subpart M begins with proposed Sec.  423.560, which sets forth 
several definitions for terms used in the subpart. These definitions 
are generally self-explanatory and mirror those used in subpart M of 
part 422 for MA, but have been modified to reflect applicability to 
Part D drug benefits.
    Section 423.562, General Provisions, provides an overview of the 
responsibilities of PDP sponsors and the rights of PDP enrollees with 
respect to grievances, coverage determinations, and appeals. The 
responsibilities of PDP sponsors under Sec.  423.562(a) include 
establishing and maintaining procedures for grievances, coverage 
determinations, exceptions to tiered cost-sharing formulary structures, 
requests for formulary exceptions, and appeals. This section would also 
specify that enrollees receive written information about the grievance 
and appeal procedures available to them through the PDP sponsor, and 
about the QIO complaint process available to enrollees. Like under the 
MA program, the proposed regulations indicate that if a PDP sponsor 
delegates any of its responsibilities under subpart M to another entity 
or individual through which the sponsor provides covered drug benefits, 
the PDP sponsor is ultimately responsible for ensuring that the 
applicable grievance, coverage determination, and appeal requirements 
are met.
    Section 423.562(b) of our proposed rule explains the basic rights 
of PDP enrollees in relation to PDP sponsors under subpart M and 
references the regulations that explain the rights. These include, for 
example, the right to a timely coverage determination and appeal rights 
pursuant to that coverage determination.
    Section 423.562(c) of our proposed rule specifies that an enrollee 
has no appeal right when there is no payment liability, or when 
benefits have been provided by a non-network provider (that is, a non-
network pharmacy), except in those situations in which, under subpart 
C, the PDP is obligated to cover such drugs. Finally, Sec.  423.562(d) 
explains that, unless otherwise noted, the general Medicare appeals 
rule under part 422, subpart M, is applicable for appeals to an 
Administrative Law Judge (ALJ) or the Medicare Appeals Council (MAC).
3. Grievance Procedures (Sec.  423.564)
    As defined in Sec.  423.560 of our proposed rule, a grievance means 
any complaint or dispute, other than one that constitutes a coverage 
determination, expressing dissatisfaction with any aspect of a PDP 
sponsor's operations, activities, or behavior, regardless of whether 
remedial action is requested. An enrollee might file a grievance, for 
example, if he or she has a complaint about the timeliness of filling a 
prescription, or the accuracy of the prescription. As required by 
section 1860D-4(f) of the MMA, the grievance procedures in this subpart 
generally mirror those found in part 422, Subpart M, for MA. Thus, our 
regulations would require that each PDP sponsor have procedures to 
ensure that grievances are heard and resolved in a timely manner, but 
they would not include prescriptive details on the procedures. The only 
exceptions to this approach, under Sec.  423.564(d), involve certain 
limited situations where a PDP sponsor must respond to a grievance 
within 24 hours, such as a grievance over a PDP sponsor's decision to 
invoke an extension relating to a coverage determination or 
redetermination, or a PDP sponsor's refusal to grant an enrollee's 
request for an expedited coverage determination or redetermination 
where the enrollee has not yet purchased or received the drug that is 
in dispute.
    Section 423.564(c) of our proposed rule explains the distinction 
between the grievance procedures of the PDP sponsor and the quality 
improvement organization (QIO) complaint process. This section further 
establishes that when an enrollee submits a quality of care complaint 
to a QIO, the PDP sponsor must cooperate with the QIO in resolving the 
complaint.
    Section 423.564(e) of our proposed rule concludes the grievance 
procedures by proposing minimum record keeping requirements for a PDP 
sponsor, which include recording the receipt date of a grievance, its 
final disposition, and the date the enrollee is notified of the 
disposition.
4. Coverage Determinations (Sec.  423.566 Through Sec.  423.576)
    These proposed provisions implement the MMA requirement that PDP 
sponsors establish procedures for making coverage determinations and 
redeterminations regarding covered drug benefits that are essentially 
the same as those in effect for MA organizations under part 422, 
subpart M for MA. Therefore, for the drug benefits under Part D, we 
have continued standard and expedited requirements for coverage 
determinations and redeterminations.
    Section 423.566(a) of our proposed rule specifies that each PDP 
sponsor must have a procedure for making timely coverage determinations 
regarding the drug benefits an enrollee is entitled to receive and the 
amount, if any, that an enrollee is required to pay for a benefit. The 
PDP sponsor is required to establish both a standard procedure for 
making coverage determinations and an expedited procedure for 
situations in which applying the standard procedure could seriously 
jeopardize the enrollee's life, health, or ability to regain maximum 
function.
    As proposed in Sec.  423.566(b), actions that would constitute 
coverage determinations include: a PDP sponsor's failure to provide or 
pay for a covered Part D drug (including failure to pay because the 
drug is not on the plan's formulary, because the drug is determined not 
to be medically necessary, because the drug is furnished by an out-of-
network pharmacy, or because the sponsor determines that the drug 
otherwise would be excluded under section 1862(a) of the Act); failure 
to provide a coverage determination in a timely manner that would 
adversely affect the health of the enrollee; decisions on the amount of 
cost sharing; or decisions on whether the preferred drug is appropriate 
for an enrollee. Section 423.566(c) lists those individuals who can 
request a standard coverage determination as the enrollee (including 
his or her authorized representative) and the prescribing physician on 
behalf of the enrollee. We

[[Page 46719]]

note that we have not included the legal representative of a deceased 
enrollee's estate (as is specified in Sec.  422.566(c)(1)(iii)) since 
that individual would be considered an authorized representative. Those 
individuals who can request an expedited determination or an expedited 
redetermination are similarly an enrollee (including his or her 
authorized representative), or the prescribing physician on behalf of 
the enrollee. In these situations we propose that a prescribing 
physician need not be an appointed representative of the enrollee in 
order to assist in obtaining either a standard or an expedited coverage 
determination. We welcome comments on any additional individuals or 
entities that should be able to request a coverage determination.
    The standard timeframes and notice requirements for coverage 
determinations are proposed in Sec.  423.568. These requirements 
include a determination as expeditiously as the enrollee's health 
condition requires, but no later than 14 calendar days after receipt of 
the request if the request is for prescription drug benefits. An 
extension of the timeframe by up to 14 calendar days is allowable if 
the enrollee requests the extension, or if the PDP sponsor can justify 
how a delay is in the interest of the enrollee. For example, the 
receipt of additional medical evidence may change the outcome of the 
decision. An enrollee must be notified of the reasons for the delay, 
and informed of the right to file an expedited grievance if the 
enrollee disagrees with the sponsor's decision to invoke an extension. 
If the request is for payment, the determination must be made no later 
than 30 calendar days after receipt of the request. Consistent with 
Sec.  1860D-4(g)(1) of the MMA, the timeframe and notice requirements 
for requests involving payment are the same as those that apply for 
clean claims under the Medicare Advantage program. This section also 
establishes the requirement for written notice for PDP sponsor denials 
and the form and content of the denial notice, including that the 
notice must explain the reason for the denial and the availability of 
appeal rights.
    Sections 423.570 and 423.572 propose the requirements regarding 
expedited coverage determinations, including how an enrollee or an 
enrollee's prescribing physician can make an oral or written request 
(Sec.  423.570(b)), and how the PDP sponsor must process requests 
(Sec.  423.570(c)). We clarify in Sec.  423.570(a) that requests for 
payment of prescription drugs already furnished for an enrollee cannot 
be expedited.
    Section 423.570(b)(2) specifies that a prescribing physician may 
provide written or oral support for a request for expedition, and under 
Sec.  423.570(c)(3)(ii), we clarify that when requests for expedition 
are made or supported by an enrollee's prescribing physician, the PDP 
sponsor must grant the request if the physician indicates that applying 
the standard timeframe could seriously jeopardize the enrollee's life 
or health, or the ability to regain maximum function. Section 
423.570(d) proposes actions following a denial of a request and 
explains that when a sponsor denies a request for an expedited 
determination that the request automatically be transferred to and 
processed under the standard determination procedures, which require 
the determination within 14 calendar days. For accepted requests for 
expedited determination, Sec.  423.572 proposes that the PDP sponsor 
must make its expedited determination and notify the enrollee and the 
prescribing physician, as appropriate, as expeditiously as the 
enrollee's health condition requires, but no later than 72 hours after 
receiving the request. Section 423.572(b) proposes the requirements for 
extensions, and includes the enrollee's right to file an expedited 
grievance if the enrollee disagrees with the PDP sponsor's decision to 
invoke an extension. Proposed Sec.  423.572(c) explains that if the PDP 
sponsor first notifies an enrollee of an adverse expedited 
determination orally, then it must mail written confirmation to the 
enrollee within 3 calendar days. Finally, Sec.  423.572(d) explains the 
requirements for the content of the expedited determination notice, and 
Sec.  423.572(e) explains that a failure to provide a timely notice 
would constitute an adverse coverage determination, which may be 
appealed. Similar to the expedited requirements for MA under Part C, 
these sections would require that drug coverage determinations be made 
as expeditiously as the enrollee's health condition requires. Note that 
given the requirement that timing of determinations (and 
redeterminations) be based on an enrollee's health condition, the PDP 
sponsor has a responsibility to ensure that an enrollee's health 
situation and needs are fully considered in reviewing any requests (for 
example, if an enrollee has a chronic condition that has necessitated 
ongoing use of the drug in question). Again, however, if the enrollee 
already received the drug and the determination involves who should pay 
for the drug (or how much), there is generally no need for an expedited 
determination since the enrollee's health needs have been met.
5. Formulary Exceptions Procedures (Sec.  423.578)

a. Exceptions to a Plan's Tiered Cost-Sharing Structure

    As noted above, section 1860D-4(g)(2) of the Act specifies that an 
enrollee may request an exception to a plan's tiered cost-sharing 
structure. Under such an exception, a ``nonpreferred drug could 
(emphasis added) be covered under the terms applicable for a preferred 
drug'' under certain conditions. At a minimum, the prescribing 
physician would have to determine that the preferred drug either would 
not be as effective for the individual or would have adverse effects 
for the individual, or both. The statute then requires that each PDP 
sponsor establish exceptions procedures consistent with guidelines 
issued by the Secretary for making determinations on such requests. 
Unfavorable determinations constitute coverage denials that would be 
subject to all the appeals rights discussed in subpart M of part 423.
    How this section of the statute is implemented will have 
significant consequences for PDP sponsors and Medicare beneficiaries. 
Although the only specific criterion established by law for assessing 
exceptions requests is the prescribing physician's determination 
explained above, we believe that the statute's direction that 
exceptions be made in accordance with ``guidelines established by the 
Secretary'' indicates that PDP sponsors be able to establish additional 
criteria, subject to the Secretary's guidance. This flexibility raises 
two key, intertwined questions. First, to what extent should the 
Secretary limit a plan's discretion in establishing exceptions 
criteria? And second, how detailed must the criteria be? The absence of 
detailed criteria, although perhaps desirable for a PDP sponsor, may 
not afford Part D enrollees the type of drug access intended under the 
law. However, making tiering exceptions too easy to obtain could 
eliminate a sponsor's ability to obtain volume pricing discounts, and 
thus, offer optimal value to beneficiaries.
    Based on existing models in the state and private sectors and on 
Federal managed care models, we believe that PDPs' formularies are 
likely to include tiered cost sharing; such tiering allows PDP sponsors 
to obtain better prices on preferred drugs, resulting in savings for 
both enrollees and the PDPs. Tiering will presumably be particularly 
critical for stand-alone PDPs (that is, non MA-PD plans), which will 
not have direct

[[Page 46720]]

relationships with doctors and thus will have no clear method of cost/
utilization control other than through their pricing structure.
    However, it is very difficult to predict exactly how PDP sponsors 
will design their tiering structures. For example, although the statute 
refers to ``preferred'' and ``nonpreferred'' drugs, actual tiering 
structures are likely to include three or more classes of drugs (such 
as ``generic,'' ``preferred brand,'' ``non-preferred brand,'' etc.). We 
believe that this uncertainty strongly suggests that the proposed 
regulations not include overly prescriptive requirements with respect 
to a PDP's exceptions criteria. Instead, we would provide general 
guidance on the scope of issues that must be addressed under a PDP's 
exceptions criteria on the procedural elements of that process, but 
still allow for flexibility and innovation in this regard as we gain 
experience with the new program.
    Thus, we would propose under Sec.  423.578 that a PDP sponsor must 
establish an exceptions process that addresses each of the following 
sets of circumstances: (1) The enrollee is using a drug and the 
applicable tiered cost-sharing structure changes during the year; (2) 
the enrollee is using a drug and the applicable tiered cost-sharing 
structure changes at the beginning of a new plan year; and (3) there is 
no pre-existing use of the drug by the enrollee. For purposes of this 
subpart, ``using a drug'' means the enrollee is receiving the drug in 
the course of treatment, including time off if it is part of the 
treatment. A PDP's exceptions criteria would not necessarily need to be 
different under each scenario.
    While we thought it necessary to require PDP sponsors to include 
certain criteria in the exceptions process, we also recognize the need 
to avoid a situation where a PDP sponsor's cost-sharing rules are 
effectively driven by the exceptions criteria, rather than the other 
way around. Thus, in Sec.  423.578(a)(2) we have proposed a limited 
number of elements that must be included in any sponsor's exception 
criteria: (1) A description of the process used by the PDP to evaluate 
the physician's certification; (2) consideration of the cost of the 
requested drug compared to that of the preferred drug; (3) 
consideration of whether the formulary includes a drug that is the 
therapeutic equivalent of the requested drug; and (4) consideration of 
the number of drugs on the plan's formulary that are in the same class 
and category as the requested drug.
    We also considered including a number of other exceptions criteria 
such as--(1) requiring PDP sponsors to establish a blanket rule 
permitting continued access to a drug at a given price when there is a 
mid-year change in the tiering structure; (2) requiring an enrollee who 
is using a drug that is subsequently removed from the sponsor's 
formulary or is no longer designated as the ``preferred drug'' to try a 
preferred drug(s), and experience adverse effects, before being 
permitted to resume using the original drug; (3) requiring a sponsor to 
establish exceptions criteria that are specific to particular classes 
of covered Part D drugs, such as cholesterol-lowering drugs; and (4) 
requiring sponsors to give enrollees an opportunity to request 
exceptions to a plan's tiered cost-sharing structure other than on a 
case-by-case basis. Additionally, we contemplated the possibility of 
establishing criteria for the review process used to evaluate plan 
formularies and tiering structures, and developing exceptions criteria 
that are specific to particular classes of covered Part D drugs. Based 
on public comment and any additional information that is available at 
the time on the formulary structure, we may add further detail to these 
criteria or include additional criteria in the final rule.
    Consistent with existing MA rules, we are proposing that an 
enrollee, the enrollee's authorized representative or the prescribing 
physician may request an exception. The statutory requirement that the 
prescribing physician determine that the preferred drug either would 
not be as effective for the individual generally, or would have adverse 
effects for the individual, would constitute a minimum threshold for 
approving an exception request. Thus, we are proposing that a PDP 
sponsor may require a written certification to that effect from the 
prescribing physician, as well as certain limitations on the content 
requirements sponsors could impose for these certifications. However, 
we would permit PDP sponsors flexibility in how this standard is 
applied. For example, a PDP sponsor could require that a physician 
certify that the preferred drug would be less effective than the 
nonpreferred drug, or the PDP sponsor could choose to apply a more 
stringent standard (such as requiring that the prescribing physician's 
certification also include the enrollee's patient history or require 
the enrollee first try the preferred drug, absent medical 
contraindications).
    A PDP's exceptions procedures would also be required to describe 
how a determination on an exception request would affect the enrollee's 
cost sharing obligations under the PDP's tiering structure. For 
example, would a request for a nonpreferred drug result in payment at 
the preferred brand drug level, or at the generic drug level, if 
available?

b. Exceptions and Appeals Rules for Non-Formulary Determinations?>

    Section 1860D-4(h)(2) of the Act establishes a limitation on 
requests for exceptions when a particular drug is not on a plan's 
formulary at all. The statute specifies that an enrollee may appeal a 
determination not to provide coverage of a non-formulary drug ``only if 
the prescribing physician determines that all covered Part D drugs on 
any tier of the formulary for treatment of the same condition would not 
be as effective for the individual as the nonformulary drug, would have 
adverse effects for the individual, or both.'' Notably, this limitation 
is set forth under the ``appeals'' provisions of the statute, as 
opposed to under the preceding coverage determination and 
redetermination provisions that are discussed above for exceptions to 
tiered cost-sharing rules. Thus, we believe the intent of this 
provision is to limit appeals to cases where the prescribing physician 
has made the determination described by the law.
    Unlike for the tiering exceptions, the statute does not 
specifically require that PDP sponsors develop an exceptions process to 
review requests for exceptions for non-formulary drugs. However, we do 
not believe that the statute intends to preclude an enrollee from 
obtaining a coverage determination from a PDP sponsor absent a 
determination by the prescribing physician, or to require that the 
physician's determination alone should result in a favorable coverage 
determination by the PDP. Thus, we propose to require that PDP sponsors 
also establish exceptions criteria for addressing these situations. 
Requiring sponsors to use an exceptions process to review requests for 
coverage of non-formulary drugs will create a more efficient and 
transparent process and will ensure that enrollees know what standards 
are to be applied. Additionally, requiring a similar exceptions process 
for conducting these types of reviews will help ensure that a PDP 
sponsor's formulary is based on scientific evidence rather than 
tailored to fit exceptions and appeals rules for formulary drugs.
    Under this exceptions process, which we propose at Sec.  
423.578(b), a PDP must allow enrollees to request (1) Coverage of 
covered Part D drugs that are not on a sponsor's formulary; (2) 
continued coverage of a drug the sponsor has

[[Page 46721]]

removed from its formulary; (3) an exception to a sponsor's policy 
regarding coverage for a step therapy; and (4) an exception to a 
sponsor's dosing limitation. A PDP's criteria would need to include a 
description of the criteria it will use to evaluate the prescribing 
physician's determination, clarify how the plan evaluates the relative 
safety and efficacy of the requested drug, and describe the cost-
sharing scheme that will be applied if coverage is provided. Again, an 
enrollee, the authorized representative, or prescribing physician could 
request an exception, and the PDP sponsor may require a written 
certification from the prescribing physician that the non-covered drug 
is medically necessary to treat the enrollee's disease or medical 
condition. An enrollee would have a right to a redetermination by the 
PDP of any unfavorable coverage determination.
    Like for tiering exceptions, we are proposing that enrollees be 
required to request reconsideration by an independent review entity 
(IRE), as opposed to having these cases automatically forwarded to the 
IRE. We welcome comments on both these issues.

c. Treatment of Determinations Regarding Exceptions Requests

    From a procedural standpoint, we propose at Sec.  423.578(c)(1) 
that determinations on exception requests constitute plan coverage 
determinations under Sec.  423.566 and should be completed in the same 
timeframes. Enrollees would then have an opportunity to request a plan 
redetermination. Unfavorable redetermination decisions could then be 
appealed to the independent review entity. The IRE's review would focus 
on whether the PDP had properly applied its formulary exceptions 
criteria for the individual in question. If it determined that the PDP 
sponsor correctly applied its exceptions criteria, the sponsor's 
determination would be upheld. Thus, the IRE would not have any 
discretion with respect to the validity of the plan's exceptions 
criteria or formulary. (CMS would be responsible for evaluating and 
approving a PDP's exceptions criteria and formulary as part of the 
annual plan approval process.) In many instances, however, evaluating 
whether the criteria for a formulary exception had been satisfied would 
necessarily involve an element of medical judgment (e.g., would a 
patient suffer significant adverse effects by using the plan-preferred 
drug?). In those situations, the IRE's medical staff would be 
responsible for reviewing the sponsoring plan's determination as to 
whether the formulary exceptions criteria had been applied properly. 
Note that part D enrollees could subsequently access higher levels of 
the appeals process like for any other unfavorable coverage 
determination, consistent with the statutory reference to section 
1852(g)(4) and (5) of the MA provisions.
    Although not required by statute, we thought it important to put in 
place certain safeguards regarding the issuing and effect of a coverage 
determination made as part of the exceptions process. We believe that 
these safeguards will help to ensure that the exceptions process is 
both fair and efficient for enrollees. First, to ensure that enrollees 
who file exceptions requests for drugs that are being removed from a 
sponsor's formulary are not disadvantaged by a sponsor's failure to 
issue a timely decision, we establish in Sec.  423.578(c)(1) and Sec.  
423.578(c)(2) that if a sponsor fails to issue a timely decision, the 
sponsor must continue to provide coverage until a decision is made on 
the request. Section 423.578(c)(2)(i) allows enrollees to receive up to 
a one-month supply of the requested drug, but a sponsor could adjust 
the supply to account for a shorter time frame.
    Once a sponsor approves an exceptions request, we believe an 
enrollee should not have to continue filing exceptions requests for 
future refills of the drug. Therefore, we provide in Sec.  
423.578(C)(3) that once a sponsor approves a drug pursuant to the 
exceptions process, an enrollee is entitled to continue receiving 
refills of the drug for as long as the physician continues prescribing 
the drug and for as long as the drug continues to be considered safe 
and effective for treatment of the enrollee's disease or medical 
condition.
    The final safeguard implemented under Sec.  423.578 prohibits PDP 
sponsors from assigning drugs approved under either exceptions process 
to a special formulary tier, co-payment, or other cost-sharing 
requirement. In other words, sponsors must employ reasonable criteria 
(for example, the cost of the requested drug compared to the cost of 
other similar drugs on the plan's formulary) in determining the co-
payments or other cost-sharing requirements of drugs approved for 
coverage under the exceptions process.
    We recognize that these provisions represent a critical component 
of the new prescription drug benefit, and we particularly welcome 
suggestions from commenters on these proposals. Our goal is to foster 
the establishment of exceptions processes that employ criteria designed 
to maximize available drug benefits for all Medicare beneficiaries, 
while ensuring that plan sponsors have the flexibility they need to 
negotiate the best process on behalf of enrollees.
6. Appeals

a. Redeterminations (Sec.  423.580 Through Sec.  423.590)

    Sections 423.580 through Sec.  423.590 explain the right to a 
redetermination and the requirements that apply to PDP sponsors for 
both standard and expedited redeterminations. If a decision regarding a 
coverage determination is unfavorable (in whole or in part) to the 
enrollee, the enrollee may file an oral or written request with the PDP 
or MA-PD plan for a redetermination on the decision. Note that, unlike 
the existing MA regulations, the proposed regulations would not 
identify Social Security Administration (SSA) field offices as a 
possible location for filing redetermination requests. Using any filing 
location other than the plan itself can significantly affect the speed 
with which the appeal is resolved. Moreover, given that section 931 of 
the MMA mandates the transfer of responsibility for Medicare appeals 
from SSA to DHHS by no later than October 1, 2005, we believe that an 
explicit regulatory reference to SSA field offices would not be 
appropriate.
    For an expedited redetermination, an enrollee or the prescribing 
physician (acting on behalf of an enrollee) may submit an oral or 
written request for redetermination. However, requests for payment of 
drugs already received cannot be expedited. The proposed requirements 
for making standard redetermination determinations of covered benefits 
in Sec.  423.590(a) specify that the PDP sponsor must issue its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than 30 calendar days from the date of receipt 
of the request. Under Sec.  423.590(b), for standard redeterminations 
involving requests for payment, the PDP sponsor must issue its 
redetermination no later than 60 calendar days from the date of receipt 
of the request. In the case of expedited redeterminations, Sec.  
423.590(d) specifies that a PDP sponsor must complete its 
redetermination and give the enrollee and the prescribing physician 
involved, as appropriate, notice of its decision as expeditiously as 
the enrollee's health condition requires, but no later than 72 hours 
after receiving the request. For both the standard and expedited 
redetermination for covered benefits, the PDP sponsor may extend the 
timeframe for making its determination

[[Page 46722]]

by up to 14 calendar days if the enrollee requests the extension, or if 
the sponsor justifies a need for additional information and how the 
delay is in the interest of the enrollee. An extension would not be 
provided for redeterminations involving requests for payment.
    If the PDP sponsor's redetermination results in an affirmation, in 
whole or in part, of its original adverse coverage determination, the 
sponsor must give written notification to the enrollee and advise the 
enrollee of the right to file an appeal with the IRE that contracts 
with CMS.

b. Independent Review Entity (IRE) Reconsideration (Sec.  423.600 
Through Sec.  423.604)

    The MMA gives the Secretary the flexibility to establish an appeals 
process similar to that used for the MA appeals process. Thus, the 
proposed IRE reconsideration process set forth at Sec.  423.600 through 
Sec.  423.604 is much like that applicable to MA organizations under 
Part C. Note that when the PDP sponsor's redetermination affirms, in 
whole or in part, its adverse coverage determination, any issue 
remaining in dispute may be appealed by the enrollee to the IRE that 
contracts with CMS. However, unlike under the MA program, PDP sponsor 
redeterminations involving tiering issues or coverage of a non-
formulary drug would not be automatically forwarded to the IRE. 
Instead, an enrollee would need to request an IRE review. This proposed 
requirement modifies the MA procedure that affords automatic referral 
to the IRE whenever the MA organization's original denial is upheld by 
the organization's redetermination. We believe that this change is 
appropriate given the statutory limitation that an appeal request be 
made only if the prescribing physician determines that all covered Part 
D drugs on the formulary would not be as effective or would have 
adverse effects. Moreover, many of the drug appeals may involve 
relatively small monetary amounts, raising doubts about the efficacy of 
forwarding all such cases to an IRE.
    Thus, Sec.  423.600 proposes that an enrollee who is dissatisfied 
with the PDP sponsor's redetermination may file a written request for 
reconsideration by the IRE. We also propose that when an enrollee files 
for an appeal, the IRE is required to solicit the views of the 
prescribing physician. Also, in order for an enrollee to request a 
reconsideration of a PDP sponsor's determination not to provide for a 
covered drug that is not on the PDP formulary, the prescribing 
physician must determine that all covered part D drugs on any tier of 
the formulary for treatment of the same condition would not be as 
effective for the individual as the nonformulary drug, would have 
adverse effects for the individual, or both.
    Section 423.602 proposes the requirements for the IRE 
reconsideration determination notice, including the requirement that if 
the determination is adverse (that is, does not completely reverse the 
PDP sponsor's adverse coverage determination), the enrollee must be 
informed of the right to request an ALJ hearing and the procedures that 
must be followed to obtain the hearing.
    Section 423.604 of our proposed rule explains that a 
reconsideration by the IRE is final and binding on the enrollee and the 
PDP sponsor, unless the enrollee requests an ALJ hearing.

c. Administrative Law Judge (ALJ) Hearings, Medicare Appeals Council 
(MAC) Appeals, and Judicial Review (Sec.  423.610 Through Sec.  
423.630)

    As stated above, Section 1860D-4(h)(1) of the Act merely requires 
the Secretary to establish a reconsideration and appeals process that 
is ``similar'' (as determined by the Secretary) to the process used for 
MA organizations under the authority of 1852(g)(4) and (5) of the Act. 
Although we believe the Congress gave us a good deal of discretion in 
designing these procedural rules under Part D, we have determined as a 
policy matter to adopt most of the ALJ, MAC, and judicial review 
procedures currently used in the MA program.
    Section 1852(g)(5) of the Act provides the right to a hearing and 
to judicial review for an enrollee dissatisfied by reason of the 
enrollee's failure to receive a covered Part D drug to which he or she 
believes he or she is entitled, and at no greater charge than he or she 
believes he or she is required to pay. Section 1852(g)(5) of the Act 
also specifies the amount in controversy needed to pursue a hearing and 
judicial review and authorizes representatives to act on behalf of 
individuals that seek appeals. In general, we would be implementing 
section 1869 changes that apply to Part D through cross-reference to 
the appropriate Part 405 regulations.
    If the IRE's reconsideration determination is not fully favorable, 
the enrollee may request a hearing before an ALJ if the amount 
remaining in controversy meets the threshold requirement established 
annually by the Secretary. The threshold requirement will be published 
annually in the Federal Register. Although a PDP sponsor generally is 
not a party to the IRE appeal and may not request a hearing before an 
ALJ, the sponsor is considered a party to the ALJ hearing for the 
limited purpose of participation in the hearing. If the ALJ hearing 
does not result in a fully favorable determination, the enrollee may 
request MAC review of the ALJ decision.
    Following the administrative review process, the enrollee is 
entitled to judicial review of the final determination if the amount 
remaining in controversy meets the threshold requirement established 
annually by the Secretary and published in the Federal Register.
7. Effectuation of Reconsideration Determinations (Sec.  423.636 
Through Sec.  423.638)
    Sections 423.636 and 423.638 propose the requirements for 
effectuation of coverage determinations reversed by the PDP sponsor, 
redeterminations reversed by the independent review entity, or 
reversals by an ALJ or higher level of appeal. For example, Sec.  
423.636(a)(1) requires that for redeterminations of requests for 
benefits, if the PDP sponsor reverses its determination, it must 
authorize or provide the benefit under dispute as expeditiously as the 
enrollee's health condition requires, but no later than 30 calendar 
days after the date it receives the request for redetermination. When 
the PDP sponsor is reversed by the independent review entity, Sec.  
423.636(b)(1) requires that it must authorize the benefit under dispute 
within 72 hours from the date it receives notice reversing the 
redetermination, or provide the benefit as expeditiously as the 
enrollee's health requires, but no later than 14 calendar days from the 
date of the reversal notice. For redeterminations of requests for 
payment, Sec.  423.636(a)(2) requires that if the PDP sponsor reverses 
its coverage determination, it must pay for the benefit no later than 
60 calendar days after the date it receives the request for 
reconsideration. Under Sec.  423.636(b)(2) if a sponsor's 
redetermination is reversed by the independent review entity, it must 
pay for the benefit no later than 30 calendar days from the date it 
receives notice reversing the redetermination.
    Section 423.638 proposes that for expedited redeterminations 
reversed by the PDP sponsor or the independent review entity, the PDP 
sponsor must authorize or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires but no later 
than 72 hours after the date it receives the request for 
redetermination, or in the case of reversal by the independent review 
entity, from the date it receives the reversal notice.

[[Page 46723]]

    Finally, for reversals by an ALJ or higher level of appeal, under 
Sec.  423.636(c) and Sec.  423.638(c) the PDP sponsor must pay for, 
authorize, or provide the benefit under dispute as expeditiously as the 
enrollee's health condition requires, but no later than 60 calendar 
days from the date it receives notice reversing its determination.
8. Federal Preemption of Grievances and Appeals
    We believe that the grievance procedures for the Part D Drug 
Program under Title I should be the same as those that apply to the MA 
program under Title II.
    Section 232(a) of the MMA amended 1856(b)(3) of the Act so that it 
now reads: ``The standards under this part shall supersede any State 
law or regulation (other than State licensing laws or State law 
relating to plan solvency) with respect to MA plans which are offered 
by MA organizations under this part.'' Section 1860D-12(g) of the Act 
then incorporates this preemption rule for PDP sponsors and 
prescription drug plans. As we discussed earlier in Part I of this 
preamble, we believe that these preemption provisions would not cause 
all State laws to be superseded--particularly in areas where we have no 
authority to regulate. In the context of our grievance and appeals 
rules, 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 for which the Secretary 
is not authorized to promulgate standards (for example, spousal rights, 
powers of attorney, or legal guardianship). Often, authorized 
representative matters are non-Federal issues. However, because we do 
have the authority to regulate in the field of grievances, we are 
concerned that state grievance requirements will now be preempted, and 
we may need to reexamine our Federal grievance requirements. We request 
comments on this preemption issue and the specific state grievance 
requirements that should be incorporated into Federal regulatory 
requirements at Sec.  423.564.
    We also note that tort law, and often contract law, are generally 
developed based on case law precedents established by courts, rather 
than by legislators through statutes or by state officials through 
regulations. In addition, we do not believe we would have the authority 
under Part D to set specific tort remedies or to govern resolution of 
private contracting disputes between PDPs and MA-PDs and their 
subcontractors. We believe that the Congress did not intend for our 
regulations to supersede each and every State requirement applying to 
MA-PDs and PDPs--even those for which the Secretary lacks expertise and 
authority to regulate. Thus, we do not believe, for example, that 
wrongful death or similar law suits based upon tort law would be 
superseded by the appeals process established in these regulations. 
Similarly, State contract law would continue to govern private contract 
disputes between PDPs or MA-PDs and their subcontractors.
    Under principles of Federalism, and Executive Order 13132 on 
Federalism, which generally require 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 stand alone PDP or an 
MA-PD plan.
9. Employer Sponsored Prescription Drug Programs and Appeals
    The waiver provisions of section 1857(i) of the Act were 
incorporated into Part D through section 1860D-22(b) of the Act. When 
an employer, whether by contracting with MA-PDs or PDPs or otherwise, 
provides prescription drug benefits in addition to those covered under 
Part C and Part D 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, as amended (ERISA), and State law (to the extent such State 
law is not preempted by ERISA). In addition, when MA-PDs, PDPs, and 
programs described in 42 U.S.C. 1395w-132 offer benefits covered under 
Part D, they also would fall under the requirements of Part 423 of our 
proposed regulations, with respect to Part D benefits.
    In drafting our Part C, MA rules, we consulted 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 under Part C, we have reason to believe that some 
Medicare eligible individuals may receive integrated prescription drug 
benefits, i.e., Part D benefits through an MA-PD, PDP, or program 
described in 42 U.S.C. 1395w-132 and supplemental benefits through an 
ERISA-covered plan. For example, an employer-sponsored plan may pay the 
cost-sharing amount for a prescription drug that is offered by an MA-PD 
or PDP. Clearly, if the enrollee had a dispute about Part D coverage, 
he or she could file an appeal with the PDP sponsor. 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 D 
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.

N. Medicare Contract Determinations and Appeals

(If you choose to comment on issues in this section, please include the 
caption ``Subpart N--Medicare Contract Determinations and Appeals'' at 
the beginning of your comments.)
1. Overview
    Section 1860D-12(b)(3)(F) of the Act directs that the ``procedures 
for termination'' in section 1857(h) of the Act be incorporated into 
contract requirements for PDP sponsors. To enhance the flow of this 
proposed rule, we have separated the provisions of section 1857(h) of 
the Act into two portions and addressed the two portions in different 
subparts of this part.
2. Proposed Provisions of the Subpart
    As discussed above, Sec.  423.509 of subpart K of this part 
implements the provisions of sections 1857(h)(1)(A) and 1857(h)(2) of 
the Act that address reasons for our termination of contracts, 
opportunity for PDP sponsors to develop a corrective action plan before 
termination, and procedures for immediate termination if we identify an 
imminent and serious health risk to enrollees.
    Sections 423.641(b) through 423.669 specifies the procedures 
outlined in section 1857(h)(1)(B) of the Act. These sections specify 
that we would provide the organization with reasonable notice and 
opportunity for hearings (including the right to appeal an initial 
decision) before termination of its contract. Additionally, the 
requirements at Sec.  423.641(a) specifies the procedures for making 
and reviewing our

[[Page 46724]]

determination that an entity is not qualified to enter into a contract 
as a PDP sponsor under this part. Finally, Sec.  423.641(c) identifies 
procedures for reviewing our decision as specified at Sec.  423.507(b) 
not to renew a contract with a PDP sponsor.
    Section 1860D-12(b)(3) of the Act states that we must apply certain 
specified provisions of section 1857 of the Act including the 
procedures for termination in section 1857(h) of the Act in the same 
manner as they apply to contracts under section 1857(a) of the Act. 
Therefore, we are proposing that a single set of procedures relating to 
contract determinations and appeals apply to both MA and PDP sponsor 
contractors. The requirements at Sec.  423.641 through Sec.  423.669 
would mirror the requirements at Sec.  422.641 through Sec.  422.698 
for the MA program.
    A summary of the specific process and content of the proposed 
appeals and determination system for PDP sponsors found in this subpart 
are below.
    Sections 423.641 through 423.669 of our regulations detail the 
specific process and content of the appeals and determinations system, 
as it relate to PDP sponsors. The topics covered in these sections fall 
into the following five categories:
    (1) Contract determinations. Sections 423.641 through 423.643 would 
describe the types of contract determinations, the notice requirements, 
and the effect of contract determinations on the PDP sponsor contract.
    (2) Reconsideration. Sections 423.644 through 423.649 would 
describe when a PDP sponsor organization may request a reconsideration 
of our contract determination, the procedures for requesting a 
reconsideration, the internal operation of the reconsideration, the 
notice requirements for relating the reconsideration determination to 
all parties, and the impact of this determination on the PDP sponsor's 
contract.
    (3) Hearing. Sections 423.650 through 423.667 would discuss in 
detail the process surrounding a hearing, including when a hearing may 
be requested by a PDP sponsor and how to make the request, the internal 
operation of the hearing (for example, designation of participants in 
the hearing, witnesses and evidence that can be presented, and record 
of the hearing), and the notice and effect of the hearing decision on 
the PDP sponsor's contract. If the contractor has submitted a request 
for a hearing timely, the effective date of the contract determination 
may have been postponed pending the reconsideration determination. 
Finally, this section discusses the right for review of the hearing 
decision by the Administrator and the effect of that review decision.
    (4) Reopening. Section 423.668 would present the opportunity for 
reopening of the contract or reconsidered determination of a hearing 
officer or the Administrator.

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.)
1. Overview
    Supbart O would implement most of the provisions of section 1860D-
12(b)(3)(E) of the Act. This section of the statute provides that the 
contract requirements at section 1857(g) of the Act that govern 
``intermediate sanctions'' for Medicare Advantage (MA) organizations, 
with a few exceptions, will apply to contracts for PDP sponsors. 
Therefore, with two exceptions, the requirements in Sec.  423.750 
through Sec.  423.760 would mirror the requirements at Sec.  422.750 
through Sec.  422.760. The two changes we are proposing to make to 
comply with the MA provisions are found below in the section called, 
``Basis for Imposing Sanctions.''
    Freezing marketing or enrollments has generally been our first and 
most frequently used sanction authority. The MMA requires at least two 
qualified plans, that is a PDP per region. If we were to freeze the 
enrollment or marketing of a PDP sponsor, that is one of only two plans 
in a region, beneficiaries would no longer have the level of choice the 
MMA intended. If we are contemplating sanctioning a plan that is one of 
only two PDP sponsors in a region, we may have to consider using other 
remedies including civil monetary penalties to maintain an adequate 
level of choice for beneficiaries. However, we do not want to 
discriminate in our treatment of PDPs when imposing sanctions. Our goal 
would be to have consistent policies and procedures across all regions 
in regard to sanctions. Therefore, we request comment on whether 
closing enrollment should be used in any situation or should we 
generally rely on civil monetary penalties as a sanction for PDPs.
2. Kinds of Sanctions (Sec.  423.750)
    Section 423.750 of our regulations would describe four types of 
sanctions that we may impose on PDP sponsors, if warranted under Sec.  
423.752. These sanctions are identical to those we have imposed on M+C 
contractors. The range of potential sanctions, and the fact that one or 
more of them may be imposed at any one time, would permit us to tailor 
our action to a specific situation.
    Three of these sanctions would disrupt the operation of the PDP 
sponsor in relation to Medicare beneficiaries (that is, suspension of 
new enrollment (Sec.  423.750(a)(2), suspension of our payments to the 
PDP sponsor for enrolled beneficiaries (Sec.  423.750(a)(3), and 
suspension of all marketing activities (Sec.  423.750(a)(4)). We may 
keep the sanction in force until we are satisfied that the organization 
has corrected and will not repeat, the deficiency on which the sanction 
was based.
    The fourth sanction that we could impose on an organization is 
civil monetary penalties ranging from $10,000 to $100,000, depending on 
the violation. Both the Office of the Inspector General (OIG) (Sec.  
423.756(f)(2)) and CMS (Sec.  423.756(f)(3)) may impose civil monetary 
penalties.
3. Basis for Imposing Sanctions (Sec.  423.752)
    Sections 423.752(a) and 423.752(b) of our regulations would list 
the seven violations for which sanctions may be imposed on a PDP 
sponsor organization. These violations are the same as those that 
warrant the imposition of sanctions for MA contractors, with the 
exception of two deletions we are proposing below. Specifically, 
sanctions would be imposed if the PDP sponsor engages in any of the 
following:
    (1) Fails to provide required medically necessary services with 
adverse effect on the enrollee.
    (2) Imposes premiums on beneficiaries that are in excess of those 
permitted in subpart F of part 423 of these proposed regulations.
    (3) Expels or will not re-enroll a beneficiary in violation of this 
part.
    (4) Engages in the practice of health screening or ``cherry 
picking.''
    (5) Misrepresents or falsifies information furnished to CMS, any 
other entity or individual under the Part D drug benefit program.
    (6) Employs or contracts with an individual or entity excluded from 
participation in the Medicare program as specified under section 1128 
or 1128A of the Act (or with an entity that employs or contracts with 
the individual or entity) for the provision of certain services.
    Additionally, as an alternative to the sanctions listed above, we 
would be able to decline to authorize renewal of the organization's 
contract (or may elect to terminate the contract entirely in accordance 
with Sec.  423.509). In addition, Sec.  423.509(a) would provide that a 
PDP sponsor organization be sanctioned if it

[[Page 46725]]

fails to carry out the terms of its contract as specified under this 
section.
    Section 1860D-12(b)(3)(E) of the Act would specifically exclude two 
of the bases for sanctions at section 1857(g)(1) of the Act for MA 
contractors from application to PDP sponsor organizations as specified 
in part 423. Specifically, we would not impose sanctions on a PDP 
sponsor in the event it fails to enforce the limit on balance billing 
under a private-fee-for-service plan as required at Sec.  
422.216(a)(4), or fails to prohibit interference with practitioners' 
advice to enrollees, as required at Sec.  422.206, since we do not 
believe these provisions are applicable in the context of the Part D 
drug benefit.
4. Procedures for Imposing Sanctions (Sec.  423.756)
    Section 423.756 of our proposed regulations would specify our 
procedures for conducting the sanction process for PDP sponsor 
organizations. This process would mirror that used for the MA program. 
A brief summary of the process is as follows--
     We must send a timely notification of sanction to the PDP 
sponsor, outlining the nature and basis of the proposed sanction, and 
copy OIG.
     We must provide the PDP sponsor with an 15 or 30 day 
extension, to respond. If requested, an uninvolved CMS official will 
conduct an informal reconsideration of the determination with a written 
decision.
     Non-monetary sanctions would be effective 15 days from the 
organization's receipt of a final notice of sanction and remain in 
effect until we determine that the violation is corrected. CMS or the 
OIG, depending on the basis for the sanction, may impose civil monetary 
penalties.
5. Maximum Amount of Civil Money Penalties Imposed by CMS (Sec.  
423.758)
    Section 423.758 of our proposed regulations would provide that we 
be given discretion, as we have been in the M+C program, to determine 
the amount of monetary penalty to impose on a PDP sponsor within the 
limits specified at Sec.  423.758. Three situations where monetary 
penalty limits are listed are as follows--
    (1) If the deficiency in which the determination was based has 
adversely affected the health of an enrollee (or has substantial 
probability of doing so), the penalty may be $25,000 per determination.
    (2) We may apply a monetary penalty for each week that a deficiency 
remains uncorrected after the organization receives our notice of 
sanction or notice of reconsideration determination, up to $10,000 per 
week.
    (3) If we determine that a PDP sponsor has terminated its contract 
without following the process required in subpart K at Sec.  423.510, 
the penalty imposed may be either $250 per Medicare beneficiary 
enrolled in the organization at the time the PDP sponsor terminated its 
contract, or $100,000, whichever is greater.
6. Other Applicable Provisions (Sec.  423.760)
    Section 423.760 of our proposed regulation provides that the 
provisions of section 1128A of the Act (except subsections (a) and (b)) 
apply to civil money penalties under this subpart to the same extent 
that they apply to a civil money penalty or procedure under section 
1128A of the Act.

P. Premiums and Cost-Sharing Subsidies for Low-Income Individuals

    Section 1860D-14 of the Act establishes a program to provide 
subsidies for assistance with premium and cost-sharing amounts for Part 
D eligible individuals with lower income and resources. The proposed 
regulations in this subpart and in regulations published by the Social 
Security Administration (SSA) adding a subpart D to a new part 418 of 
title 20 of the Code of Federal Regulations implement section 1860D-14 
of the Act.
    The statute divides subsidy eligible individuals into two different 
groups based on income and resources: (1) Full subsidy eligible 
individuals; and (2) other low-income subsidy eligible individuals. The 
different groups are entitled to different amounts of subsidy 
assistance. In this proposed regulation, we are defining the 
eligibility criteria and the amounts of subsidy assistance provided.
1. Eligibility for the Low-Income Subsidy (Sec.  423.773)
    In order to qualify for a full subsidy, an individual must live in 
one of the fifty States or the District of Columbia and have countable 
income below 135 percent of the Federal poverty level for the 
individual's family size. For purposes of this section, ``federal 
poverty line'' (FPL) has the meaning given that term in section 673(2) 
of the Community Services Block Grant Act (42 U.S.C. 9902(2)), 
including any revision required by that section.
    In addition, an individual must have resources that do not exceed 
three times the resource limit under section 1613 for applicants for 
Supplemental Security Income (SSI) under title XVI, which in 2006 is 
$6,000 if single, or $9,000 if married. Thereafter, this resource limit 
will be increased annually by the percentage increase in the Consumer 
Price Index (all items, U.S. city average) as of September for the year 
before, rounded to the nearest multiple of $10.
    Individuals not eligible for the full subsidy may be eligible for 
the partial subsidy if they live in one of the fifty States or the 
District of Columbia and have income below 150 percent of the FPL for 
their family size, and have resources in 2006 that do not exceed 
$10,000 if single, or $20,000 if married. Beginning in 2007 and for 
each subsequent year, the resource limit will be increased annually by 
the percentage increase in the Consumer Price Index (all items, U.S. 
city average) as of September for the year before, rounded to the 
nearest multiple of $10.
    Low-income Part D eligible individuals who reside in the 
territories are not eligible to receive premium and cost-sharing 
subsidies under this subpart. Subpart S of this proposed rule addresses 
the provision of covered Part D drugs to low-income individuals 
residing in the territories.
    In making income and resource determinations for the low-income 
subsidy for Part D, the statute refers to certain sections of the SSI 
program rules. For example, the MMA refers to income being determined 
in the same manner as for Qualified Medicare Beneficiaries (QMBs) under 
the Medicaid program, without use of the more liberal methodologies 
that States are permitted to use. The QMB provisions reference the SSI 
rules (specifically, section 1612 of the Act, which are the rules of 
the SSI program for determining income). Our proposed definition of 
income is consistent with the MMA in that it references SSI rules.
    The MMA provides that we will compare the individual's income to 
the appropriate FPL applicable to ``the family of the size involved.'' 
As there is no reference in the MMA statute to using previous 
definitions of family size, we propose to define family size to include 
the applicant, his or her spouse who lives in the same residence, and 
the number of individuals related to the applicant who live in the same 
residence and who depend on the applicant or the applicant's spouse for 
at least one-half of their financial support.
    We considered limiting family size to 1 or 2 individuals to more 
closely resemble the SSI rules where family size is not actually 
defined but where benefits are paid on the basis of an eligible 
individual or eligible couple. This is the definition we propose to use

[[Page 46726]]

in determining eligibility for Transitional Assistance under the drug 
card. The decision to limit family size under the drug card was based 
on the short duration of that program (18 months), the limited benefit 
($600 a year), and the fact that we would have to rely entirely on a 
computer and systems-based process for determining Transitional 
Assistance eligibility and verifying income and other information from 
applicants. However, we do not believe it was the intent of the 
Congress to similarly limit the definition for purposes of determining 
eligibility for subsidies under the Part D program. Unlike the 
provisions authorizing the Medicare-approved drug discount card 
program, there are no provisions with respect to the low-income subsidy 
program that give the Secretary specific authority to define family 
size. Instead, we are interpreting the term ``family of the size 
involved.'' We believe that this term implies a definition that is 
greater than an individual or couple and that includes other dependent 
relatives residing in the applicant's household. In addition, in order 
for the term ``family size'' to have meaning in the context of subsidy 
determinations, the notion of dependency needs to take into account the 
impact of a dependent on the relative need of the applicant or the 
applicant's spouse in attaining the subsidy. Accordingly, we have 
specified that dependents included in the calculation of family size 
are only those relatives residing in the residence who are financially 
dependent on the applicant or the applicant's spouse for one-half of 
their support.
    In determining the income to be compared to the FPL for the size of 
the family involved, we would include income of the Medicare 
beneficiary and spouse, if any. Thus, if a married individual applies, 
both the income of the applicant and his or her spouse who lives in the 
same residence, regardless of whether the spouse is also an applicant, 
is counted and measured against the appropriate standard for the low-
income subsidy. In our view, this best comports with the statutory 
reference to determining income in the manner described in section 
1905(p)(1)(B) of the Act (for QMBs). In making a standard QMB income 
determination, States will consider the income of one spouse as 
available to the other spouse. Moreover, since both spouses will be 
considered in the family size determination, it would be 
counterintuitive to count a spouse's presence while not including that 
spouse's income. Other members who meet the one-half support test will 
be counted in the family size calculation, but income of these 
dependents will be ignored in the eligibility determination. The one-
half support test ensures that a family member with sizable income is 
not erroneously counted as a dependent while that person's income is 
ignored.
    The MMA (at section 1860D-14(a)(3)(D)) provides that resources will 
be determined according to section 1613 of the Act. The resource 
standard depends upon whether the applicant is a single individual or a 
member of a married couple and whether the resources will be measured 
against the basic or alternative resources standards. See section 
1860D-14(a)(3)(D) and (E) and H.R. Conference Report No. 108-391 at 
470. However, that section does not define resources, it defines what 
are not resources. The MMA also provides for the development of a 
simplified application in which applicants attest to their level of 
resources and submit only minimal documentation. The implication of 
this provision is that the Congress envisioned a simple process. In 
order to keep the process simple and minimize administrative cost, we 
intend to only consider liquid resources (that is, those that could be 
converted to cash within twenty days) and real estate that is not an 
applicant's primary residence as resources that are available to the 
applicant to pay for the Part D premiums, deductibles and copayments. 
Thus, we will not consider other non-liquid resources (for example, a 
second car) to be available to the applicant for this purpose.
    We do not believe this policy will have a significant impact on 
program costs. We believe any such program costs associated with not 
counting non-liquid resources other than countable real estate would be 
offset by the administrative savings resulting from a more simplified 
program. As we indicate further in this section, we are working with 
SSA on a quality assurance strategy that will strike an appropriate 
balance between administrative costs and program goals and objectives.
    Section 1860D-14(a)(3)(B)(v)(I) of the Act requires that full-
benefit dual eligibles (as defined under section 1935(c)(6) of the Act) 
and individual receiving benefits under the SSI program be treated as 
full subsidy eligible individuals with respect to premium assistance, 
elimination of the deductible, continuation of coverage above the 
initial coverage limit, and elimination of cost-sharing above the 
annual out-of-pocket threshold. However, copayment subsidies for these 
individuals will vary depending on whether the individual is in an 
institution or has income below or above 100 percent of the FPL. Full 
benefit dual eligible individuals with income above 100 percent of the 
FPL will have copayments not to exceed $2 for a generic or a preferred 
multiple source drug or $5 for an other drug.
    Under Medicaid, the term ``dual eligibles'' generally refers to 
low-income Medicare beneficiaries who qualify for some level of medical 
assistance. Those entitled to full benefits under Medicaid generally 
have most of their health care expenses, including prescription drugs, 
paid for by a combination of Medicare and Medicaid. However, Federal 
law also specifies several groups of dual eligibles who, while not 
entitled to full Medicaid benefits, are entitled to more limited 
medical assistance, specifically payment of Medicare Part A or Part B 
premiums and/or cost sharing, such as payment of Medicare deductibles 
and coinsurance. These groups are certain QMBs, specified low-income 
Medicare beneficiaries (SLMBs), qualified disabled and working 
individuals (QDWIs), and certain qualifying individuals (QIs).
    For purposes of the low-income subsidy under Part D, we propose to 
define the term ``full benefit dual eligible individual'' as an 
individual who for any month has coverage under a PDP or MA-PD and is 
determined eligible by the State for medical assistance for full 
benefits under title XIX for the month under any eligibility category 
covered under the State plan or comprehensive benefits under a 
demonstration under section 1115 of the Act. Comprehensive benefits 
referred to in this section do not include those benefits received 
under section 1115 Pharmacy Plus demonstrations. For individuals who 
become medically needy by spending down excess medical expenses, the 
individual is not eligible as medically needy until he or she satisfies 
their spenddown obligation. This requirement is reflected in the 
proposed regulations at Sec.  423.772.
    Section 1860D-14(a)(3)(B)(v)(II) of the Act authorizes the 
Secretary to treat QMBs, SLMBs, and QIs who are not full benefit dual 
eligible individuals as full subsidy eligible individuals. This 
authority does not apply to QDWIs. As indicated in the proposed 
regulations at Sec.  423.773(c), the Secretary proposes to elect to 
exercise this authority and treat these individuals as being eligible 
for full subsidy assistance. This decision is based on the fact that 
nearly all QMBs, SLMBs, and QIs, by definition, will likely meet the 
requirements to be considered a full subsidy individual. Generally, 
QMB, SLMB, and QI individuals have income below 135

[[Page 46727]]

percent of the FPL and resources that do not exceed twice the SSI 
limit. The exception will be in the few States that have more 
liberalized income and asset rules for these groups under section 
1902(r)(2) of the Act. We do not believe that treating these groups as 
subsidy eligible will have a large cost impact. Further, we believe 
that it will ease the administrative burden of having to educate these 
individuals on the need to apply for the subsidy.
    Section 1860D-14(a)(1) distinguishes between noninstitutionalized 
full benefit dual eligible individuals with incomes at or below 100 
percent of the FPL and other non-institutionalized individuals covered 
as full subsidy eligibles. This distinction is made solely for purposes 
of the reduction in cost-sharing below the out of pocket threshold. 
Therefore, full benefit dual eligibles (and, as proposed above, at the 
Secretary's election QMBs, SLMBs, and QIs) receive a full premium 
subsidy, have no annual deductible, and have coverage above the initial 
coverage limit. However, with respect to cost-sharing below the out-of-
pocket threshold, these individuals have a two-tiered system depending 
upon whether their incomes are at or below 100 percent of the FPL or 
above 100 percent of the FPL. For those noninstitutionalized full 
benefit dual eligible individuals below 100 percent of the FPL, a 
copayment is imposed that does not exceed the lesser of $1 for a 
generic or a preferred multiple source drug or $3 for any other drug, 
or the amount charged to other individuals with income below 135 
percent of the FPL who meet the resource standard based on three times 
the SSI standard. For individuals in this group above 100 percent of 
the FPL, a copayment not exceeding $2 for a generic or a preferred 
multiple source drug is imposed, or $5 for an other drug.
    Finally, the statute gives the Secretary the option to permit a 
State to make subsidy eligibility determinations by using the 
methodology it uses under section 1905(p) of the Act if the Secretary 
determines that this would not result in any significant difference in 
the number of individuals who are made eligible for the subsidy. This 
would permit a State to use the same resource methodologies that it 
uses to determine Medicaid eligibility for QMBs, SLMBs, and QIs if the 
Secretary determines that the use of those methodologies would not 
result in any significant differences in the number of individuals who 
are made eligible for a subsidy. This includes the less restrictive 
methodologies the State uses under section 1902(r)(2) of the Act to 
determine eligibility for QMBs, SLMBs, and QIs. At this time, the 
Secretary proposes not to exercise this option.
    This means that when making eligibility determinations for other 
low-income subsidy eligibles, all States will use the same resource 
methodologies across the country. The rationale for not electing this 
authority is twofold. First, uniformity in the application process is a 
desired goal and having alternative resource methodologies that would 
vary among States would detract from that goal. Second, based on the 
administrative burden and complexity that would be involved in 
administering this alternative process, we see very little benefit in 
terms of the number of individuals who would be determined subsidy 
eligible.
2. Eligibility Determinations, Redeterminations and Applications (Sec.  
423.774)
    In accordance with section 1860D-14(a)(3)(B)(i) of the Act, an 
application for subsidy assistance may be filed with either a State's 
Medicaid program office or SSA. Inquiries made by individuals to PDPs 
or MA-PDs concerning application or eligibility for the low-income 
subsidy should be referred to State agencies or SSA. Eligibility 
determinations would then be made by the State for applications filed 
with the State Medicaid agency or by the Commissioner of Social 
Security for those filed with SSA. The Congress believes that more 
beneficiaries would enroll in the new Part D benefit if given the 
option to apply at the Social Security office as well as State Medicaid 
offices. While our goal is to provide a single application and 
determination process for the low-income subsidy, we recognize that the 
statute provides that redeterminations and appeals of eligibility 
determinations are to be made in the same manner as for medical 
assistance for those individuals who are determined eligible by the 
State Medicaid agency. Similarly, the Commissioner will decide how to 
conduct redeterminations and appeals for those subsidy determinations 
made by Social Security. We invite comments on State Medicaid agency 
procedures how to best implement the redetermination and appeal process 
that we believe would best be accomplished if the two separate 
processes produce the same outcome.
    We note that eligibility determinations for low-income subsidies 
would be effective beginning with the first day of the month in which 
the individual applies for a subsidy, but no earlier than January 1, 
2006, provided the applicant meets the requirements for eligibility 
when he or she applies and has enrolled with a prescription drug 
coverage provider or MA plan with prescription drug coverage. Initial 
eligibility determinations would remain in effect for a period not to 
exceed 1 year.
    Because States and Social Security offices would be performing 
subsidy determinations, States and SSA would need to share data with 
CMS. We will then use the data to notify the PDP sponsor or MA 
organization of the individual's eligibility. We will also use the data 
to provide information on income so that PDP sponsors and MA 
organizations may determine the amount of Part D premiums and 
copayments that may be charged to an individual eligible for the low-
income subsidy as discussed later in this preamble.
    Section 1860D-14(a)(3)(E)(ii) of the Act directs the Secretary and 
the Commissioner of SSA to develop a model simplified application form 
for the determination and verification of Part D eligible individual's 
assets or resources for the other low-income subsidy provision. We 
believe it is important to develop a simplified application for income 
as well as resources and to develop an application that will address 
both the full and the other low-income subsidy provisions. Therefore, 
we are working with SSA to develop a model application form to be used 
to determine eligibility for all subsidies. The application will 
reflect the definitions of income and resources discussed earlier in 
this subpart.
    With regard to the method and degree to which income and resources 
will be verified, our general policy is to not spend more on 
verification than the expected return in terms of benefit savings. 
Therefore, we intend to use the most efficient and cost-effective 
process that will balance the need for program integrity with the goal 
of reducing paperwork burden and cost.
    We envision a process based on an operations research strategy 
whereby States and SSA will build on existing verification processes 
used for other programs. We plan on maximizing the use of automated 
data matches for verification of income and certain liquid resources 
(which minimize both paperwork burden and cost), and relying on 
specific targeting or profiling criteria derived from a database that 
would identify a subset of applications for purposes of in-depth 
verification. This in-depth verification process will enable SSA and 
States to focus on elements attested to by the applicant that do not 
lend themselves to verification by electronic means (that is,

[[Page 46728]]

countable real estate). By developing a targeted approach, we believe 
we can strike an appropriate balance between administrative costs and 
program goals and objectives. We request comments on this approach.
    In developing a simplified application, we also considered a number 
of other issues in order to streamline the application process. For 
example, the proposed rules permit a personal representative to assist 
in the application process. We are proposing to define personal 
representative as an individual who is authorized to act on behalf of 
the applicant, an individual acting responsibly on behalf of an 
applicant who is incapacitated or incompetent, or an individual of the 
applicant's choice who is requested by the applicant to act as his or 
her representative in the application process.
    In addition, we would permit the use of a proxy signature process 
to allow applications to be taken over the phone or by an Internet 
process. Under a proxy signature process, an individual attests to the 
accuracy of the information provided under penalty of perjury prior to 
submitting the information for processing. Our proposed requirements 
specify that the individual applying for the low-income subsidy, or a 
personal representative on his or her behalf complete the application 
for the low-income subsidy, and certify as to the accuracy of the 
information provided.
    Section 1860D-14(a)(3)(E)(iii)(II) of the Act provides that 
statements from financial institutions shall accompany applications in 
support of the information provided therein. As previously discussed, 
we believe States and SSA will be able to verify information through 
data matches. As a result, we would reduce an applicant's burden in 
producing financial statements by not requiring paper copies except 
when specifically requested. For example, SSA and States may verify 
some resources for the low-income subsidy through data matches with 
1099 files from the IRS, which show the annual amount of interest 
earned on interest bearing accounts. If the data from the 1099 files 
indicates the applicant's interest is below a threshold amount relating 
to the resource limit and the applicant has no countable real estate, 
the State or SSA could decide that no further information is needed 
from the applicant relating to certain types of resources. When the 
threshold is exceeded, additional information may be requested of the 
individual to support the application. Use of this process would ease 
the burden on individuals preparing to file an application and will 
reduce the administrative burden on States and SSA in handling paper 
verification. Accordingly, Sec.  423.774(d) requires the submission of 
statements from financial institutions only if requested by the State 
or SSA.
3. Premium Subsidy (Sec.  423.780) and Cost-Sharing Subsidy (Sec.  
423.782)
    In accordance with section 1860D-14 of the Act, the proposed 
regulations specify the Part D premium subsidy and the Part D cost-
sharing subsidy amounts available to subsidy eligible individuals, with 
the specific subsidy amounts varying depending upon the individual's 
income and resources/assets level. Table P-2 below shows the premium 
and cost-sharing subsidy amounts for the different groups of eligible 
individuals.

a. Full Subsidy Eligible Individuals

    In accordance with section 1860D-14(a)(1)(A) of the Act, full 
subsidy eligible individuals are entitled to a full premium subsidy 
equal to 100 percent of the ``premium subsidy amount,'' not to exceed 
the basic premium for coverage under the prescription drug plan 
selected by the beneficiary.
    Under section 1860D-14(b)(2) of the Act, the premium subsidy amount 
is equal to the greater of the low-income benchmark premium or the 
lowest monthly beneficiary premium for a prescription drug plan that 
offers basic prescription drug coverage in the region. The premium 
subsidy determined would apply regardless of whether the individual 
enrolls in a PDP or MA-PD. However, in the event the low-income 
benchmark premium is less than the lowest monthly beneficiary premium 
for basic prescription drug coverage offered by a PDP sponsor in a PDP 
region, in accordance with section 1860D-14(b)(3) of the Act, the 
premium subsidy will be equal to the monthly beneficiary premium for 
basic prescription drug coverage offered by a PDP sponsor in the PDP 
region.
    Under section 1860D-14(b)(2) of the Act, the low-income benchmark 
premium amount for a PDP region equals either the weighted average of 
the monthly beneficiary premiums for all basic prescription drug plans 
(if all prescription drug plans in the PDP region are offered by the 
same PDP sponsor), or the weighted average of monthly beneficiary 
premiums for basic prescription drug coverage and the monthly 
beneficiary premiums attributable to basic prescription drug coverage 
for alternative prescription drug coverage for both PDP and MA-PD 
plans. Because section 1860D-14(b)(2)(A)(ii) of the Act references 
section 1851(a)(2)(a)(i) of the Act, the premiums of cost plans under 
section 1876 of the Act, PACE plans, specialized MA plans for special 
needs individuals and private fee-for-service plans are excluded for 
purposes of determining the weighted average in the region. This is 
because section 1851(a)(2)(a)(i) of the Act refers only to MA 
coordinated care plans. We interpret the calculation of the ``weighted 
average'' as described in the regulations at Sec.  423.279(b) of this 
proposed rule.
    Table P-1 below is an illustration of the premium subsidy 
determination.

                                Table P-1.--Determination of the Premium Subsidy
----------------------------------------------------------------------------------------------------------------
                  Plan options in region                              Low-income premium subsidy (full)
----------------------------------------------------------------------------------------------------------------
                                                                                                 Maximum premium
                                                              Percentage of     Premium times      subsidy for
                                               Monthly      part D enrollees     percentage         eligible
                  Plans                      beneficiary    in each plan \2\      (weighted        individual
                                             premium \1\        (percent)         average)        enrolling in
                                                                                                      plan
----------------------------------------------------------------------------------------------------------------
PDP 1 Offered by Sponsor A..............             40.00                15              6.00             36.00
MA-PD Plan 1............................             38.00                 5              1.90             36.00
PDP 2 Offered by Sponsor B..............             36.00                40             14.40             36.00
MA-PD Plan 2............................             20.00                15              3.00             20.00
MA-PD Plan 3............................              0.00                25              0.00              0.00
                                                                             ------------------

[[Page 46729]]

 
    Weighted Average Basic Premium in     ................  ................             25.30  ................
     Region =...........................
----------------------------------------------------------------------------------------------------------------
 The greater of the Low Income Premium Benchmark Amount (25.30) or the lowest PDP premium in the region (36.00)
  equals 36.00, so the maximum premium subsidy is the lower of 36.00 or the actual plan premium for basic
  coverage.
\1\ Assumes no supplemental premium or late enrollment penalties.
\2\ Assumes enrollment weights from the prior year's reference month (not first year of program).

    Table P-1 illustrates the determination of the premium subsidy 
amount in a hypothetical region in which there are 2 PDPs, each offered 
by different sponsors, and 3 MA-PD plans. Because there are PDPs 
offered by more than one sponsor, the maximum premium subsidy amount is 
the greater of 2 amounts: the low-income premium benchmark amount or 
the lowest PDP premium in the region. The former is calculated by 
summing the products of the plan (basic) premium and the plan 
percentage of Part D enrollment in the region, and equals $25.30. The 
lowest PDP premium in the region, however, is $36.00. Therefore, in 
this exhibit, the full premium subsidy amount for the region is 
determined to be $36.00. Consequently, a Part D eligible individual 
meeting the requirements for a full premium subsidy would have a choice 
of 3 zero-premium plans in which to enroll (PDP 2, MA-PD 2, and MA-PD 
3), because the maximum premium subsidy amount equals or exceeds the 
premiums for these plans. However, if this individual chose to enroll 
in PDP 1 or MA-PD 1 for some reason, he or she would be obligated to 
pay the difference between the plan premium and the premium subsidy 
amount ($4 or $2, respectively) each month.
    We anticipate that fallback plan premiums would be treated the same 
as those for risk-bid plans in the calculation of the low-income 
benchmark premium amount.
    In accordance with section 1860D-14(b)(2) of the Act, the low-
income benchmark premium amounts are determined without the addition of 
any amounts attributable to late enrollment penalties.
    Individuals eligible for the full premium subsidy who are subject 
to late enrollment penalties under proposed Sec.  423.46 would also be 
entitled to a subsidy equal to 80 percent of any late enrollment 
penalty for the first 60 months in which the penalties are imposed, and 
100 percent of any penalties in any subsequent month, in accordance 
with section 1860D-14(a)(1)(A)(ii) of the Act and proposed Sec.  
423.780(c).
    Section 423.782 of the proposed rule incorporates the provisions of 
section 1860D-14(a)(1)(B), 1860D-14(a)(1)(C), 1860D-14(a)(1)(D), and 
1860D-14(a)(1)(E) of the Act relating to the elimination of the 
deductible, continuation of coverage above the initial coverage limit 
(that is, no coverage gap), and reductions in cost-sharing. 
Specifically, full subsidy eligible individuals have no deductible. In 
addition, these individuals have continuation of coverage from the 
initial coverage limit (under paragraph (3) of section 1860D-2(b) of 
the Act and Sec.  423.104(e)(3)) through the out-of-pocket threshold 
(under paragraph (5) of the same section). In other words, there is no 
coverage gap, or ``donut hole,'' for these individuals.
    In accordance with section 1860D-14(a)(1)(D)(i) of the Act, 
institutionalized full-benefit dual eligible individuals have no cost-
sharing below the out-of-pocket threshold. We are proposing to define 
``institutionalized individual'' for this subpart as a full-benefit 
dual eligible individual who is an institutionalized individual as 
defined in section 1902(q)(1)(B) of the Act.
    Under section 1860D-14(a)(1)(D)(ii) of the Act, full-benefit dual 
eligibles in 2006 with incomes that do not exceed 100 percent of the 
poverty line for their family size will pay no more than $1 for generic 
drugs or preferred multiple source drug (as defined in section 
1927(k)(7)(A)(i) of the Act). In addition, they would pay $3 for any 
other drug, or, if less, the amount charged to other individuals with 
income below 135 percent of poverty who meet the three times the SSI 
resource standard test, for costs below the out-of-pocket threshold. 
These $1 and $3 copayment amounts are increased beginning in 2007 by 
the percentage increase in the CPI (all items, U.S. city average), 
rounded to the nearest multiple of 5 cents. The cost-sharing subsidies 
would count toward the application of the out-of-pocket threshold.
    After the out-of-pocket threshold is reached, cost-sharing would be 
eliminated for all full subsidy individuals and full benefit dual 
eligible individuals. In accordance with section 1860D-14(a)(1)(D)(iii) 
of the Act, all other full subsidy eligible individuals and full 
benefit dual eligibles with income above 100 percent of the FPL in 2006 
will pay copayment amounts of $2 for a generic drug or preferred 
multiple source (as defined in section 1927(k)(7)(A)(i) of the Act) and 
$5 for any other drug, for costs up to the out-of-pocket threshold. In 
accordance with section 1860D-2(b)(4) and 1860D-2(b)(6) of the Act, 
these copayments are indexed based on an annual percentage increase in 
average per capita aggregate expenditures for covered Part D drugs, 
rounded to the nearest multiple of 5 cents (see Sec.  423.104(e)(5) of 
this proposed rule). Also, all other full subsidy eligible individuals 
and full benefit dual eligible individuals have continuation of 
coverage from the initial coverage limit (under paragraph (3) of 
section 1860D-2(b) of the Act and Sec.  423.104(e)(3)) through the out-
of-pocket threshold (as specified under paragraph (4) of the section), 
with limited cost-sharing.
    After the catastrophic threshold is reached, cost-sharing would be 
eliminated for all full benefit dual eligible individuals.

b. Other Low-Income Subsidy Eligible Individuals

    In accordance with section 1860D-14(a)(2)(A) of the Act, for other 
low-income subsidy eligible individuals who do not qualify for the full 
subsidy or as full benefit dual eligible individuals, their premium 
subsidy would be on a sliding linear scale basis. The sliding scale 
premium subsidy would range from 100 percent of the beneficiary base 
subsidy (as discussed earlier, equal to the greater of the low-income 
benchmark premium or the lowest monthly beneficiary premium for

[[Page 46730]]

a prescription drug plan that offers basic prescription drug coverage 
in the PDP region), for individuals at or below 135 percent of the FPL 
for their family size, to no subsidy for individuals at 150 percent of 
the FPL for their family size. In contrast to full subsidy eligible 
individuals or full benefit dual eligible individuals, other subsidy 
eligible individuals subject to the late enrollment penalties under 
Sec.  423.46 would be responsible for 100 percent of the penalties. We 
welcome comments concerning the manner in which the sliding scale 
premium subsidy is calculated for individuals with income from 135 
percent up to 150 percent of the FPL. For ease of administration, we 
could set a scale in a stepped fashion, for example, a set decrease in 
the subsidy amount for every 5 percent increase in income level.
    Other subsidy eligible individuals would have their annual 
deductible reduced from $250 to $50. This $50 is indexed in accordance 
with section 1860D-2(b)(6) of the Act beginning in 2007 based on the 
annual percentage increase in average per capita aggregate expenditures 
for covered Part D drugs, rounded to the nearest multiple of $1. Other 
subsidy eligible individuals would have continuation of coverage from 
the initial coverage limit (under paragraph (3) of section 1860D-2(b) 
of the Act) through the out-of-pocket threshold (under paragraph (4) of 
that section), meaning no coverage gap or ``donut hole.'' For coverage 
through the out-of-pocket threshold, these individuals would pay 15 
percent coinsurance, substituting for the higher beneficiary 
coinsurance described in section 1860D-2(b)(2) of the Act (see Sec.  
423.104(e)(2) of this proposed rule). The cost-sharing subsidies would 
count toward the application of the out-of-pocket threshold. After the 
out-of-pocket threshold is reached, these individuals' cost-sharing 
would be limited to the copayment or coinsurance amount specified under 
section 1860D-2(b)(4)(A)(i)(I) of the Act (see Sec.  423.104(e)(5) of 
these proposed rules), which, in 2006, means co-payment amounts of $2 
for a generic drug or preferred multiple source (as defined in section 
1927(k)(7)(A)(i) of the Act) and $5 for any other drug. In accordance 
with section 1860D-2(b)(4) and 1860D-2(b)(6) of the Act, the $2 and $5 
copayments would be indexed based on an annual percentage increase in 
average per capita aggregate expenditures for covered Part D drugs, 
rounded to the nearest multiple of 5 cents.
    A question has been raised concerning whether an MA-PD plan could 
choose to reduce or eliminate copayments for dual eligible individuals. 
We believe that specialized MA plans (under section 231 of the MMA, as 
defined in proposed regulations at 42 CFR 422.2) offering benefits only 
to dual eligible individuals could choose to reduce or eliminate 
copayments for their members as a supplemental benefit. Otherwise, the 
Part D copayments stipulated by the MMA for low-income individuals 
cannot be reduced or eliminated. This is because any reduction of the 
copayments must apply to all plan members under the uniformity of 
benefits provisions, set forth in Sec.  423.265(c). Accordingly, MA-PD 
plans other than special MA-PD plans for dual eligibles may not offer 
their members who are dual eligible lower co-payments or co-insurance 
than those paid by its other plan members.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP03AU04.000


[[Page 46732]]


BILLING CODE 4120-01-C
4. Administration of Subsidy Program (Sec.  423.800)
    We would be establishing a process to notify the PDP sponsor or MA 
organization that an individual is both eligible for the subsidy and 
the amount of the subsidy. Because CMS has not yet developed such a 
process, comments are welcome concerning notification to the PDP 
sponsor or MA organization that an individual is eligible for a subsidy 
and the amount of the subsidy. Similarly, we request comments on the 
proposed requirement that the PDP sponsor or MA organization notify CMS 
that premiums or cost-sharing have been reduced and the amount of the 
reduction. We are also considering the process for reimbursing the 
sponsor or organization for the amount of the premium or cost-sharing 
reductions. Any individually identifiable information must be kept 
confidential. Finally, we are requesting comments on how to best 
reimburse subsidy eligible individuals with respect to out-of-pocket 
costs relating to excess premiums and cost-sharing incurred before the 
date the individual was notified of subsidy eligibility but after the 
effective date the individual became subsidy eligible.
    Similarly, we are requesting comments on how to deal with premiums 
and cost sharing paid by charities or other programs, for example, the 
Ryan White program or State Pharmacy Assistance programs, on behalf of 
an individual during a period when he or she is determined to be 
subsidy eligible. We are specifically requesting comments on whether 
Medicare should treat these programs for purposes of premium or cost 
sharing reimbursement as we would other employer-sponsored insurance 
programs in which Medicare is a primary payer for purposes of 
coordination of benefits. In addition, we are requesting comments on 
whether beneficiaries should be responsible for reimbursing any cost 
sharing or premiums paid on their behalf by another program or charity.
    In accordance with section 1860D-14(c)(2) of the Act, reimbursement 
to PDPs or MA-PDs may be computed on a capitated basis, taking into 
account the actuarial value of the subsidies and with appropriate 
adjustments to reflect differences in the risks actually involved. 
(Refer to Subpart G of this proposed rule for a discussion of interim 
payments and final reconciliation payments.)
    Subsidy amounts under section 1860D-14 of the Act are counted 
toward the counting of the out-of-pocket threshold at section 1860D-
2(b)(4)(C)(ii) of the Act. Prescription drug plans and MA-PDs would be 
responsible for tracking the application of the low-income subsidy 
amounts as described in Sec.  423.100 of these proposed rules.

Q. Guaranteeing Access to a Choice of Coverage (Qualifying Plans and 
Fallback Plans)

(If you choose to comment on issues in this section, please include the 
caption ``Subpart Q''' Guaranteeing Access to A Choice of Coverage 
Qualifying Plans and Fallback Plans'' at the beginning of your 
comments.)
1. Overview (Sec.  423.851)
    Subpart Q would implement the provisions of sections 1860D-3, 
1860D-11(g), 1860D-12(b)(2), 1860D-13(c)(3) and 1860D-15(g) of the Act. 
In this section, we address a beneficiary's right to have access to a 
choice of at least two plans; the requirements and limitations on the 
bid submission; review and approval of fallback prescription drug 
plans; contract requirements specific to fallback plans; and the 
determination of enrollee premium and our payments for those plans.
2. Terminology (Sec.  423.855)

a. Eligible Fallback Entity

    As provided under section 1860D-11(g)(2) of the Act, an ``eligible 
fallback entity'' for a particular contract period is defined as an 
entity that meets all the requirements to be a PDP sponsor (except that 
it does not have to be capable of withstanding potential financial 
losses as a licensed risk-bearing entity) and does not submit a bid 
under the risk bidding process for any PDP region for the first year of 
that contract period. An entity would be treated as submitting a bid 
under the competitive bidding process, and thus not be an eligible 
fallback entity, if the entity was acting as a subcontractor for an 
integral part of the drug benefit management activities of a PDP 
sponsor that is submitting a bid for a prescription drug plan. An 
entity would not, however, be treated as submitting a bid if it is a 
subcontractor of an MA organization, unless that organization is acting 
as a PDP sponsor with respect to a prescription drug plan, rather than 
offering an MA-PD plan. We anticipate that some eligible fallback 
entities may contract with other entities for the performance of some 
required pharmacy benefit management functions.
    As the result of this restriction in bidding, eligible fallback 
entities would have decided not to submit either a full-risk or limited 
risk bid in any region (either as a direct contractor, or as a 
subcontractor for a PDP sponsor) in order to be eligible to submit a 
fallback prescription drug bid in any region. Section 1860D-11(g)(2)(B) 
of the Act applies this restriction to the first year of a contract 
period. We interpret this to mean that an entity that submitted a risk 
bid in any region in the first year of a three-year contract cycle 
would not be permitted to be a fallback plan in the second and third 
year of the same contract cycle for any region. Taken together with the 
limitations in Sec.  423.265(a)(2) on qualifying as a risk-bearing PDP, 
these requirements will force organizations to choose either the 
fallback process or the at-risk process. If an organization wins the 
fallback bidding, it is effectively barred under Sec.  423.265(a)(2) 
from bidding as a risk plan in that region for 4 years--for the 3-year 
contract term, it is barred everywhere, and in the 4th year, it is 
barred from bidding as a risk plan in that region. We believe that the 
intent of this restriction was to maximize participation in the 
competitive bidding program and to limit the attractiveness of 
participating as a fallback plan for those plans that could participate 
on an at-risk basis. One of our objectives is to design our bidding 
process so that fallback plans are not required at all, that is, to 
support full-risk plans and to provide for limited-risk plans in a 
particular region if full-risk plans are not available. To the extent 
that any fallback plans may be required, we are required to submit an 
annual report to the Congress on the application of the fallback plan 
provisions and on further recommendations for limiting the need for 
such plans and maximizing participation by limited risk plans.
    We could consider an alternative interpretation of what it means to 
``offer a fallback plan'' in a region for purposes of section 1860D-
12(b)(2)(C) of the Act. The alternatives would be--
    1. Having a contract with us to be a fallback provider; or
    2. Actually offering prescription drug benefits to enrollees when 
and if the fallback service area is ``activated.''
    With the second interpretation, a fallback entity may not 
necessarily be barred from the at-risk bidding for 4 years. If the 
fallback contract was not activated and no plan was offered during year 
3, the entity could be eligible to bid at risk for year 4. 
Interpretation 2 seems reasonable and consistent with the conference 
negotiations, since the policy goal would be to prevent plans from 
converting their enrollment under a fallback contract to enrollment 
under an

[[Page 46733]]

at-risk plan. If a fallback contract were not activated, there would be 
no enrollment and no risk of conversion. This interpretation would be 
appropriate in the case of an Indefinite Delivery type of contract in 
which bidders are approved as potential contractors and orders may or 
may not later be placed against the contracts. However, there are a 
variety of contracting vehicles available, and we are not prepared to 
limit the type of contract used at this time. We are requesting 
comments on this interpretation of ``offer a fallback plan,'' and on 
the advantages and disadvantages of this type of contracting for 
eligible fallback entities.

b. Fallback Prescription Drug Plan

    As provided under section 1860D-11(g)(4) of the Act, a fallback 
prescription drug plan is defined as a prescription drug plan offered 
by an eligible fallback entity that--
     Provides only actuarially equivalent standard prescription 
drug coverage (without supplemental benefits) as defined in Sec.  
423.100;
     Provides access to negotiated prices, including discounts 
from manufacturers;
     Meets the requirements for PDP sponsors except as 
otherwise indicated; and
     Meets other requirements as specified by us.
    We would require that fallback plans offer actuarially equivalent 
standard coverage as defined in Sec.  423.100 in order to ensure the 
incorporation of industry standard cost and utilization containment 
methods, such as tiered coinsurance structures. We would welcome 
comments on other requirements, or exceptions from requirements, that 
should be considered relative to fallback plans.

c. Qualifying Plan

    Under Sec.  423.855 of our proposed rule, a qualifying plan is 
defined as either a full-risk or limited risk prescription drug plan 
(PDP) or an MA-PD plan that provides basic coverage, or an MA-PD plan 
that provides supplemental coverage for no additional charge to the 
beneficiary. Specifically, if the MA-PD plan coverage includes 
supplemental prescription drug coverage, then in order to meet the 
definition of a ``qualified plan'' the MA-PD must be able to apply a 
premium rebate under Part C of Medicare as a credit against the 
supplemental coverage premium, leaving no cost to the beneficiary for 
the supplemental coverage. MA-PD plans must also be open for enrollment 
and not operating under a capacity waiver in order to be counted as a 
qualifying plan in an area.
3. Assuring Access to a Choice of Coverage (Sec.  423.859)

a. Access Standards

    As provided under section 1860D-3(a) of the Act and codified in our 
proposed regulations at Sec.  423.859(a), we are required to ensure 
that each Part D eligible individual has available a choice of 
enrollment in at least two qualifying plans offered by different 
entities in the geographic area in which he or she resides. Therefore, 
beneficiaries in an area must have a choice of two plans that provide 
basic coverage (or an MA-PD plan that provides supplemental coverage 
for no additional charge to the beneficiary). However, to meet the 
access test, different sponsors must offer the two qualifying plans, 
and at least one of the plans must be a PDP.

b. Fallback Service Area

    As provided in section 1860D-11(g)(3) of the Act, before the start 
of a contract year, we would determine if Part D eligible individuals 
in a PDP region have available a choice of enrollment in a minimum of 
two qualified plans offered by different entities, at least one of 
which is a prescription drug plan. In the event that we determine that 
beneficiaries within a PDP region or some portion of the PDP region do 
not have a choice of two qualified plans, we would establish a 
``fallback service area.'' Thus, a fallback service area is any area 
within a PDP region in which we have determined that Part D eligible 
individuals do not have available a choice of enrollment in two 
qualified plans, at least one of which is a prescription drug plan. 
Three examples of the application of a fallback service area follow:
    Example 1--We would establish a fallback service area in an area 
where an MA regional PPO plan is offered but no PDP is offered in the 
region. Since beneficiaries in the region would only have the choice of 
a MA-PD and not a stand-alone PDP, we would define the area as a 
fallback service area.
    Example 2--A fallback service area would also be designated if only 
one PDP is offered in a region, but in some or all parts of the region 
neither a regional (PPO) MA-PD plan nor a local MA-PD plan are 
available to beneficiaries. Since beneficiaries would not have a choice 
of two qualifying plans, we would define the areas within the region 
that only have access to the PDP, and not an MA-PD plan, as fallback 
service areas. As a result, it would be possible for only certain areas 
(counties) within a region to be designated as fallback service areas.
    Example 3--A fallback service area would also be designated in any 
area in which only one entity offered all qualifying plans, even if 
that sponsor offered two PDPs, or one PDP and one MA-PD plan with basic 
coverage, covering the entire region.
    In order to meet the requirement that two qualifying plans be 
available to beneficiaries in each service area, we could, as provided 
under section 1860D-11(f) of the Act and Sec.  423.272(c) of these 
regulations, approve limited risk plans. If two qualifying plans were 
not approved in any particular service area even after our 
consideration of limited risk plan applications from entities applying 
to become PDP sponsors, beneficiaries in that service area would be 
provided with the opportunity to enroll in a fallback plan.

c. Waivers for Territories

    Section 423.859(c) of our proposed regulations would make Medicare 
beneficiaries residing in the U.S. territories--which include American 
Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto 
Rico, and the Virgin Islands--eligible to enroll in Part D. As provided 
under section 1860D-42(a) of the Act, we would have the authority to 
waive any Part D requirements, including the requirement that access to 
two qualifying plans be assured in each service area, as necessary to 
assure access to qualified prescription drug coverage for Part D 
eligible individuals residing in the U.S. territories. For instance, if 
no fallback plans responded to our RFP for offering Part D coverage in 
a territory, but one PDP plan did, we might consider such a waiver as 
being in the interest of those beneficiaries. In addition, entities 
wishing to become prescription drug plans in the territories may 
request waivers or modifications of Part D requirements that facilitate 
their operation in those areas. We will publish in operational guidance 
a list of acceptable waivers and modifications of Part D requirements 
for entities that wish to operate prescription drug plans in the 
territories.
    We will consider waiving the following requirements in order to 
assure sufficient access to qualified prescription drug coverage for 
Part D eligible individuals residing in the U.S. territories--
    The proposed requirement set forth in section 1860D-3(a)(1) of the 
Act and Sec.  423.859(a) of our proposed regulations that we ensure 
access to at least 2 qualifying plans offering standard

[[Page 46734]]

prescription drug coverage in each service area.
    The proposed pharmacy access standard under section 1860D-4(b)(1) 
of the Act and Sec.  423.120 of our proposed regulations, and the 
service area requirement set forth in Sec.  423.112.
    The proposed requirement set forth in section 1860D-4(k) of the Act 
and Sec.  423.132 of our proposed regulations that PDP sponsors 
offering a prescription drug plan ensure that pharmacies inform Part D 
enrollees of any differential between the price of the covered drug to 
the enrollee and the price of the lowest priced generic drug that is 
therapeutically equivalent and bioequivalent and available at that 
pharmacy. This waiver mirrors language in the subpart C preamble 
regarding Sec.  423.132 (public disclosure of pharmaceutical prices for 
equivalent drugs). There, we indicate that we will consider waiving 
this requirement for pharmacies under certain circumstances--including 
if the pharmacy is located in one of the U.S. territories. We propose 
replicating the waiver that is provided in the drug card regulation 
regarding public disclosure of prices for equivalent drugs. The 
rationale for this waiver in the drug card regulation was that few 
discount drug cards currently have contractual relationships with 
retail pharmacies in the territories; waiver of the requirement was 
meant to reduce the administrative complexity of endorsed card 
sponsors' contracts with participating retail pharmacies in the 
territories and, thus, encourage entities to apply to offer a discount 
card in the territories.
    We request comments on the appropriateness of these proposed 
waivers of Part D requirements. In addition, we request comments 
regarding any additional waivers of Part D requirements we may wish to 
consider in order to assure access to qualified prescription drug 
coverage for Part D eligible individuals residing in the U.S. 
territories.
4. Submission and Approval of Bids (Sec.  423.863)
    As provided in section 1860D-11(g)(1)(A) of the Act, we would 
establish a separate bidding process for fallback plans from the 
process addressed in Sec.  423.265 of our regulations. We anticipate 
that we would ``pre-qualify'' bidders from eligible fallback entities 
in the first half of 2005 for the offering of fallback prescription 
drug plans in one or more regions in 2006. While formal awards would be 
made, the services of a fallback plan would only be used if at least 
two full-risk or limited-risk plans (one of which could be an MA-PD 
plan) were unavailable. It is quite possible--and it is our policy 
objective--that we would never use the services of a fallback 
contractor because there would be at least two risk-bearing plans 
offered in every region of the country. We would re-solicit bids every 
three years thereafter in accordance with the three-year contracting 
cycle provided under 1860D-11(g)(7)(B) of the Act, or annually 
thereafter as needed to replace contractors between contracting cycles. 
However, a fallback prescription drug plan may be offered for any year 
within the contract period only if that area is a fallback service area 
for that year. We will provide additional guidance on the form and 
manner in which such fallback bids would be submitted. In general, we 
would enter into contracts with fallback plans using federal 
acquisition rules on a timetable ensuring that such contracts were in 
place at the same time as prescription drug plans would otherwise be 
offered. In the event that fallback contracts are required, we expect 
to award (only) two fallback contracts, through a competitive process 
factoring in price (discounts) and administrative costs.
    As discussed in earlier sections of this preamble, section 1860D-
11(i) of the Act specifies that we may not interfere with negotiations 
between drug manufacturers and pharmacies and PDP sponsors, and may not 
require a particular formulary or institute a price structure for the 
reimbursement of covered Part D drugs. However, the revenue 
requirements standard in 5 U.S.C. 8902(i), discussed in subpart F of 
this preamble, requires us to ascertain that the bid ``reasonably and 
accurately reflects the revenue requirements for benefits provided 
under that plan.'' Therefore, while we will not set the price of any 
particular drug, or require an average discount in the aggregate on any 
group of drugs (such as single-source brand-name drugs, multiple-source 
brand name drugs, or generic drugs), we will evaluate whether the bid 
is reasonably justified. As specified in 5 U.S.C. 8902(i), we will take 
steps to ensure that benefits are ``consistent with the group health 
benefit plans issued to large employers,'' to ensure that the bid 
amounts submitted are comparable to those available on the private 
market. For example, if the price reference points appear to be 
particularly high (or low), we may request an explanation of the 
bidders' pricing structure, and the nature of their arrangements with 
manufacturers. We would also ensure that there is no conflict of 
interest leading to higher bids. In addition to evaluating the 
reasonableness of the bid amounts submitted by fallback plans, we also 
propose to negotiate price-related performance targets with fallback 
plans, consistent with current market practices in which plan sponsors 
negotiate price-related reference points with PBMs. Additionally, we 
would also consider potential contractors based on what they bid for 
administrative functions like claims processing.
    Unlike plans that contract on a risk basis, fallback entities are 
paid on the basis of cost, and thus these entities will have less of an 
incentive to negotiate low drug prices. Consequently, because the 
statute directs us to pay management fees that are tied to performance 
measures, and directs that there must be a measure for costs, we are 
contemplating tying the performance payments of fallback entities to 
the average discounts they are able to negotiate, including discounts 
from manufacturers. To the extent possible, we would like the concept 
of discount to reflect a broad measure of lower per member spending, 
this may be accomplished by greater reliance on generics or use of step 
therapy. Thus, for example, if a performance incentive was based on 
whether the plan was able to maintain an average discount of 20 percent 
below the Average Wholesale Price (AWP) of a drug (referred to as ``AWP 
minus (-) 20 percent''), and if the plan averaged less of a discount, 
it might lose some of its performance incentive payments. If the plan 
was able to maintain an average discount greater than AWP-20 percent, 
it could qualify for additional incentive payments. Other potential 
targets might include average cost per prescription, average 
anticipated (or guaranteed) rebate per prescription, average dispensing 
fee per (type of) prescription, or average administrative fee per 
prescription.
    We understand that this type of incentive contracting is found in 
the pharmacy benefit management market today, and believe that pursuing 
this type of approach will incentivize fallback plans to secure the 
best possible prices for beneficiaries and the Medicare program. 
However, we are aware that using a floating target such as AWP as a 
reference point may be counterproductive to our goal of minimizing 
costs, since the AWP can easily be raised to keep prices stable. 
Therefore, we are interested in identifying other potential reference 
points that would be less subject to manipulation, such as a 
relationship to average sales price, or to the prior year's negotiated 
and delivered prices. We considered whether this approach could

[[Page 46735]]

be viewed as a violation of the noninterference provisions of section 
1860D-11(i) of the Act. We believe that section 1860D-11(g)(5)(B)(i) of 
the Act makes clear that the Congress contemplated taking prices into 
account in calculating incentive payments for fallback entities. 
Moreover, even though the performance measures will be defined in 
advance, the determination of incentive payments will be made at the 
end of the contract period, and thus does not represent interference in 
the bidding process. Therefore, we are proposing to place performance 
clauses in the contracts with fallback entities that would tie 
performance payments to the fallback plan's ability to negotiate 
certain levels of discounts on drug prices that will be passed on to 
beneficiaries and us as costs. We would also like to receive comments 
on alternative reference points or alternative methodologies that could 
promote competitive pricing.
    Except as provided below, in section 6, all of the provisions of 
Sec.  423.272 of our regulations regarding the review and approval of 
prescription drug plans apply to the approval or disapproval of 
fallback prescription drug plans. As indicated in Sec.  423.265(d)(4), 
and discussed in subpart F of this preamble, all risk bids would be 
submitted as either full-risk or limited risk. After we evaluate all 
full-risk and limited risk bids, we will determine whether the region 
is, in whole or in part, a fallback service area and enter into (or 
activate) fallback plan contracts. In accordance with section 1860D-
11(g)(1)(B)(ii) and section 1860D-11(g)(1)(B)(v) of the Act, only one 
fallback prescription drug plan would be approved to serve all fallback 
service areas in any one region, and we would not enter into a contract 
with just one fallback entity to offer all of the fallback plans 
throughout the United States.
    As with risk bids, we believe we have the authority to negotiate 
with respect to fallback plans in four broad areas: administrative 
costs, aggregate costs, benefit structure, and plan management. We 
would evaluate administrative costs for reasonableness in comparison to 
other bidders. We would examine aggregate costs to determine whether 
the revenue requirements for actuarially equivalent standard 
prescription drug coverage as defined in Sec.  423.100 are reasonable 
and equitable. We would be interested in steps that the plan is taking 
to control costs, such as through measures to encourage use of generic 
drugs, therapeutic interchange to preferred brand-name drugs, and 
formulary compliance. We would be interested in reviewing the formulary 
to ensure that it is appropriate for a region in which beneficiaries do 
not have alternative plans from which to choose. We would examine and 
discuss any proposed benefit structures or changes to benefits, 
particularly with regard to any potentially discriminatory features. 
Finally, we would discuss indicators and any identified issues with 
regard to plan management, such as customer service.
5. Rules Regarding Premiums (Sec.  423.867)
    Except as provided with regard to any enrollment penalty or low-
income assistance, or employer group waivers under sections 1857(i) and 
1860D-22(b) of the Act (Sec.  423.462(a) in subpart J), the monthly 
beneficiary premium charged under a fallback prescription drug plan 
offered in all fallback service areas in a PDP region must be uniform. 
It must equal 25.5 percent of an amount equal to our estimate of the 
average monthly per capita actuarial cost, including administrative 
expenses, under the fallback prescription drug plan of providing 
coverage in the region. In calculating administrative expenses, we 
would use a factor based on similar expenses of prescription drug plans 
that are not fallback prescription drug plans. We would like to receive 
comments suggesting the kinds of costs fallback plans might have that 
PDPs would not (for example, the cost of gearing up systems quickly, 
less ability to negotiate pharmacy network discounts) and what costs 
they would not have (for example, marketing).
    Fallback plans would not receive a portion of any applicable late 
enrollment penalties since they do not bear risk for increased expenses 
attributable to individuals to whom the penalty applies. Monthly 
beneficiary premiums for enrollees in fallback prescription drug plans 
would be deducted from Social Security benefits (as provided in Sec.  
422.262(f)(1)) or in any other manner provided under section 1840 of 
the Act.
6. Contract Terms and Conditions (Sec.  423.871)
    In general, the terms and conditions of contracts with eligible 
fallback entities offering fallback prescription drug plans would be 
the same as the terms and conditions of contracts for prescription drug 
plans, with the following exceptions:
     The contract term for a fallback prescription drug plan 
would be for a period of 3 years (except as may be renewed after a 
subsequent bidding process). However, a fallback prescription drug plan 
may be offered for any year within the contract period only if that 
area is a fallback service area for that year.
     An eligible fallback entity with a contract under this 
part may not engage in any marketing or branding of a fallback 
prescription drug plan. This refers to marketing activities promoting 
the plan and its sponsor to Part D eligible beneficiaries as addressed 
in Sec.  423.50 of this proposed rule, and not to required 
dissemination of information on approved plan characteristics to 
enrollees as required in Sec.  423.128 of our proposed rule. 
Beneficiary education and outreach to employers potentially interested 
in providing supplemental coverage will remain solely our 
responsibility.
     We would establish performance measures for fallback 
prescription drug plans as discussed elsewhere in this subpart.
     Payment terms would include payment for actual costs 
(taking into account price concessions) of covered Part D drugs 
provided to Part D eligible individuals enrolled in the plan, and 
management fees tied to the performance measures that we establish.
     Each contract for a fallback prescription drug plan would 
require an eligible fallback entity offering a fallback prescription 
drug plan to provide us with the information that we determine is 
necessary to carry out the fallback plan payment provisions, and 
calculate accurate payments, including, but not limited to, all 
documentation relating to including 100 percent of drug claims, costs, 
rebates and discounts, and disclosure of all direct and indirect 
remuneration as offsets to the claim costs.
     We could amend the contract at any time, as needed, to 
reflect the exact regions or counties to be included in the fallback 
service area(s).
    Other contract terms will be specified during the bid solicitation 
process. Competitive procedures (as defined in section 4(5) of the 
Office of Federal Procurement Policy Act (41 U.S.C. 403(5)) will be 
used in fallback plan contracting.
    As discussed above, as part of the payment process for fallback 
plans authorized by section 1860D-11(g)(5) of the Act, we would assess 
the performance of plans with regard to specific performance measures 
and tie this performance to an incentive payment. These measures would 
include at least measures for cost containment, quality programs, 
customer service, and benefit administration (including claims 
adjudication). ``Cost containment'' refers to processes in place to 
ensure that costs

[[Page 46736]]

to the Medicare Prescription Drug Account and to enrollees are 
minimized through mechanisms such as generic substitution and price 
discounts. The term ``quality programs'' refers to drug utilization 
review processes in place to avoid adverse drug reactions and drug over 
utilization and to reduce medical errors. The term ``customer service'' 
refers to processes in place to ensure that the entity provides timely 
and accurate filling of prescriptions and delivery of pharmacy and 
beneficiary support services. We would be interested in surveying 
enrollees of fallback plans to assess customer satisfaction with plan 
services. The terms ``benefit administration and claims adjudication'' 
refer to processes in place to ensure that the entity provides 
efficient and effective benefit administration and claims adjudication, 
such as accurately programming and updating its benefit administration 
information systems, and providing timely and accurate claims 
adjudication.
7. Payment to Fallback Plans (Sec.  423.875)
    The amount payable under approved fallback prescription drug 
contracts would be the amount determined under the specific contract 
negotiated for each such plan. In general, all such contracts would 
provide for payment for the allowable and allocable costs (taking into 
account negotiated price concessions) of covered Part D drugs provided 
to Part D eligible individuals enrolled in the plan and payment of 
management fees that are tied to the performance measures we 
established for the management, administration, and delivery of the 
benefits under the contract.
    In contrast to PDP sponsors offering prescription drug plans and MA 
organizations offering MA-PD plans, eligible fallback entities are not 
required to bear any of the risk associated with the provision of the 
prescription drug benefit. They may, however, bear administrative cost 
risk related to the achievement of specified performance measures. In 
other words, they would receive reimbursement for the full contracted 
cost attributable to delivering the drug benefit, including management 
fees and administrative costs, but may not receive the full measure of 
available incentive payments tied to performance measures unless 
specified targets have been met.
    We are considering alternatives for the fallback plan payment 
process. Under one proposal, we would establish an account against 
which the claims costs and management fees would be debited. This means 
that the entity offering the fallback plan would debit the prescription 
drug claim costs and their negotiated administrative fees against this 
account in a manner to which we agree and would then be subject to 
certain cost reporting and settlement requirements, as, for instance, 
with regard to rebate allocation. An alternative approach would be to 
establish an estimated monthly payment per enrollee as a prospective 
payment for the fallback plan. Initially, that amount could change 
monthly to reflect differences between the costs of enrollees in a 
fallback plan versus payments to the plan under the prospective system. 
The objectives of this approach would be to provide the correct amount 
of money to the fallback plan to reflect their actual costs. We request 
comment on payment methodologies, particularly in regard to prospective 
or retrospective rebate allocation.

R. Payments to Sponsors of Retiree Prescription Drug Plans

1. Overview
    Subpart R would implement section 1860D-22 of the Act, which 
provides for making subsidy payments to sponsors of qualified retiree 
prescription drug plans. Section 1201 of the MMA amends the Internal 
Revenue Code of 1986 to provide that these subsidy payments will be 
exempt from Federal tax. Further guidance on the Federal tax treatment 
of the subsidy will be under the auspices of the U.S. Department of the 
Treasury.

a. Options for Sponsors of Retiree Prescription Drug Programs

    The enactment of Title I of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) on 
December 8, 2003, has provided sponsors of retiree prescription drug 
plans with multiple options for providing drug coverage to their 
retirees. We believe the availability of these various options will 
encourage employers and unions to continue to assist their retirees in 
having access to prescription drug coverage.
    Generally, employers and unions who offer drug benefits to their 
retirees (and their spouses and dependents) who are also eligible for 
Medicare Part D could--
    (1) Provide prescription drug coverage through employment-based 
retiree health coverage. If employment-based retiree health coverage 
were at least actuarially equivalent to the standard prescription drug 
coverage under Medicare Part D, the sponsor would be eligible for a 
special Federal subsidy for each individual enrolled in the sponsor's 
plan who is also eligible for Medicare Part D, but who nevertheless 
elects not to enroll in Medicare Part D;
    (2) Contract with a PDP sponsor or Medicare Advantage (MA) 
organization to enroll Medicare beneficiaries covered under the retiree 
plan into a prescription drug plan (PDP) or Medicare Advantage-
prescription drug (MA-PD) plan. Alternatively, the sponsor itself could 
apply to be a PDP sponsor or MA organization and offer a PDP or MA-PD 
plan to its retirees. That plan could consist of ``enhanced alternative 
coverage'' (as defined under Sec.  423.4 of our proposed rule), that 
is, drug coverage that is more generous than that offered under the 
standard prescription drug coverage under Medicare Part D (as defined 
under Sec.  423.4 of our proposed rule). Medicare would subsidize the 
cost of such coverage through direct and reinsurance subsidies. At its 
option, the sponsor could elect to subsidize the monthly beneficiary 
premium (as calculated under Sec.  423.286 of the Drug Benefit);
    (3) Provide prescription drug coverage that supplements, or 
``wraps-around,'' the coverage offered under the PDP or MA-PD plans in 
which their retirees (and retirees' spouse and dependents) enroll.
    The first option is the subject of this subpart of our proposed 
rule. The latter options, all of which involve employers' or unions' 
retirees (and their spouses and dependents) enrolling in Part D, are 
discussed in detail in the preamble to subpart J. We note that 
employers also have the option of subsidizing the monthly beneficiary 
premium for the PDP or MA-PD plan in which the employer or union's 
retirees (and their spouses and dependents) elect to enroll.
    If employers or unions elect to sponsor either an enhanced 
alternative plan covered under Medicare Part D or supplemental coverage 
that ``wraps around'' Medicare Part D, either election will have an 
impact as to when their retirees (and retirees' dependents) will be 
eligible for catastrophic drug coverage, with important consequences 
for participants, sponsors, the plans, and the Medicare program. By 
delaying the provision of government-financed catastrophic coverage, 
these plans would lower the cost of Part D to the Federal government by 
lowering our reinsurance payments while preventing beneficiaries from 
facing any gaps in coverage. As discussed in subpart C of this 
preamble, individuals enrolled in a PDP or MA-PD plan would be eligible 
for catastrophic drug coverage after they have incurred out-of-pocket 
drug costs in the amount specified under Sec.  423.104(e)(iii)(A) of 
our proposed rule. Under the reinsurance provisions,

[[Page 46737]]

Medicare would reimburse PDP sponsors and MA organizations offering MA-
PD plans 80 percent of their gross costs for providing catastrophic 
coverage (excluding administrative costs and net of discounts, rebates, 
and similar price concessions). Only drug costs paid by a Part D 
enrollee, or on behalf of a Part D enrollee by another person, would 
count toward the annual out-of-pocket threshold. Amounts reimbursed by 
insurance or otherwise, by a group health plan, or by another third-
party payment arrangement would not count toward the threshold. We 
refer to those drug expenditures that count toward the out-of-pocket 
threshold as ``true out-of-pocket expenditures'' (TrOOP).
    Under these rules, sponsors who provide retirees (and retirees' 
spouses and dependents) enhanced alternative coverage would, in effect, 
delay the total drug spending that would trigger catastrophic coverage, 
because plan participants would have lower cost sharing, and thus, have 
lower out-of-pocket costs. Similarly, employers or unions who would 
sponsor supplemental coverage that would ``wrap-around'' Medicare Part 
D coverage would raise the total drug spending that would trigger 
government-financed catastrophic coverage, since drug costs paid for by 
those plans would reduce beneficiary costs and would not count toward 
the true out-of-pocket annual limit.
    When an employer or union elects to contract with a PDP sponsor or 
MA-PD organization, the PDP sponsor, under Sec.  423.458(c) of our 
proposed rule, or the MA organization, under Sec.  422.106(c), may 
submit written requests to us for permission to waive requirements 
under Part D that hinder the design or offering of PDP or MA-PD plans 
to employers. We believe these waivers would facilitate efficient 
administration and integration of their enhanced Part D coverage with 
other retiree health benefits offered by the sponsor, as another 
subsidized option for employers to offer enhanced coverage instead of 
using Medicare's alternative retiree drug subsidy. For example, the PDP 
sponsor or MA organization could request permission to restrict 
enrollment in its PDP or MA-PD plan to the sponsor's retirees (and 
their spouses and dependents) and offer a benefit that resembles or 
enhances the sponsor's existing coverage. Similarly, should the plan 
sponsor wish to enroll its retirees (and their spouses and dependents) 
in its own plan, with enrollment limited to those individuals, the 
sponsor could apply to be a PDP sponsor or MA organization offering a 
MA-PD plan and request such waivers as necessary.
    We encourage plan sponsors to carefully review each option and 
determine which one is most beneficial to the sponsor and its retirees. 
We believe that the variety of options will encourage sponsors to 
retain drug coverage for their retirees (and their spouses and 
dependents), and we seek comment on how we can use all of these 
subsidized options to maximize enhancements in retiree coverage.

b. The Retiree Drug Subsidy Provision

    During the past 15 years, the availability and generosity of 
employment-related retiree health coverage has been eroding due to 
rising health care costs, increasing numbers of retirees (who may be 
more costly to cover than younger active workers), and the impact of 
changes in accounting rules. For example, in 1988 approximately 66 
percent of the nation's private sector firms with 200 or more workers 
that offered health benefits to active workers also offered retiree 
health benefits to any of their retirees, including both the pre-65 and 
the ages 65 and older populations, but by 2003 only 38 percent of these 
firms were offering retiree health coverage. Most employers that offer 
retiree health benefits also provide retiree prescription drug 
coverage. A more detailed discussion of the trends in retiree coverage, 
as well as the limitations in the data available on these trends is 
provided in the impact analysis section of this proposed rule.
    By providing heavily subsidized insurance coverage of prescription 
drug expenditures incurred by, or on behalf of, Medicare beneficiaries, 
the MMA would significantly reduce the cost of existing retiree 
beneficiary drug coverage. For retiree-beneficiaries who enroll in Part 
D, Medicare would become the primary insurer. MMA would then lower the 
sponsor's cost of drug coverage by having the sponsor's plan become a 
secondary payer of retiree drug coverage. However, plan sponsors may 
benefit from the greater flexibility and fewer prescriptive 
requirements of the alternative retiree drug subsidy.
    The retiree drug subsidy is designed to accommodate plan sponsors 
seeking greater flexibility and less regulation. In addition, while the 
expenses associated with providing retiree drug coverage continue to be 
deductible expenses for Federal tax purposes, the payments associated 
with the retiree drug subsidy are not counted as taxable income for 
employers. As discussed in the Regulatory Impact Analysis of this 
preamble, the after-tax nature of the retiree drug subsidy payments 
effectively increases the value of these payments for employers that 
are subject to the corporate income tax. For example, the tax-free $611 
average retiree drug subsidy amount would be equivalent to about $940 
of taxable income for employers with a marginal tax rate of 35 percent. 
As discussed further in the impact analysis, we believe that the tax 
treatment of the retiree drug subsidy payments will provide an 
additional incentive for employers to participate in the retiree drug 
subsidy program.
    The intent of the MMA retiree prescription drug subsidy provisions 
is to slow the decline in employer-sponsored retiree insurance. By 
providing a special subsidy payment to sponsors of qualifying plans, 
the MMA provides employers with extra incentives and flexibility to 
maintain prescription drug coverage for their retirees. Our intention 
is to make these subsidy payments as reasonably available to plan 
sponsors as possible. We wish to take into account as much as possible 
the needs and concerns of plan sponsors, consistent with necessary 
assurances that Federal payments are accurate and in accordance with 
statutory requirements, that the interests of retiree-beneficiaries are 
protected, and that employers do not receive ``windfalls'' consisting 
of subsidy payments that are not passed on to beneficiaries.
    We plan to conduct outreach to plan sponsors, retirees and retiree 
associations, and other interested parties on all aspects of the MMA. 
We encourage their input on the feasibility and advisability of the 
approaches we have identified, as well as any other issues presented by 
the new statute, or additional options beyond those we have identified. 
We look forward to employer, union, and other public comments on all 
aspects of this proposed regulation. We particularly seek comments on 
the sections noted in the preamble.
2. Definitions (Sec.  423.882)
    The Act contains a number of definitions that are critical to 
understanding how the retiree drug subsidy functions. To make it easier 
to understand how these definitions work together to establish the 
subsidy amount, we first provide an overview of the structure of the 
subsidy program and then provide a description of the key concepts. As 
noted above, a significant portion of the Medicare population receives 
prescription drug coverage through employer and/or union

[[Page 46738]]

sponsored retiree health benefits. The Act provides for Medicare 
payment to plan sponsors who choose to provide prescription drug 
coverage that is at least as generous as the standard prescription drug 
benefit under Medicare Part D. The Congress intended for the subsidy to 
encourage as many sponsors as possible to retain this coverage for 
their retirees (and their spouses and dependents). The subsidy payment 
made to a sponsor of a qualified retiree prescription drug plan would 
be based on actual drug spending by individuals enrolled in the plan 
and not premium payments. The subsidy is 28 percent of certain costs 
that are incurred for certain prescription drugs for individuals 
covered under the qualified retiree prescription drug plan who are 
eligible for the Medicare Part D drug benefit but who are not enrolled 
in Medicare Part D. The statute defines a number of terms in order to 
distinguish between costs that are to be considered in determining the 
subsidy payment amount, and costs that may not be considered in 
determining the subsidy payment amount.
    Only group health plans that provide health coverage to Part D 
eligible individuals based on their status as retiree participants (or 
spouses or dependents of retiree participants) may qualify as a retiree 
prescription drug plan. The term ``group health plan'' is defined later 
below. Additionally, to be considered a qualified retiree prescription 
drug plan, the sponsor's group health plan must be at least actuarially 
equivalent to the standard drug coverage under Medicare Part D (in 
accordance with section 1860D-22(a)(2)(A) of the Act and as discussed 
below in section 3(b) of this subpart). As required under section 
1860D-22(a)(2)(A) of the Act, the sponsor must submit an actuarial 
attestation that its plan is at least actuarially equivalent to the 
standard Medicare Part D prescription drug benefit for the plan to be a 
``qualified retiree prescription drug plan.'' In addition to meeting 
tests of actuarial equivalence, the plan must be a group health plan 
that provides prescription drug benefits to Medicare Part D eligible 
individuals, as defined in Sec.  423.882, based on their status either 
as retirees or as spouses and dependents of those retirees.
    The next step is to identify the ``qualifying covered retirees'' 
(that is, those Medicare beneficiaries eligible to enroll in Medicare 
Part D who are enrolled in the retiree plan, but who are not enrolled 
in the Medicare Part D benefit) and determine the ``gross covered 
retiree plan-related prescription drug costs'' (gross costs) under the 
plan for these individuals for the year. Gross costs refer to the costs 
directly associated with the dispensing of a prescription drug. (In the 
prescription drug industry, gross costs are frequently referred to as 
the ``ingredient costs'' (the cost of the drug itself) and the 
``dispensing fee'' (the pharmacy charge for dispensing the drug to a 
patient)). The statute, however, specifically excludes the retiree 
health plan's administrative costs from gross costs. Having established 
that gross costs are the base upon which the subsidy payment is to be 
determined, the statute then specifies that the payment may be made 
only for those costs that fall between the ``cost threshold'' and the 
``cost limit''. For 2006, the cost threshold is $250 and the cost limit 
is $5,000. In other words, the first $250 in prescription drug costs 
for an individual during a year and any prescription drug costs for 
that year that exceed $5,000 is disregarded. The dollar values for the 
cost threshold and cost limit are adjusted annually.
    The statute then specifies that the amount of gross costs that fall 
between the cost threshold and cost limit must be reduced by any 
discounts, chargebacks, rebates, and other price concessions. These net 
costs actually paid by the sponsor or by or on behalf of the retiree 
are referred to as the ``allowable retiree costs.'' The intent of this 
provision is to ensure that Medicare subsidy payments take into account 
the pricing adjustments and discounts that actually occur in the market 
today. Some pricing adjustments, such as manufacturer rebates, 
typically occur well after payment is made to the pharmacy. Since the 
ingredient costs and dispensing fees found in the claims data do not 
include the lower ``prices'' achieved as a result of manufacturer 
rebates and other price concessions, further adjustment is needed to 
account for these other pricing related factors when determining the 
costs under the plan that will be ``allowable'' for purposes of the 
Medicare subsidy payment amount.
    To summarize, the statute provides that the retiree drug subsidy 
payment amount equals 28 percent of the allowable costs attributable to 
the portion of the gross costs that fall between the cost threshold and 
cost limit. The definitions below further articulate the meaning of the 
key terms involved in determining the subsidy payment amount. The 
definitions are organized to first describe the Medicare Part D 
eligible individuals, then terminology related to retiree plans, and 
finally, terminology related to the subsidy payment amount and the 
basis upon which the payment is determined.

Part D Eligible Individual

    Section 423.4 of our proposed rule defines a Part D eligible 
individual as an individual who is entitled to or enrolled in benefits 
under Medicare Part A or who is enrolled under Medicare Part B.

Qualifying Covered Retiree

    Section 1860D-22(a)(4) of the Act defines a qualifying covered 
retiree as a Part D eligible individual who is not enrolled in a Part D 
prescription drug plan (PDP) or Medicare Advantage-Prescription Drug 
(MA-PD) plan but who is covered under a qualified retiree prescription 
drug plan. We note that the qualifying covered retiree is not 
necessarily the retired employee who is the participant under the plan; 
it also includes coverage of a Part D eligible individual who is 
covered under the plan as a spouse or dependent of a participant. 
(Under ERISA, an employee or former employee who is covered under an 
employment-related plan is referred to as the ``participant.'' 
Dependents of the participant are referred to as ``beneficiaries,'' but 
to avoid confusion with ``Medicare beneficiaries,'' we will refer to 
the beneficiaries under the health plan as ``spouses and dependents.'')

Employment-Based Retiree Health Coverage

    Section 1860D-22 (c)(1) of the Act defines employment-based retiree 
health coverage. Employment-based retiree health coverage means 
coverage of health care costs under a group health plan based on an 
individual's status as a retired participant in the plan or as the 
spouse or dependent of a retired participant. The term includes 
coverage provided by voluntary insurance coverage or pursuant to 
statutory or contractual obligation.

Group Health Plan

    The term ``group health plan'' has the same meaning as defined in 
section 607(1) of ERISA, 29 U.S.C. 1167(1). Section 1860D-22(c)(3) of 
the Act specifies that the definition of a group health plan includes 
plans maintained for their employees by the Federal government 
(including the Federal Employee Health Benefits Program (FEHBP) and the 
TRICARE program); plans maintained by State or local government; and 
church plans exempt from Federal taxes under section 501 of the 
Internal Revenue Code of 1986 (despite the fact that those types of 
group health plans are not generally subject to ERISA requirements).

[[Page 46739]]

Qualified Retiree Prescription Drug Plan

    A qualified retiree prescription drug plan means employment-based 
retiree health coverage that meets the requirements set forth in Sec.  
423.884(a) through Sec.  423.884(d) for a Part D eligible individual 
who is a participant or the spouse or dependent of a participant under 
the coverage.

Sponsor

    Sponsor means plan sponsor as defined in section 3(16)(B) of ERISA, 
29 U.S.C. 1002(16)(B). This term means an employer, an employee 
organization (generally a trade union) or a combination of employers 
and employee organizations. Section 1860D-22(c)(2) of the Act, however, 
modifies this definition in the case of a plan maintained jointly by 
one employer and an employee organization and for which the employer is 
the primary source of financing, in which case the term ``sponsor'' 
means the employer.

Covered Part D Drug

    Covered Part D drug has the meaning given in Sec.  423.4 of our 
proposed rule and as discussed in subpart C of this preamble.

Retiree Drug Subsidy Amount

    The retiree drug subsidy amount is defined as 28 percent of the 
allowable retiree costs for each qualifying covered retiree. Section 
1860D-22(a)(3) of the Act describes the subsidy payment to be made to 
the sponsor of a qualified retiree prescription drug plan with respect 
to each qualifying covered retiree who is covered under the plan.

Gross Covered Retiree Plan-Related Prescription Drug Costs

    Section 1860D-22(a)(3)(C)(ii) of the Act defines gross covered 
retiree plan-related prescription drug costs to mean specified costs 
incurred for a qualifying covered retiree enrolled in a qualified 
retiree prescription drug plan ``during a coverage year.'' (For ease of 
reference, we use the term ``gross retiree costs'' interchangeably with 
the defined term.) We explain below in the preamble discussion related 
to Sec.  423.888, that we have tentatively determined that the subsidy 
should be based on calendar year data. For purposes of this definition, 
we simply use the term ``year;'' in the final regulation, we will 
clarify whether it is a plan year or a calendar year.
    In accordance with section 1860D-22(a)(3)(C)(ii) of the Act, we 
define the term, gross covered retiree plan-related prescription drug 
costs, (gross retiree costs) to mean the costs incurred under a 
qualified retiree prescription drug plan for a qualifying covered 
retiree that are directly related to the dispensing of covered Part D 
drugs during the year (other than administrative costs), whether they 
are paid under the plan or by the retiree. Costs for covered Part D 
drugs incurred under the plan that are paid for by the retiree include 
all retiree cost sharing under the plan (for example, deductibles or 
copayments). Costs for non-covered Part D drugs are not considered 
gross retiree costs, even if paid for under the plan.
    As discussed above, dispensing fees are included in gross retiree 
costs, but administrative costs are excluded. Therefore, we expect to 
monitor dispensing fees carefully through our audit activities in order 
to ensure that other administrative costs are not improperly included 
in the dispensing fees.

Allowable Retiree Costs

    In accordance with section 1860D-22(a)(3)(C)(i) of the Act, 
allowable retiree costs means gross covered retiree plan-related 
prescription drug costs between the cost threshold and cost limit that 
are actually paid by either the qualified retiree prescription drug 
plan or the qualifying covered retiree (or on the retiree's behalf), 
net of any manufacturer or pharmacy discounts, chargebacks, rebates, 
and similar price concessions. For the purposes of determining the 
subsidy payment, allowable retiree costs include cost sharing paid ``on 
behalf of'' the qualifying covered retiree by any person or entity. 
This would include amounts paid by family members and charitable 
organizations to assist the retiree in his or her cost-sharing 
obligations. Amounts paid by other group health plans and insurers, 
such as under a spouse's plan that provides secondary coverage towards 
the cost sharing, would also be considered allowable retiree costs.
    We note that the rules for calculating allowable costs under the 
subsidy provisions of section 1860D-22 of the Act must not be confused 
with the rules that pertain to the amount of cost sharing that must be 
paid by beneficiaries who enroll in Medicare Part D. Under section 
1860D-2 of the Act (Sec.  423.466(b) of our proposed rule), beneficiary 
cost sharing under the PDP or MA-PD plan only counts toward reaching 
the annual ``out of pocket threshold'' that triggers catastrophic 
coverage if it is paid by the beneficiary or by another person such as 
a family member. In general, beneficiary cost sharing for which the 
beneficiary is reimbursed through insurance, a group health plan, or 
other third-party payment arrangement will not count toward the annual 
out-of-pocket threshold. The employer/union subsidy provisions contain 
no similar limitation. Thus, beneficiary cost sharing is an allowable 
cost regardless of who pays the cost sharing.
    Because allowable retiree costs exclude gross retiree costs below 
the cost threshold, a plan sponsor will be entitled to a subsidy 
payment for a qualifying covered retiree only if that individual's 
gross retiree costs, or total drug spending under the plan for a year, 
exceed the cost threshold for that year.
    As noted above, allowable retiree costs are drug costs that are 
actually paid by either the qualified retiree prescription drug plan or 
the qualifying covered retiree (or on the retiree's behalf), and 
therefore net of any drug discounts, chargebacks, rebates, and any 
other similar price concessions passed through to the plan or retiree. 
(For purposes of this discussion, we will refer to all of the 
immediately preceding terms as ``rebates''; that is, discounts, 
chargebacks, rebates, and similar price concessions). We understand 
that much of the rebate accounting is not applied in the context of 
point of sale claims data, but rather in periodic accounting 
adjustments, and that rebates are frequently reported along with 
administrative fees paid by the manufacturer. We are aware and 
concerned that, in some cases, plan sponsors may accept lower 
administrative costs or receive services at or below fair market value 
in lieu of some or all of the rebates. We are concerned that this 
practice may result in improper shifting of costs in order to 
inappropriately maximize subsidy amounts. We intend to monitor these 
arrangements closely to ensure that allowable retiree costs are not 
improperly inflated. We are also concerned that these accounting and 
business practices would be incompatible with the requirement to 
disclose all price concessions for purposes of determining allowable 
retiree costs and we, therefore, are proposing to require that the true 
cost of rebates be segregated in all records. We require that all 
rebates passed through to the plan sponsor and retiree in any form be 
subtracted when calculating allowable retiree costs.
    Due to the nature and timing of rebate accounting, we believe that 
this will require a form of step-down cost reporting in which rebates 
received at the aggregate level may be apportioned down to the level of 
plan enrollees incurring allowable retire costs on a reasonable basis. 
Since Medicare beneficiaries would be expected to have higher per 
capita prescription drug

[[Page 46740]]

utilization than other populations, we believe it would generally be 
appropriate to allocate rebates (and other similar price concessions) 
on the basis of percentage of dollars spent rather than of covered 
lives. The method of apportioning and applying rebates will be 
influenced by the payment methodology that is implemented for the 
retiree drug subsidy (see discussion in section 5 of this subpart). For 
example, in a one-time annual retroactive payment system, where payment 
of the subsidy is made after the close of the year, it should not be 
too difficult to factor in the rebates credited to the sponsor (or 
plan) for the period in question since the subsidy payment may occur 
after the rebates have been credited. Conversely, under a monthly 
payment system, factoring in the rebates would require a process to 
reflect the rebates as they are realized, because they are not likely 
to be determined and known until after some subsidy payments occur.
    We believe either approach would require a form of cost reporting 
in which rebates received at the aggregate plan level would be 
apportioned to plan enrollees. One approach would be to reduce the 
subsidy payments by a certain percentage calculated to equal the 
assumed size of the rebates expected to occur. After 2006, the amount 
of reduction could be based upon the rebates received in prior years. 
Once the actual rebates were credited for the year in which the subsidy 
payments were made, the payments could be reconciled. Alternatively, 
rebates could be accounted for and paid in the month in which they are 
received. We also briefly discuss how rebates could be applied to 
different payment methodologies in section 5(b) of this subpart.
    In any case, plans must require and keep accurate records on all 
price concessions and ensure that these are distinctly accounted for 
separately from administrative fees. We are considering how to best 
account for all of the price concessions and rebates. We welcome 
comments on the nature and scope of price concessions in this industry, 
and on the various forms these arrangements may take, as well as on the 
pass-through issue. We also welcome comments on how rebates and other 
forms of remuneration can be most accurately applied to the cost data 
to efficiently satisfy the requirement that all rebates must be netted 
out of allowable retiree costs, while minimizing the burden on 
sponsors. All cost reporting would be subject to inspection and audit 
(including periodic audits) by CMS and the OIG. As discussed later, to 
the extent either CMS or the OIG discover that a sponsor was overpaid 
for the retiree drug subsidy (that is, the records do not support the 
payments made, or there is insufficient documentation to determine 
whether the payments are correct), we may recoup the overpayments or 
take other appropriate action. The reopening and overpayment provisions 
are discussed in section 6 of this subpart R.

Dispensing Fees

    For purposes of consistency, we plan to use the same definition 
that will be applied to PDP and MA-PD plans. See the discussion of 
dispensing fees in subpart C of the preamble to our proposed rule, 
which discusses possible definitions.
3. Requirements to Apply for the Retiree Subsidy (Sec.  423.884)

a. General Requirements

    This section outlines the general requirements related to applying 
for the subsidy payment described in this proposed rule. First, in 
order to be considered a qualified retiree prescription drug plan, a 
plan must meet the definition of employment-based retiree health 
coverage as defined in Sec.  423.882 of our proposed rule, and must 
also comply with the requirements proposed in Sec.  423.884 and 
discussed in this section of the preamble. Additionally, a plan sponsor 
that wishes to be paid the Medicare subsidy must apply annually for the 
subsidy. In paragraph b, below, we describe the actuarial attestation 
that must be submitted with the subsidy application; in paragraph c, we 
describe the application process, including the information that must 
be submitted to establish that the sponsor qualifies for a subsidy; and 
in paragraph d, we describe the disclosure notices that plan sponsors 
are required to provide to beneficiaries. Finally, the sponsor must 
meet the requirements of proposed Sec.  423.888(d) with regard to 
maintenance and access to records for purposes of audit, as discussed 
in section 5 of this subpart, below.
    We intend to conduct outreach to plan sponsors, including State and 
local governments, who would be prospective applicants for these 
subsidy payments in order to encourage communication, better understand 
the needs of the employer community, and provide information on the 
retiree drug subsidy program, as well as to solicit suggestions on how 
we can best implement this program. We invite comments on the most 
effective methods of conducting outreach, as well as prospective venues 
for conducting that outreach.

b. Attestation of Actuarial Value Amount

1. Attestation Requirements
    In Sec.  423.884(a) of our proposed rule we would require that the 
sponsor submit an attestation to us that the actuarial value of the 
prescription drug coverage under its retiree plan or plans is at least 
equal to the actuarial value of standard Medicare Part D prescription 
drug coverage. (A more complete discussion of actuarial equivalency 
follows, below.) In Sec.  423.884(a)(1) of our proposed rule, we would 
require that the attestation be submitted annually after year 2006, but 
no later than 90 days prior to the earlier of the start of the calendar 
year or plan year. (Our tentative decision is to use a calendar year.) 
For purposes of the initial application for the subsidy for 2006, the 
attestation must be submitted by September 30, 2005. Additionally, we 
would require that an updated attestation be submitted when mid-year 
changes to the drug coverage materially affect the drug coverage's 
actuarial value. (A material change means any change that potentially 
causes a plan to no longer meet the actuarial equivalence test.) These 
submissions would not be required when non-material changes are made to 
the coverage (for example, when there are changes in the period of open 
enrollment). We would require that the attestation be submitted 90 days 
prior to the effective date of any material changes. If the impending 
changes result in the plan either no longer being a qualified retiree 
prescription drug plan or no longer providing creditable coverage 
because its benefits are no longer actuarially equivalent to Medicare 
Part D coverage for purposes of either actuarial test, we would require 
that beneficiaries be notified of this change 90 days prior to the 
change taking effect and informed regarding opportunities to enroll in 
Medicare Part D. (See subsequent discussion regarding disclosure 
notices.)
    We believe that requiring attestation on an annual basis and 90 
days prior to material changes in coverage, with a 90 day notice to 
beneficiaries when necessary, should provide sufficient assurance to 
beneficiaries and CMS that the plan meets requirements concerning 
actuarial equivalency and affords beneficiaries time to enroll in 
Medicare Part D without incurring a late enrollment penalty as provided 
for in Sec.  423.56 of our proposed rule. We would also require that 
the attestation, which must be signed by an authorized

[[Page 46741]]

representative of the plan sponsor (or a plan administrator designated 
by the sponsor), include a certification, signed under penalty of 
perjury, that indicates that the information contained in the 
attestation is true and accurate to the best of the attester's 
knowledge and which acknowledges that the information is being provided 
to obtain Federal funds. We welcome comments on whether these proposals 
provide sufficient protection for beneficiaries and whether these 
proposals would be operationally feasible without creating an undue 
burden for sponsors.
2. Establishing Actuarial Equivalency
    Section 1860D-11(c) of the Act provides the Secretary with the 
authority to determine the standards and methods for determining 
actuarial equivalence. In developing standards for actuarial 
equivalence, our intent is to consider how to maximize coverage for 
retirees while limiting costs for the government, and the retiree drug 
subsidy is one important option for achieving this objective. The MMA 
provisions creating Part D provide multiple options for plan sponsors, 
ranging from participating in the retiree drug subsidy to various 
mechanisms for enrolling retirees in Part D prescription drug plans 
while offering enhanced benefits. Our goal is not only to protect, but 
also to enhance coverage offered to retirees. As discussed elsewhere, 
prior to enactment of the MMA, employers have been systematically 
restricting drug coverage for future retirees. Taken together, these 
legal and behavioral factors introduce substantial uncertainty about 
how plan sponsors will assess their options and react to the new Part D 
benefit.
    Congress has clearly and repeatedly articulated four key policy 
objectives for the Medicare retiree drug subsidy program. The first 
goal involves maximizing the number of retirees retaining employer-
based drug coverage through the retiree drug subsidy program created by 
Section 1860D-22 of the Act. The second goal entails not creating 
windfalls, whereby retirees might receive a smaller subsidy from 
sponsors of their retiree drug plans than Medicare would pay on their 
behalf. The third goal is to minimize the administrative burdens on 
beneficiaries, employers and unions. The final goal is to minimize 
costs to the government of providing retiree drug subsidies (and not 
exceed the budget estimates). While the first, third and fourth goals 
received extensive discussion during the creation of MMA, the second 
goal has emerged largely in response to the possibility that the MMA 
might have created an unintended windfall.
    We believe the Secretary has authority to achieve these goals based 
on the requirements that plans qualifying for the retiree drug subsidy 
must offer at least actuarially equivalent benefits to those offered by 
standard Part D prescription drug plans (PDPs). Our proposed regulation 
reflects our attempt to accomplish the four objectives of maximizing 
the number of retirees benefiting from the retiree drug subsidy, 
avoiding windfalls, minimizing administrative burden and not exceeding 
budget estimates. In doing so, we are considering a range of potential 
options, each of which may have an impact on achieving the key 
objectives. We seek comments on how best to accomplish these goals, 
recognizing both that there may be tradeoffs, and that our 
implementation must be consistent with the statutory authority provided 
the Secretary.
    The definition of actuarial equivalence in this context may have an 
impact on our policy objectives. One possible definition would 
stipulate that plans must meet the same test as for ``creditable 
coverage.'' The test for creditable coverage requires that, on average, 
the total or ``gross'' value of the benefit package offered by the 
employer at least equal that of the standard Part D benefit offered by 
PDPs, without regard to the financing of this benefit package. As we 
discuss in subpart B of this preamble, the main concern in establishing 
creditable coverage is in determining the level of health benefit 
coverage the beneficiary has had, and not on how it was financed, since 
no payments are involved. However, when applying this gross value (of 
plan payout) test in the context of the retiree drug subsidy, we must 
be concerned with whether our subsidy payments to sponsors will exceed 
the costs that sponsors actually incur in sponsoring the coverage. This 
one test, or ``single prong'' approach, to defining actuarial 
equivalence could not by itself preclude the existence of windfall 
payments. This is because, without considering financing, an employer 
theoretically could impose the full cost of the benefit package on the 
employee through employee premiums, and still be eligible for a subsidy 
payment if the package the employee was buying met the actuarial 
equivalence test. Or, the employer could contribute a smaller amount 
toward the financing of the package than it would receive in a subsidy 
payment. We seek comments on whether additional steps associated with 
this approach could ever preclude windfalls. In particular, some 
observers have argued that the forces in a competitive labor market, 
collectively bargained contracts, and constraints on changing state, 
local and other public sector retiree health plans obviate the 
likelihood of windfalls. We have serious reservations about the 
adequacy of such forces in precluding the existence of any windfalls 
without significant additional monitoring by Medicare or others to 
assure that benefit subsidy payments are passed on to augment benefits 
received by retirees. Such approaches may create excessive 
administrative burdens on retirees, employers, and unions, and thus 
alternative approaches to precluding windfalls are likely to be 
preferable.
    Another possible policy option would be to use the ``one prong'' 
approach to determining actuarial equivalency, but to also limit the 
amount of the retiree drug subsidy so that it could not exceed the 
amount paid by plan sponsors on behalf their retirees. This would 
assure the elimination of windfalls. However, while this approach would 
be simple both to describe and operationalize, we have questions about 
the adequacy of the legal basis underpinning such a policy.
    A third approach, which could be implemented in a variety of ways, 
would establish a ``two-prong'' test of actuarial equivalence: A 
``gross'' test would assure the total value of benefits, and a ``net'' 
test would reflect only the value of benefits not financed by 
beneficiaries. This third approach is structured specifically to 
preclude windfalls. The first prong of the actuarial equivalency would 
again be a test based strictly on plan design. This test would evaluate 
whether the expected amount of paid claims (or ``plan payout'') under 
the retiree prescription drug coverage is at least equal to the 
expected amount of paid claims under the standard Medicare Part D 
benefit. The second prong of the actuarial equivalency test would be a 
``net value'' test in which the gross value of the plan design would be 
reduced to account for the level of benefits financed solely by the 
beneficiary. For instance, the net value of the coverage could be 
calculated by subtracting the retiree premium from the expected amount 
of paid claims under the retiree drug program. In order to qualify for 
the subsidy, a sponsor's plan would have to meet both prongs of the 
actuarial equivalence standard.
    The ``net'' prong of the two-prong test of actuarial equivalence 
could have several variants. While each variant of the two-prong test 
would preclude windfalls, each would present a different balance among 
potentially

[[Page 46742]]

competing objectives. At a minimum, we believe that the net value of 
the creditable coverage should as a policy matter at least equal the 
average per capita amount that Medicare would expect to pay as the 
retiree drug subsidy. (We estimate this value at $611 in 2006.) While 
there may be policy advantages to this approach, we have questions 
about the adequacy of the legal basis underpinning such a policy. We 
specifically invite comment on the question of whether the statutory 
language could reasonably be interpreted to support this approach. 
Alternatively, a higher threshold could be required. For instance, we 
could require that this value be more closely related to the net value 
of the standard Medicare Part D benefit (which is the expected amount 
of paid claims under Medicare Part D less the monthly beneficiary 
Medicare Part D premium under Sec.  423.286 of our proposed rule). 
However, as the threshold was raised, it would be more difficult for 
retiree plans to qualify, that is, to (1) not provide windfalls and (2) 
offer coverage that is at least as generous in overall actuarial value 
as the Medicare subsidy.
    Another alternative benchmark value for the net test could be the 
after-tax value of the expected average per capita retiree drug 
subsidy. (There is special tax treatment available for the retiree drug 
subsidy. Plan sponsors get to deduct all the associated expenses but 
the value of the subsidy payments is not recognized as income for tax 
purposes.) Unfortunately, determining the appropriate amounts to use 
for this benchmark would pose significant problems because of the 
heterogeneity of the plan sponsors. For example, we estimate that at 
least 60 percent of retirees that are age 65 and older receive retiree 
health benefits from entities that are exempt from taxation (including 
both public and nonprofit entities, based on data from the 2001 Medical 
Expenditure Panel Survey); for those plan sponsors subject to taxation, 
their rates of taxation vary markedly. In addition, as mentioned above, 
we have questions about the adequacy of the legal basis underpinning 
this approach.
    As noted above, adopting a two-prong test with the higher value for 
the net test could arguably provide greater protection to 
beneficiaries, but might drive plan sponsors out of participating in 
the retiree drug subsidy and toward using the Part D-based options for 
supporting and enhancing drug coverage. Conversely, adopting a lower 
value for the net test might qualify more plan sponsors to participate 
in the retiree drug subsidy, but it might also discourage some 
employers and unions from increasing their contributions to reach the 
higher threshold level, and thereby increasing generosity of coverage. 
Public comment would help limit uncertainty by clarifying the likely 
responses of plan sponsors to these different approaches. In addition, 
we solicit comments not only on the desirability of the different 
options, but also (as noted above) on the legal bases for possible 
options.
    In any case, the actuarial equivalence test(s) established by CMS 
must be applied to each sponsor's retiree prescription drug plan in 
order to determine if it is a qualified retiree prescription drug plan 
for purposes of qualifying for a subsidy. In considering the point of 
reference for a ``plan,'' we recognize that there is tremendous 
diversity and complexity in prescription drug coverage options among 
employers and unions for retirees. There may be either different 
employer/union contribution levels or benefit designs within a single 
plan for various segments of retirees (referred to as ``tiered cost 
sharing''). A qualified retiree prescription drug plan is defined with 
reference to the definition of a ``group health plan'' which section 
1860D-22(c)(3) of the Act specifies is to be the definition of that 
term in section 607(1) of ERISA. That definition states that the term 
``means an employee welfare benefit plan providing medical care * * * 
to participants or beneficiaries directly through insurance, 
reimbursement, or otherwise * * * .'' Section 3(1) of ERISA in turn 
defines an employee welfare benefit plan as ``any plan, fund, or 
program [which is] established or maintained by an employer or by an 
employee organization, or by both, to the extent that the plan, fund, 
or program was established or is maintained for the purpose of 
providing for its participants or their beneficiaries, through the 
purchase of insurance, or otherwise, * * * medical, surgical, or 
hospital care or benefits * * *.''
    Section 1860D-22(a)(2)(A) of the Act clearly indicates that a plan 
must meet the actuarial equivalence test in order to qualify for a 
subsidy. We propose to apply the ERISA definition in a way that is 
appropriate in the context of section 1860D-22 of the Act, and 
recognizes the diversity in retiree drug coverage among employers and 
unions. Our proposal is modeled on the approach adopted by the 
Department of Treasury at 26 CFR Sec.  54.4980(B)(2), in the context of 
a different definition of ``group health plan.'' In the Questions and 
Answers that relate to that section, Q-6 and A-6 take the position that 
all health benefits provided by a sponsor are presumed to be under a 
single plan unless it is clear from the plan instruments and 
instrumental operation that the plans are separate plan arrangements. 
We believe this proposed approach is familiar to plan sponsors, is 
appropriately flexible, and protects retiree-beneficiaries. We welcome 
comments on how best to apply the statutory definition of a ``plan'' 
within this context, especially to sponsors that offer a multiple 
choice of retiree plans with various levels of sponsor contributions.
    We believe we have discretion as to whether to require that the 
sponsor demonstrate that the value of the retiree coverage under the 
group health plan is actuarially equivalent to standard prescription 
drug coverage under Part D for each individual based on: (1) the 
benefit package received by the individual, or (2) on average across 
all participants and beneficiaries receiving coverage under the 
sponsor's group health plan. We propose to require sponsors to apply 
the actuarial equivalence test to each group health plan as a whole, 
with the standard met if on average the actuarial value of retiree drug 
coverage under the plan is at least equal to the value of standard 
prescription drug coverage under Part D. We believe that this approach 
would be less burdensome for sponsors.
    As previously noted in subpart F of this preamble, we will provide 
additional information in the future on the processes for determining 
actuarial valuation, including that of retiree prescription drug 
coverage. We are currently considering the following guidelines--
     We anticipate that we would specify, as either recommended 
or required in further guidance, data sources, methodologies, 
assumptions, and other techniques in accordance with generally accepted 
actuarial principles. We would require that the actuarial attestation 
be provided to us and we would verify that the attestation was signed 
by a qualified actuary. In addition, we may select a random sample of 
attestations for which we would require additional information to 
provide a quality control review. Also, we expect that a detailed 
review of the actuarial attestation would be included in the auditing 
process.
     Section 1860D-11(c)(3)(B) of the Act specifies that PDP 
sponsors or MA organizations offering MA-PD plans may use qualified 
independent actuaries in developing bids. We believe it is appropriate 
to adopt this model with respect to this proposed rule, allowing 
retiree plan sponsors to use outside actuaries in their processes. We 
would

[[Page 46743]]

specify that a qualified actuary is an individual who is a member of 
the American Academy of Actuaries, because members of the Academy must 
meet not only educational and experience requirements, but also a code 
of professional conduct and standards of practice. These standards 
create a common ground for actuarial analysis. Furthermore, a member of 
the Academy is subject to its disciplinary action for violations of the 
code and standards. This same requirement is specified in the SCHIP 
legislation at section 2103(c)(4)(A) of the Act.

c. Sponsor Application for Subsidy Payment and Required Information

    A plan sponsor who wishes to be paid the retiree drug subsidy must 
apply annually for the subsidy. We will provide the technical details 
(including important systems issues) to sponsors and other interested 
parties in the very near future in order to facilitate our developing 
appropriate guidance, which will, in turn, encourage sponsor 
participation and minimize the burden to sponsors to the maximum extent 
possible. We intend to actively seek comments from sponsors and to 
release guidance to sponsors in 2005. In order for plan sponsors to 
receive a subsidy payment for 2006, we would require that all plan 
sponsors apply for the subsidy payment no later than September 30, 
2005. For future years, as described above in the discussion of 
attestation, we would require that plan sponsors apply for the subsidy 
no later than September 30 of the previous year. Table R-1, containing 
the key dates involved in the sponsor application process, is included 
at the end of this section.
    We request comment on this approach, including how such a deadline 
might interfere with a sponsor's open season, and whether or not 
sponsors will already know, as early as 90 days prior to the start of 
the year, which plan option a beneficiary has enrolled in. For sponsors 
that institute retiree prescription drug coverage after September 30, 
2005, we would require that these sponsors apply at least 150 days 
prior to the start of the new plan for the first plan year.
    We would require that sponsors (or an administrator of the plan 
designated by the sponsor) provide all of the following information as 
part of the application for special subsidy payment--
     Employer Tax ID Number (if applicable);
     Sponsor name;
     Sponsor address;
     Contact name, job title and email address;
     Actuarial attestation and supporting documentation for 
each qualified retiree prescription drug plan for which the sponsor 
will be seeking subsidy payments;
     Identifying information for each of the separate plans.
    Additionally, the following information must also be submitted for 
each plan--
     Full names of each qualifying covered retiree (as defined 
previously) enrolled in the sponsor's prescription drug plan (including 
spouses and dependents if Medicare-eligible), and the following 
information--
     Health Insurance Claim (HIC) number (when available);
     Date of birth;
     Sex;
     Social Security number; and
     Relationship to the retired employee.
    (Nothing in this data collection discussion should be construed as 
limiting OIG authority to conduct any audits and evaluations necessary 
for carrying out our proposed regulations.)
    Since we will be dealing with individually identifiable health 
information, we provide elsewhere in this preamble a separate 
discussion of privacy issues related to the submission of this 
information. We note that, in most cases, the plan sponsor would not 
have access to claims information or similarly protected health 
information regarding retirees. Therefore, throughout this preamble 
where we refer to information provided by the plan sponsor, we may in 
fact mean by the plan administrator, insurer, or group health plan on 
behalf of the plan sponsor. In addition, we are aware that sponsors may 
not have information on Medicare Part D eligible individuals who 
receive benefits under the employer-sponsored plan as spouses or 
dependents of a plan participant. We are also aware that many employers 
do not currently collect information about dependents, but plan 
administrators may maintain that information about dependents. 
Moreover, we are also aware that all plans do not consistently collect 
Medicare Health Insurance Claim (HIC) and Social Security numbers. 
Therefore, in order to be able to make and/or audit subsidy payments, 
we need a process to be able to identify the Medicare beneficiaries on 
whose behalf the subsidy payments would be made. We welcome comments on 
the proposed information list.
    We encourage sponsors who plan to request a subsidy payment from 
Medicare to begin to evaluate the availability of this information and 
to plan for the creation of a file with this type of information 
contained in it. Technical systems specifications for the file would be 
included in guidance to sponsors from CMS. We actively seek input from 
employers, plan sponsors, plan administrators, and other interested 
parties to facilitate our developing the most appropriate, efficient, 
and effective guidance.
    We have worked with many employers and other insurers in the 
context of Medicare Secondary payer requirements, and we believe that 
this will help facilitate the identification process. We welcome the 
opportunity to work with employers and insurance companies in this 
regard. Additionally, we launched a ``Voluntary Data Sharing'' 
initiative in 2000 that allows CMS and employers to electronically 
exchange employee group health coverage information and Medicare 
entitlement information on a current basis. This process can, for 
example, identify whether a retiree or spouse is a Medicare beneficiary 
and the date of entitlement to Medicare. More information about the CMS 
Employer Voluntary Data Sharing initiative can be found at: http://www.cms.hhs.gov/medicare/cob/employers/emp_vdsa.asp.
    Finally, an authorized representative of the requesting sponsor 
must sign the completed application. The application will specify the 
terms and conditions of eligibility to receive a subsidy payment. The 
application would require the sponsor to comply with all Federal laws 
and regulations, as well as the terms and conditions of eligibility for 
a subsidy payment, including auditing of claims for subsidy payment and 
combating fraud and abuse, any further certification that CMS may 
require. The sponsor would be required to acknowledge that the 
information is being provided to obtain Federal funds. The signed 
application would constitute an agreement between the sponsor and CMS 
and would be referred to as the ``sponsor agreement.'' The sponsor 
would be required to include in all subcontracts with third party 
administrators and other subcontractors performing functions in 
connection with the sponsor retiree drug benefit an acknowledgement 
that the subcontractor knows and understands that all information 
provided in connection with the contract will be used for purposes of 
obtaining Federal reimbursement.
    Once the full application for subsidy payment is submitted, we 
would match the names and identification numbers of retirees submitted 
by the sponsor with the Medicare Data Base (MDB) to determine which 
individuals are both eligible for Medicare Part D (that is,

[[Page 46744]]

individuals who are entitled to benefits under Medicare Part A or who 
are enrolled under Medicare Part B) but who are not enrolled in 
Medicare Part D. We would then provide to the sponsor (or to a plan 
administrator designated by a sponsor) the names and other necessary 
identifying information, if any, of the sponsor's qualifying covered 
retirees.
    We recognize that there would be a need to update information from 
sponsors on a routine basis in order to incorporate newly eligible 
retiree-beneficiaries and to prevent overpayments and underpayments as 
qualifying covered retirees make switches between Medicare Part D and 
the retiree drug plan. We are considering options for this enrollment 
update process. One possibility is to use a complete enumeration file 
submitted as part of the annual application process, with subsequent, 
periodic updating. We would appreciate public comments on this issue.
    We are also considering and seek comment on whether to require a 
surety bond type of instrument or preferred creditor status `` as part 
of the enrollment process--in order to address situations related to 
businesses that may terminate or experience bankruptcy prior to 
completion of a final reconciliation.

                     Table R-1.--Proposed Key Dates
------------------------------------------------------------------------
       Publication of final rule                    Early 2005
------------------------------------------------------------------------
Application for Subsidy Due Date for     No later than September 30,
 All Sponsors, regardless of whether      year 2005.
 they operate on a calendar or plan.
Attestation of Actuarial Equivalence     No later than September 30,
 Due Date for all Sponsors.               2005.
Retiree drug subsidy Program Begins....  January 1, 2006.
Application for Subsidy Due Date for     September 30, 2006 (for 2007)
 plans operating on a plan year basis.    and each September 30
                                          thereafter for subsequent
                                          years.
Application for Subsidy and Attestation  September 30, 2006 (for 2007)
 of Actuarial Value Due Date for plans    and each September 30
 operating on a calendar year basis.      thereafter for subsequent
                                          years.
Application for Sponsors that institute  150 days prior to the start of
 coverage after September 30, 2005.       the new plan.
Notice to CMS of mid-year plan changes   90 days prior to the plan
 that materially affect actuarial         change.
 valuation.
Notice to enrollees of plan changes      90 days prior to the plan
 that result in the plan no longer        change.
 being a qualified retiree prescription
 drug plan.
------------------------------------------------------------------------

d. Creditable Coverage and Notification

    Section 1860D-22(a)(2)(c) of the Act specifies that in order for a 
sponsor's plan to meet the definition of a qualified retiree 
prescription drug plan, the sponsor must provide for disclosure of 
whether coverage is ``creditable coverage'' in accordance with the 
proposed requirements set forth under proposed Sec.  423.56 of our 
proposed rule. The actuarial equivalence standard for creditable 
coverage is the same as one of the tests proposed for the actuarial 
equivalence standard for qualified retiree prescription drug plans in 
order to qualify for a retiree drug subsidy. The actuarial equivalence 
standard for creditable coverage is the ``gross value'' test (that is, 
whether the expected amount of paid claims (or ``plan payout'') under 
the retiree prescription drug coverage is at least equal to the 
expected amount of paid claims under the standard Medicare Part D 
benefit), which is the so-called first prong of the actuarial 
equivalence test for purposes of qualifying for the retiree drug 
subsidy.
    As explained in subpart B of the preamble of our proposed rule, if 
a Medicare Part D eligible individual fails to enroll in Medicare Part 
D upon first becoming eligible for Medicare Part D, the individual 
would be subject to the late enrollment penalty if the individual 
elects to enroll in Medicare Part D at a later date. However, the late 
enrollment penalty would be waived if the beneficiary had creditable 
prescription drug coverage during the time he or she was not enrolled 
in Part D.
    Proposed Sec.  423.56 of our proposed rule would require certain 
entities providing drug coverage, including group health plans, to 
disclose to Part D eligible individuals and CMS whether that coverage 
is considered ``creditable coverage'' as described in proposed Sec.  
423.56(a) of our proposed rule, or whether the value of the coverage to 
the individual is at least actuarially equivalent to standard 
prescription drug coverage under Medicare Part D. Consequently, plan 
sponsors under this proposed rule would be subject to the requirements 
in proposed Sec.  423.56 of our proposed rule governing disclosure of 
creditable coverage.
    As discussed in subpart B of our proposed rule and discussed below, 
we intend to describe the proposed process for providing this 
disclosure notice, including guidance on its content, placement, and 
timing of notice. The content of the disclosure notice and its timely 
receipt would be important components in the decision making process 
for beneficiaries, because the creditable status of the retiree's drug 
coverage would have a direct impact on the assessment of late 
enrollment penalties associated with Medicare Part D premiums. 
Notifying the retiree of any subsequent changes in their creditable 
coverage status is equally important. Because retirees would have a 
limited time in which to make decisions about their Medicare Part D 
coverage without facing a penalty, it would be important that the 
notification of creditable status be provided in a timely and 
conspicuous manner. However, we are also concerned about the potential 
administrative burden imposed by this proposed requirement and 
therefore, we are soliciting comments on the format, placement, and 
timing of this notice.
    We have considered several approaches to implementing this 
requirement. One possible approach would be to provide the sponsors 
with standard language that could be incorporated into the required 
disclosure materials the sponsors routinely disseminate to their 
enrollees in their retiree drug plans. (We could provide standard 
language to be inserted into these materials.) We are soliciting 
comments regarding the types of materials that could provide an 
appropriate vehicle for this purpose, as well as ways to ensure that 
the notice is conspicuous and readily identified by recipients, 
particularly in those instances where the coverage is not creditable.
    Another possible approach would be to require each sponsor to issue 
a separate notice to each Part D eligible enrollee in their retiree 
drug plan. This

[[Page 46745]]

type of notice would be the most conspicuous and would subsequently 
increase the likelihood that beneficiaries are made aware of the 
creditable coverage status of their prescription drug coverage. Because 
retirees are subject to financial penalties for the failure to maintain 
creditable coverage when they enroll in Medicare Part D after the 
initial enrollment period, a separate notice may better inform 
beneficiaries and ensure that they take appropriate action to avoid the 
penalties. The Health Insurance Portability and Accountability Act of 
1996 (HIPAA), Pub. L. 101-93, requires entities that offer health 
insurance coverage to inform their members, in writing, of the type and 
duration of ``creditable coverage.'' Implementing regulations at 62 FR 
16901 (April 8, 1997) provided a ``Certification of Creditable 
Coverage'' that must be produced and disseminated to individuals when 
their coverage ends. We considered requiring that information about the 
creditable status of prescription drug coverage be included in this 
certification. However, since the certification required under HIPAA is 
not provided until after the coverage has ended, it would arrive too 
late to assist beneficiaries in deciding whether to enroll in Part D. 
However, the HIPAA certification may serve as a useful model, and we 
invite your comments about the administrative burden associated with 
producing and disseminating a similar notice of creditable status to 
beneficiaries.
    The timing and frequency of these notices would also be a key 
consideration. The initial notice of creditable status would have to be 
coordinated with the first ``Annual Coordinated Enrollment Period for 
Part D,'' which begins November 15, 2005, to ensure that retirees have 
this information when making their decisions regarding Part D coverage. 
Retirees would also need to know about any change in the creditable 
status of existing coverage before this change becomes effective so 
that they have sufficient time to decide whether to obtain Part D 
coverage. If a retiree's creditable drug coverage ends or is changed to 
the extent that it is no longer creditable, the retiree has a ``Special 
Enrollment Period'' during which he or she can enroll in Part D without 
financial penalty. Thus, we believe that this notice should be 
provided, at a minimum of these two important times, and also upon 
request by the beneficiary.
    We view this process as an important one, and invite comments on 
how best to ensure that retirees receive timely and adequate notice of 
the creditable status of their prescription drug coverage without 
imposing a significant administrative burden on sponsors that provide 
the coverage. We also note that section 1860D-22(a)(2)(C) of the Act 
requires sponsors to disclose the creditable status of this coverage to 
us, and we invite your comments on the possible methods of providing 
this disclosure.
4. Retiree Drug Subsidy Amounts (Sec.  423.886)
    As explained previously, Sec.  423.886 governs the subsidy amount a 
sponsor of a qualifying retiree prescription drug plan receives for 
each qualifying covered retiree that is enrolled with the sponsor in a 
year. The sponsor is eligible to receive a subsidy payment for each 
qualifying covered retiree whose gross covered retiree plan-related 
prescription drug costs exceed the cost threshold. The amount of the 
subsidy would be 28 percent of the allowable retiree costs attributable 
to the gross retiree costs that are above the threshold and do not 
exceed the cost limit. For plan years ending in 2006, the cost 
threshold is $250 and the cost limit is $5000.
    The cost threshold and cost limit for a plan year that ends after 
2006 would be adjusted in the same manner that the annual Part D 
deductible and the annual Part D out-of-pocket threshold are adjusted 
annually under Sec.  423.104(e)(1)(ii) and Sec.  423.104(e)(4)(iii)(B) 
of our proposed rule, respectively. Accordingly, beginning in 2007, we 
will adjust the cost limit and cost threshold based on the annual 
percentage increase or decrease in average per capita expenditures for 
covered Part D drugs in the United States for Part D eligible 
individuals for the 12 month period ending in July of the previous 
year, with the cost threshold rounded to the nearest multiple of $5 and 
the cost limit rounded to the nearest multiple of $50.
    CMS claims that are generated by an overpayment of the subsidy to a 
sponsor, including collection of interest, administrative costs, and 
late payment penalties would be governed by regulations at 45 CFR Part 
30, subpart B.
5. Payment Methods, Including Provision of Necessary Information (Sec.  
423.888)

a. Plan Year Versus Coverage (Calendar) Year

    Under section 1860D-22(a)(3)(B) of the Act, the cost threshold and 
cost limits that determine the amount of the subsidy are calculated for 
``plan years that end in'' 2006 and subsequent calendar years. However, 
section 1860D-22(a)(3)(A) of the Act refers to the subsidy amount for a 
qualifying covered retiree for a ``coverage year,'' that is defined as 
calendar year. Thus, we believe that, in the context of section 1860D-
22 of the Act, the reference to retirees enrolled in a qualified plan 
``during a coverage year'' can be read to mean that the retiree must be 
enrolled during either a calendar year or plan year that ends in the 
specified calendar year. As explained below, we would prefer a strict 
calendar year basis and believe our proposed requirements would permit 
sponsors with non-calendar plan years to comply with reasonable 
modifications. We are interested in receiving comments on whether we 
should maintain our initial policy based on the calendar year or 
whether we should consider a plan year as the basis for the subsidy.
    While a calendar year approach is more straightforward from the 
perspective of Federal administration of the subsidy program, use of 
``plan year'' may better conform to the accounting systems of the plans 
and the sponsors. However, we note that the Federal subsidy is related 
to drug spending, not plan coverage. If we do elect to use a ``plan 
year'' as the basis for payment, we would use the definition of a 
``plan year'' in section 3(39) of the Employee Retirement Income 
Security Act of 1974 (ERISA), 29 U.S.C. 1002(39), which includes, for a 
plan, the calendar, policy, or fiscal year on which the records of a 
plan are kept. If we do elect to use a ``plan year,'' the statute makes 
clear that the cost threshold and the cost limit will apply based on 
the calendar year in which the ``plan year'' ends. For example, in the 
case of a July 1, 2006-June 30, 2007, ``plan year,'' the cost threshold 
and the cost limit applicable in general in 2007 would also apply for 
this ``plan year.'' Because the actuarial attestation would be due no 
later than April 1, 2006 (90 days in advance of the plan year), it is 
quite possible that the cost threshold and cost limits for 2007 would 
not yet have been calculated at that time.
    Another issue that is unique to the use of a ``plan year'' as a 
basis for the subsidy payment that arises in the first year of the 
program is how to handle plan years that begin in 2005. For example, if 
a plan year ends on June 30, 2006, only six months of that plan year 
accrued after January 1, 2006. The following are at least three options 
for addressing this problem:
    (1) The first option is to start counting gross costs for 
prescriptions filled after January 1, 2006. That is, even though

[[Page 46746]]

the plan year in this example began on July 1, 2005, gross costs of 
qualifying covered retirees would only take into account prescriptions 
filled beginning with January 1, 2006. These gross costs would have to 
exceed $250 before their associated allowable costs would be subsidy 
eligible. Since subsidy payments are not authorized prior to the start 
of the Part D program, this option represents the strictest reading of 
the statute, in that gross costs and, therefore, allowable costs, are 
calculated without regard to the portion of the plan year that falls 
before January 1, 2006. It would, however, disadvantage plans that 
choose to use plan year instead of calendar year, since total subsidy 
payments for calendar 2006 would be lower than they would have been if 
calendar year had been used since the cost threshold must be met a 
second time in calendar 2006.
    (2) The second option is to determine a subsidy amount as if the 
sponsor were authorized to receive subsidy payments for the entire 
``plan year'' and then to prorate this amount based on the number of 
``plan year'' months that fall in 2006. First, gross costs would be 
determined for the entire ``plan year''. Allowable costs and the 
subsidy amount would be derived based on the proportion of the gross 
costs that exceed the cost threshold but are less than the cost limit. 
Finally, the subsidy amount for the plan year would be prorated by the 
number of months of the plan year that fall in 2006. In our example of 
a July 1-June 30 plan year, six months would fall in 2006 so the annual 
subsidy amount would be cut in half. This option, while still 
consistent with the statute, would provide a larger payment than the 
first option.
    (3) The third option would determine subsidy amounts on monthly 
basis as if the sponsor were authorized to receive subsidy payments for 
the entire ``plan year'', but would then pay only the amounts for the 
``plan year'' months that fall in 2006. The process for determining the 
subsidy is similar to that described in option two, but rather than 
calculating an annual subsidy amount, one would determine the subsidy 
payments applicable to costs incurred for each month of the plan year. 
The sponsor would then receive the subsidy payments for the months in 
the plan year that fell in 2006 (that is, January 1 through June 30, 
2006). This option would require that the sponsor determine the month 
in which costs are incurred. Therefore, it adds some complexity to the 
calculation of the subsidy. However, since subsidy eligible 
expenditures are weighted more toward the latter part of the plan year, 
this option would produce a stream of subsidy dollars that would 
parallel the actual flow of the sponsor's plan expenditures.

We would like to receive your comments on these options or other 
possible approaches, as well as on the threshold issue of whether we 
should rely only on calendar years, as explained below. We again note 
that relying on calendar years avoids the complications discussed 
above.

b. Payment Methodology

    Section 1860D-22(a)(5) of the Act specifies that payments to plan 
sponsors are to be made ``in a manner similar to'' the payment rules in 
section 1860D-15(d) of the Act, which apply to payments made to PDP 
sponsors and MA organizations under Part D. We believe that section 
1860D-15(d) of the Act gives us broad discretion to determine a payment 
method. We wish to develop a payment methodology that is beneficial to 
the sponsors, and is cost efficient. Some of the factors to consider in 
developing a system that will pay subsidies are whether it is 
technologically feasible and what it would cost. Another issue is that 
pharmaceutical rebates, which must be excluded from allowable retiree 
costs, are generally not factored into the payments at the point of 
sale but instead not until much later in the process. We also recognize 
that highly automated insurance carriers or pharmacy benefit managers 
(PBMs) are used by almost all the sponsors for collection of the claims 
data that will be key elements of the data required for the payment of 
the subsidy.
    Our proposed policy is predicated on the assumption that plan 
sponsors utilize the services of sophisticated point-of-sale claims 
payment agents such as PBMs. We further understand that PBMs (or 
comparable administrative entities) routinely adjudicate prescription 
drug claims on a real-time basis and have very limited claims 
(sometimes referred to as incurred, but not received) or payment lags. 
As a result, actual monthly expenditures are routinely known shortly 
after the close of a month. We outline below our proposed approach to 
calculating and paying the alternative subsidy to qualified retiree 
prescription drug plans in 2006 (using an actuarial attestation based 
on a plan year, but with the alternative subsidy computed on a calendar 
year basis):
     For each month starting with January 2006, the plan 
sponsor would certify by the 15th of the following month (that is, 
February, 2006 for January, 2006) the total amount by which actual 
retiree-beneficiary gross drug spending exceeded the cost threshold yet 
remained below the cost limit. Medicare would pay 28 percent of the 
certified amount to the sponsor by the 30th of that month. Not later 
than 45 days after the end of the calendar year, the plan sponsor would 
submit a final reconciliation (but for outstanding rebates) to us for 
payment by or, if applicable, to us. (We recognize that plan sponsors 
may not receive some rebates until after the close of the their plan 
year.)
     In the month in which they are received (or recognized), 
the appropriate share of any discounts, rebates, or other price 
concessions, along with any adjustments to the actual expenditures for 
prior months, are reflected. Any amounts owed the government would 
offset the subsidy payment for that month, to the extent that the 
amount owed to the government would exceed any applicable monthly 
payment, the plan sponsor would pay this amount to us.
     Plan sponsors (or more likely, plan administrators, 
insurers or group health plans on their behalf) would maintain detailed 
records of claims payment and other matters. The specifics of the data 
retention, data submission, audit and financial requirements would be 
determined in future instructions.
    We note that, due to our need for monthly coverage and spending 
data, this system could work equally well for plans whether their plan 
year is coterminous with or is different than the calendar year. 
Because the special subsidy is based on allowable gross drug spending, 
without regard to the relationship of this spending to plan coverage or 
reimbursement, we believe the amount of drug spending for each eligible 
retiree-beneficiary can be easily be extracted from the insurance 
coverage provided in a ``plan year''. We believe months, as opposed to 
a daily, weekly, or annual basis, constitute the appropriate unit for 
computing the special subsidy. We note that more detailed, 
disaggregated data would be needed for purposes of audits and annual 
reconciliations.
    Actual monthly payments could be adjusted by the actual amounts 
received in that month for discounts, chargebacks and rebates 
appropriately attributed to allowable gross costs (as defined for 
purposes of claiming the special subsidy). Under this approach, 
payments would be based on actual drug spending and discount, 
chargeback or rebate payments. While arguably more data intensive, we 
believe this to be the most straightforward option, minimizing reliance 
on projections and

[[Page 46747]]

actuarial representations. It also would facilitate expeditiously 
paying sponsors full subsidy amounts to which they would be entitled. 
Any underpayment or overpayment would generally be dealt with through 
an adjustment to subsequent periodic payments. This option would 
provide a payment stream, which comes closest to subsidizing actual 
plan expenditures as they occur.
    The following items would be three possible alternative options to 
our proposed methodology discussed above and the broad outline of the 
process for receiving subsidy payments. Under all three alternative 
options, sponsors would have to meet the specified filing deadlines in 
order to receive subsidy payments:
    (1) The first alternative option would be to make a single payment 
after the close of the year. Under this option, by the start of the 
fourth month after the close of the plan or calendar year, sponsors 
whose attestation of actuarial equivalence had been approved for that 
year would submit to us the number of months of coverage for each 
qualifying covered retiree and their gross and allowable costs. 
(Partial years of coverage would result from individuals becoming 
qualifying covered retirees during the course of the year and also from 
decedents who die during the course of the year. In the case of new 
qualifying covered retirees, only their expenses from the month of 
their status change forward can be included in their gross and 
allowable costs, which would have to exceed the cost threshold in order 
for a payment to be made.) Gross and allowable costs would be derived 
directly from claims payments and retiree cost sharing for 
prescriptions dispensed during the plan year offset by appropriate 
rebate cost reporting (as discussed in section 2 of this subpart with 
respect to allowable retiree costs). The portion of gross costs that 
exceeded the cost threshold but were less than the cost limit would be 
derived. Discounts, chargebacks, and rebates, which already would have 
been factored for the year, would be removed from these gross costs to 
calculate allowable costs and the subsidy amount. We would review this 
submission and make a payment for the year by the end of the following 
month. This alternative option would be the simplest to administer and 
would obviate the need for interaction between CMS and sponsors other 
than during the review process. From the perspective of sponsors, 
however, this option may be less desirable since payment would not be 
received until after the close of the year.
    (2) The second alternative option would be to make interim payments 
throughout the year with a settlement after the end of plan or calendar 
year. Under this alternative option, sponsors desiring to receive 
subsidy payments would develop an estimate of per capita subsidy 
payments based on the plan's claims history and the rebates or 
discounts received in the prior period. Sponsors would submit the 
estimate, as well as the basis for the estimate, at the same time that 
they submit their attestation of actuarial equivalence (which we have 
proposed in section 3(b) of the preamble to be three months prior to 
the start of the plan year). If the sponsor files on a timely basis and 
we agree that the sponsor offers a qualified retiree prescription drug 
plan, we would review the estimate and the documentation and determine 
an interim monthly per capita amount. Plans would be paid a percentage 
(70 percent for 2006 and 2007, 90 percent for subsequent years) of this 
interim payment level on a periodic basis for each qualifying covered 
retiree based on the sponsor's enrollment information which would be 
matched against Medicare records to verify qualifying status. We would 
pay less than 100 percent of this amount to minimize the possibility of 
having to recoup large amounts of money at the time of settlement. We 
are proposing to pay 70 percent in 2006 and 2007 given the significant 
uncertainty that will exist in estimating subsidy payments. We request 
comments on whether estimating techniques as to qualifying covered 
retirees and as to levels of drug spending during the year are reliable 
enough to justify a higher percentage. By the start of the fourth month 
after the close of the plan or calendar year, the sponsor would submit 
documentation on gross claim costs and rebates, as described in option 
1, above. We would review the documentation and settle for the year by 
making an additional payment if more payment were due to the sponsor or 
by reducing subsequent interim payments to reflect any overpayment. 
This alternative option is more administratively complex than the first 
alternative option because it entails developing an interim payment 
amount and making those payments. It would, however, provide subsidy 
funding to sponsors during the plan or calendar year.
    (3) The third alternative option would be to make lagged payments 
based mainly on actual experience on a periodic basis throughout the 
year with a settlement after the end of the year limited to reconciling 
estimated versus actual discounts, chargebacks, and rebates. By the 
15th of the month following the close of the payment period, sponsors 
whose attestation of actuarial equivalence had been approved would 
submit information to us on gross and allowable costs for the previous 
payment period for each qualifying covered retiree whose gross costs, 
coverage (that is, calendar) year to date, exceeded the cost threshold, 
but were not in excess of the cost limit. The information submission 
would be based on actual claims experience. Actual monthly payments 
could then be adjusted on a percentage basis for estimated discounts, 
chargebacks, and rebates (the sponsor would submit a justification, 
which we would approve, for the percentage used). By the 15th of the 
following month, we would review the submission and make payment. By 
the start of the fourth month after the close of the plan or calendar 
year, the sponsor would submit documentation on actual discounts, 
chargebacks, and rebates received for the plan compared to those 
estimated. Any under payment or overpayment would be dealt with through 
an adjustment to subsequent periodic payments.

We would like your comments on the operational aspects of the proposed 
policy, as well as the broad alternative options, and on their 
desirability from the perspective of plan sponsors.
    In addition to the question of payment methodology, there is the 
issue of the periodicity of the subsidy payments. While this is not an 
issue with regard to an annual retroactive payment, the question of 
periodicity does arise with regard to the ongoing payment alternatives. 
We would like your comments on the use of bi-annual, quarterly or 
monthly payment periods under these approaches. We also considered a 
variable payment option in which the frequency of payment would vary in 
accordance with the size of the sponsor's plan. For example, a sponsor 
with 10,000 or more qualifying covered retirees would receive monthly 
payments while sponsors with less than 10,000 qualifying covered 
retirees would receive quarterly payments. We are concerned that this 
alternative may be inequitable in terms of cash flow and overly 
administratively complex to implement. Again we are asking for your 
comments, particularly with regard to the balance between timeliness 
versus administrative burden posed by monthly or quarterly payments 
versus annual payments. We are also asking for your comments on whether 
to use more than one of the payment alternatives described above based 
upon the size of

[[Page 46748]]

the sponsor's plan. For example, in order to minimize administrative 
burden on small businesses, sponsors with less than 100 qualifying 
retirees could receive an annual retroactive payment. We solicit 
comments, in particular on the issue of whether less frequent payments 
might be preferable for small employers because it would minimize their 
reporting burden.
    Our understanding is that PBMs and other entities currently 
involved in the administration of claims are highly automated and 
capable of efficiently and effectively providing the necessary 
information at low (incremental) cost in a timely manner. We are 
particularly interested in your comments about the capabilities of the 
service providers and their views, as well as the views of the plan 
sponsors and others, on the most appropriate arrangement, as well as 
your comments on the feasibility of the proposed approach and proposed 
alternative options.

c. Data Collection

    Regardless of what payment methodology is ultimately chosen for the 
subsidy, we would need certain data from the sponsors of the plans (or 
the plan administrators, insurers or group health plans designated by 
the sponsors) in order to accurately calculate the amount of the 
subsidy to which the sponsor is entitled. This data would include 
updating of the information that was provided during the application 
process such as the names of the qualifying covered retirees enrolled 
in the plan, including the spouses and the dependents, the Health 
Insurance Claim (HIC) numbers (when available), social security 
numbers, dates of birth, sex, and relationship to the retired 
employees. We would also require an affirmation that the Medicare 
benefits of each qualifying covered retiree are not secondary to the 
sponsor's retiree health coverage (if the Medicare benefits are 
secondary to the sponsor group health plan, that would indicate that 
the participant is not in retiree status and, thus, is not a qualifying 
covered retiree except in certain situations in which the retiree 
qualifies for Medicare based on ERSD status), and dates of enrollment 
in the sponsor's retiree plan.
    The plan sponsor (or the designated administrator, insurer, or 
group health plan) would be required to submit cost data for each 
qualifying covered retiree. The timing of the submission and the 
relevant time period of the cost data is contingent on the payment 
methodology that is adopted in the final rule for the subsidy. A 
separate issue, however, is the level of detail of the cost data. There 
are two options, and a combination of the two, to be considered:
    (1) First, we could require that the sponsor (or the plan 
administrator, insurer, or group health plan designated by the sponsor) 
submit the aggregate total of all allowable drug costs of all of the 
qualifying covered retirees in the plan for the time period in 
question. This would be the cost incurred between the cost threshold 
and cost limit with an appropriate adjustment for rebates. This 
aggregate cost would not be broken down to each qualifying covered 
retiree. The sponsor (or administrator, insurer, or group health plan) 
would have to maintain the claims data to support its submission for 
audit purposes. While this option would probably be easier for the 
sponsors and would be the most protective of the individual's privacy, 
it may be the most problematic in terms of assuring the accuracy of the 
subsidy payment.
    (2) A second option would be for the sponsor (or the plan 
administrator, insurer, or group health plan) to submit the aggregate 
allowable costs for each qualifying covered retiree for the time period 
in question. This would be more complex for the sponsor and would raise 
some privacy questions but would provide more assurance with regard to 
the accuracy of the subsidy payment.
    (3) A third option would be to combine various elements of the 
first two options. For example, the sponsor (or the administrator, 
insurer, or group health plan) would be required to submit information 
with the specificity outlined in the second option for each of the 
first two years of the subsidy's availability. In the third and fourth 
years, however, the sponsor (or the administrator, insurer, or group 
health plan) would submit its claims data in accordance with the first 
option.
    (4) A fourth potential option that we considered and subsequently 
ruled out would have been for the sponsor (or the plan administrator, 
insurer, or group health plan) to submit the actual claims data for 
each qualifying covered retiree. This option, however, would have been 
the most complex in terms of administering the subsidy program and the 
most problematic in terms of privacy. In addition, the benefits of this 
option would not have outweighed the higher costs associated with 
submitting actual claims data for each qualifying covered retiree.
    As discussed in the next section, we would require the creation and 
retention of detailed, individual records reflecting both claims and 
financial data. In assessing the merits of the two options, it is 
important to understand our plans for vigorous implementation of our 
audit authority. We believe that a vigorous audit program is consistent 
with permitting the reporting of more aggregated data. For example, 
plan sponsors could report the aggregate total of gross allowable drug 
costs for all qualifying covered retiree-beneficiaries incurred in a 
month, adjusted to reflect discounts, chargebacks and rebates (we 
discuss the issue of adjustments based upon rebates and other price 
concessions in section 2 of this subpart in connection with the 
discussion of allowable retiree costs). In the end-of-year report, CMS 
could require more detailed information on eligibility, drug spending, 
and discounts, rebates and chargebacks. Finally, we might require the 
retention of detailed enrollee records for audit or other analytical 
purposes. We believe that by requiring different levels of detail for 
data and records, depending on the purpose for which they are to be 
used, provides sponsors and plan administrators, insurers, or group 
health plans with a minimum amount of burden and a maximum amount of 
flexibility and time in which to produce the required records. We 
welcome your comments on these options or your proposals for other 
options. Regardless of what option is chosen, we would require that the 
data include the period of time when the cost was incurred, the period 
of Medicare eligibility for each qualifying covered retiree, and the 
period of enrollment in the sponsor's retiree plan for each qualifying 
covered retiree. This is because, as mandated by section 1860D-22 of 
the Act, only costs incurred while the Medicare beneficiary is enrolled 
in the sponsor's drug plan and not in Part D can be considered 
allowable retiree costs.
    This proposed rule also specifies, as required by section 1860D-
15(d) of the Act, that all information obtained pursuant to this 
subpart may be used by the officers, employees, and contractors of the 
Department of Health and Human Services only for the purposes of, and 
to the extent necessary in, carrying out this subpart R of part 423.

d. Audits

    At Sec.  423.888(d), we propose that the sponsor of the plan (or 
the plan administrator, insurer, or group health plan designated by the 
sponsor) would be required to maintain and provide access to sufficient 
records for our audits or audits of the OIG to assure the accuracy of 
the attestation regarding actuarial value and the accuracy of subsidy 
payments made under this subpart. This proposed rule specifies that the 
working documents and reports of the actuaries conducting the analyses

[[Page 46749]]

that serve as the basis for the attestation, and all documentation of 
the costs incurred and utilization for the amount of the subsidy 
payment, including the underlying claims data, would be made available 
for audit inspection. All records would be maintained for at least 6 
years after the end of the plan year in which the costs were incurred. 
We believe that 6 years is a sufficient length of time to preserve our 
right to conduct follow-up audits and would not be too burdensome on 
the sponsors. Six years is also the length of time certain other 
Medicare records are required to be retained. In the event of an 
ongoing investigation, litigation or negotiation, we or the OIG may 
extend the 6-year retention period. We invite your comments on the 
appropriateness of this level of documentation, and any unique 
operational issues it may raise. We may conduct audits in a manner 
similar to the audits of financial records of PDP sponsors and MA 
organizations, as outlined in Sec.  423.504(d)(2) of our proposed rule.
6. Appeals (Sec.  423.890)
    Although the statute does not contain provisions for administrative 
appeals of the retiree drug subsidy amount, and although we do not 
believe there is a constitutional property interest in the retiree drug 
subsidy (See American Manufacturers Mutual Insurance Co. v. Sullivan, 
526 U.S. 40 (1999) (individual did not have a property right in the 
receipt of payment of a bill for medical services before an agency 
determined that the services were reasonable and necessary); Giese v. 
Barnhart, 55 Fed. Appx. 799, 2002 WL 31856 (9th Cir. 2002) (there is no 
``termination'' of benefits warranting due process when the individual 
never qualified for benefits in the first place), we believe that it is 
prudent policy to allow an opportunity for review of certain agency 
decisions issued in relation to this subpart. Examples of these 
decisions are as follows--
     A retiree prescription drug plan is determined not to be 
actuarially equivalent.
     An enrollee in a retiree prescription drug plan is 
determined not to be a qualifying covered retiree.
     A determination of the subsidy amount to be paid to a 
sponsor.
    We propose using a three step process for review of subsidy 
determinations.
    (1) In the first step, the sponsor could request an informal 
written reconsideration by us of the subsidy determination. Initial 
subsidy determinations would be final and binding unless the sponsor 
requested reconsideration in a timely manner or we reopened the 
determination in accordance with the procedures discussed below. The 
request for reconsideration would have to be filed within 15 days of 
the date of the notice of the adverse determination. We believe a short 
time frame is necessary in order to ensure that subsidy amounts can be 
finalized in as expeditious a manner as possible. We note that the 15-
day time frame is used in MA contract termination appeals (see Sec.  
422.650) and we believe employers are similar to MA organizations in 
their level of sophistication. We expect that sponsors possess adequate 
resources to meet the time line and pursue the appeals in the proper 
manner. The written reconsideration would be entirely on the papers. 
Sponsors would be able to submit a position paper and any additional 
evidence they wished us to consider. We would make its informal 
reconsideration determination on these papers and inform the sponsor of 
its decision. We could inform the sponsor of its determination orally 
(over the telephone) or in writing (by electronic mail or by post); 
however, on a sponsor's request, we would put our decision in writing. 
We expect that when we make a reconsideration determination wholly 
favorable to the sponsor, a written decision will not be requested. Our 
reconsideration determination would be final and binding, unless the 
sponsor further appealed the determination or if we reopened the 
reconsideration determination in accordance with the reopening 
provisions discussed below.
    (2) The second step of the appeals process would be an informal 
hearing before our hearing officer (who was not a party to the initial 
decision). Requests for a hearing would need to be made within 15 days 
of the date the sponsor received our reconsideration decision. If there 
is a dispute as to the date of receipt, unless there was evidence to 
the contrary, we would assume that the sponsor received the decision at 
least 5 days from the date on the written reconsideration decision. 
Because we expect that we would deliver only favorable decisions 
orally, we do not expect receipt of an orally communicated decision 
would be an issue in determining whether a party has met the deadline 
for requesting a hearing of an adverse determination. The hearing 
officer's decision would be final and binding, unless further appealed 
to our Administrator. We have also proposed that the hearing officer 
appointed by the Administrator would be limited to a review of the 
record that was before us in making its initial or review determination 
and no new evidence could be presented at the hearing stage. The 
hearing officer's scope of authority would be limited to determining 
whether we applied our own policies in accordance with the facts that 
were before us. Our hearing officer would have to render the decision 
in an as expeditious manner as possible.
    (3) The third step of the appeals process would be a review by our 
Administrator. A sponsor could request an Administrator review or the 
Administrator, on his or her own motion, could take review, but in 
either case this review would have to be requested (or taken) within 15 
days of the hearing officer's decision. Again, we would expect that 
sponsors received the hearing officer's decision within 5 days of the 
date on this decision.
    We believe a three-step appeals process allowing an opportunity for 
informal written review, followed by an oral hearing would conserve 
both agency and sponsor resources and ensure that a more formal hearing 
process is not invoked unless necessary. However, we also have 
considered other options, including having at the second level of 
appeal a telephone hearing with a CMS hearing officer instead of an in-
person hearing. Another option is for a hearing on the record with the 
Hearing Officer, but without the opportunity for oral testimony. 
Although we believe these rules are procedural rules not subject to 
notice and comment rulemaking, in the case of this new benefit, we 
would welcome comments on the sufficiency of these rules and the other 
options discussed above.
    In addition to the appeals process, we have included provisions for 
reopening and revising an initial or reconsidered determination. We 
believe the authority to reopen retiree drug subsidy determinations 
would be in keeping with our authority in section 1860D-22(a)(2)(B) of 
the Act to ``perform audits and other oversight activities necessary to 
ensure * * * accuracy of payments,'' since this audit authority would 
not be meaningful if we could not reopen payment determinations we 
later determined to be erroneous. In addition, we believe that sections 
1870 and 1871 of the Act provide us with the authority to reopen final 
determinations of the retiree drug subsidy to such employers. 
Therefore, in this proposed rule we would include reopening provisions 
based on those used in Medicare claims reopening, and found in part 405 
of the Code of Federal Regulations (subparts G and H). Including 
reopening provisions would allow us to ensure that any overpayments or 
underpayments

[[Page 46750]]

discovered as a result of oversight or audit could be rectified. Under 
our proposed provisions, reopening could occur for any reason within 
one year of the final determination of payment, within four years for 
good cause, or at any time when the initial, reconsidered, or revised 
determination was procured by fraud or similar fault. We could initiate 
a reopening on its own, or an employer could request reopening, but 
these requests would be at our discretion. The Supreme Court has 
determined that in the context of reopening cost reports, a fiscal 
intermediary's decision not to reopen a final determination is not 
subject to judicial review, (See Your Home Visiting Nurse Services, 
Inc. v. Shalala, 525 U.S. 449, 456 (1999)), and we believe the same 
reasoning would apply in the context of Part D.
    Good cause would be interpreted in the same manner as in Part 405 
and as further clarified in the Medicare Carriers Manual (MCM), section 
12100. Thus, good cause would exist, if--(a) new and material evidence, 
not readily available at the time of the determination, is uncovered; 
(b) there is an error on the face of the evidence on which such 
determination or decision is based; or, (c) there is a clerical error 
in determination. In order to meet the standard under (a), the evidence 
could not have been available at the time the determination was made. A 
clerical error constitutes such errors as computational mistakes. An 
error on the face of the evidence exists if it is clear, based upon the 
evidence that was before us when we reached our initial determination, 
that the initial determination is erroneous. For example, good cause 
would exist in cases where it is clear from the files that rebates or 
administrative costs were not appropriately accounted for, where 
computation errors had been made, where an employer included non-Part D 
drugs in their calculations, where individuals not enrolled in the plan 
were included in calculating payment, and in similar situations. 
Reopening could occur at any time if the underlying decision was 
obtained through fraud or similar fault--such as if an employer 
sponsor--or its subcontractor--knew or should have known that it was 
claiming erroneous subsidies. We believe it would be necessary to 
include subcontractors in this standard, since we expect many sponsors 
will contract with benefit administrators to manage the benefit, and 
these administrators will be providing data to CMS. We have not 
included provisions for reopening hearing officer or Administrator 
decisions, but are considering allowing for the reopenings as well. We 
request comments on this issue.
7. Privacy
    The HIPAA Privacy Rule at 45 CFR part 160 and subparts A and E of 
part 164 (``Privacy Rule'') applies to ``covered entities,'' which 
include group health plans and health insurance issuers, as defined in 
45 CFR 160.103. Third party administrators would be business 
associates, as defined in 45 CFR 160.103, of group health plans. 
Sponsors would not become covered entities by sponsoring a plan and do 
not have access to claims information or similar Protected Health 
Information necessary to support the subsidy payment. Much of the data 
that we would need to support the subsidy payment outlined above would 
be protected health information held by group health plans, insurers, 
and ``third party administrators'' on behalf of self-funded group 
health plans.
    Covered entities may only use or disclose protected health 
information as permitted or required by the Privacy Rule. A business 
associate contract generally must limit the business associate's uses 
or disclosures of protected health information to those the covered 
entity could make. Permitted uses and disclosures include those for 
treatment, payment, and health care operations as well as those for 
public priority purposes, such as those uses and disclosures required 
by law (45 CFR 164.512(a)).
    Section 423.888(b) would require the plan (or the third party 
administrator on behalf of the plan, as applicable) or the insurer of 
the plan to disclose certain data to CMS that is related to the retiree 
drug subsidy when directed by the plan sponsor to do so. We believe we 
have the authority to mandate the disclosure of this data to CMS 
pursuant to our oversight authority under section 1860D-22(a)(2)(B) of 
the Act, which provides that the Secretary shall have the access to 
such records as necessary to ensure the adequacy of subsidy payments 
made to sponsors. A sponsor applying for the subsidy can direct the 
plans that it sponsors (or the third party administrators or the 
insurers, as applicable) to disclose the protected health information 
to us, and disclosure will be permitted under the Privacy Rule because 
the disclosure is required by law, that is, by this regulation. In 
order to protect the privacy of the information, the protected health 
information would be provided directly to CMS and would not be shared 
with the sponsor. (CMS would disclose the information on the enrollees' 
Part D eligibility to the sponsors or the plan under Sec.  
423.884(b)(6).) We invite comment on the impact this will have on 
sponsors of retiree plans and on the group health plans, issuers, and 
third-party administrators of these plans.
8. Change of Ownership (Sec.  423.892)
    Sponsors who apply for a subsidy payment would be required to 
comply with change of ownership requirements, similar to those set 
forth in proposed Sec.  423.551 for the MA-PD and PDP plans. However, 
for purposes of the retiree drug subsidy, we are proposing slightly 
different change of ownership provisions than those proposed in Sec.  
423.551 for PDPs. We request comments regarding how these provisions 
could 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, and whether sponsors should be subject to 
novation agreement and facility leasing provisions similar to those 
proposed in Sec.  423.551.
    In Sec.  423.892, we would carry over the three situations that 
constitute change of ownership (CHOW) in Sec.  423.551 of our proposed 
rule. We would state that a CHOW includes the following--
     The removal, addition, or substitution of a partner, 
unless the partners expressly agree otherwise as permitted by 
applicable State law;
     A transfer of substantially all of the assets of the 
sponsor to another party; or
     The merger of the sponsor's corporation into another 
corporation, or the consolidation of the sponsor's organization with 
one or more other corporations, resulting in a new corporate body.
    The proposed exception to the three provisions discussed above 
would be that a transfer of corporate stock or the merger of another 
corporation into the sponsor's organization, with the sponsor 
organization surviving, would not usually constitute a CHOW.
    We would require a sponsor that has a sponsor agreement in effect 
and who is considering or negotiating a CHOW, to notify us at least 60 
days before the anticipated effective date of the change. In addition, 
we would also require that when there is a CHOW, and this results in a 
transfer of the liability for prescription drug costs, the existing 
subsidy agreement would automatically be assigned to the new owner. We 
would also require that the new owner

[[Page 46751]]

to whom a sponsor agreement is assigned be subject to all applicable 
statutes and regulations and to the terms and conditions of the subsidy 
agreement.
    We welcome comments on any aspect of the proposed section on change 
of ownership. We are particularly interested in comments on situations 
in which a sponsor transfers substantial assets, but substantially less 
than all of its assets, to another party. Please describe the different 
scenarios that might develop under such circumstances, especially the 
extent to which benefits covered by the sponsor agreement might 
reasonably be expected to be provided by the old or new owner and the 
best approach for either transferring, issuing or reissuing sponsor 
agreements. We would also like to receive comments on scenarios that 
might develop if more than one entity retains or acquires liability for 
prescription drug costs as the result of the terms of a change in 
ownership.
9. Construction (Sec.  423.894)
    Sections 423.890(a) through Sec.  423.890(d) are based on section 
1860D-22(a)(6) of the Act. It provides that nothing in section 1860D-22 
of the Act must be interpreted as preventing--
     An individual who is eligible for Medicare Part D and who 
is covered under employment-based retiree health coverage from 
enrolling in a prescription drug plan or in a MA-PD plan;
     The sponsor of employment-based retiree health coverage or 
an employer or other person from paying all or any part of any premium 
required for coverage under a prescription drug plan or MA-PD plan on 
behalf of an individual;
     Employment-based retiree health coverage from providing 
coverage that is supplemental to the benefits provided under a 
prescription drug plan or a MA-PD plan, including benefits to retirees 
who are not covered under a qualified retiree prescription drug plan, 
but who are enrolled in a PDP or MA-PD plan;
     Employment-based retiree health coverage from providing 
coverage that is better than the standard prescription drug coverage 
(as defined in Sec.  423.104(e)) to retirees who are covered under a 
qualified retiree prescription drug plan; and
     Sponsors from providing for flexibility in benefit design 
and pharmacy access provisions, without regard to the requirements for 
basic Medicare Part D drug coverage, as long as the actuarial 
equivalence requirement (as defined in Sec.  423.884(a)) is met.

S. Special Rules for States--Eligibility Determinations for Low-Income 
Subsidies, and General Payment Provisions

1. Eligibility Determinations (Sec.  423.904)
    The MMA added a new section 1935 to the Act, ``Special Provisions 
Relating to Medicare Prescription Drug Benefit,'' which specifies the 
requirements for States regarding low-income subsidies under the new 
part D benefit. In accordance with the statute, our proposed 
regulations at Sec.  423.904(a) and (b) would require States to make 
initial eligibility determinations for premium and cost sharing 
subsidies based on applications filed with the States, to conduct 
periodic redeterminations consistent with the manner and frequency that 
redeterminations are conducted under Medicaid, and to notify us of 
eligibility determinations and redeterminations once they are made.
    In Sec.  423.904(c), States would be directed to identify 
individuals who apply for the low-income subsidy who may also be 
eligible for programs under Medicaid that provide assistance with 
Medicare cost sharing and to offer enrollment in these programs. This 
requirement is consistent with existing obligations imposed on States 
when they make eligibility determinations for Medicaid. We also specify 
that States notify deemed subsidy eligibles of their subsidy 
eligibility.
    In section Sec.  423.904(d), we would require States to begin 
accepting application forms for the low-income subsidy no later than 
July 1, 2005. Our rationale for requiring States to take applications 
earlier than the open enrollment period for PDP and MA-PD plans would 
be to allow more time to process the large number of expected subsidy 
applications at the beginning of the program.
    In section Sec.  423.904(d), we would also require States to make 
available application forms, provide information on the nature of and 
requirements for the subsidy program, and provide assistance in 
completing subsidy applications. States also would be required to 
ensure that applicants or personal representatives attest to the 
accuracy of the information provided. In verifying application 
information, we would specify that States may require the submission of 
statements from financial institutions and may require that information 
on the application be subject to verification in a manner the State 
determines to be most cost-effective and efficient. As we discuss under 
subpart P, we envision a process that will balance the need for program 
integrity with the goal of reducing paperwork burden and cost.
    In addition, Sec.  423.904(d) would direct States to provide us 
with necessary information to carry out implementation of the Part D 
program. This will include information such as income levels for other 
low-income subsidy eligible individuals under Sec.  423.773 needed to 
permit PDPs and MA-PDs to determine the amount of sliding scale premium 
subsidy that a person will receive under Sec.  423.780(b).
    In developing this proposed rule, we worked with the Social 
Security Administration (SSA) on a simplified application form and 
process for the low-income subsidy program. As a result, we developed 
uniform criteria for determining resources, income, and family size 
under the subsidy, which are reflected in the proposed definitions at 
Sec.  423.772, and the proposed eligibility requirements at Sec.  
423.773.
    We are considering a number of options to ease the burden on States 
and to ensure, to the degree permissible under the MMA, a consistent 
eligibility determination process. We invite comments from States on 
this issue.
2. General Payment Provisions (Sec.  423.906)
    We specify in Sec.  423.906(a) that States could receive the 
regular Federal match for administrative costs in determining subsidy 
eligibility.
    Section 1935(d) of the Act contains provisions on Medicaid 
coordination with Medicare prescription drug benefits. The proposed 
regulations specify in Sec.  423.906(b) that, in the case of a person 
who is eligible for Part D and also eligible for full Medicaid 
benefits, medical assistance is not available for Medicaid covered 
drugs that could be covered under Part D or for cost sharing related to 
such drugs. In these cases Medicare is the primary payer. The provision 
of Part D covered drugs is no longer considered a benefit under the 
Medicaid program for full benefit dual eligibles, even if such 
individuals have not enrolled in a Part D plan. Therefore, no payment 
should be made under Medicaid for covered Part D prescription drugs for 
full benefit dual individuals.
    Also, in our proposed regulations in Sec.  423.906(c), we specify 
that for individuals enrolled in a drug plan under Part D or in an MA-
PD States may elect to cover under Medicaid outpatient drugs, other 
than Part D covered drugs, in a manner as otherwise provided in their 
State Plan for individuals who are not full-benefit dual eligible 
individuals or through

[[Page 46752]]

arrangements with the PDP sponsor or MA-PD.
3. Treatment of Territories (Sec.  423.907)
    Low-income Part D eligible individuals residing in the territories 
are not eligible for premium and cost-sharing subsidies. However, in 
accordance with section 1935(e) of the Act, territories may submit a 
plan to the Secretary under which medical assistance is to be provided 
to low-income individuals for covered Part D drugs. Territories with 
approved plans will receive increased grants under sections 1108(f) and 
1108(g) of the Act. Section 423.907 contains the provisions explaining 
the territories submittal of plans and the grant funding.
4. State Contribution to Drug Benefit Costs Assumed by Medicare (Sec.  
423.908 through Sec.  423.910)
    Medicare will subsidize prescription drug costs for full-benefit 
dual eligible individuals. However, in accordance with section 1935(c) 
of the Act, States and the District of Columbia will be responsible for 
making monthly payments to the Federal government beginning in January 
2006 to defray a portion of the Medicare drug expenditures for these 
individuals. The statute directs, and we would specify, in Sec.  
423.910(b)(2) that State payments would be made in a manner similar to 
the mechanism through which States pay Medicare Part B premiums on 
behalf of low-income individuals who are eligible for both Medicare and 
Medicaid, except that those payments will be deposited into the 
Medicare Prescription Drug Account in the Federal Supplementary Medical 
Insurance Trust Fund.
    As we are proposing to specify in Sec.  423.908 through Sec.  
423.910, to calculate the monthly State contributions, we would first 
calculate an amount we refer to as the projected monthly per capita 
drug payment. This amount is based in part on a State's Medicaid per 
capita expenditures for covered Part D drugs for Medicare beneficiaries 
eligible for full benefits under Medicaid for 2003, which is equal to 
the weighted average of gross per capita Medicaid expenditures for 
prescription drugs for 2003 for Medicaid recipients not receiving drugs 
through a managed care plan and the estimated actuarial value of 
prescription drugs benefits provided under a capitated managed care 
plan for these individuals in 2003. The weighted average would be based 
on the proportion of individuals who, in 2003, did and did not receive 
medical assistance for covered outpatient drugs through a Medicaid 
managed care plan.
    The gross per capita Medicaid expenditures for prescription drugs 
for 2003 is equal to the average (mean) per person expenditures 
(including dispensing fees) for a State during 2003 for covered Part D 
drugs provided to Medicare beneficiaries receiving full benefits under 
Medicaid who are not receiving medical assistance for drugs through a 
Medicaid managed care plan, based on data from the Medicaid Statistical 
Information System (MSIS) and other available data, as adjusted by an 
adjustment factor.
    We would apply an adjustment factor to the gross per capita 
Medicaid expenditures for prescription drugs. The adjustment factor for 
a State would have to equal the ratio of the aggregate payments to the 
State in 2003 under rebate agreements under section 1927 of the Act to 
a State's 2003 gross expenditures for covered Part D drugs not received 
through a Medicaid managed care plan, based on data contained in the 
CMS-64 Medicaid expenditure report. We propose to define 2003 as CY 
2003 (January 1, 2003, through December 31, 2003). The gross per capita 
Medicaid expenditures for prescription drugs for 2003 will be reduced 
by this adjustment factor ratio.
    The projected monthly per capita drug payment for a month would be 
equal to \1/12\ of the product of the State's Medicaid per capita 
expenditures for covered Part D drugs for Medicare beneficiaries 
eligible for full benefits under Medicaid for 2003 and a proportion 
equal to 100 percent minus the Federal medical assistance percentage 
(as defined in section 1905(b) of the Act) applicable to the State for 
the year for the month at issue. This amount would be increased by the 
growth factor for each year beginning in 2004 through the year for the 
month at issue. The growth factor for years 2004, 2005, and 2006 would 
be the average percent change from the previous year of the per capita 
amount of prescription drug expenditures (determined using the most 
recent National Health Expenditure projections). The growth factor for 
2007 and succeeding years would equal the annual percentage increase in 
average per capita aggregate expenditures for covered Part D drugs in 
the United States for Part D eligible individuals for the 12-month 
period ending in July of the previous year.
    The monthly State contributions for each year, beginning in January 
of 2006, would be the product of the projected monthly per capita drug 
payment, the total number of full benefit dual eligible individuals for 
the State in the applicable month, and the applicable ten year phased-
down factor for the year (see Table S-1). As illustrated in Table S-1, 
State contributions would decline each year until 2015, at which time 
the applicable 10 year phased-down factor for each year will be fixed 
at 75 percent.
    As specified in Sec.  423.910(b)(3), failure on the part of a State 
to pay these State contribution amounts would result in interest 
accruing on those payments at the rate provided under section 
1903(d)(5) of the Act, in accordance with section 1935(c)(1)(C) of the 
Act. In addition, as required by the statute, we would immediately 
offset unpaid amounts and accrued interest against Federal Medicaid 
matching payments due to the State under section 1903(a) of the Act. As 
we specify in Sec.  423.910(e), we would perform periodic data matches 
to identify full-benefit dual eligibles for purposes of computing State 
contributions. As we specify in Sec.  423.910(d), States would be 
required to provide data on full benefit dual eligible enrollees in 
order to conduct the data match required under section 1935(c)(1)(D) of 
the Act.
    States would make contributions only on behalf of Medicare 
beneficiaries who would otherwise be eligible for outpatient 
prescription drug benefits under Medicaid. States would not make 
contributions on behalf of individuals such as those QMBs who are not 
otherwise eligible for Medicaid, SLMBs, and QIs for whom the State will 
pay only Part B premiums or Medicare cost sharing on their behalf. In 
order to give meaning to the term full benefit dual eligible for 
purposes of the baseline calculation, we needed to define it in a 
manner that would permit the baseline calculation to operate. 
Therefore, we are proposing that Medicaid eligible individuals who 
receive comprehensive benefits including drug coverage under Medicaid 
and are also covered under Medicare Part A or Part B to be full benefit 
dual eligibles for purposes of calculating the baseline. This 
definition of full benefit dual eligibles excludes Medicare 
beneficiaries who receive Medicaid drug coverage under a section 1115 
Pharmacy Plus demonstration.
    As we specify in Sec.  423.910(g), to assist States in their budget 
planning, we must notify States by October 15 each year of the 
projected monthly per capita drug payment calculation for the next 
calendar year.
    The ten-year phased-down State contribution factors are identified 
below in Table S-1.

[[Page 46753]]



  Table S-1.--Annual Phased--Down Percentages of State Contributions to
                   Medicare Part D Drug Benefit Costs
------------------------------------------------------------------------
                                                                State
                            Year                              Percentage
------------------------------------------------------------------------
2006.......................................................           90
2007.......................................................      88\1/3\
2008.......................................................      86\2/3\
2009.......................................................           85
2010.......................................................      83\1/3\
2011.......................................................      81\2/3\
2012.......................................................           80
2013.......................................................      78\1/3\
2014.......................................................      76\2/3\
2015 and thereafter........................................           75
------------------------------------------------------------------------

T--Part D Provisions Affecting Physician Self-Referral, Cost-Based HMO, 
PACE, and Medigap Requirements

(If you choose to comment on issues in this section, please include the 
caption ``T-Part D Provisions Affecting Self-Referral, Cost-Based HMO, 
PACE, and Medigap Requirements'' at the beginning of your comments.)
    Subpart T includes discussion of several other regulatory areas 
that would be affected by the proposed provisions implementing the 
Medicare prescription drug benefit. In the discussion that follows, we 
specify the revised requirements for physician self-referral 
prohibition, cost-based HMOs, PACE organizations, and Medigap policies. 
Any corresponding regulation text appears before or after the section 
423 rules in subpart A of our proposed rules.
1. Definition of Outpatient Prescription Drugs for Purposes of 
Physician Self-Referral Prohibition (Sec.  411.351)
    Section 1877 of the Act, also known as the physician self-referral 
law, prohibits a physician from making referrals for certain designated 
health services (DHS) payable by Medicare to an entity with which the 
physician (or an immediate family member) has a financial relationship 
(ownership or compensation) unless an exception applies. Section 1877 
of the Act also prohibits the DHS entity from submitting claims to 
Medicare for DHS furnished as a result of a prohibited referral.
    ``Outpatient prescription drugs'' are a designated health service 
under section 1877 of the Act. We have defined in regulation 
``outpatient prescription drugs'' for purposes of the physician self-
referral prohibition as ``all prescription drugs covered by Medicare 
Part B'' (Sec.  411.351). However, effective January 1, 2006, 
additional outpatient drugs will be covered under Medicare Part D. 
These additional covered Part D drugs are defined elsewhere in this 
preamble in II.C.1 of Subpart J, and in regulations text at Sec.  
423.100.
    As a result of the proposed Medicare prescription drug benefit 
provisions, we propose to amend the physician self-referral definition 
of ``outpatient prescription drugs'' at Sec.  411.351 to include the 
additional outpatient drugs covered under the new Part D benefit. 
Specifically, we propose to define ``outpatient prescription drugs'' 
for purposes of the physician self-referral prohibition as ``all drugs 
covered under Medicare Part B and Part D.'' We believe that referrals 
for Part D drugs are subject to the same risk of overutilization and 
anti-competitive behavior as referrals for Part B drugs when a 
financial relationship exists between the referring physician and the 
entity furnishing the drugs. We are soliciting comments on this 
proposed definition.
2. Cost-Based HMOs and CMPS offering Part D coverage (Sec.  417.440 and 
Sec.  417.534)
    Section 1860D-21(e) of the Act provides that Part D rules will 
generally apply to reasonable cost reimbursement HMOs and CMPs 
(Competitive Medical Plans) that contract under section 1876 of the Act 
and that offer qualified prescription drug coverage to Part D eligible 
enrollees in the same manner as such rules apply to local MA-PD plans 
(described in section 1851(a)(2)(A)(i) of the Act). As a result, 42 CFR 
part 417 must be revised to reflect the treatment of an HMO or CMP as a 
local MA-PD plan. To codify these changes in regulation we are revising 
Sec.  417.440(b) specifying that an HMO or CMP may offer qualified 
prescription drug coverage. In new Sec.  417.534(b)(4), we specify that 
to the extent that a cost HMO or CMP chooses to participate in the Part 
D program by offering qualified prescription drug coverage to its 
members, any costs associated with the offering of Part D benefits may 
not be claimed on its Medicare cost report.
    Section 1860D-21(e)(2) of the Act reinforces the fact that section 
1876 reasonable cost contracts that offer Part D of Medicare may do so 
only as MA-PD plans. This section of the statute stipulates that 
section 1876 reasonable cost contracts may only offer Part D coverage 
to individuals also enrolled for Medicare in the reasonable cost 
contract. In other words, section 1876 reasonable cost HMOs and CMPs 
are not permitted to operate as ``free standing'' PDPs.
    Section 1860D-21(e)(3) of the Act provides that the Part D bids of 
section 1876 reasonable cost contracts will not be included in the 
computation of the national average monthly bid amount and the low-
income benchmark premium amount. We discuss the national average 
monthly bid amount in the subpart F preamble and the low-income 
benchmark premium amount in the subpart P preamble.
    The waiver authority provided in section 1860D-21(c) of the Act 
would be available to section 1876 reasonable cost HMOs and CMPs in the 
same manner as it is available to MA-PD plans. We discuss section 
1860D-21(c) of the Act and the waiver authority it provides in the 
subpart J preamble. To the extent that a Part D requirement is in 
conflict with or duplicative of a section 1876 requirement, or to the 
extent that a waiver would promote coordination of Part A and Part B 
benefits with Part D benefits, waiver would also be available to 
section 1876 reasonable cost HMOs and CMPs. We invite comment on 
whether there are any Part D requirements otherwise applicable to MA-PD 
plans that would be uniquely problematic to implement for section 1876 
reasonable cost HMOs and CMPs.
3. PACE Organizations Offering Part D Coverage

a. Overview

    Section 1860D-1(a)(1) of the Act provides that in general each Part 
D eligible individual is entitled to obtain qualified prescription drug 
coverage as a fee-for-service enrollee or a MA enrollee. Although PACE 
enrollees are neither fee-for-service nor MA beneficiaries, those 
entitled to benefits under Part A or enrolled under Part B will be Part 
D eligible individuals. Section 1860D-21(f)(1) of the Act further 
specifies that a PACE program may elect to provide qualified 
prescription drug coverage to its Part D eligible enrollees.
    Currently, sections 1894 and 1934 of the Act require PACE 
organizations to provide enrollees with all medically necessary 
prescription drugs. Drugs covered under Medicare Parts A and B are 
included in the monthly Medicare capitation rate paid to PACE 
organizations for Medicare beneficiaries, while outpatient prescription 
drugs are included as a portion of the monthly Medicaid capitation rate 
paid to PACE organizations for Medicaid recipients or the Medicaid 
premium paid by non-Medicaid recipients. The MMA alters the payment 
structure for covered Part D drugs for PACE organizations by shifting 
the payer source for PACE enrollees who are full benefit dual eligibles 
(as defined under section

[[Page 46754]]

1935(b)(6) of the Act) from Medicaid to Medicare, and in part from the 
beneficiary to Medicare in the case of non-full benefit dual eligibles 
who elect to enroll in Part D. Prescription drug coverage for PACE 
enrollees enrolled in Medicaid who are not Medicare beneficiaries would 
continue to be funded by the State through their monthly capitation 
payment to the PACE organization.
    As discussed in proposed Sec.  423.34(d), in accordance with 
section 1935(d)(1) of the Act, full benefit dual eligibles will no 
longer be eligible for medical assistance for covered Part D drugs 
under Medicaid; rather, such individuals may only receive coverage for 
covered Part D drugs under Part D of Medicare. Consequently, in order 
for PACE organizations to continue to meet the statutory requirement to 
provide prescription drug coverage to their enrollees, and ensure that 
they receive adequate payment for the provision of covered Part D 
drugs, PACE organizations will need to offer qualified prescription 
drug coverage to their Part D eligible enrollees.
    The MMA provides little specific guidance for implementing the 
prescription drug benefit for Part D eligible PACE enrollees. Section 
1860D-21(f) of the Act indicates that to the extent a PACE program 
elects to provide qualified prescription drug coverage to Part D 
eligible individuals, Part D requirements apply to the provisions of 
such coverage in a manner that is similar to that of MA-PD local plans. 
Furthermore, the PACE organization may be deemed as an MA-PD local 
plan.
    We believe that Congress did not intend to alter the way in which 
PACE services, including outpatient prescription drugs, are currently 
being provided to enrollees. Therefore, we are proposing that PACE 
organizations not be deemed as MA-PD local plans. Rather, PACE 
organizations would be treated in a manner that is similar to an MA-PD 
local plan for purposes of payment under Part D. This approach is 
consistent with section 1894(d)(1) of the Act that provides that 
payments will be made to PACE organizations in the same manner and from 
the same sources as payments are made to a Medicare+Choice (now MA) 
organization.
    In order to account for the shift in payer source for dual eligible 
and Medicare-only PACE enrollees, we believe that PACE organizations 
would elect to provide Part D coverage to their enrollees in order to 
receive payment for prescription drugs. We view the Part D requirements 
that are associated with payment as most directly relevant to PACE 
organizations. However, because all Part D requirements applicable to 
MA-PD local plans apply in a similar manner to PACE organizations, we 
also discuss a limited set of non-payment related Part D provisions 
that would be directly relevant to PACE.
    A background of the PACE model is provided below followed by a 
discussion of Part D requirements as they relate to PACE programs 
offering qualified prescription drug coverage.

b. Background

    Sections 4801 through 4803 of the Balanced Budget Act of 1997 (Pub. 
L. 105-33) established PACE as a Medicare benefit category and a State 
plan option under Medicaid. PACE organizations provide services to 
frail, elderly individuals as an alternative to nursing home placement. 
The PACE benefit includes all Medicare benefits under Parts A and B, 
all services in the Medicaid State plan, and any other service(s) 
deemed necessary by the PACE interdisciplinary team. The PACE benefit 
currently includes outpatient prescription drugs as well as over-the-
counter medications that are indicated by the participant's care plan. 
Thus, all PACE organizations have been providing the equivalent of 
qualified prescription drug coverage as described in proposed part 423.
    Similar to institutionalized individuals, PACE participants do not 
acquire their prescription drugs directly from pharmacies, except in 
unusual circumstances such as when a participant is away from the PACE 
organization's service area and requires urgent care. Rather, the PACE 
organization either dispenses prescription drugs directly to 
participants from its own in-house pharmacy or obtains prescription 
drugs from a contracted pharmacy that delivers the medications to PACE 
participants.
    PACE organizations are risk-bearing entities that receive a 
capitated monthly rate from Medicare for Medicare-covered services and 
from Medicaid for Medicaid-covered services. As required by sections 
1894(f)(2)(B) and 1934(f)(2)(B) of the Act, the PACE organization pools 
payments received from all sources in order to provide all services 
needed by its enrollees, including services covered by neither Medicare 
nor Medicaid. Most PACE enrollees are dually eligible for Medicare and 
Medicaid; however, participants may be eligible for Medicare only or 
Medicaid only. Sections 1894(b)(1)(A) and 1934(b)(1)(A) of the Act 
require the PACE organization to provide all covered services to 
enrollees regardless of source of payment. PACE statutory language 
further clarifies that deductibles, co-payments, coinsurance, or other 
cost-sharing responsibilities do not apply for PACE participants. 
Consequently, a PACE organization may not charge its participants any 
cost-sharing. We note that payment of premiums is permitted under the 
PACE statutory language.
    The PACE Medicare and Medicaid regulations are located in part 460 
of title 42 of the CFR. As directed by sections 1894 and 1934 of the 
Act, these regulatory requirements are a blend of Medicare Advantage 
(MA) and Medicaid managed care requirements as well as requirements 
from the PACE Protocol that was created by On Lok, Inc. under a 
demonstration with the Secretary. Thus, although certain PACE 
requirements are the same or similar to the proposed MA requirements, 
most are unique to PACE.

c. Payment Related Requirements for MA-PD Plans and PACE Organizations

i. Part D Bids for Basic Prescription Drug Coverage
    Section 1860D-11(b) of the Act requires entities seeking to offer 
qualified prescription drug coverage under Part D, including MA-PD 
plans, PDPs, 1876 cost plans, and PACE organizations to participate in 
a bidding process. As discussed in Sec.  423.279 of the proposed rule, 
these bids would serve as the basis for establishing a national average 
monthly bid amount under Sec.  423.780 of our proposed rule that would 
be applicable to all plans, including PACE organizations. However, 
section 1860D-21(f)(3) of the Act specifies that the bids of certain 
plans, including PACE organizations, would not be included in the 
computation of the national average benchmark amount as well as the 
low-income benchmark premium amount under Sec.  423.780(a).
    In accordance with proposed subpart F, we are proposing that each 
PACE organization would submit a Part D bid that would reflect its 
average monthly revenue requirements to provide qualified prescription 
drug coverage, including enhanced alternative prescription drug 
coverage, for a Part D eligible individual with a national average risk 
profile. This bidding process would occur in a similar manner as for 
MA-PD plans and PDPs. In accordance with Sec.  423.265(c)(3) of our 
proposed rule, the Part D bids would be prepared according to CMS 
guidelines on actuarial valuation and actuarially certified.

[[Page 46755]]

    Plans would use qualified actuaries to prepare their bids in 
accordance with these principles. However, we are concerned that 
requiring small PACE organizations to independently contract with 
actuaries would be costly and burdensome. In order to minimize their 
cost, PACE organizations may choose to collectively contract with an 
outside actuary to develop the methodology for establishing a bid, 
however, each bid would need to be actuarily certified. We note that 
although each PACE organization's bid would not necessarily be the 
same, all would follow the same methodology in that they would be 
required to include the cost of providing basic drug coverage.
    Since PACE organizations are required to enroll Medicare-only 
individuals who meet PACE eligibility requirements, all PACE 
organization bids would also be required to include the portion of the 
bid attributable to the cost of providing the enhanced alternative 
prescription drug coverage discussed later in this section.
ii. Part D Premiums for Prescription Drug Coverage
    As stated previously, PACE organizations are required to provide 
uniform benefits to all enrollees regardless of source of payment. We 
have reviewed the proposed Title I regulation in conjunction with the 
PACE regulation and have identified that there would be 3 primary 
categories of PACE enrollees under the MMA: (1) Individuals enrolled in 
Medicaid, but not Medicare (Medicaid-only); (2) Individuals enrolled in 
Medicare and Medicaid (Dual eligibles); and (3) Individuals enrolled in 
Medicare, but not Medicaid (Medicare-only). Within the Medicare-only 
category of enrollees would be 3 subcategories: (a) Those individuals 
with income below 135 percent of the Federal poverty line (FPL) and 
resources below three times the maximum amount of resources an 
individual may have and still be eligible for supplemental security 
income under Title XVI of the Act, (b) those individuals with income 
below 150 percent of the FPL and resources in 2006 that do not exceed 
$10,000 if single, or $20,000 if married as set forth under proposed 
Sec.  423.773(d) and, (c) those individuals with income above 150 
percent FPL or resources that exceed the amounts set forth under Sec.  
423.773(b)(2) or (d)(2).
    To ensure that PACE organizations receive payment for the Part D 
benefit that is consistent with the MMA and PACE statutory 
requirements, we are proposing policies to address these categories of 
PACE enrollees. We note that Medicaid-only PACE enrollees are 
ineligible for Part D prescription drug coverage. Prescription drug 
coverage offered by the State would be funded through the Medicaid 
portion of the monthly capitation rate paid to the PACE organization.
    Since section 1894 of the Act precludes cost sharing for PACE 
enrollees, our only option is to require PACE organizations to offer 
qualified prescription drug coverage without cost-sharing obligations. 
Therefore, for dual eligible and Medicare-only PACE enrollees, we are 
proposing that PACE organizations offer enhanced alternative 
prescription drug packages with no enrollee cost-sharing. For both dual 
eligibles and Medicare-only enrollees, CMS would pay PACE organizations 
a direct subsidy, as calculated under Sec.  423.329(a)(1). In addition, 
the PACE organization would receive low-income premium and cost sharing 
subsidy payments or partial subsidy payments for those enrollees who 
qualify for the low-income subsidy. We note that dual eligible 
beneficiaries are deemed eligible for the full low-income subsidy under 
Sec.  423.773(c), which includes a premium subsidy up to the low-income 
benchmark premium amount under Sec.  423.780(a) or, if greater, the 
lowest beneficiary premium amount for a PDP offering basic prescription 
drug coverage in the PDP region where the beneficiary resides. We 
believe that as compared to larger PDPs and MA-PD plans, PACE 
organizations may lack the purchasing power to obtain significant 
discounts and other price concessions for covered Part D drugs. We, 
therefore, expect that some PACE organizations will submit bids under 
Part D that on average are higher than those submitted by other Part D 
plans. Consequently, because the low-income premium subsidy payments 
are based on regional bid averages, the premium subsidy payments 
received by PACE organizations might be lower than their Part D basic 
beneficiary premiums, and thus might not cover the full costs of 
providing dual eligible beneficiaries coverage for covered Part D 
drugs. (Section 1860D-13(a)(1) of the Act requires that the enrollee's 
premium would be increased to cover this discrepancy between the plan 
bid and the national average monthly bid amount as described under 
Sec.  423.286(d)(1)).
    We are concerned about the impact on low-income PACE enrollees and 
request public comment on other approaches to handling this premium 
differential. We note also that Medicare-only beneficiaries who do not 
qualify for the low-income subsidy or only qualify for the partial low-
income subsidy under Sec.  423.780(b) would also be responsible for 
paying the difference between the low-income premium subsidy and the 
plan's beneficiary premium.
    The enhanced alternative prescription drug premium amount would be 
established by the PACE organization during the bidding process and 
would take into account the additional cost of providing a prescription 
drug package to enrollees without the application of cost-sharing. 
Premium amounts actually paid by PACE enrollees would vary for dual 
eligibles and for Medicare-only PACE enrollees depending on whether the 
enrollee qualifies for the low-income premium subsidy.
    Section 423.104(g)(2) of our proposed rule specifies that a plan 
may not offer enhanced alternative prescription drug coverage unless it 
also offers basic prescription drug coverage. In this instance, PACE 
organizations vary from MA-PD plans in that their enrollees are exempt 
from cost-sharing. It would be impractical to offer basic prescription 
drug coverage to PACE enrollees because stand-alone basic prescription 
drug coverage assumes beneficiary cost-sharing. As codified in Sec.  
423.458(d) of our proposed rule, section 1860D-21(c)(2) of the Act 
establishes authority for CMS to waive Part D provisions for PACE 
organizations that: (1) Conflict with PACE provisions (2) duplicate 
PACE requirements; or (3) improve the coordination of benefits between 
Part D and PACE. Under this authority we are proposing to waive Sec.  
423.104(g)(2) for PACE organizations in order to promote coordination 
of benefits between Part D and PACE.
    Section 423.265(b) of our proposed rule specifies that each 
potential PDP sponsor or MA organization planning to offer an MA-PD 
plan must submit Part D bids and supplemental information not later 
than the first Monday in June for each prescription drug or MA-PD plan 
it intends to offer in the subsequent calendar year.
    The start-up of a new PACE organization may take from 2.5-3 years 
to develop the capacity to offer PACE services, including capital 
expenditures associated with constructing or renovating space for a 
PACE Center. In addition, as required by sections 1894 and 1934 of the 
Act, many activities associated with PACE involve the States. For 
example, PACE applications are submitted to the State for review prior 
to CMS review and the PACE program agreement is a 3-party contract; 
CMS, the State in which the potential PACE program is located, and the 
PACE organization. We do not believe it would be appropriate for a 
potential

[[Page 46756]]

PACE organization to miss the deadline for submission of bids because 
of logistical issues associated with PACE. For these reasons, we are 
proposing to waive our proposed Sec.  423.265(b).
iii. Risk Corridor Payments
    Proposed Sec. Sec.  423.308 and 423.336 define allowable risk 
corridor costs and outline the risk corridor payment methodology. As 
stated previously, risk corridor payments allow plans to transition 
from administratively set payment rates to market based payment rates 
by limiting some of the risk of bidding. Their purpose is to adjust for 
significant differences in the projected cost and actual cost of 
providing basic prescription drug benefits. We have reviewed Part D 
risk corridor payment provisions and have determined that they do not 
conflict with the PACE requirement of full financial risk in Sec. Sec.  
1894(f)(2)(B)(v) and 1934(f)(2)(B)(v) of the Act. Therefore, we are 
proposing that PACE organizations would be eligible to participate in 
the Part D risk corridor provision.
    In accordance with proposed Sec.  423.308, PACE organizations would 
be required to track allowable risk corridor costs for all Part D 
eligible PACE enrollees for purposes of risk corridor payments. We note 
that the costs for Medicare only enrollees (who would be purchasing 
enhanced alternative prescription drug coverage) must be adjusted not 
only to exclude any costs attributable to benefits beyond basic 
coverage, but also to exclude any basic coverage costs determined to be 
attributable to increased utilization over the standard benefit as the 
result of the insurance effect of enhanced alternative coverage in 
accordance with CMS guidelines on actuarial valuation.
iv. Reinsurance Payments
    Part D reinsurance payments are available to Part D plans for 
allowable reinsurance costs above the annual out-of-pocket threshold. 
As discussed in Subpart C, only certain out-of-pocket costs, or true 
out-of-pocket expenditures (TrOOP), actually incurred by the 
beneficiary, another person, an SPAP, or paid for by CMS in the form of 
the low-income cost sharing subsidy count toward the annual out-of-
pocket threshold. Because PACE organizations are precluded from 
imposing cost-sharing on their enrollees, PACE enrollees will not incur 
any direct cost-sharing that would count toward TrOOP. However, for 
dual eligibles and other Medicare-only enrollees who qualify for the 
low-income subsidy, the low-income subsidy amounts received by the PACE 
programs will count toward the annual out-of-pocket threshold. 
Consequently, for enrollees with high drug costs that qualify for the 
low-income subsidy, PACE programs will be eligible for reinsurance 
payments. In accordance with proposed Sec.  423.800 PACE organizations 
would be required to track the application of low-income cost sharing 
subsidies to be applied to the out-of-pocket threshold for purposes of 
reinsurance payments. In contrast, PACE organization will not receive 
any reinsurance payments for Medicare-only enrollees who do not qualify 
for the low-income subsidy, since these individuals will have no 
incurred costs that count toward the out-of-pocket threshold.
    We request public comment concerning the impact of these rules on 
PACE organizations. We are particularly interested in receiving drug 
utilization information from PACE organizations. We also request public 
comments identifying additional alternatives for providing comparable 
prescription drug benefits to PACE enrollees.

d. Application of Additional MA-PD Plan Requirements to PACE 
Organizations

    As discussed previously, Sec.  423.458(d) establishes regulatory 
authority for CMS to waive Part D provisions for PACE organizations. 
Section 423.458(d) states that PACE organizations may request waivers 
from CMS. Initially, CMS will identify Part D provisions on behalf of 
PACE organizations that we believe require waivers. We have identified 
the non-payment related Part D provisions listed below to waive on 
behalf of PACE organizations. The provisions identified below do not 
represent an exhaustive list of all necessary waivers. We request 
public comment identifying any additional Part D requirements that meet 
the criteria of section 1860D-21(c)(2) of the Act. We plan to provide 
this more comprehensive listing of Part D provisions that CMS would 
waive on behalf of PACE organizations.
i. Requirements for Providing Information About Part D
    Sections 423.48 and 423.128 of the proposed regulation specify 
requirements for providing information about Part D and for the 
dissemination of plan information. Plans would be required to provide 
information to CMS regarding benefits, formularies, premiums, cost 
sharing, and enrollee satisfaction. This information would be published 
in Medicare's comparative plan brochures and provide key information 
for beneficiaries to use in making informed decisions about Part D 
prescription drug coverage.
    We believe that the differences between MA-PD plans/PDPs and PACE 
would complicate comparison and confuse beneficiaries. In addition to 
specific eligibility requirements for enrollment in PACE, PACE 
organizations exist only in those States that elect to include PACE in 
their Medicaid State plan. We are concerned that including PACE 
information in the comparative plan brochure would be misleading and 
specifically request public comment on the advantages and disadvantages 
of including PACE in the MA-PD/PDP comparative brochure. We are 
proposing that PACE organizations receive a waiver of this requirement 
in order to promote better coordination of the benefits under PACE and 
Part D.
ii. Negotiated Prices
    Section 423.104(g) of the proposed rule would require MA-PD plans 
and PDPs to provide enrollees with access to negotiated drug prices. 
Since PACE enrollees receive the vast majority of their prescription 
drugs directly from the PACE organization with no cost sharing applied, 
the negotiated price requirement is already accounted for under part 
460. Therefore, we are proposing a waiver of Sec.  423.104(g) in order 
to promote better coordination of benefits between Part D and PACE.
iii. Access to Pharmacy Networks
    Section 423.120(a)(1) of the proposed rule would require that a 
plan's contracted pharmacy network be located within specified 
distances from enrollees. Because PACE enrollees receive their 
prescription drugs directly from their PACE organization as opposed to 
through a pharmacy, the distance between the enrollee and a network 
pharmacy is irrelevant. We believe that requiring a PACE organization 
to set up a pharmacy network would be burdensome, costly, and 
unnecessary and diverts funds from patient care. Thus, we are proposing 
to waive this requirement in order to promote better coordination of 
benefits between PACE and Part D.
iv. Single Card, Standardized Technology
    Section 423.120(c) of the proposed rule would require plans to 
employ the use of a card or other type of standardized technology to 
assist enrollees in accessing negotiated prices for Part D drugs. Since 
PACE participants do not routinely acquire their prescription drugs 
directly from pharmacies, requiring PACE organizations to develop 
standardized technology would be burdensome, costly, and unnecessary 
and diverts

[[Page 46757]]

funds away from patient care. Therefore, we are proposing to waive 
proposed Sec.  423.120(c) under the authority of 1860D-21(c)(2) of the 
Act for PACE organizations to promote better coordination of benefits 
between Part D and PACE.
v. Out-of-Network Pharmacies
    Section 423.124 of the proposed rule specifies access requirements 
for drugs obtained through out-of-network pharmacies. These provisions 
would ensure that enrollees residing in long term care facilities have 
access to drugs in an out-of-network long term care pharmacy and AI/AN 
enrollees have access to an out-of-network I/T/U pharmacy. Enrollees 
who obtain their Part D covered drugs from these out-of-network 
pharmacies would be financially responsible for deductibles or cost-
sharing applicable under network pharmacies.
    Under the current PACE regulations in Sec. Sec.  460.90(a) and 
460.100, PACE organizations are responsible for all prescription drugs, 
including those provided to any participants residing in long term care 
facilities, AI/AN, and those associated with an emergency health event 
or an approved urgent care need. As noted previously, PACE participants 
are not responsible for deductibles, co-payments, coinsurance, or other 
cost sharing associated with prescription drugs. In the PACE program, 
when participants are out of the service area and need prescription 
drugs, the PACE organization would arrange payment in full with the 
pharmacy.
    As noted previously, PACE organizations are required to provide all 
PACE enrollees with prescription drug coverage. Therefore, we view the 
out of network pharmacy requirements as duplicative of PACE 
regulations. Thus, we are proposing to waive Sec.  423.124 of the 
proposed rule for the reasons noted above.
vi. Disclosure of Price Difference Between Part D Drug and Generic 
Equivalent
    Public disclosure requirements in proposed Sec.  423.132 provide 
that a PDP or MA-PD plan must ensure that its pharmacies inform 
enrollees of any differential between the negotiated price for a 
covered Part D drug and the lowest priced generic equivalent. This 
requirement is inconsistent with the PACE model. PACE participants or 
their caregivers work with the PACE interdisciplinary team in making 
care planning decisions and have input into all aspects of their care, 
including prescription drug use. For this reason, we are proposing a 
waiver of the public disclosure requirement in proposed Sec.  423.132 
under the authority of section 1860D-21(c)(2) of the Act for PACE 
organizations in order to promote better coordination of benefits 
between Part D and PACE.
vii. Privacy, Confidentiality, and Accuracy of Records Requirements
    Requirements associated with privacy, confidentiality, and accuracy 
of enrollees' records under Part D are included in proposed Sec.  
423.136. We view these requirements as duplicative of Sec.  460.200(e) 
of the PACE regulation. We believe that the PACE regulations are 
providing the same protections as would be provided under proposed 
Sec.  423.136. For the reasons noted above, we are proposing to waive 
Sec.  423.136.
viii. Medication Therapy Management Program
    The medication therapy management program requirements in proposed 
Sec.  423.150 would require MA-PDs and PDPs to employ pharmacists to 
counsel beneficiaries who have chronic conditions and use multiple 
drugs to ensure they are taking safe combinations of prescription drugs 
and using the drugs properly. PACE enrollees typically suffer from 
multiple health conditions that necessitate close monitoring by their 
interdisciplinary team. Currently, PACE organizations have pharmacists 
on staff or under contract, working with PACE primary care physicians 
as they develop the participants' care plans and monitor their drug 
regimens. In addition, the PACE interdisciplinary team, through its 
daily interactions with PACE participants and their caregivers, 
provides counseling to ensure that medication regimens are followed. We 
believe that the existing PACE regulations satisfy or exceed the 
medication therapy management program requirements in proposed Sec.  
423.150. For the reasons noted above, we are proposing to waive 
proposed Sec.  423.150 for PACE organizations.
ix. Licensing
    Proposed Sec.  423.401 specifies licensing requirements for PDPs. A 
PDP must be organized and licensed under State law as a risk-bearing 
entity eligible to offer health insurance or health benefits coverage 
in each State in which it offers a prescription drug plan. A similar 
requirement exists for MA-PDs. Organizations that are not licensed 
under State law would obtain certification from the State that the 
organization meets financial solvency and other standards required by 
the State for it to operate.
    We view these requirements as duplicative of PACE requirements. 
First, sections 1894(e)(2)(iv) and 1943(e)(2)(iv) of the Act require 
PACE organizations to meet applicable State and local laws and 
requirements. In addition, sections 1894(f)(2)(B)(v) and 
1934(f)(2)(B)(v) of the Act require PACE organizations to be at full 
financial risk. Therefore, we believe PACE organizations are meeting 
the intent of these MA requirements. For the reasons noted above, we 
are proposing to waive Sec.  423.401 for PACE because we believe they 
are duplicative of PACE requirements.
x. Determinations and Appeals Processes
    Proposed process requirements for grievances, coverage 
determinations, reconsiderations, and appeals under Part D are 
discussed in Subpart M. We believe the PACE grievance and appeals 
processes under Sec. Sec.  460.120 and 460.122 meet the intent of the 
MMA since they would accommodate complaints regarding prescription drug 
coverage. Therefore, we are proposing to waive Sec. Sec.  423.560-
423.638 for PACE organizations because we believe they are duplicative 
of PACE requirements.
xi. Application Process
    Subpart K of proposed part 423 includes requirements governing the 
application process, contracts with PDP sponsors, and reporting 
requirements. Sections 1894 and 1934 of the Act, as well as PACE 
regulations in subparts B and C specify application and contract 
(called a program agreement in accordance with sections 1894 and 1934 
of the Act) requirements for PACE that duplicate requirements in 
subpart K. For this reason, we are proposing to waive the sections in 
proposed subpart K that address the application process and contract 
requirements.
    We invite comments on the MMA requirements we have proposed to be 
waived for PACE organizations and ask for comment on additional waivers 
that may be needed to integrate the Medicare prescription drug benefit 
and the PACE benefit.
4. Medicare Supplemental Policies

a. Overview and Background

    In this proposed rule, we are including two provisions related to 
Medicare supplemental (Medigap) policies. As required under section 
1882(v), as added by section 104 of MMA, we are setting forth standards 
for the written disclosure notice that Medigap insurers must provide to 
their

[[Page 46758]]

policyholders who have drug coverage. In addition, in order to reflect 
the addition of the Medicare drug benefit by MMA, we are proposing to 
revise the definition of a Medigap policy.
i. Medicare Supplemental Policies
    A Medicare supplemental (Medigap) policy is a health insurance 
policy sold by private insurance companies to fill the ``gaps'' in 
original Medicare plan coverage. A Medigap policy typically provides 
coverage for some or all of the deductible and coinsurance amounts 
applicable to Medicare-covered services and sometimes covers items and 
services that are not covered by Medicare. Under section 1882 of the 
Social Security Act (Act), Medigap policies generally may not be sold 
unless they conform to one of the 10 standardized benefit packages that 
have been defined, and designated as plans ``A'' through ``J,'' by the 
National Association of Insurance Commissioners (NAIC). Three States 
(Massachusetts, Minnesota, and Wisconsin) have different standardized 
Medigap plans and are sometimes referred to in this context as the 
``waiver'' States.
    Three of the 10 standardized Medigap plans (Plans H, I, and J) 
contain coverage for outpatient prescription drugs. In addition, there 
are Medigap policies issued before the standardization requirements 
went into effect (``prestandardized'' Medigap plans) that cover drugs, 
as well as Medigap policies in the waiver States, some of which have 
varying levels of coverage for outpatient prescription drugs.
ii. Legislative Authority and Background
    In connection with the addition of a prescription drug benefit to 
Medicare, the MMA also prescribes changes to the law applicable to 
Medigap policies. Among other requirements, section 1882(v) of the 
Social Security Act, as added by section 104 of the MMA, requires 
Medigap issuers to provide a written disclosure notice to individuals 
who currently have a policy with prescription drug coverage. (Section 
1882(v)(6)(A) specifies that this is to be called a ``Medicare Rx 
policy.'') The MMA also requires that the Secretary establish standards 
for this disclosure notice in consultation with the National 
Association of Insurance Commissioners (NAIC).
    The purpose of this disclosure notice is to inform an individual 
who has a Medigap Rx policy about his or her Medigap choices once the 
new Medicare Prescription Drug Benefit Program (Medicare Part D) goes 
into effect on January 1, 2006. Specifically, effective on that date, 
section 1882(v) will prohibit the sale of new Medigap Rx policies, and 
require the elimination of drug coverage from Medigap Rx policies held 
by beneficiaries who enroll under Part D. The statute permits the 
renewal of Medigap Rx policies if the policy was purchased prior to 
January 1, 2006, and the individual does not enroll in Part D.
    In addition, beneficiaries who do not enroll in Part D during the 
Initial Enrollment Period, and choose to enroll later, will be charged 
higher Part D premiums unless they can establish that they had 
creditable prescription drug coverage prior to enrolling in Part D. 
Under section 1860D-13(b)(4)(F) of the Act, and Sec.  423.56(a) of this 
proposed rule, Medigap policies meet the definition of creditable 
prescription drug coverage if they also meet actuarial equivalence 
requirements.
    Issuers of Medigap insurance policies are required to provide 
disclosure notices to policyholders with Medigap Rx policies that 
inform them of their options under the new legislation, as well as 
informing them whether or not their policies constitute ``creditable 
prescription drug coverage.'' As explained in the preamble to Subpart B 
of this proposed rule, to be considered creditable prescription drug 
coverage, the coverage must be determined (in a manner specified by the 
Secretary) to provide prescription drug coverage the actuarial value of 
which (as defined by the Secretary) equals or exceeds the actuarial 
value of standard prescription drug coverage under Medicare Part D. 
Subparts B and F of this proposed rule provide additional detail on 
creditable coverage and actuarial equivalence.

b. Definition of Medicare Supplemental Policy

    Because of the importance of these disclosure notices to 
beneficiaries, we believe it is necessary to clarify what comes within 
the scope of a Medigap Rx policy. We are proposing to revise and 
clarify the definition of a Medicare supplement (Medigap) policy, 
currently codified at 42 CFR 403.205, to reflect the addition of the 
Medicare drug benefit by MMA. There was some ambiguity in the past 
about whether a policy that covered only prescription drugs, either as 
a separate, ``stand-alone'' policy or as a rider to another policy, met 
the definition of a Medigap policy. The ambiguity was created by the 
fact that there was no Medicare drug benefit to supplement, and has 
been resolved with the enactment of the Medicare drug benefit. There 
has also been some confusion about whether a rider attached to a 
Medigap policy is considered to be part of the policy, and therefore 
subject to Medigap requirements.
    Accordingly, we propose to revise the definition of a Medigap 
policy, effective January 1, 2006, to include any insurance policies or 
riders that contain a prescription drug benefit, and that are primarily 
designed for, or are primarily marketed and sold to Medicare 
beneficiaries. We are also proposing to clarify that any rider attached 
to a Medigap policy is an integral part of the policy. All the 
requirements that apply to the base policy, such as guaranteed 
renewability or disclosure requirements, would apply to the rider. 
Thus, for instance, if an insurer offers an optional prescription drug 
rider that can be added to any other policies, addition of the rider 
would make the entire policy a Medigap prescription drug policy 
(Medigap Rx policy) subject to the disclosure requirements for these 
policies in section 1882(v) of the Act.
    Moreover, any stand-alone drug policies that were not previously 
considered to meet the definition of a Medigap policy, will meet that 
definition as of January 1, 2006, when the prescription drug benefit 
takes effect, and new sales of these policies would be prohibited after 
that date.

c. Standards for the Disclosure Notice That Medicare Supplemental 
(Medigap) Issuers Are Required To Provide Current Policy Holders With 
Drug Coverage

i. General
    We believe that the statute is quite clear about the choices that 
need to be made by beneficiaries who hold Medigap Rx policies. 
Therefore, we propose to establish standards for the disclosure notice 
in the form of a required notice that sets forth those choices. The 
proposed notice is set forth below.
ii. Timing and Content of the Disclosure Notice
    The statute requires Medigap issuers to send a written disclosure 
notice to each individual who is a policyholder or certificate holder 
of a Medigap Rx policy at the most recent available address of that 
individual. The issuers must send the disclosure notice during the 60-
day period immediately preceding the initial Medicare Part D enrollment 
period. The initial enrollment period (IEP) for Medicare Part D runs 
from November 15, 2005 through May 15, 2006. Accordingly, Medigap 
issuers must send the written disclosure notice between September 16, 
2005 and November 15, 2005.

[[Page 46759]]

    The written disclosure notice must inform the individual of his or 
her Medigap options if the individual does or does not enroll in 
Medicare Part D. These include the following:
     If the individual does enroll in Part D, he or she can 
keep the Medigap policy but the drug coverage must be eliminated.
     If the individual enrolls in a Medicare Part D 
Prescription Drug Plan (PDP) during the initial enrollment period 
(IEP), the individual also has the right to buy another Medigap plan, 
from the same issuer, that does not include drug coverage. The 
individual has a guaranteed right to buy Plan A, B, C, or F (including 
the high deductible Plan F) or one of the new Medigap benefit packages 
mandated by section 104(b) of the MMA (which are expected to be 
designated K and L), if these plans are offered by the issuer and 
available to new enrollees. The issuer may also offer other Medigap 
plans on a guaranteed issue basis.
     If the individual does not enroll in Part D, he or she has 
the option of keeping the Medigap policy with drug coverage.
     If the individual does not enroll in Part D during the 
IEP, the individual may continue enrollment in his or her current 
Medigap plan without change, but the individual will lose the right to 
buy another Medigap plan on a guaranteed issue basis. In addition, if 
the current Medigap plan does not provide creditable prescription drug 
coverage, there are limitations on the periods in a year in which the 
individual may enroll in Medicare Part D and any such enrollment may be 
subject to a late enrollment penalty (increased premium) if the current 
Medigap plan does not provide creditable prescription drug coverage. We 
also propose to require that the disclosure notice contain information 
on the potential impact of an individual's election on his or her 
Medigap premiums.
    It is important to note that the disclosure requirement in section 
104 of the MMA that applies to Medigap issuers is separate from the 
disclosure requirement contained in section 101 of the MMA (section 
1860D-13 of the Act). The disclosure requirement in section 104 of the 
MMA applies exclusively to issuers of Medigap policies and contains 
very specific statutory criteria for the disclosure notice. The 
disclosure requirement in section 101 of the MMA applies to various 
forms of prescription drug coverage, including Medigap. See Subpart B.
    The MMA requires that these entities, including Medigap issuers, 
disclose to the Secretary, as well as to the Part D eligible 
individuals, whether the coverage they provide currently meets the 
actuarial equivalence requirement for creditable coverage. The entities 
must also notify the individuals if the coverage changes so that it no 
longer meets the actuarial equivalence requirement. Section 101 of the 
MMA directs the Secretary to establish procedures for the documentation 
of creditable prescription drug coverage by these entities. We are 
developing procedures for the disclosure requirements in section 101 of 
the MMA. In Subpart B of this proposed rule, we provide a discussion of 
the disclosure provisions in section 101 of the MMA.
iii. Medigap Policies as Creditable Coverage
    Medigap issuers will be responsible for determining whether the 
drug coverage under their policies is creditable drug coverage in 
accordance with the final rule implementing the Part D drug benefit. 
However, The CMS actuaries have determined that, if the final Part D 
regulations were to reflect the definition of creditable prescription 
drug coverage in this proposed rule, drug coverage in standardized 
Medigap Plans H and I would not meet such a standard. Since actuarial 
equivalence can be demonstrated using a group's experience, it is 
possible to have a specific group for which the drug coverage in 
standardized Medigap Plan J would be creditable prescription drug 
coverage. However, based on the distributions of drug utilization that 
the actuaries have seen so far, they believe that drug coverage in 
standardized Medigap Plan J would be unlikely to meet the definition of 
creditable prescription drug coverage based on this proposed rule. We 
caution, however, that whether or not coverage is creditable cannot be 
determined until we have issued a final rule implementing the new Part 
D drug benefit.
iv. Required Disclosure Notice
    The disclosure notice set forth below contains the basic language 
that would be required to be included in all disclosure notices sent by 
Medigap issuers. It also proposes specific language to be included for 
policies that do not provide creditable coverage. We propose to use the 
same basic model for policies that do provide creditable coverage, but 
we are not proposing exact language at this time. We are instead 
inviting comments on how the draft notice could be adapted for the 
types of policies that might provide creditable coverage. As noted 
above, it is highly unlikely, though theoretically possible, that a 
standardized Plan J could be found to provide creditable coverage. In 
addition, some pre-standardized policies with drug coverage, as well as 
policies sold in any of the three ``waiver'' states of Massachusetts, 
Minnesota and Wisconsin might qualify. We would, however, note that we 
expect to require that the notice informing policyholders that they do 
have creditable coverage must advise them that they may be subject to 
late enrollment penalties under Part D if they eventually enroll in a 
Part D plan and have not maintained the creditable drug coverage they 
have under their Medigap policies.
    In addition, we plan to work with the waiver States so that in the 
event the coverage offered in those States meets the definition of 
creditable coverage, there will be a required disclosure notice 
appropriate for use in those States. We are also soliciting comments on 
what to include in these potential model disclosure notices.
    The following is a proposed disclosure notice for Medigap issuers 
to use for Medigap policies that do not have creditable drug coverage. 
As stated above, this group likely will include standardized Medigap 
Plans H, I, and J, as well as prestandardized Medigap plans, or plans 
sold in waiver states, that do not provide creditable drug coverage. 
The information shown in brackets represents text that may be modified 
by the Medigap issuer based on State law or the issuer's own policies. 
For example, if the Medigap issuer wishes to offer additional plans on 
a guaranteed issue basis if the individual enrolls in Medicare Part D 
during the IEP and wants to buy a Medigap plan without drug coverage, 
the issuer may tailor the required language to add that guaranteed 
issue offering.
    This draft disclosure notice reflects consultation with the NAIC. 
We provided the NAIC with an earlier draft of the disclosure notice. 
After having an opportunity to review our disclosure notice, the NAIC's 
Senior Issues Task Force prepared its own version of the draft 
disclosure notice. We participated in lengthy discussions of these 
draft versions of the disclosure notice at NAIC meetings and during 
conference calls. The disclosure notice largely reflects the disclosure 
notice developed by the NAIC's Senior Issues Task Force. We have, 
however, made some changes to ensure that the draft fully complies with 
the statutory requirements and we will consult further with the NAIC.

[[Page 46760]]

    The draft model disclosure notice text follows:

Important Notice to Medicare Supplement Policyholders Who Have 
Prescription Drug Benefits

    You have a Medicare Supplement (Medigap) policy from [name of 
company] that includes an outpatient prescription drug benefit. 
Please read this entire notice about your Medigap policy and the new 
Medicare Prescription Drug Program (Medicare Part D). The coverage 
options that will be available to you under Part D beginning January 
1, 2006 will provide greater value than your current coverage. It is 
important to know this because it will affect the important choices 
you have to make about your drug coverage.
    You can enroll in the new Medicare Prescription Drug Program 
(Medicare Part D) from November 15, 2005 to May 15, 2006. Medicare 
Part D is voluntary; you can choose to enroll or not to enroll. 
There are two ways to enroll in Medicare Part D. If you want to stay 
in Original Medicare with a Medigap policy, you can enroll in a 
Prescription Drug Plan (PDP). Or you may choose to enroll in a 
Medicare Advantage (MA) plan that covers prescription drugs. If you 
enroll in a Medicare Advantage plan that covers prescription drugs, 
you will get all your Medicare benefits from that plan and you may 
get little benefit from a Medigap policy. Call 1-800-MEDICARE (1-
800-633-4227) or visit www.medicare.gov on the web for more 
information about Medicare Advantage or Medicare Part D.

If You Do Not Enroll in Part D

    If you decide not to enroll in the new Medicare Prescription 
Drug Program (Medicare Part D), you can keep your current Medigap 
policy without changes and you do not need to do anything in reply 
to this notice. However, because the outpatient prescription drug 
benefit in your policy is not equal in value to the Medicare Part D 
benefit, you should keep in mind that you will probably be charged 
higher Part D premiums if you want to enroll in Medicare Part D 
after May 15, 2006. Make sure you read the section called ``If You 
Enroll in Medicare Part D After May 15, 2006.''

If You Enroll in Part D By May 15, 2006

    If you enroll in the new Medicare Prescription Drug Program 
(Medicare Part D) through a PDP on or before May 15, 2006 and you 
want to keep a Medigap policy, you have the following options:

You can keep your current Medigap policy, but Federal law requires 
us to remove the prescription drug coverage, and adjust your 
premium. [In your case, the new premium will be [issuer insert 
dollar amount of premium]]; If you choose this option, you must 
notify us promptly of the effective date of your Part D enrollment 
so that we can remove the drug coverage from your policy as of that 
date. [Insert options for notifying issuer]
     or
You can cancel your existing policy and enroll in one of our other 
plans that does not contain outpatient prescription drug coverage 
[Plans A, B, C, F (including the high deductible Plan F), and the 
plans likely to be designated K or L] [issuer insert plans from 
above list that you currently offer or any others you may want to 
offer], regardless of your health. [Descriptions of these plans and 
their current premiums are enclosed--OR--If you would like 
information about one or more of these plans, please contact us at 
1-800-000-0000 or www.issuer.com]. [If you want a new Medigap 
policy, you must apply for it within 63 days of your enrollment in 
the new Medicare Prescription Drug Program (Medicare Part D)]. You 
must notify us promptly of the date your Part D enrollment will 
begin so that we can start your new policy without drug coverage as 
of that date.

    If you enroll in Part D and you do not apply for a different 
Medigap policy, you can keep your current Medigap policy but the 
drug coverage will be removed from the policy, as described in 
Option 1.

If You Enroll in Medicare Part D After May 15, 2006

    If you do not enroll in the Medicare Prescription Drug Program 
(Medicare Part D) during the initial Medicare Part D enrollment 
period, but want to do so after May 15, 2006, you need to know 
[three] things.
    1. There are limitations on when you can enroll in Medicare Part 
D. Generally, you will only be able to enroll between November 15th 
and December 31st each year.
    2. Because you will be enrolling after May 15, 2006, you will 
have to pay a higher monthly premium for Medicare Part D than if you 
enrolled by May 15, 2006, unless you have other coverage that 
qualifies you to enroll without a late enrollment penalty. You will 
pay this higher premium for as long as you have Part D coverage. 
Also, the longer you wait to join Part D, the higher your premium 
will be.
    3. You may not be able to enroll in another Medigap policy with 
our company, as you could have if you had enrolled in Medicare Part 
D by May 15, 2006. You will be able to keep your current policy with 
the drug benefit removed.
    If you enroll in Medicare Part D after May 15, 2006, please let 
us know as soon as possible. Federal law requires us to remove the 
prescription drug benefit from your Medigap policy and adjust your 
premium.

Effect on Premiums

    In making your decision about what to do, please keep in mind 
that the law requires us to make changes to our plans. These 
changes, and the decisions that policyholders like you will make, 
will have an effect on future premiums. Please contact us so we can 
discuss the likely differences in premiums, depending on which 
choices you make now and how those premiums may change over time.

Assistance

    If you need help understanding your choices, please contact us 
at 1-800-000-0000 or www.issuer.com for more information [insert 
issuer phone number and website address].
    Your State Health Insurance Assistance Program (SHIP) can help 
you with information about your Medigap policy and the new Medicare 
Prescription Drug Program (Medicare Part D). You can reach the SHIP 
Program [at insert SHIP number--OR by finding your State's Program 
number on the next page].
    For more information about Medicare Part D, call 1-800-MEDICARE 
(1-800-633-4227). Information is also available at www.medicare.gov 
on the web.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether 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.
    Below is a summary of the proposed information collection 
requirements outlined in this regulation. We are soliciting comment on 
these proposed requirements, before they are submitted to OMB for PRA 
approval.

Subpart A--General Provisions

    Subpart A does not contain any requirements subject to the PRA.

Subpart B--Eligibility and Enrollment

Section 423.34 Enrollment process

    (b) A Part D eligible individual seeking to enroll in a PDP must 
complete and submit the PDP's enrollment form to the PDP prior to 
enrollment.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit the required enrollment 
application to a PDP sponsor. We estimate that it will take 30 minutes 
to complete and submit the required application to the PDP. During the 
first Part D initial enrollment period, it is estimated that 24 million 
individuals will complete and submit these applications. This estimate 
is based on preliminary estimates of the number of individuals who will 
enroll in PDPs in 2006. In 2007, and beyond,

[[Page 46761]]

the number of enrollments will be substantially less, since an 
individual will generally be limited to changing PDPs during the annual 
coordinated election period, therefore, it is estimated 6 million 
individuals may change their PDPs annually and that 2 million new 
beneficiaries will be making first time elections into PDPs.
    (c) A PDP sponsor must provide each individual with prompt notice 
of acceptance or denial of the individual's enrollment request.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor to disclose to an individual notice of 
acceptance or denial of the individual's enrollment request. Although 
we have no basis at this time for estimating either the number of 
regions or the number of participating plans, a rough estimate is that 
during the first Part D initial enrollment period a total of 24 million 
notices will be disclosed, affecting approximately 100 PDPs (based upon 
an estimate of 2 PDPs per 50 states, if each state were to be a region, 
or alternatively, 4 PDPs for each of 25 regions). Given that each PDP 
will be creating disclosure notices for mass mailings, we are proposing 
the following burden estimates. We estimate that it will take each PDP 
approximately 8 hours to produce each notice--either an acceptance or a 
denial notice must be provided. We further estimate that on average, it 
will take each PDP sponsor 1 minute to assemble and disseminate each 
notice. We further estimate that on average, it will take each sponsor 
4,000 hours to disclose 240,000 notices during this first year. In 
2007, and beyond, we estimate that 60,000 notices will be disclosed 
annually at 1,000 hours per sponsor. This assumption is based on that 
fact that once the notices have been standardized, a PDP sponsor will 
mass-produce and mail the required notices.

Section 423.36 Enrollment Periods

    (c) An individual is eligible to enroll in a Part D plan, enroll in 
a PDP, or disenroll from a PDP and enroll in another PDP, if the 
individual demonstrates to CMS, in accordance with guidelines CMS 
issues, that the PDP sponsor offering the PDP substantially violated a 
material provision of its contract under this part that meets the 
requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit the required materials to CMS 
demonstrating that a PDP substantially violated a material provision of 
its contract. Based on our experience with the current Medicare+Choice 
program, we would expect that few, if any, individuals will avail 
themselves of this option. Generally, in those instances where CMS has 
found that an M+C organization has substantially violated a material 
provision of its contract, CMS has taken the necessary action on behalf 
of these individuals. Thus, we do not estimate any burden on 
individuals under this provision.

Section 423.42 Coordination of Enrollment and Disenrollment Through 
PDPs.

    (a) An individual may enroll in, or disenroll from a PDP during the 
enrollment periods specified in Sec.  423.36, by filing the appropriate 
enrollment form with the PDP sponsor or through other mechanisms CMS 
determines appropriate.
    The burden associated with this is discussed above in Sec. Sec.  
423.34 and 423.36 of the PRA section.
    (c) Each PDP sponsor must submit every disenrollment notice to CMS 
within timeframes CMS specifies. The PDP sponsor must also provide each 
enrollee with a notice of disenrollment and file and retain 
disenrollment requests for the period specified in CMS instructions.
    The burden associated with these requirements is the time and 
effort necessary for a PDP sponsor to disclose the disenrollment notice 
to each enrollee and CMS, and file/retain disenrollment requests for 
the period specified in CMS instructions. We estimate that on an annual 
basis there will be approximately 24,000 disenrollments per PDP 
sponsor. Given that each sponsor will be creating a standardized 
disclosure notice for mass mailings, we are proposing the following 
burden estimates. We estimate that it will take each PDP sponsor 
approximately 8 hours to produce the standardized notice. We further 
estimate that on average, it will take each PDP sponsor 1 minute to 
disclose each notice and that on average each PDP sponsor will be 
required to disclose 24,000 notices on an annual basis for an annual 
burden of 400 hours. Once the notice has been disclosed to the enrollee 
the PDP sponsor will forward a copy of the notice to CMS on a batch 
basis. We estimate that it will require each PDP sponsor 52 hours on an 
annual basis to send the batch files of disenrollment notices to CMS on 
an annual basis. In regard to the record retention requirement we 
estimate that it will require each of the PDP sponsors 52 hours on an 
annual basis to maintain the required documentation. While this 
estimate may appear low, we believe the retention of the documentation 
will most likely be an automated process.

Section 423.44 Disenrollment by the PDP.

    (c) If the disenrollment is for any of the reasons specified in 
paragraphs (b)(1), (b)(2)(i), or (b)(iv) of this section, the PDP 
sponsor must give the individual timely notice of the disenrollment, 
that meets the requirements set forth in this section, with an 
explanation of why the PDP is planning to disenroll the individual.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor to disclose to an individual notice of 
disenrollment. We estimate that on an annual basis it will require a 
total of 576,100 notices, affecting each PDP sponsors to some degree, 
as described below. Given that each PDP sponsor will be creating 
disclosure notices for mass mailings, we are proposing the following 
burden estimates. We estimate that it will take each PDP sponsor 
approximately 8 hours to produce the standardized notice. We further 
estimate that on average, it will take each PDP 1 minute to disclose 
each notice. Burden estimates for these disenrollments are provided 
below.
    (d) A PDP sponsor may disenroll an individual from the PDP for 
failure to pay any monthly premium if the PDP sponsor can demonstrate 
to CMS that it made reasonable efforts to collect the unpaid premium 
amount.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor to submit the required materials to CMS 
demonstrating that the PDP sponsor made reasonable efforts to collect 
the unpaid premium amount and the time and effort necessary for a PDP 
sponsor to disclose to an individual the notice of disenrollment. We 
estimate that it will take a PDP 5 minutes to submit the required 
documentation to CMS for each occurrence and that each of the PDP 
sponsors will be required to submit the necessary documentation to CMS 
960 times on an annual basis. We estimate that on an annual basis 
96,000 individuals will be disenrolled for failure to pay premiums, and 
it will take each PDP 1 minute to disclose each notice and that each 
PDP will be required to disclose 960 notices on an annual basis for a 
annual burden of 16 hours.
    To disenroll an individual from its PDP, based on an individual's 
behavior, the PDP sponsor must document the enrollee's behavior, its 
own efforts to resolve any problems, as described in paragraphs 
(d)(2)(i) through (d)(2)(iii) of

[[Page 46762]]

this section and any extenuating circumstances.
    The burden associated with this requirement is the time and effort 
necessary for a PDP to document and retain the documentation that meets 
the requirements set forth in this section. We estimate that it will 
take a PDP 3 hours to capture and retain the required documentation for 
each occurrence and that each PDP will have 1 occurrence on an annual 
basis.
    The PDP sponsor must disenroll an individual when the individual no 
longer resides in the PDP's service area. We estimate that on an annual 
basis 240,000 individuals will be disenrolled for moving out of the 
service area, and it will take each PDP 1 minute to disclose each 
notice. It is estimated that each PDP will disclose 24,000 notices on 
an annual basis for a annual burden of 400 hours.
    When a PDP contract terminates as provided in Sec.  423.507 through 
423.510 as the PDP sponsor must send a notice to the enrollee before 
the effective date of the plan termination or area reduction. The 
notice must provide an effective date of the plan termination and a 
description of alternatives for obtaining benefits under Part D.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor to disclose to an individual the notice of 
disenrollment. We estimate that on an annual basis it will require a 
total of 240,000 notices, affecting approximately 10 PDPs. Given that 
each PDP will be creating disclosure notices for mass mailings, we are 
proposing the following burden estimates. We estimate that it will take 
each PDP sponsor approximately 8 hours to produce the standardized 
notice. We further estimate that on average, it will take each PDP 1 
minute to disclose each notice and that each PDP will be required to 
disclose 24,000 notices on an annual basis for a annual burden of 400 
hours.

Section 423.48 Information About Part D.

    Each PDP and MA-PD plan must provide, on an annual basis, and in a 
format and using standard terminology that CMS may specify in guidance, 
the information necessary to enable CMS to provide to current and 
potential Part D eligible individuals the information they need to make 
informed decisions among the available choices for Part D coverage.
    The burden associated with this requirement is the time and effort 
necessary for a PDP to submit the required materials to CMS. We 
estimate that on an annual basis it will take 100 PDP sponsors 2 hours 
to submit the required documentation to CMS.

Section 423.50 Approval of Marketing Materials and Enrollment Forms

    (a) At least 45 days (or 10 days if using marketing materials that 
use, without modification, proposed model language as specified by CMS) 
before the date of distribution, the PDP sponsor must submit the its 
marketing materials and forms, as defined in paragraph (b) of this 
section, to CMS for review.
    The burden associated with this requirement is the time and effort 
necessary for a PDP to submit the required materials to CMS. We 
estimate that on an annual basis it will take 100 PDP sponsors 2 hours 
to submit the required documentation to CMS.

Section 423.56 Procedures To Document Creditable Status of Prescription 
Drug Coverage

    (b) Each entity or State that offers prescription drug coverage 
under any of the types described in Sec.  423.4 must disclose, to all 
Part D eligible individuals whether such coverage meets the 
requirements of actuarial equivalence set forth in Sec.  423.265.
    The burden associated with this requirement is the time and effort 
necessary for each of these entities and States to disclose to an 
individual notice of coverage. We estimate that on an annual basis it 
will require a total of 5,800,000 notices, affecting slightly over 
440,000 entities, including 440,000 employer and union-sponsored group 
health plans with Medicare-eligible workers, and fewer than 200 other 
entities including over 100 Medigap plans, State Pharmaceutical 
Assistance Programs, and a handful of State Pharmacy Plus programs. 
[Note: A discussion of the costs of the disclosure notices for public 
and private employer and union sponsored qualified prescription drug 
plans is in the impact analysis section on payments to sponsors of 
retiree prescription drug plans.] Given that each entity and State will 
be creating disclosure notices for mass mailings, we are proposing the 
following burden estimates. We estimate that it will take each entity 
or State approximately 8 hours to produce the standardized notice. We 
further estimate that on average, it will take each entity 1 minute to 
disclose each notice. It is estimated that the burden per entity will 
be as follows:

--On average, the 4 State Pharmacy Plus programs will provide 169,118 
notices for an annual burden of 2819 hours (these notices are required 
in 2005 even though, as discussed elsewhere in this preamble, these 
States may decide to lower their costs while maintaining equivalent 
benefits by replacing or reforming these programs).
--On average each of the 440,000 group health plans will provide 4.5 
notices for an annual burden of .075 hours.
--On average each of the 20 State Pharmaceutical Assistance Programs 
will provide 60,000 notices for an annual burden of 1000 hours.
--On average each of an estimated 120 Medigap issuers will provide 
15,833 notices for an annual burden of 264 hours.

    (c) Each entity must disclose their creditable coverage status to 
CMS in a form and manner described by CMS.
    The burden associated with this requirement is the time and effort 
necessary for each entity to submit the required creditable coverage 
status materials to CMS. We estimate that on an annual basis it will 
take each entity 1 hour to submit the required documentation to CMS.

Subpart C--Benefits and Beneficiary Protections.

    (h) A PDP sponsor or an MA organization offering qualified 
prescription drug coverage is required to disclose to CMS data on 
aggregate negotiated price concessions obtained from pharmaceutical 
manufacturers and passed through to beneficiaries, via pharmacies and 
other dispensers, in the form of lower subsidies, prices, and/or 
monthly beneficiary prescription drug premiums, in the manner and 
frequency specified by CMS.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsor or an MA organization to disclose to CMS the 
aggregated negotiated price data on concessions to CMS. We estimate 
that on an annual basis it will take 100 PDPs and 350 organizations 10 
hours to submit the required documentation to CMS for total annual 
burden of 4,500 hours.

Section 423.120 Access to Covered Part D Drugs

    (b) A PDP sponsor or MA organization's formulary must be reviewed 
by a pharmacy and therapeutic committee that committee must maintain 
written documentation of its decisions regarding formulary development 
and revision.
    The burden associated with this requirement is the time and effort 
necessary for a PDP or MA committee to document and retain the 
documentation that meets the requirements set forth in this section.

[[Page 46763]]

    We estimate that it will take 100 PDPs and 350 providers PDP or MA 
entity 1 hour each to capture and retain the required documentation on 
an annual basis for total annual burden of 450 hours.
    A PDP sponsor or MA organization offering an MA-PD plan must 
provide notice of at least 30 days to CMS, affected enrollees, 
authorized prescribers, pharmacies, and pharmacists prior to removing a 
covered Part D drug from its formulary, or making any change in the 
preferred or tiered cost-sharing status of a covered Part D drug.
    The burden associated with this requirement is the time and effort 
necessary for an entity offering an MA-PD PDP plan to provide notice of 
at least 30 days to CMS, affected enrollees, authorized prescribers, 
pharmacies, and pharmacists of the removal of a covered Part D drug 
from its formulary.
    Given that each entity will be creating disclosure notices for mass 
mailings, we are proposing the following burden estimates. We estimate 
that on an annual basis it will take each entity approximately 1 hour 
to produce the standardized notice. We further estimate that on 
average, it will take 100 PDP's and 350 MA organizations 40 hours to 
disclose the required notice for a total annual burden of 18,450 hours.
    (c) A PDP sponsor or MA organization offering an MA-PD plan must 
issue and reissue, as necessary, a card or other type of technology to 
its enrollees to use to access negotiated prices for covered Part D 
drugs.
    The burden associated with this requirement is the time and effort 
necessary for an entity to provide each enrollee a card. The burden 
associated with this requirement is reflected in section 423.128.

Section 423.128 Dissemination of Plan Information

    (a) A PDP sponsor or MA organization offering an MA-PD plan must 
disclose its plans information as required by this section to each 
enrollee of a prescription drug plan offered by the sponsor under this 
part and to Part D eligible individuals.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor or MA organization offering an MA-PD plan 
to disclose its plans information. We estimate that it will require 100 
PDP sponsors and 350 MA organizations 80 hours on an annual basis to 
prepare the plan materials. We further estimate that on an annual 
basis, on average, it will require each entity 120 hours on an annual 
basis to disclose the required materials to enrollees and eligible 
individuals for a total annual burden of 90,000 hours.
    (e) A PDP sponsor or MA organization offering qualified 
prescription drug coverage must furnish to enrollees, an explanation of 
benefits when prescription drug benefits are provided under qualified 
prescription drug coverage that meets the requirements et forth in this 
section.
    The burden associated with this requirement is the time and effort 
necessary for 100 PDP sponsors and 350 MA organizations offering an MA-
PD plan must disclose an explanation of benefits when prescription drug 
benefits to enrollees. We estimate that it will require each entity 160 
hours on an annual basis disseminate the required materials for total 
annual burden of 56,000 hours.

Subpart D--Cost Control and Quality Improvement Requirements for 
Prescription Drug Benefit Plans

Section 423.153 Cost and Utilization Management, Quality Assurance, 
Medication Therapy Management Programs, and Programs To Control Fraud, 
Abuse, and Waste

    (d) To become a PDP sponsor an applicant must disclose to CMS and 
others upon request, the amount of the management and dispensing fees 
and the portion paid for medication therapy management services to 
pharmacists.
    The burden associated with this requirement is the time and effort 
necessary for an applicant to submit the required information to CMS 
upon request. We estimate that is will require 100 applicants, 30 
minutes each to provide the required material to CMS for consideration 
for a total annual burden of 50 hours.

Section 423.168 Accreditation Organizations

    (c) An accreditation organization approved by CMS must provide to 
CMS in written form and on a monthly basis all of the following 
required by this part.
    Since CMS expects to contract with less then 10 organizations on an 
annual basis, this requirement is not subject to the PRA.

Section 423.171 Procedures for Approval of Accreditation as a Basis for 
Deeming Compliance

    (a) A private, national accreditation organization applying for 
approval must furnish to CMS all of the information and materials set 
forth in this part.
    Since CMS expects to less then 10 applicants on an annual basis, 
this requirement is not subject to the PRA.

Subpart F--Submission of Bids and Monthly Beneficiary Premiums; 
Plan Approval

Section 423.265 Submission of Bids and Related Information

    (a) An applicant may submit a bid that meets the requirements set 
forth in this section, to become a PDP sponsor or to become an MA 
organization offering an MA-PD plan.
    The burden associated with this requirement is the time and effort 
necessary for an entity to submit the required materials to CMS. We 
estimate we will receive 100 PDP and 350 MA applications on an annual 
basis and that it will requires each entity 80 hours to submit the 
required documentation to CMS for total annual burden of 26,000 hours.

Subpart G--Payments to PDP Sponsors and MA-PD Plans for All 
Medicare Beneficiaries for Qualified Prescription Drug Coverage

Section 423.329 Determination of Payment

    (b) PDP sponsors must submit data regarding drug claims to CMS that 
can be linked at the individual level to Part A and Part B data in a 
form and manner similar to the process provided under Sec.  422.310 and 
other information as CMS determines necessary.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors submit the required claims data to CMS. We 
estimate that on an annual basis it will take 100 PDPs 52 hours to 
submit the required documentation to CMS for total annual burden of 
5,200 hours.

Section 423.336 Risksharing Arrangements

    (a) A PDP sponsor may submit a bid that requests a decrease in the 
applicable first or second threshold risk percentages or an increase in 
the percents applied under paragraph (b) of this section.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors submit the required bid materials to CMS. We 
estimate that on an annual basis it will take 10 PDPs 20 hours to 
submit the required documentation to CMS for total annual burden of 300 
hours.
    (c) Within 6 months of the end of a coverage year, the PDP sponsor 
or MA organization offering a MA-PD plan sponsor must provide to CMS 
the cost data requirements set forth in the paragraph.
    The burden associated with this requirement is the time and effort

[[Page 46764]]

necessary for PDP sponsors submit the required cost data to CMS. We 
estimate that on an annual basis it will take 100 PDP sponsors and 350 
MA organizations 10 hours to submit the required documentation to CMS 
for total annual burden of 45,000 hours.

Section 423.343 Retroactive Adjustments and Reconciliations

    (c) Within 6 months after the end of a coverage year, the PDP 
sponsor or MA organization offering a MA-PD plan must provide CMS must 
provide to CMS the data requirements set forth in the paragraph.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors and MA organizations to submit the required 
data to CMS. We estimate that on an annual basis it will take 100 PDP 
sponsors and 350 MA organizations 10 hours to submit the required 
documentation to CMS for total annual burden of 4,500 hours.
    (d) Within 6 months after the end of a coverage year, the PDP 
sponsor or MA organization offering a MA-PD plan must provide CMS the 
cost data requirements set forth in the paragraph.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors and MA organizations to submit the required 
cost data to CMS. We estimate that on an annual basis it will take 100 
PDP sponsors and 350 MA organizations 10 hours to submit the required 
documentation to CMS for total annual burden of 4,500 hours.

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

Section 423.410 Waiver of Certain Requirements To Expand Choice

    (f) Under this section a prospective prescription drug plan (PDP) 
applicant may submit a waiver application to CMS to waive certain state 
licensure and fiscal solvency requirements in order to contract with 
CMS.
    The burden associated with this requirement is the time and effort 
necessary for a PDP applicant to submit a waiver application that meets 
the requirements of this section. We estimate that on an annual basis 
it will take 100 applicants 10 hours to submit the required waiver 
documentation to CMS for total annual burden of 1000 hours.

Subpart J--Special Part D Rules for Organizations Offering MA Plans 
and Coordination under the Part D Program

Section 423.458 Application of Part D Rules to MA-PD plans on and After 
January 1, 2006

    (c) Organizations offering or seeking to offer a Medicare 
Advantage-Prescription Drug plan may request from CMS in writing waiver 
or modification of those requirements under Part D of Medicare that are 
duplicative of, or that are in conflict with provisions otherwise 
applicable to the plan under Part C of Medicare.
    The burden associated with this requirement is the time and effort 
necessary for an organization to submit the required waiver information 
to CMS for consideration. We estimate we will receive 10 waiver 
applicants, 20 hours to provide the required material to CMS for 
consideration for a total annual burden of 200 hours.

Section 423.462 Additional Part D Waiver Authority for Prescription 
Drug Plans

    (a) Prescription drug plans may request, in writing, a waiver or 
modification of those requirements under Part D of Medicare that hinder 
the design of, the offering of, or the enrollment in, prescription drug 
plans under contracts between prescription drug plans and employers, 
labor organizations, or the trustees of funds established by one or 
more employers or labor organizations to furnish benefits to the 
entity's employees, former employees, or members or former members of 
labor organizations.
    The burden associated with this requirement is the time and effort 
necessary for an organization to submit the required waiver information 
to CMS for consideration. We estimate we will receive 10 waiver 
applicants, 20 hours to provide the required material to CMS for 
consideration for a total annual burden of 200 hours.

Subpart K--Application Procedures and Contracts With PDP Sponsors

Section 423.502 Application Requirements

    (b) In order to become a PDP sponsor, 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 PDP sponsors and MA organizations to submit the required 
application materials to CMS. We estimate that on an annual basis it 
will take 100 PDP sponsors and 350 MA organizations 10 hours to submit 
the required documentation to CMS for total annual burden of 4,500 
hours.

Section 423.505 Contract Provisions

    (d) The PDP sponsor agrees must maintain for 6 years books, 
records, documents, and other evidence of accounting procedures and 
practices that are sufficient to meet the requirements set forth in 
this section.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors and MA organizations to maintain the 
required documentation outlined in this section. We estimate that on an 
annual basis it will take 100 PDP sponsors and 350 MA organizations 52 
hours to maintain the required documentation on an annual basis, for 
total annual burden of 23,400 hours.
    (f) The PDP sponsor must submit to CMS certified financial 
information that must include the requirements set forth in this 
section.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors and MA organizations to submit the required 
certified data to CMS. We estimate that on an annual basis it will take 
100 PDP sponsors and 350 MA organizations 8 hours to submit the 
required documentation to CMS for total annual burden of 3,600 hours.
    (g) PDP sponsors must inform all related entities, contractors and 
subcontractors that payments they receive are, in whole or in part, 
from Federal funds.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to all related entities. We estimate that it will require 
each of the 100 PDP sponsors 8 hour on an annual basis to disclose the 
information for a total annual burden of 800 hours.
    (j) As a condition for receiving a monthly payment under subpart G 
of this part, the PDP sponsor agrees that its chief executive officer 
(CEO), chief financial officer (CFO), or an individual delegated the 
authority must request payment under the contract on a document that 
certifies the accuracy, completeness, and truthfulness of all data 
related to payment, as stipulated in this section.
    The burden associated with this requirement is the time and effort 
necessary for 100 PDP sponsors to submit the required certified 
document that meets all of the certification

[[Page 46765]]

requirements referenced in this section to CMS. We estimate that on an 
annual basis it will take 100 PDP sponsors 8 hours to submit the 
required documentation to CMS for total annual burden of 800 hours.

Section 423.507 Nonrenewal of Contract

    (a) If a PDP sponsor does not intend to renew its contract, it must 
notify CMS in writing by the first Monday of June in the year in which 
the contract ends and notify, in an manner that meets the requirements 
of this section, each Medicare enrollee, at least 90 days before the 
date on which the nonrenewal is effective.
    The burden associated with this requirement is the time and effort 
necessary for a PDP sponsor to submit a notice of nonrenewal to CMS. We 
estimate that on an annual basis it will take 10 PDP sponsors 1 hour to 
submit the required documentation to CMS for total annual burden of 10 
hours.

Section 423.508 Modification or Termination of Contract by Mutual 
Consent

    (b) If the contract is terminated by mutual consent, the PDP 
sponsor must provide notice to its Medicare enrollees and the general 
public as provided in paragraph (c) of this section.
    Based on our experience with the M+C program CMS does not 
anticipate that more then 9 of these terminations will occur on an 
annual basis.

Section 423.509 Termination of Contract by CMS

    (b) If CMS notifies the PDP sponsor in writing 90 days before the 
intended date of their termination the PDP sponsor must notify its 
Medicare enrollees of the termination by mail at least 30 days before 
the effective date of the termination.
    The PDP sponsor must also notify the general public of the 
termination at least 30 days before the effective date of the 
termination by publishing a notice in one or more newspapers of general 
circulation in each community or county located in the PDP sponsor's 
service area.
    Based on our experience with the M+C program CMS does not 
anticipate that more than 9 of these terminations will occur on an 
annual basis.

Section 423.510 Termination of Contract by the PDP Sponsor

    (a) If a PDP sponsor terminates its contract because CMS fails to 
substantially carry out the terms of the contract the PDP sponsor must 
give advance notice to CMS, its Medicare enrollees, and the general 
public in a manner that meets the requirements set forth in the 
section.
    Based on our experience with the M+C program CMS does not 
anticipate that more than 9 of these terminations will occur on an 
annual basis.

Section 423.514 Reporting Requirements

    (b) Each PDP sponsor must report to CMS or other Federal agencies, 
on an annual basis the information necessary to meet the requirements 
set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for 100 PDP sponsors to submit the required document that 
meets all of the requirements referenced in this section to CMS or 
other federal agencies. We estimate that on an annual basis it will 
take 100 PDP sponsors 40 hours to submit the required documentation, 
for total annual burden of 4,000 hours.
    (f) Each PDP sponsor must make the information reported to CMS 
under this section available to its enrollees upon reasonable request.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors to disclose the required materials that meet 
all of the requirements referenced in this section to the public upon 
request. We estimate that on an annual basis it will take 100 PDP 
sponsors 20 hours to submit the required documentation, for total 
annual burden of 2,000 hours.

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

Section 423.551 General Provisions

    Paragraph (c) states that a PDP sponsor that has a Medicare 
contract in effect under Sec.  423.502 of this part and is considering 
or negotiating a change in ownership must notify CMS at least 60 days 
before the anticipated effective date of the change. The PDP sponsor 
must also provide updated financial information and a discussion of the 
financial and solvency impact of the change of ownership on the 
surviving organization.
    The burden associated with this requirement is the time and effort 
of the PDP sponsor considering or negotiating a change in ownership, to 
notify CMS and provide the information specified in this section. While 
this requirement is subject to the PRA, we believe that it would affect 
less than 10 entities on an annual basis; therefore, it is exempt from 
the PRA in accordance with 5 CFR 1320.4.

Section 423.552 Novation Agreement Requirements

    Paragraph (a) discusses the conditions for CMS approval of a 
novation agreement. This paragraph requires the PDP sponsor to notify 
CMS at least 60 days before the date of the proposed change of 
ownership and requires them to provide CMS with updated financial 
information and a discussion of the financial solvency impact of the 
change of ownership on the surviving organization.
    The burden associated with this requirement is discussed above in 
Sec.  423.551 of the PRA section.
    This paragraph also requires the PDP sponsor to submit to CMS, at 
least 30 days before the proposed change of ownership date, 3 signed 
copies of the novation agreement containing the provisions specified in 
this section, and 1 copy of other relevant documents required by CMS.
    The burden associated with this requirement is time and effort of 
the PDP sponsor to provide CMS with the required documentation. While 
this requirement is subject to the PRA, we believe that it would affect 
less than 10 entities on an annual basis; therefore, it is exempt from 
the PRA in accordance with 5 CFR 1320.4.

Subpart M--Grievances, Coverage Determinations, and Appeals

Section 423.562 General Provisions

    Paragraph (a). A PDP sponsor must ensure that all enrollees receive 
written information about the Grievance and appeal procedures that are 
available to them through the PDP sponsor and that meet the 
requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 8 hours on an annual basis to disclose the 
information for a total annual burden of 800 hours.

Section 423.564 Grievance Procedures

    Paragraph (e). The PDP sponsor must maintain records on all 
grievances received both orally and in writing, including, at a 
minimum, the date of receipt, final disposition of the grievance, and 
the date that the PDP sponsor notified the enrollee of the disposition.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors to maintain the required documentation 
outlined in this section. We estimate that on an

[[Page 46766]]

annual basis it will take 100 PDP sponsors 52 hours to maintain the 
required documentation on an annual basis, for total annual burden of 
5,200 hours.

Section 423.568 Standard Timeframe and Notice Requirements for Coverage 
Determinations

    Paragraph (a). When a party makes a request for a drug benefit, the 
PDP sponsor must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than 14 calendar days after receipt of the request.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 8 hours on an annual basis to disclose the 
information for a total annual burden of 800 hours.
    If the PDP sponsor 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 sponsor's decision to invoke an extension.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 4 hours on an annual basis to disclose the 
information for a total annual burden of 400 hours.
    Paragraph (b). If a PDP sponsor decides to deny a drug benefit, in 
whole or in part, it must give the enrollee written notice of the 
determination.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 4 hours on an annual basis to disclose the 
information for a total annual burden of 400 hours.

Section 423.570 Expediting Certain Coverage Determinations

    Paragraph (c). The PDP sponsor must document all oral requests in 
writing and maintain the documentation in the case file.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors to maintain the required documentation 
outlined in this section. We estimate that on an annual basis it will 
take 100 PDP sponsors 26 hours to maintain the required documentation 
on an annual basis, for total annual burden of 2,600 hours.
    Paragraph (d). If a PDP sponsor denies a request for expedited 
determination, it must give the enrollee prompt oral notice of the 
denial and subsequently deliver, within 3 calendar days, a written 
letter that explains the notice requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 4 hours on an annual basis to disclose the 
information for a total annual burden of 400 hours.

Section 423.572 Timeframes and Notice Requirements for Expedited 
Coverage Determinations

    Paragraph (a). Except as provided in paragraph (b) of this section, 
a PDP sponsor that approves a request for expedited determination must 
make its determination and notify the enrollee (and the prescribing 
physician involved, as appropriate) of its decision, whether adverse or 
favorable, as expeditiously as the enrollee's health condition 
requires, but no later than 72 hours after receiving the request.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee and prescribing physician involved. We 
estimate that it will require each of the 100 PDP sponsors 4 hours on 
an annual basis to disclose the information for a total annual burden 
of 400 hours.
    (b) When the PDP sponsor extends the deadline, 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 sponsor's decision to invoke an extension.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 4 hours on an annual basis to disclose the 
information for a total annual burden of 400 hours.
    (c) If the PDP sponsor 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.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 4 hours on an annual basis to disclose the 
information for a total annual burden of 400 hours.


Sec.  423.578  Exceptions process.

    Paragraph (a). An enrollee, the enrollee's authorized 
representative, or the enrollee's prescribing physician may file a 
request for an exception.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a request for exception. We 
estimate it will require an individual 30 minutes to provide the 
request and that each of the 100 PDP sponsors will receive 20 requests 
on an annual basis. Therefore, we estimate a total annual burden of 
1000 hours.
    Paragraph (b). An enrollee, the enrollee's authorized 
representative, or the prescribing physician (on behalf of the 
enrollee) may file an exception request.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a request for exception. We 
estimate it will require an individual 30 minutes to provide the 
request and that that each of the 100 PDP sponsors will receive 20 
requests on an annual basis. Therefore, we estimate a total annual 
burden of 1000 hours.
    A PDP sponsor may require a written certification from the 
enrollee's prescribing physician that the requested prescription drug 
is medically necessary to treat the enrollee's disease or medical 
condition.
    The burden associated with this requirement is the time and effort 
necessary for a prescribing physician to submit the required 
documentation to the PDP sponsor. We estimate it will require a 
prescribing physician 30 minutes to provide the request and that that 
each of the 100 PDP sponsors will make 10 requests on an annual basis. 
Therefore, we estimate a total annual burden of 500 hours.

Section 423.582 Request for a Standard Redetermination

    Paragraph (a) An enrollee must ask for a redetermination by making 
an oral or written request with a PDP sponsor that made the coverage 
determination or a SSA office.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a request for redetermination. We 
estimate it will require an individual 30 minutes to provide the 
request and that each of the 100 PDP sponsors will receive 20 requests 
on an annual basis.

[[Page 46767]]

Therefore, we estimate a total annual burden of 1000 hours.
    (c) If the 60-day period in which to file a request for a 
redetermination has expired, an enrollee may file a request for 
redetermination and extension of time frame with the PDP sponsor.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a request for extension of 
redetermination. We estimate it will require an individual 15 minutes 
to provide the request and that each of the 100 PDP sponsors will 
receive 10 requests on an annual basis. Therefore, we estimate a total 
annual burden of 250 hours.
    Paragraph (d) The person who files a request for redetermination 
may withdraw it by filing a written request for withdrawal at one of 
the places listed in paragraph (a) of this section.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a withdraw request. We estimate 
it will require an individual 15 minutes to provide the request and 
that each of the 100 PDP sponsors will receive 10 requests on an annual 
basis. Therefore, we estimate a total annual burden of 250 hours.

Section 423.584 Expediting Certain Redeterminations

    Paragraph (c) The PDP sponsor must document all oral requests in 
writing, and maintain the documentation in the case file.
    The burden associated with this requirement is the time and effort 
necessary for PDP sponsors to maintain the required documentation 
outlined in this section. We estimate that on an annual basis it will 
take 100 PDP sponsors 8 hours to maintain the required documentation on 
an annual basis, for total annual burden of 800 hours.
    (d) If a PDP sponsor denies a request for expedited 
redetermination, it must give the enrollee prompt oral notice, and 
subsequently deliver, within 3 calendar days, a written letter that 
explains the requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 2 hours on an annual basis to disclose the 
information for a total annual burden of 200 hours.

Section 423.590 Timeframes and Responsibility for Making 
Redeterminations

    Paragraph (a) When the PDP sponsor 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 PDP sponsor's decision to invoke an extension.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 2 hours on an annual basis to disclose the 
information for a total annual burden of 200 hours.
    (d) The PDP sponsor 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.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 PDP sponsors to disclose the necessary 
information to an enrollee. We estimate that it will require each of 
the 100 PDP sponsors 2 hours on an annual basis to disclose the 
information for a total annual burden of 200 hours.

Subpart N--Medicare Contract Determinations and Appeals

    This Subpart deals with Contract Determinations and Appeals; 
therefore, the information collection requirements referenced in this 
Subpart are exempt from the PRA in accordance with 5 CFR 1320.4(a)(2) 
during the conduct of an administrative action, investigation, and/or 
audit.

Subpart O--Intermediate Sanctions

Section 423.756 Procedures for Imposing Sanctions

    (a) Before imposing the intermediate sanctions specified in this 
section, CMS will allow the PDP sponsor to provide evidence that it has 
not committed an act or failed to comply with the requirements as 
described. In addition, CMS may allow additional time for the PDP 
sponsor to provide the evidence if the PDP sponsor sends a written 
request providing a credible explanation of why additional time is 
necessary.
    These information collection requirements are exempt from the PRA 
in accordance with 5 CFR 1320.4(a)(2) during the conduct of an 
administrative action, investigation, and/or audit.

Subpart P--Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals

Section 423.774 Eligibility Determinations, Redeterminations and 
Applications

    Paragraph (d) of this section discusses the application 
requirements for individuals applying for low-income subsidy. This 
paragraph states that individuals applying for low-income subsidy, or a 
personal representative applying on the individual's behalf, must 
complete all required elements of the application, provide any 
statements from financial institutions, as requested, to support 
information in the application, and certify, as to the accuracy of the 
information provided on the application form.
    The burden associated with this requirement is the time and effort 
for the individual or personal representative applying on the 
individual's behalf, to complete the low-income subsidy application, 
provide financial statements as requested and to certify that the 
information provided is accurate. These collection requirements are 
subject to the PRA; however, the burden associated with these 
requirements is currently approved under OMB 0938-0467 with a 
current expiration date of October 31, 2005. We will revise this 
currently approved PRA package to incorporate the burden being imposed 
on new enrollees. We estimate that this requirement will impose a 
burden on 4.5 new enrollees for a total additional burden of 750,000 
hours annually (4.5 x 10 minutes).

Section 423.800 Administration of Subsidy Program

    Paragraph (b) of this section requires the PDP sponsor offering the 
PDP, or the MA organization offering the MA-PD plan, to reduce the 
individual's premiums and cost-sharing as applicable and provide 
information to CMS on the amount of such reductions, in a manner 
determined by CMS. This paragraph also requires the PDP sponsor and MD-
PD organization to maintain documentation to track the application of 
the low-income cost-sharing subsidies to be applied to the out-of-
pocket threshold.
    The burden associated with these requirements is the time and 
effort for the PDP sponsor or the MA organization to provide 
information to CMS and to maintain documentation. We estimate that it 
will take each of the 100 PDP sponsors and each of the 350 MA 
organizations approximately 52 hours on an annual basis to provide the 
information to CMS. We also estimate

[[Page 46768]]

that it will take approximately 26 hours for each entity to maintain 
the information for tracking purposes. Therefore, we estimate that it 
will take approximately 35,100 total hours annually to comply with 
these requirements.

Subpart Q--Guaranteeing Access to a Choice of Coverage

Section 423.859 Assuring Access to a Choice of Coverage

    Paragraph (c) states that CMS may waive or modify the requirements 
of this part if an entity seeking to become a prescription drug plan in 
a State other than the 50 States or the District of Columbia requests 
waiver or modification of any Part D in order to provide qualified 
prescription drug coverage in a State other than the 50 States or the 
District of Columbia.
    The burden associated with this requirement is the time and effort 
for the PDP to make a request of waiver or modification to CMS. We 
estimate that approximately 2 PDPs will request a waiver or 
modification on an annual basis. Since this requirement affects less 
than 10, it is exempt from the PRA in accordance with 5 CFR 1320.3.

Section 423.863 Submission and Approval of Bids

    Paragraph (a) discusses the process CMS uses for the solicitation 
and approval of bids. CMS solicits bids from eligible fallback entities 
for the offering in all fallback service areas in one or more PDP 
regions of a fallback prescription drug plan. CMS specifies the form 
and manner in which fallback bids are submitted in separate guidance to 
bidders.
    The burden associated with this requirement is the time and effort 
for the fallback entities to prepare and submit a bid.
    We estimate as an upper limit that approximately 20 fallback 
entities will submit a bid every three years. We also estimate that it 
will take each fallback entity approximately 80 hours to complete and 
submit the bid to CMS. Therefore, we estimate it will take a total of 
(5 * 80) /3 = 133.33 hours on an annual basis to comply with this 
requirement.
    Paragraph (b) discusses the procedures CMS uses to enter into 
contracts. CMS solicits bids from eligible fallback entities and uses 
competitive procedures to enter into contracts.
    The burden associated with this requirement is the time and effort 
for the fallback entities to enter into a contract with CMS.
    We estimate, again as an upper limit, that approximately 5 fallback 
entities will enter into a contract with CMS on an annual basis. Since 
this requirement affects less than 10, it is exempt from the PRA in 
accordance with 5 CFR 1320.4.

Section 423.871 Contract Terms and Conditions

    Paragraph (f) states that each contract for a fallback prescription 
drug plan requires an eligible fallback entity offering a fallback 
prescription drug plan to provide CMS with the information CMS 
determines is necessary to carry out the requirements of this section.
    The burden associated with this requirement is the time required of 
the fallback prescription drug plan to provide CMS with the information 
CMS determines necessary. We estimate that approximately 5 fallback 
prescription drug plans will enter into a contract with CMS. Since this 
requirement affects less than 10, it is exempt from the PRA in 
accordance with 5 CFR 1320.4.

Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans

Section 423.884 Requirements for Qualified Retiree Prescription Drug 
Plans

    (a) and (b) In order to qualify for the retiree drug subsidy, the 
employer or union sponsor shall file an annual application with CMS for 
each qualified prescription drug plan maintained, including an 
attestation as to actuarial value. For convenience, these applications 
may be packaged together.
    The burden associated with this requirement is the time and effort 
necessary for an entity to submit the application to CMS. The 
requirements of this part state that an application must provide 
sponsor and plan identification information, together with an 
actuarially-certified attestation that the actuarial value of the 
prescription drug coverage in each such plan is at least equal to the 
actuarial value of standard Medicare Part D prescription drug coverage 
in accordance with actuarial guidelines established by CMS in 
accordance with generally accepted actuarial principles. If there is a 
change during the year that materially affects the actuarial value of 
their drug coverage, sponsors will need to submit an updated 
attestation. Sponsors will also be required to collect identifying 
information on their qualifying covered retirees.
    For each entity we estimate an average of 2 hours administrative 
work to assemble the application, 31 hours for systems changes to 
extract identifying information on qualifying covered retirees and 
about 17 hours for preparation of the actuarial attestations, for a 
total of approximately 50 hours, for each prescription drug plan. The 
17-hour estimate for preparation of actuarial attestations is a 
weighted average. See the economic impact section of this proposed 
regulation for the analysis pertaining to the range of time needed for 
sponsors of various sizes and numbers of plans.
    For the number of entities applying for the subsidy, we have used 
50,000, our estimate of the total number of public, private, and union 
sponsors projected to offer retiree prescription drug coverage in 2005. 
We have estimated on the basis of this figure in order to calculate the 
highest potential burden.
    The total burden for preparation and filing of the 2005 
applications for 50,000 sponsors is 2,500,000 hours. We also estimate 
that 5 percent of the initial applications may have to be refiled due 
to mid-year changes to drug coverage that materially affect actuarial 
value. We estimate 125,000 hours for this activity.
    If CMS determines that a sponsor of a retiree prescription drug 
program meets all of the requirements of this section, it will send to 
the sponsor a written notice of that determination along with two 
copies of the sponsor agreement outlining the conditions for obtaining 
a subsidy payment. If the sponsor wishes to participate in the subsidy 
program, it must return both copies of the agreement, signed by an 
authorized representative, to CMS.
    The burden associated with this requirement is the time and effort 
necessary for an entity to submit the required signed agreements to 
CMS. We estimate that on an annual basis it will take 50,000 entities 
30 minutes to submit the required agreements to CMS, for a total of 
25,000 hours.
    (c) Each entity must disclose the creditable coverage status for 
each prescription drug plan to CMS in a form and manner described by 
CMS. We estimate this activity to take about 1 hour each for a total of 
approximately 50,000 hours.
    In addition, each entity must notify each Part D eligible 
individual of the plan's creditable coverage status in a form and 
manner prescribed by CMS. The burden associated with the sponsor 
notices is required by Sec.  423.56 of the proposed regulation, as 
discussed earlier in this analysis.
    For the sponsors of retiree drug coverage, we estimate that it will 
take 50,000 entities approximately 8 hours

[[Page 46769]]

each to produce a standardized notice for a total of 400,000 burden 
hours.
    Given that each entity will be creating disclosure notices for mass 
mailings, we are proposing the following burden estimates. We estimate 
that it will take each of them 4 hours to disclose, on average, 240 
(rounded) notices (or 1 minute per notice), for a total burden of 
200,000 hours. This estimate is based on that assumption that once the 
notices have been standardized, each entity will mass-produce and mail 
the required notices.
    If an individual establishes to CMS that he or she was not 
adequately informed that he or she no longer had creditable 
prescription drug coverage or the coverage is involuntarily reduced, 
the individual may apply to CMS to have the coverage treated as 
creditable coverage so as to not be subject to the late enrollment fee 
described in Sec.  423.46. The burden associated with this requirement 
is the time and effort necessary for an individual to apply to CMS to 
have such coverage treated as creditable coverage. While we have no way 
of determining how many individuals will apply to CMS, for the purpose 
of providing an upper bound estimate for public comment we estimate 
that on an annual basis it will take 100,000 individuals 15 minutes to 
apply to CMS, for a total of 25,000 hours.
    (d) The employer or union sponsor of the plan must maintain the 
records outlined in this section for 6 years after the expiration of 
the plan year in which the costs were incurred.
    The burden associated with this requirement is the time and effort 
necessary for an entity to maintain the required documentation for six 
years. We estimate that on an annual basis it will take 50,000 entities 
20 hours to retain the required documentation, for a total of 1,000,000 
burden hours.

Section 423.890 Appeals

    The information collection requirements set forth in this section 
are exempt from the PRA as stipulated in 5 CFR 1320.4.

Section 423.892 Change in Ownership

    A sponsor who is contemplating or negotiating a change of ownership 
must notify CMS. We estimate that approximately 5 percent of sponsors 
will fall into this category in a given year.
    The burden associated with this requirement is the time and effort 
necessary for a sponsoring entity to submit the required notification 
to CMS. On an annual basis it will take 2,500 entities (5 percent of 
50,000) about 30 minutes to submit the required notification to CMS, 
for a total of approximately 1,250 burden hours.

Subpart S--Special Rules for States--Eligibility Determinations for 
Subsidies and General Payment Provisions

Section 423.904 Eligibility Determinations for Low-Income Subsidies

    Paragraph (b) of this section states the State agency must inform 
CMS of cases where eligibility is established or redetermined.
    The burden associated with the requirement on State agencies to 
inform CMS of cases where eligibility is established or redetermined is 
estimated to total approximately 11,220 annual hours. We estimate that 
there will be approximately 600,000 of these cases on an annual basis. 
We also estimate that it will take approximately 10 hours per month for 
the State agency to inform CMS of these cases.
    Paragraph (d) of this section requires States to make available--
low-income subsidy application forms, information on the nature of, and 
eligibility requirements for the subsidies under this section, and 
offer assistance with the completion of the application forms. States 
must require an individual or personal representative applying for the 
low-income subsidy to complete all required elements, provide documents 
as necessary, and certify as to the accuracy of the information 
provided. In addition, States must provide CMS with other information 
as specified by CMS that may be needed to carry out the requirements of 
the Part D prescription drug benefit.
    The burden associated with the requirement on States to make 
available the information specified in this section is subject to the 
PRA; however, we believe the burden for this requirement to be a 
reasonable and customary business practice; therefore, imposes no 
additional burden on the States.
    The burden associated with the requirement on States to require the 
applicant of the low-income subsidy to complete all required elements, 
to provide documents, and to certify as to the accuracy of the 
information is subject to the PRA; however, the burden associated with 
this requirement is discussed in Sec.  423.774 above.
    The burden associated with the requirement on States to provide CMS 
with other information as specified by CMS is estimated to total 
approximately 1,020 annual hours. Since it is difficult to determine at 
this time the volume of information CMS will request, we are estimating 
that it will take on average 20 hours per State on an annual basis to 
provide CMS with the specified information.

Section 423.907 Treatment of Territories

    Paragraph (a) of this section discusses the requirements on 
territories to submit plans for approval by the Secretary to receive 
increased grants. This paragraph states that a territory may submit a 
plan to the Secretary under which medical assistance is to be provided 
to low-income individuals for the provision of covered Part D drugs. 
Paragraph (b) of this section describes what a plan must include.
    The burden associated with this requirement is the time and effort 
of territories to prepare and submit a plan for approval. While this 
requirement is subject to the PRA, we estimate that this requirement 
would affect only 5 territories; therefore, it is exempt from the PRA 
in accordance with 5 CFR 1320.4.

Section 423.908 Phased-Down State Contribution to Drug Benefit Costs 
Assumed by Medicare

    Paragraph (d) of this section discusses the requirements on States 
to submit MSIS data. This paragraph requires States to provide accurate 
and complete coding to identify the numbers and types of Medicaid and 
Medicare dual eligibles in their MSIS data submittals.
    The burden associated with the requirement on States to provide 
accurate and complete coding in their MSIS data submittals is subject 
to the PRA; however, this requirement is already approved under OMB 
0938-0502 with a current expiration date of January 31, 2006.
    Paragraph (e) of section requires States to submit an electronic 
file, in a manner specified by the Secretary, identifying each full 
benefit dual eligible enrolled in the State for each month with Part D 
drug coverage who is also determined to be full benefit eligible by the 
State for full Medicaid benefits.
    The burden associated with the requirement on States to submit an 
electronic file identifying each full benefit dual eligible enrolled in 
the State for each month with Part D drug coverage is estimated to 
total approximately 120 hours per State on an annual basis. We estimate 
that it will take approximately 10 hours for each State to submit an 
electronic file on a monthly basis. Therefore, we estimate a total 
burden of 6,120 hours on an annual basis. Startup development effort is 
estimated at 100 hours per State for a total of 5,100 hours.

[[Page 46770]]

    If you comment on these information collection and recordkeeping 
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-4068-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-4068-P), 
[email protected]. Fax (202) 395-6974.

IV. Regulatory Impact Statement

A. Overall Impact

[If you choose to comment on issues in this section, please include the 
caption ``Impact Analysis'' at the beginning of your comments.]

    We have examined the impacts of this proposed rulemaking 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), Executive Order 13132 on 
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
    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 major rules with economically significant 
effects ($100 million or more in any one year). Our estimate is that 
this rulemaking is ``economically significant'' as measured by the $100 
million standard, and hence also a major rule under the Congressional 
Review Act. Accordingly, we have prepared a regulatory impact analysis.
    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) amends Title XVIII of the Social Security Act (the Act) 
to create a voluntary prescription drug benefit within the Medicare 
program beginning in 2006. The Medicare prescription drug benefit will 
make prescription drugs more affordable for beneficiaries by offering 
subsidized Medicare prescription drug coverage to all beneficiaries, 
with even more generous assistance available to low-income 
beneficiaries. We believe that this is an important step in modernizing 
the Medicare program to better meet beneficiaries' needs. We anticipate 
that by giving beneficiaries access to affordable insurance coverage 
that helps them to pay for their outpatient prescription drugs--which 
have become a critical component in the delivery of comprehensive, 
quality health care services--the Medicare prescription drug benefit 
will help beneficiaries to lead healthier, more productive lives, while 
also helping to improve the effectiveness of the Medicare program.
    The MMA also authorizes Medicare to make retiree drug subsidy 
payments to employers and unions that provide qualified retiree 
prescription drug coverage to beneficiaries who do not enroll in a Part 
D plan. This alternative retiree drug subsidy provides special tax-
favored payments to the qualified retiree health plans. The retiree 
drug subsidy program has highly flexible rules that permit employers 
and unions to continue providing drug coverage to their Medicare-
eligible retirees while retaining their current plan designs that are 
at least equivalent to the standard Part D benefit and using the drug 
subsidy to reduce the cost of providing generous coverage.
    With the trend toward declining retiree health insurance coverage 
that has occurred over the past decade, the Medicare alternative 
retiree drug subsidy is intended to ``help employers [to] retain and 
enhance their prescription drug coverage so that the current erosion in 
coverage would plateau or even improve'' (Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 Conference Report, p. 53).
    Medicare Part D also offers employers a variety of other options 
for continuing to assist their Medicare retirees. They can also choose 
to provide enhanced drug coverage to their Medicare-eligible retirees 
through or in coordination with Part D by encouraging their Medicare-
eligible retirees to enroll in Part D (with Medicare subsidizing the 
costs of their standard Part D benefits), and providing enhanced 
coverage over and above the standard Part D benefit. This can be 
achieved by either providing separate supplemental drug coverage that 
wraps around a Part D plan (similar to policies that wrap around 
Medicare benefits under Part A and Part B), arranging for a Part D plan 
(that is, a prescription drug plan (PDP) or Medicare Advantage 
Prescription Drug Plan (MA-PD)) to provide enhanced benefits to their 
retirees, or choosing to become a Part D plan that offers enhanced 
benefits to their retirees. In all of these cases, financial support 
from the new Medicare drug subsidy can augment contributions by 
employers to provide a more generous and less costly drug benefit for 
retirees than is possible through employer support alone.
    We believe that the implementation of Medicare Part D, including 
the Medicare retiree drug subsidy and the other opportunities it 
affords employers for providing continued prescription drug assistance 
to their Medicare retirees, will result in combined aggregate payments 
by employers and Medicare for drug coverage on behalf of retirees 
generally being greater--and frequently significantly greater--than 
they otherwise would have been without the enactment of the MMA. 
Furthermore, the Medicare prescription drug benefit and retiree drug 
subsidy represent a particularly important strengthening of health care 
coverage for future Medicare-eligible retirees, given the erosion in 
the availability and generosity of employer-sponsored retiree coverage 
for future Medicare beneficiaries that has already been taking place, 
as is discussed in further detail subsequently in this impact analysis.
    We estimate that in calendar year (CY) 2006 about 41 million 
Medicare beneficiaries will receive drug coverage either through a 
Medicare Part D plan (that is, by enrolling in a PDP or MA-PD), 
including beneficiaries who receive supplemental premium subsidies and 
enhanced drug coverage as a new retiree benefit, or through an employer 
or union sponsored retiree plan that is sufficiently generous to 
qualify for the Medicare retiree drug subsidy. By CY 2010, due to 
growth in the overall Medicare population, we estimate that nearly 45 
million Medicare beneficiaries will be receiving such coverage.
    The Medicare drug benefit, including the retiree drug subsidy, will 
lead to an increase in Federal spending on Medicare benefits and a 
decrease in Federal spending on Medicaid benefits (as dual eligibles' 
drug coverage is shifted from Medicaid to Medicare). The net effect of 
these changes on Federal outlays is estimated to be $48 billion in CY 
2006 and $67 billion in CY 2010, with the total effect estimated to be 
$287 billion over the period from CY 2006-2010. The vast majority of 
this Federal spending is on Medicare subsidies that defray the cost of 
the Medicare drug benefit for beneficiaries, that provide substantial 
additional cost-sharing and premium assistance to low-income 
beneficiaries, and that make it more

[[Page 46771]]

affordable for employers to continue to provide and support high 
quality retiree drug coverage. We also anticipate that States will save 
money due to the Medicare drug benefit, as responsibility for drug 
coverage for full-benefit dual eligibles is shifted from Medicaid to 
Medicare and as State spending on State prescription drug assistance 
programs is likely to be at least partly displaced by the Medicare drug 
benefit. We also estimate that many more eligible low-income 
beneficiaries will take up Medicaid and other low-income benefits, in 
addition to the comprehensive Medicare drug benefit, as a result of the 
additional value of the drug benefit and unprecedented beneficiary 
outreach activities. Taking all of these considerations together, we 
estimate that the Medicare drug benefit will lead to net State 
budgetary savings of about $500 million in CY 2006 and $3.0 billion in 
CY 2010, with total net savings of about $8.2 billion over the period 
from CY 2006-2010.
    As discussed in more detail in section L of the impact analysis, 
from both an economic and budgetary accounting perspective, Federal 
spending on the Medicare drug benefit largely represents transfers of 
Federal budget revenue from taxpayers to Medicare beneficiaries and 
retiree plans sponsored by private and public sector employers and 
unions. Also, from an economic perspective, there is effectively a 
transfer of Federal budget revenues from taxpayers to State 
governments, as Medicare pays for some of the costs of drug coverage 
for full-benefit dual eligibles that had been previously paid for by 
States and as the Medicare drug benefit displaces some State spending 
on prescription drug assistance programs. In addition, a portion of the 
Federal spending on Medicare Part D is for administrative costs 
incurred by PDPs and MA-PDs to administer the benefit.

B. Unfunded Mandates

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a proposed rule (and subsequent 
final rule) that includes any Federal mandate that may result in 
expenditure in any one year by State, local, or tribal governments, in 
the aggregate, or by the private sector, of $110 million. We anticipate 
that this rule would not impose costs above the $110 million UMRA 
threshold on State, local, or tribal governments. With the exception of 
the electronic prescribing provisions (for which we are unable to 
develop a cost estimate because standards are still to be developed), 
we have determined that this rule would not impose costs on the private 
sector exceeding $110 million.
1. Private Sector
    There are two provisions of the MMA that are reflected in this 
notice of proposed rulemaking that represent mandates on the private 
sector as defined by the UMRA: Provisions related to disclosure notices 
of creditable coverage and electronic prescribing.
    As discussed elsewhere in this document, certain private sector 
entities--Medigap plans and private sector employer or union sponsored 
health plans that provide drug coverage to Medicare beneficiaries who 
are retired or who are active workers--are required to provide at 
certain times disclosure notices on whether the coverage provided 
equals or exceeds the actuarial value of defined standard Part D 
coverage. Later in the impact analysis we provide a discussion of the 
costs expected to be borne in providing such notices, including the 
costs associated with performing the actuarial valuation of the drug 
benefits. The largest cost for providing these notices is expected to 
occur in the months preceding the implementation of the drug benefit in 
January 2006 when the largest volume of notices need to be provided. 
Following receipt of these notices, beneficiaries will be making 
choices regarding where they receive their drug coverage.
    For private sector employers that provide retiree drug coverage, 
the implementation of Medicare Part D, including the Medicare retiree 
drug subsidy program, is expected to produce net savings that far 
exceed the costs of the disclosure notices. This is true both for 
employers that choose to obtain the retiree drug subsidy, and for 
employers and unions that decide to restructure their prescription drug 
coverage to provide continued assistance by paying Medicare Part D 
premiums and/or supplementing the Medicare prescription drug benefit.
    For those private entities that will not achieve savings--Medigap 
insurers and group health plans that offer coverage only to 
beneficiaries who are active workers, not retirees--the cost of 
providing disclosure notices is estimated to be approximately $69 
million in 2005 (which translates into an average of roughly $154 per 
employer that offers drug coverage to Medicare beneficiaries who are 
active workers and about $11,050 per Medigap insurer). Thus, the costs 
associated with the notice requirements are not expected to reach the 
$110 million UMRA threshold.
    Another private sector mandate in the MMA is that no later than 
April 1, 2009, prescriptions for covered Part D drugs for Medicare 
beneficiaries that are transmitted electronically will have to comply 
with certain standards. The proposed rule describes the process that 
will be used to develop these standards, but the actual standards are 
not yet specified. Moreover, we are seeking comment on a set of 
approaches to speed the adoption and reduce the cost of more rapid 
adoption of electronic prescribing, and to maximize the benefits of 
electronic prescribing on reducing costs and inappropriate care 
involving the drug benefit. Consequently, at this time it is not 
possible to estimate the impact. An impact statement on the actual 
standards will be prepared separately.
    We also note that Section 104 of the MMA, which prohibits the sale 
of new Medigap policies with drug coverage or the renewal of existing 
Medigap policies that contain drug coverage for Medicare drug benefit 
enrollees, is not an unfunded mandate as defined by UMRA. This 
statutory Medigap prohibition does not result in the ``expenditure'' of 
funds by the private sector, one part of the statutory test for an 
unfunded mandate. Moreover, the MMA itself directly restructures the 
role of Medigap insurance, and it is not the ``promulgation of any 
rule'' on our part, the other factor in the statutory test for an 
unfunded mandate. For a discussion of the effect on Medigap insurers of 
the MMA prohibition, see section J of the impact analysis.
2. States, Local and Tribal Governments
    While States will incur direct costs as a result of this proposed 
rule, as discussed in greater detail in section H on State impacts, 
States will achieve net savings under this proposed rulemaking, as now 
Medicare will be paying for prescription drug costs previously funded 
under Medicaid, State Pharmacy Assistance Programs (SPAPs), and State 
sponsored retiree health insurance, or will be providing subsidies for 
State sponsored qualified retiree prescription drug coverage. There are 
several sources of the direct costs States will incur. As described 
below, several of these, taken alone and without consideration of 
offsetting gains, would reach or exceed the threshold level in UMRA.
    In order to defray a portion of the Medicare drug expenditures for 
full-benefit dual eligibles, States will be responsible for making 
monthly payments to the Federal government

[[Page 46772]]

beginning in January 2006. These payments are estimated to be $8.5 
billion in CY 2006, reaching $11.1 billion by CY 2010. These payments 
represent the largest direct cost to States. States will also incur 
costs associated with assisting in eligibility determinations for the 
Medicare Part D low-income subsidies. In addition to giving 
responsibility for eligibility determinations to the Social Security 
Administration, the MMA also gives States, as a condition of receipt of 
any Federal financial assistance under Title XIX, responsibility for 
conducting determinations for eligibility for low-income premium and 
cost-sharing subsidies under Part D, and as part of those 
determinations also make determinations related to medical assistance 
for Medicare cost-sharing under Medicare Parts A and B. Federal 
matching payments will be available to assist in paying for these 
administrative costs. Prior to enactment of the MMA, we roughly 
estimated that the State share of Medicaid administrative costs that 
might be associated with these low-income eligibility determinations 
was approximately $100 million a year, beginning in FY 2005. However, 
we are undertaking new collaborations with the Social Security 
Administration, the State Health Insurance Assistance Programs (SHIPs), 
and other groups to assist in outreach and enrollment, and to help 
avoid any new administrative burdens for States. We plan to develop an 
updated estimate of State administrative costs for eligibility 
determination activities once the operational processes for the 
eligibility determinations are more fully developed. We also note that 
there are likely to be some additional costs to States arising from 
this activity, as discussed in section H of this impact analysis, due 
to the Medicare Part D low-income eligibility determinations process 
raising awareness of other benefits available to low-income Medicare 
beneficiaries through Medicaid and leading to higher enrollment in that 
program. As noted earlier, however, we believe that overall costs to 
the States will be reduced due to implementation of the new Medicare 
drug benefit.
    In addition, States will also have revenue losses associated with 
the MMA prohibition on States imposing taxes on premiums related to 
Part D coverage. As a result of the shift of beneficiaries from 
prescription drug coverage subject to State premium taxes to Part D 
coverage, we estimate that the loss in premium tax revenue to States 
will be about $111 million in CY 2006, and $129 million by CY 2010, 
totaling $598 million over this period.
    States will also incur direct costs attributable to required 
disclosure notices for creditable coverage. Similar to the requirement 
for private sector employers, State governments that offer retiree 
health insurance benefits with drug coverage will need to provide 
disclosure notices to Medicare beneficiaries enrolled in their employer 
sponsored plans related to that coverage. States will also need to 
provide disclosure notices to Medicare beneficiaries who receive drug 
coverage through State Medicaid programs, State Pharmacy Plus programs, 
and State Pharmacy Assistance Programs. As noted elsewhere in this 
document, the costs of providing such notices are small and are far 
more than offset by the savings achieved from receiving the Medicare 
retiree drug subsidy (because States may also qualify for this subsidy) 
or through the enrollment of beneficiaries in the Part D benefit.
    As discussed in the States section of the impact analysis, the 
direct and indirect costs and revenue losses to States are more than 
offset by savings States will achieve as a result of the implementation 
of the Medicare Part D prescription drug benefit. As noted in that 
section, the net savings to States increase over time, as the share of 
drug coverage costs for full-benefit dual eligibles for which States 
are required to compensate Medicare declines.
    Local governments that offer retiree health insurance benefits that 
include coverage for prescription drugs also will need to provide 
disclosure notices to Medicare beneficiaries enrolled in their employer 
sponsored plans related to that coverage. As noted previously, the 
costs of providing such notices are small, and are far more than offset 
by the savings achieved either from receiving the Medicare retiree drug 
subsidy (because local governments may also qualify for this subsidy) 
or through the enrollment of beneficiaries in the Part D benefit.
    We have determined that this proposed rule does not mandate any 
requirements for Tribal governments.

C. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct costs on State and local 
governments, preempts State law, or otherwise has Federalism 
implications.
    As discussed previously, the MMA and this proposed rule have 
implications for States. In addition to the provisions addressed in the 
UMRA discussion, the statute includes specific provisions prohibiting 
State regulation of PDP plans, except for licensure and solvency, and 
permitting the Secretary to waive even State licensure and solvency 
requirements. The majority of these waivers, however, are temporary and 
may not exceed 36 months, except in the case of a State that does not 
have a licensing process for PDP sponsors. As specified in the MMA, we 
will consult with the National Association of Insurance Commissioners 
(NAIC) on establishing the financial solvency and capital adequacy 
standards that will be used in the waiver process.
    Because of the national nature of the Medicare Part D benefit, the 
statute includes provisions that supercede State law relative to the 
Secretary's final electronic prescribing standards applicable to 
covered Part D drugs for Part D eligible individuals, and also 
prohibits States from limiting the amount that a PDP sponsor can 
recover from liable third parties under Medicare Secondary Payer 
provisions.
    CMS has started routine consultations with States regarding the 
numerous provisions related to the Medicare prescription drug benefit 
that have implications for States. Among these, CMS' Center for 
Medicaid and State Operations has regular meetings with State Medicaid 
Directors and has used these opportunities to provide our State 
partners with information about MMA. For example, in March 2004, CMS 
held conference calls with State representatives to provide them with 
an overview of the MMA and information on what to expect during 
implementation, to discuss the provisions in the statute dealing with 
State payments to the Federal government under Section 103 of the MMA, 
and to allow States to raise issues about the implementation process. 
In April and May 2004, CMS held conference calls with State 
representatives to discuss the calculation of State phased-down 
contribution, definition of ``full-benefit dual eligibles'', excluded 
drugs, enhanced FMAP on family planning drugs, and related State 
payment issues. CMS is currently working with State Medicaid Directors, 
State Pharmaceutical Assistance Program staff, and State Health 
Insurance Assistance Program (SHIP) counseling staff to raise awareness 
of the Medicare prescription drug discount card program, and we expect 
to have similar efforts for the implementation of the Medicare Part D 
prescription drug benefit. We have also consulted with the NAIC on 
Medigap issues.

[[Page 46773]]

    The Medicare retiree drug subsidy is an optional program that 
public or private employers may choose to participate in if they offer 
qualified retiree prescription drug coverage. Like other employers, 
State and local governments that offer qualified retiree prescription 
drug coverage and wish to receive Medicare retiree drug subsidy 
payments will need to comply with the reporting requirements of this 
proposed rule, such as attestation of actuarial equivalence and certain 
data reporting necessary for calculating the retiree drug subsidy 
payment amount. However, these are not requirements because no public 
or private employer need apply for Medicare retiree drug subsidy 
payments. Thus, we have determined that the retiree drug subsidy 
provisions of this proposed rule would not impose direct costs on State 
and local governments. As discussed earlier in the preamble, we intend 
to conduct outreach to prospective applicants for Medicare retiree drug 
subsidy payments, including State and local governments that sponsor 
retiree health plans, in an effort to better understand the needs of 
this segment of the employer community, share information about the 
Medicare retiree drug subsidy program, and solicit suggestions about 
how we can best implement the program.

D. Limitations of the Analysis

    The following analyses present projected effects of this proposed 
rule on Medicare beneficiaries, the Federal budget, States, private 
sector organizations that provide drug coverage to Medicare 
beneficiaries, and small entities. These impact estimates are generally 
consistent with the President's fiscal year 2005 budget. Unless 
otherwise noted, all estimates in this impact analysis are net 
budgetary spending based on calendar year data.
    Because 2006 will be the first year of the Medicare prescription 
drug benefit and retiree drug subsidy program, we do not have program 
experience from prior years. In estimating the impact of a completely 
new program, there are limited data and much greater uncertainty than 
would be the case with modifications to existing programs. 
Additionally, there are further policy and administrative issues under 
consideration in the context of the rule making process. We have 
explored a wide variety of potential approaches. We believe that these 
estimates provide a reasonable representation of the likely effects of 
the policies and potential options discussed. Our analysis generally 
reflects the broad range of options we have explored and represents a 
``mid-range'' estimate of the projected possible impacts of the 
Medicare drug benefit and retiree drug subsidy. We are continuing to 
work to examine the effects of the issues under consideration and to 
refine our understanding of the impacts. We would welcome comments on 
any aspect of the approach, methodology, or assumptions used to develop 
the estimates presented in this impact analysis.
    In addition, we note that analyses in the 2004 Medicare Trustees 
Report can provide a sense of the range of uncertainty inherent in 
these types of estimates. Because the methodology used in our estimates 
is fairly similar to the one used by the Medicare Trustees, we believe 
that the Trustees Report provides relevant information on the potential 
range of uncertainty in these types of estimates (see the ``2004 Annual 
Report of the Boards of the Federal Hospital Insurance and Federal 
Supplementary Medical Insurance Trust Funds'' available on the CMS Web 
site).

E. Enrollment Estimates

1. Summary
    We estimate that in CY 2006 about 41 million Medicare beneficiaries 
will receive drug coverage either through a Medicare Part D plan (that 
is, by enrolling in a PDP or MA-PD) or through an employer or union 
sponsored retiree plan that is eligible for the Medicare retiree drug 
subsidy. By CY 2010, as a result of growth in the overall Medicare 
population, we estimate that nearly 45 million Medicare beneficiaries 
will be receiving such coverage.
    As mentioned previously, Medicare Part D offers additional 
assistance with Medicare drug benefit cost-sharing and premiums to low-
income beneficiaries who meet certain income and assets requirements. 
We estimate that about 10.9 million beneficiaries would enroll in the 
Medicare Part D low-income subsidy program in CY 2006. Among low-income 
subsidy participants, we estimate that about 6.4 million would be full-
benefit dual eligibles.
2. Projection Assumptions
    We project that there will be 43.3 million beneficiaries entitled 
to or enrolled in Medicare Part A or enrolled in Medicare Part B in 
2006 who will be eligible for Medicare Part D. We estimate that roughly 
95 percent of these beneficiaries, 41.2 million, will receive drug 
coverage either through a Medicare Part D plan (that is, a PDP or MA-
PD) or through an employer sponsored retiree plan that is eligible for 
the Medicare retiree drug subsidy.
    First, we assume that Medicare beneficiaries who are active workers 
and who have employer-sponsored insurance as their primary payer with 
Medicare as a secondary payer (MSP), will not participate in Medicare 
Part D at this time. Since these beneficiaries are active workers, not 
retirees, they would be ineligible for the Medicare retiree drug 
subsidy. In addition, we believe that it is unlikely that these 
beneficiaries will enroll in the Medicare drug benefit at this time. 
These beneficiaries are likely to already have creditable drug coverage 
from their employer and that coverage would be the primary payer 
regardless of enrollment in the Medicare drug benefit. In the future, 
when Medicare becomes the primary payer for these beneficiaries, they 
will have an opportunity to enroll in Medicare Part D without a late 
enrollment penalty as long as they had creditable drug coverage from 
their previous primary insurer.
    Second, we assume that all beneficiaries who are full-benefit dual 
eligibles will enroll in the Medicare drug benefit. As discussed in the 
preamble, there will be automatic processes put in place to ensure that 
any beneficiary who is a full-benefit dual eligible who does not enroll 
in the Medicare drug benefit will be automatically enrolled in a 
Medicare Part D plan.
    Third, among all other eligible beneficiaries, we assume that 
roughly 99 percent receive prescription drug coverage either through a 
Medicare Part D plan (that is, a PDP or MA-PD) or through an employer 
or union sponsored retiree plan that is eligible for the Medicare 
retiree drug subsidy. This assumption is based in part on the 
experience of high participation rates in Medicare Part B, but on other 
factors as well. The standard Medicare Part D benefit shares several 
similar features with Medicare Part B that encourage enrollment. Both 
are subsidized benefits, where the beneficiary premium is set at 
roughly 25 percent of the cost of the insurance, with the government 
providing a subsidy to cover the remaining 75 percent.
    In addition, under both Part B and Part D, beneficiaries face a 
late enrollment penalty or surcharge (in the form of higher premiums) 
unless they enroll within the initial enrollment period, have met 
creditable coverage requirements in the case of Medicare Part D, or 
have met certain other requirements that occur in a limited number of 
circumstances. We believe

[[Page 46774]]

that the late enrollment penalty is a strong incentive for beneficiary 
enrollment. The statute provides that the penalty is the greater of 
either 1 percent of the base beneficiary premium for each month of late 
enrollment or an amount that CMS determines is actuarially sound for 
each month of late enrollment that is subject to the penalty (that is, 
when the beneficiary did not have other creditable coverage). As 
discussed elsewhere in the preamble, during the first several years of 
the program, we currently expect that we would specify a penalty amount 
of 1 percent of the base beneficiary premium per month of late 
enrollment. In future years once we have sufficient data and experience 
under the program, we anticipate being able to determine the 
appropriate penalty amount (that is, either one percent or a greater 
amount that is actuarially sound). This late enrollment penalty begins 
after the close of the open enrollment period in May 2006 for those 
beneficiaries without other creditable coverage. Prescription drug 
costs are a major concern for Medicare beneficiaries. There will be 
extensive educational and outreach efforts prior to implementation of 
Medicare Part D to educate beneficiaries about the coverage available 
to them through the Medicare drug benefit and about enrollment 
processes, including the presence of the late enrollment penalty. We 
think that beneficiaries' concern about current prescription drug costs 
and the likelihood that as an elderly or disabled individual they will 
have even greater need for prescription drugs as they age, in 
combination with the substantial late enrollment penalty, will result 
in high initial enrollment in the Medicare drug benefit.
    We also note that we believe it is likely that some beneficiaries 
who have not enrolled in Medicare Part B will choose to enroll in the 
Medicare prescription drug benefit. Many beneficiaries who currently 
have not enrolled in Part B would face a late enrollment surcharge 
should they want to enroll in Part B at this time. These same 
beneficiaries would not face a late enrollment penalty if they chose to 
enroll in the Medicare Part D drug benefit during the initial 
enrollment period, and we believe their experience with the Part B late 
enrollment surcharge may influence their decision-making regarding Part 
D.
    Other features of the Medicare drug benefit are also likely to 
encourage high enrollment. In addition to the Federal subsidy of the 
beneficiary premium (which is a part of the standard benefit), a subset 
of beneficiaries, specifically those who meet certain income and assets 
requirements, are eligible for additional low-income subsidies. We 
expect that States over the next 18 months will also be doing 
aggressive outreach particularly related to the lower income 
population. For example, many States have been working with CMS to 
facilitate enrollment (including for some States auto-enrollment 
arrangements) of beneficiaries participating in State Pharmaceutical 
Assistance Programs into the Medicare drug discount card program. In 
addition, as discussed elsewhere in the preamble, the MMA also provides 
for transitional grants to States with Pharmaceutical Assistance 
Programs in each of fiscal years 2005 and 2006, to among other things, 
help facilitate enrollment in Part D.
    Also, in the months preceding the implementation of the Part D 
benefit, the approximately 76 percent of beneficiaries who have drug 
coverage (based on 2001 Medicare Current Beneficiary Survey data) will 
receive separate specific disclosure notices from the entities from 
which they get that coverage regarding enrollment in the Medicare 
prescription drug benefit and the applicability of the late enrollment 
penalty. These notices from other sources are in addition to the 
extensive outreach efforts that CMS and SSA will conduct over the next 
18 months. We also expect that Medicare Advantage plans will work with 
their members to facilitate enrollment into MA-PD plans.
    Another feature of the Medicare Part D program that factors into 
our expectations regarding participation is the availability of the 
Medicare retiree drug subsidy. The Medicare retiree drug subsidy lowers 
the cost of providing drug benefits for employers that sponsor 
qualified retiree plans, making it more affordable for employers to 
provide this coverage. We anticipate that most beneficiaries with 
employer or union sponsored retiree drug coverage will receive their 
prescription drug coverage through an employer or union plan that is 
eligible for the Medicare retiree drug subsidy.
    It is important to note, though, that in addition to the ability to 
obtain Medicare retiree drug subsidy payments, Medicare Part D also 
gives employers a variety of other options for providing their retirees 
with assistance with prescription drug costs. Employers can choose to 
provide enhanced drug coverage to their Medicare-eligible retirees 
through or in coordination with Part D by encouraging their retirees to 
enroll in Part D (with Medicare subsidizing the costs of their standard 
Part D benefits), and providing enhanced coverage over and above the 
standard Part D benefit. This can be achieved by either arranging for a 
PDP or MA-PD Part D plan to provide enhanced benefits to their 
retirees, choosing to become a Part D plan that offers enhanced 
benefits to their retirees, or providing separate supplemental drug 
coverage that wraps around a Part D plan (similar to policies that wrap 
around Medicare benefits under Parts A and B). Thus, some beneficiaries 
with employer sponsored drug coverage are likely to receive enhanced 
prescription drug benefits by enrolling in Part D and receiving 
employer sponsored enhanced Part D benefits or wraparound coverage and/
or premium assistance.
    The advantages and disadvantages to employers of choosing among the 
various options for providing employer prescription drug assistance 
(for example, taking the Medicare retiree drug subsidy versus offering 
enhanced prescription drug benefits through a Part D plan) will in many 
cases be influenced by a number of factors, including current benefit 
design, employer and retiree contributions and other financial 
considerations, tax status, labor relations, and contractual 
agreements. Because of these factors and because employers have several 
options that are advantageous to their retirees and to them in terms of 
both costs and labor relations, it is difficult to accurately predict 
which specific choices they will make in many cases. We expect that 
some employers will choose to provide prescription drug assistance in 
the form of enhanced benefit packages through Part D plans or separate 
wraparound coverage. Employers commonly do this relative to Medicare 
Part A and Part B coverage, either through separate supplemental 
policies or through arrangements with Medicare Advantage plans. In 
fact, the Medicare retiree drug subsidy represents a new type of 
arrangement for employers relative to the interaction of their retiree 
coverage with Medicare. Thus, we expect that some employers may prefer 
to interface with the new Medicare prescription drug benefit in a 
manner similar to their supplementation of the basic Medicare Part A 
and Part B benefits. In addition, we anticipate that providing enhanced 
Part D benefits or separate wraparound coverage may be an attractive 
option to those employers that may not be eligible for the Medicare 
retiree drug subsidy because their retiree drug benefits, as currently 
structured, are not as generous as the standard Medicare Part D 
benefit.
    Regardless of whether employers seek the Medicare retiree drug 
subsidy or provide drug coverage to retirees by

[[Page 46775]]

encouraging them to participate directly in the Medicare prescription 
drug benefit and providing enhanced benefits or wraparound coverage, 
Medicare Part D is estimated to significantly lower employers' cost of 
providing drug coverage, thus making the provision of that coverage 
much more affordable and thus more likely. The variety of choices 
available to employers means that there is some uncertainty around 
specific choices on the part of employers. An example of the complexity 
of the issues surrounding employer decision making related to the 
Medicare retiree drug subsidy is the tax-advantaged status of the 28 
percent subsidy. This provides a substantially different incentive to 
three groups of employers: (a) Those for-profit employers paying 35 
percent on the margin in corporate income tax rates, (b) those for-
profit employers paying far lower rates for a variety of reasons 
(including not earning a profit), and (c) governmental and non-profit 
sponsors who do not pay corporate income taxes to begin with. These 
different incentives, in turn, could affect whether plan sponsors 
choose the alternative Medicare retiree drug subsidy or choose to 
enhance benefits provided through Part D.
    A fourth participation assumption concerns enrollment in the low-
income subsidy portion of the program. We estimate that approximately 
14.5 million beneficiaries will be eligible for the low-income subsidy 
in 2006. We assume that a portion of beneficiaries who are eligible for 
the low-income subsidy (while receiving prescription drug coverage 
under Part D) will not take up the low-income assistance. While we 
assume 100 percent uptake among full-benefit dual eligibles (as 
discussed previously), we assume that roughly 56 percent of other 
beneficiaries who are eligible for the low-income subsidy will choose 
to enroll in it. We assume less than full uptake of the low-income 
subsidy among these beneficiaries based on experience with other means 
tested programs such as Medicaid and Medicare Savings (QMB/SLMB) 
programs, which suggests that full take up does not generally occur.
    There are several limitations inherent in the assumptions to 
predict the specific impacts of a major new program like the Medicare 
drug benefit. For example, it can be difficult to project enrollment 
rates in this entirely new program, and there is uncertainty about how 
employers will respond to the multiple approaches available to augment 
Medicare prescription drug coverage including the retiree drug subsidy. 
The assumptions discussed previously reflect our current best 
estimates, considering the structure of the program, the wide variety 
of new efforts to educate beneficiaries and facilitate enrollment, and 
information about participation rates in other types of similar 
programs where available. In addition, the estimates do not take into 
account the possibility that some beneficiaries may have creditable 
drug coverage through pre-standardized Medigap plans. To the extent 
that such situations exist and beneficiaries choose to remain in such 
coverage, our estimates for Medicare Part D may be slightly overstated.

F. Anticipated Effect of Medicare Part D on Beneficiaries

    Included in the following section are discussions of: the 
anticipated positive effects of the Medicare prescription drug benefit 
on beneficiaries, a recap of the Medicare drug benefit's structure, 
estimates of the average amount of drug spending covered by the 
Medicare drug benefit and average beneficiary premiums, and a 
discussion of the benefits of the Medicare retiree drug subsidy and the 
other opportunities Medicare Part D affords employers for providing 
continued prescription drug assistance to retirees.
1. Qualitative Discussion of Positive Effects of the Medicare Drug 
Benefit
    The purpose of the Medicare prescription drug benefit is to provide 
all of the nation's Medicare beneficiaries with the opportunity to 
enroll in a prescription drug benefit that is subsidized by the 
Medicare program. Outpatient prescription drugs have become an integral 
component in the delivery of comprehensive, high-quality health care 
services. Giving beneficiaries access to affordable drug coverage that 
helps them to pay for their outpatient prescription drugs and helps 
beneficiaries and their health professionals use prescription drugs 
more effectively as part of their overall health care, will enable 
beneficiaries to lead healthier, more productive lives, while improving 
the effectiveness of the Medicare program.

 a. Enhancement of the Medicare Benefit Package

    When the Medicare program was first enacted, outpatient 
prescription drug coverage was generally not included in private sector 
health benefit packages. However, over the last two decades, 
prescription drugs have played an increasingly critical role in health 
care delivery. For example, currently, at least one medication is 
ordered, provided, or continued in approximately 65 percent of all 
visits to office-based physicians by persons 65 years and over (2001 
National Ambulatory Medical Care Survey, National Center for Health 
Statistics). Prescription drugs have significantly improved the 
treatment and management of many major conditions--including life-
threatening diseases such as stroke (anticoagulant or clot-blocking 
therapy), heart disease and coronary artery disease (antihypertensive 
medications, cholesterol-lowering drugs), and cancer (targeted 
biologics and other agents that modify the course of illness and can be 
taken orally), as well as disorders that have fundamental impacts on 
quality of life like psychiatric illnesses (antipsychotics and 
antidepressants), osteoporosis (bone-strengthening drugs), and 
arthritis (anti-inflammatory drugs and other disease-modifying 
agents)--thereby contributing to longer and healthier lives as well as 
reductions in other types of medical expenditures such as inpatient 
admissions and lengths of stay (``The Price of Progress: Prescription 
Drugs in the Health Care Market,'' J.D. Kleinke, Health Affairs 20:5, 
September/October 2001, available at http://www.healthaffairs.org). 
Many other significant diseases have seen improvements in treatment and 
management and thus in patient health as a result of new medications. 
Examples include: AIDS/HIV, complex infections, diabetes, asthma and 
chronic lung diseases, Parkinson's disease, and many less common but 
serious disorders. With more new medicines in development than ever 
before, potential future health benefits from better drug therapies are 
even greater. Medicare Part D will augment the Medicare program benefit 
package by making drug coverage, which is currently offered in most 
private sector health plans, available to all beneficiaries. This 
represents an important step in modernizing the Medicare program to 
better meet beneficiaries' needs and respond to changes in health care 
delivery.

b. Access to Subsidized Prescription Drug Coverage

    The Medicare prescription drug benefit will make subsidized 
prescription drug coverage available to the estimated 24 percent of 
Medicare beneficiaries that currently do not have any prescription drug 
coverage at all (based on 2001 Medicare Current Beneficiary Survey 
data). Additionally, the Medicare prescription drug benefit will make 
subsidized coverage available to many other beneficiaries who may have 
less generous, costly drug coverage--including those who currently 
receive drug coverage through

[[Page 46776]]

Medigap policies or through ``access-only'' group health plans (group 
health plans that are available through their former employers which 
require retirees to pay the premiums for such coverage), and those 
retirees who may currently be paying a large share of the cost of their 
retiree coverage.
    By providing a substantial subsidy to defray the cost of Medicare 
drug coverage, including new subsidies for the retiree coverage and 
Medicare Advantage coverage that many beneficiaries receive today, the 
Medicare prescription drug benefit will make prescription drug coverage 
more accessible and affordable for many beneficiaries. As discussed in 
more detail elsewhere in the preamble, the Medicare program will make 
payments to PDPs and MA-PDs (through a direct subsidy and government 
reinsurance payments) that will amount to roughly 75 percent of the 
total cost of the Medicare Part D prescription drug benefit for all 
beneficiaries. Medicare Part D will also offer low-income beneficiaries 
additional assistance by reducing or eliminating beneficiary premiums 
and by providing very low cost-sharing requirements.

c. Improved Compliance With Treatment Regimens

    Available data suggest that not having drug coverage, combined with 
high drug expenses, may cause some beneficiaries to either not have 
their prescriptions filled or have them filled less often because they 
are not financially able to purchase outpatient prescription drugs. 
Because the Medicare prescription drug benefit will reduce 
affordability barriers associated with obtaining outpatient 
prescription drugs by reducing both the costs of drug treatment and 
beneficiaries' payments, we believe it will help to improve 
beneficiaries' compliance with their drug treatment regimens.
    There is evidence that some beneficiaries, particularly those 
without drug coverage, do not fill some prescriptions ordered by their 
physicians and skip doses to make their drugs last longer due to cost 
concerns. For example, a study of Medicare beneficiaries in eight 
States found that among those without drug coverage, 25 percent 
reported not filling a prescription due to cost, while 27 percent 
reported skipping doses to make drugs last longer. These rates of 
``noncompliance'' with physician prescribing orders were more than 
double the rates reported among beneficiaries with drug coverage (Dana 
G. Safran, et. al., ``Prescription Drug Coverage And Seniors: How Well 
Are States Closing the Gap?'' Health Affairs Web Exclusive W253, July 
2002, http://content.healthaffairs.org/cgi/reprint/hlthaff.w2.253v1.pdf).
    Furthermore, analysis of data from the 2001 Medicare Current 
Beneficiary Survey (MCBS), a nationally representative sample of 
Medicare beneficiaries shows that Medicare beneficiaries without drug 
coverage fill fewer prescriptions than those with drug coverage. 
Overall, beneficiaries without drug coverage, on average, self-report 
filling 37 percent fewer prescriptions (18) than those with drug 
coverage (29). While some of this difference in utilization likely 
reflects differences in health status and other beneficiary 
characteristics, this phenomenon holds true even among groups of 
beneficiaries with large numbers of chronic conditions. For 
beneficiaries with five or more chronic conditions, those without drug 
coverage self-report, on average, filling approximately 38 
prescriptions a year compared to beneficiaries with drug coverage, who 
self-report filling, on average, 50 prescriptions.
    Finally, a study in the December 2001 issue of the Journal of 
General Internal Medicine found that certain characteristics, such as 
minority ethnicity, and low income (defined as income less than 
$10,000) significantly increase the risk that individuals without drug 
coverage will restrict their use of medications by, for example, 
skipping doses or avoiding taking medication altogether. For example, 
the odds of medication restriction in minority subjects were higher 
among those with no drug coverage than among those with full drug 
coverage. Similarly, the odds of medication restriction were higher in 
low-income subjects with no drug coverage than in those with full drug 
coverage. (Michael A. Steinman, et al., ``Self-restriction of 
Medications Due to Cost in Seniors without Prescription Coverage,'' 16 
Journal of General Internal Medicine 793-799, Dec. 2001). Thus, 
comprehensive coverage is particularly likely to have an impact on 
prescription drug use among disadvantaged populations.

d. Improved Health and Reduction of Adverse Health Effects

    Not filling prescriptions, skipping doses, or cutting pills in half 
are referred to in the medical literature as ``medication 
noncompliance,'' and can have adverse health effects. We believe that 
by reducing financial barriers associated with obtaining outpatient 
prescription drugs and encouraging beneficiary compliance with their 
drug treatment regimens, the Medicare prescription drug benefit will 
reduce the occurrence of adverse health events and lead to overall 
improvements in beneficiaries' health.
    Medication noncompliance can lead to worsening health problems and 
the need for additional health care services. For example, a study of 
prescription drug noncompliance among disabled adults found that about 
half of the individuals reporting medication noncompliance due to cost 
reported experiencing one or more health problems as a result, 
including pain, discomfort, disorientation, change in blood pressure or 
other vital signs, having to go to a doctor or emergency room, or being 
hospitalized. (Jae Kennedy and Christopher Erb, ``Prescription 
Noncompliance Due to Costs Among Adults with Disabilities in the United 
States,'' American Journal of Public Health, July 2002). This same 
study cited other research indicating that medication noncompliance is 
a clinical problem, particularly related to chronic illnesses such as 
hypertension, and has been found to be a predictor of hospital 
admissions and emergency room visits in other studies.
    Similarly, another study found that limiting access to medications 
among low-income, elderly Medicaid patients increased rates of 
admission to nursing homes. The study analyzed Medicaid recipients aged 
60 years or older who took three or more medications per month and at 
least one maintenance drug for chronic diseases. Limiting affordable 
access to prescription drugs for this population (through a 
reimbursement cap on medications) increased rates of admission to 
nursing homes. The authors concluded that for the sicker patients in 
the study, the limitation on medication more than ``double[d] the 
rate'' of admission in comparison to a group whose medications were not 
limited. (Stephen B. Soumerai et al., ``Effects of Medicaid Drug-
Payment Limits on Admission to Hospitals and Nursing Homes,'' 325 New 
England Journal of Medicine 1072, 1074, 1991).
    There is also evidence suggesting that the use of specific drugs 
may reduce adverse health events, utilization of other health care 
services, and related costs for certain groups of patients. For 
example, a recent study found that the use of statins in cholesterol-
lowering drug therapy reduced the incidence of coronary disease-related 
deaths by 24 percent in elderly men and women (ages 70 to 82) with a 
history of, or risk factors for, vascular disease, and also reduced the 
incidence of non-fatal heart attacks and fatal or non-fatal strokes in 
these patients (``Pravastatin in Elderly

[[Page 46777]]

Individuals at Risk of Vascular Disease (PROSPER): A Randomised 
Controlled Trial,'' Lancet 2002, 360:9346, 1623-1630).
    Similarly, the Heart Outcomes Prevention Evaluation (HOPE) study 
has found that antihypertensive drug therapy reduced the combined risk 
of cardiovascular death, heart attack and stroke by 22 percent in 
approximately 9,000 high-risk middle-aged and elderly patients (ages 55 
and older), with $871,000 in net estimated savings over 4 years, and 
also significantly reduced the risk of adverse cardiovascular outcomes 
by 25 to 30 percent in a broad range of high-risk middle-aged and 
elderly patients with diabetes mellitus (See ``Drug Therapy and Heart 
Failure Prevention,'' Editorial, Jennifer V. Linseman, PhD, and Michael 
R. Bristow, MD PhD, Circulation 107:1234, American Heart Association, 
2003; ``Economic Impact of Ramipril on Hospitalization of High-Risk 
Cardiovascular Patients, Cathryn A. Carroll, PhD MA MBA BSPharm, The 
Annals of Pharmacotherapy, Volume 37, No. 3, pp. 327-331; and ``Effects 
of Ramipril on Cardiovascular and Microvascular Outcomes in People With 
Diabetes Mellitus: Results of the HOPE Study and MICRO-HOPE Substudy, 
Evaluation (HOPE) Study Investigators, Lancet 355 (9200):253-259, 
2000).
    While there is evidence that the use of certain prescription drugs 
may be cost-effective for specific groups of patients (in the sense 
that they result in net health care cost savings or produce health 
improvements at relatively low cost), thus far it has been difficult to 
generalize the results of these drug-specific studies more broadly to 
estimate the potential health care cost savings or morbidity or 
mortality reductions in the context of an overall Medicare prescription 
drug benefit. First, the findings from available cost-effectiveness 
analyses in the literature suggest that while some prescription drugs 
may lead to short-term or long-term reductions in net health care 
costs, other prescription drugs may lead to net increases in health 
costs. Second, the Medicare prescription drug benefit will improve 
access to prescription drugs for a broader patient population than is 
typically included in the available studies in the literature, which 
may affect the potential cost-effectiveness of certain drugs. For 
example, while the literature suggests that the use of statin drugs for 
lowering blood cholesterol levels in patients with existing heart 
disease is relatively cost-effective, using these drugs to preventively 
lower blood cholesterol levels in patients that do not have heart 
disease may be less cost-effective (see ``Are Pharmaceuticals Cost-
Effective? A Review Of The Evidence,'' Peter J. Neumann, Eileen A. 
Sandberg, Chaim M. Bell, Patricia W. Stone, and Richard H. Chapman, 
Health Affairs 19:2, November/December 2000; and ``The Price of 
Progress: Prescription Drugs in the Health Care Market,'' J. D. 
Kleinke, Health Affairs 20:5, September/October 2001 available at 
http://www.healthaffairs.org).
    In addition to the anticipated reductions in adverse health events 
associated with anticipated improvements in prescription drug 
compliance, we believe that many elements of the Medicare prescription 
drug benefit--including quality assurance, electronic prescribing, 
better beneficiary information on drug costs and ways to reduce drug 
costs (for example, through generic substitution), and medication 
therapy management which are designed to improve medication use and 
reduce the risk of adverse events, including adverse drug 
interactions--will also improve beneficiaries' health outcomes. We 
believe that these improvements will occur through enhanced beneficiary 
education, health literacy and compliance programs; improved 
prescription drug-related quality and disease management efforts; and 
ongoing improvements in the information systems that are used to detect 
various kinds of prescribing errors--including duplicate prescriptions; 
drug-drug, drug-allergy and drug-food interactions; incorrect dosage 
calculations, and problems relating to coordination between pharmacies 
and health providers. We also believe that additional reductions in 
errors and additional improvements in prescription choices based on the 
latest available evidence will occur over time as the electronic 
prescribing provisions of the MMA are implemented (To Err is Human: 
Building A Safer Health System, Institute of Medicine of the National 
Academies, 1999, pp. 191-193, http://www.iom.edu or http://www.nap.edu).
    Ultimately, we believe that the evidence supports our conclusion 
that making prescription drugs more available and affordable will help 
beneficiaries to live healthier, more productive lives. We also believe 
that expanding prescription drug coverage will reduce adverse health 
events and Medicare program spending on more costly services for some 
beneficiaries, and will be particularly important for beneficiaries 
with limited means who are more likely to forego beneficial 
prescription drugs when they do not have coverage. However, the effect 
on aggregate Medicare program spending across all beneficiaries is 
difficult to ascertain. At this time, there have not been studies that 
have found evidence that expansions of drug coverage across a large 
population, as will occur under the Medicare drug benefit, yields 
aggregate health care cost savings. Furthermore, there have been mixed 
results on the impact of coverage on the cost-effectiveness of care 
involving certain individual drugs in general, and in differing patient 
populations. Thus, the extent to which the Medicare drug benefit may 
lead to reductions in Medicare spending for other health care services 
in the aggregate across all beneficiaries is difficult to predict. 
Additional research will be needed to further examine and quantify 
these potential effects. For example, we are currently conducting a 
demonstration study on the extent to which coverage of oral medicines 
reduces the use of professionally-delivered medicines and the 
associated physician and health care services that are currently 
covered in Part B. We are very interested in developing further 
evidence on the best ways to encourage outcome improvements and overall 
health care cost reductions through drug coverage, and would welcome 
comments in this area and how this can be incorporated into the 
implementation of the drug benefit. For example, CMS is currently 
collaborating with AHRQ and other experts to identify priorities for 
developing better evidence and increasing value in the use of 
outpatient medications, and intends to develop further evidence as part 
of the implementation of the drug benefit.
2. Recap of the Structure of the Medicare Part D Drug Benefit
    As discussed in more detail elsewhere in the preamble, standard 
prescription drug coverage under Medicare Part D for 2006 consists of a 
$250 deductible, 25 percent cost-sharing (or an actuarially equivalent 
cost-sharing structure) up to an initial coverage limit of $2,250, 100 
percent cost-sharing after the initial coverage limit until an out-of-
pocket threshold of $3,600 is reached, and nominal cost-sharing for 
expenditures beyond the out-of-pocket threshold (that is, the greater 
of 5 percent coinsurance or a copayment of $2 for a generic or 
preferred multiple source drug and $5 for any other drug in 2006, or an 
actuarial equivalent cost-sharing structure). For each year after 2006, 
the deductible, initial coverage limit, out-of-pocket threshold, and 
nominal copayment amounts are indexed to per capita growth in 
prescription drug expenditures for Part D enrollees, as

[[Page 46778]]

described in more detail in the preamble.
    While we model all of our impact estimates on the defined standard 
benefit structure, we note that PDP and MA-PD plans have the option of 
offering actuarially equivalent standard or alternative coverage. In 
addition, plans may offer enhanced alternative coverage where for an 
additional premium they offer supplemental drug coverage such as 
coverage for benefits above the initial coverage limit (that is, 
coverage of the so-called ``doughnut hole''), and we anticipate that 
some plans will offer this coverage.
    Beneficiaries who meet certain income and assets requirements 
qualify for low-income subsidy assistance with cost-sharing and 
premiums. While the out-of-pocket threshold level is the same for all 
enrollees, the beneficiary cost-sharing liability covered by the low-
income subsidy counts towards the Part D out-of-pocket threshold. 
Therefore, subsidy-eligible individuals will pay substantially less 
than all other enrollees before the catastrophic coverage begins. 
Institutionalized full-benefit dual eligibles pay no cost-sharing. 
Other full-benefit dual eligibles with income not in excess of 100 
percent of the Federal Poverty Level (FPL) face no deductible, have 
nominal cost sharing of $1 for generic drugs or preferred multiple 
source drugs and $3 for any other drug up to the out-of-pocket 
threshold, and receive full coverage for drug costs beyond the out-of-
pocket threshold. Other full-benefit dual eligibles with income above 
100 percent of FPL and beneficiaries who are not full benefit dual 
eligibles, but who have income less than 135 percent of FPL and assets 
up to $6,000 per individual (or $9,000 per couple) in 2006, face no 
deductible, have nominal cost sharing of $2 and $5 for the respective 
drugs up to the out-of-pocket threshold, and receive full coverage for 
costs beyond the out-of-pocket threshold. For other beneficiaries with 
income less than 150 percent of FPL and assets up to $10,000 per 
individual (or $20,000 per couple) in 2006, there is a reduced 
deductible of $50, cost-sharing of 15 percent for costs up to the out-
of-pocket threshold, and nominal cost sharing of $2 and $5 for the 
respective drugs for costs beyond the out-of-pocket threshold. For 
years after 2006, all aspects of the benefit structure related to the 
low-income subsidy are indexed to growth in per capita drug spending, 
except for the nominal copayment amounts for full-benefit dual 
eligibles with income not in excess of 100 percent of FPL and the low-
incomes assets tests, which are indexed to the Consumer Price Index.
    The low-income subsidy also offers beneficiaries substantial help 
with premiums. Many beneficiaries who receive the low-income subsidy 
will pay no premium for Medicare drug coverage. Full-benefit dual 
eligibles and beneficiaries who have incomes up to 135 percent of FPL 
and who meet the assets test receive a full Federal subsidy of the 
beneficiary premium--that is, beneficiaries pay no premium as long as 
they select a PDP or MA-PD that has a premium that does not exceed the 
greater of the low-income benchmark premium or the lowest PDP premium 
for basic coverage for the region and as long as they sign up for 
Medicare Part D within the initial enrollment period or have met 
creditable coverage requirements. Other beneficiaries receiving a low-
income subsidy--those with income between 135 percent and 150 percent 
of FPL and meeting asset requirements--would face a sliding scale 
premium based on income.
    Medicare Part D also has implications for beneficiaries enrolled in 
the Program of All Inclusive Care for the Elderly (PACE). PACE programs 
already provide a comprehensive drug benefit to dual eligible enrollees 
and to enrollees who only have Medicare coverage. For the dual eligible 
enrollees, PACE programs will now be receiving funding for prescription 
drugs through Medicare Part D instead of through the State Medicaid 
program. PACE enrollees who only have Medicare coverage are today 
paying the full cost of their drug coverage. As a result of the Federal 
subsidization of Part D coverage, they will receive substantial premium 
relief. This lowering of premiums for beneficiaries who only have 
Medicare coverage may lead to an increase in enrollment in PACE 
organizations.
3. Estimated Total Drug Spending, Spending Paid by the Medicare Drug 
Benefit, and Premiums

a. Summary

    Table V-1 presents estimates for Medicare Part D enrollees of 
average total drug spending, average drug spending paid for by the 
Medicare drug benefit, and the average premium associated with Medicare 
Part D drug coverage. Since beneficiaries who are eligible for the low-
income subsidy receive additional assistance with cost-sharing and 
premiums, we present estimates separately for beneficiaries who do and 
do not receive the low-income subsidy.
    For Medicare Part D enrollees who do not receive the low-income 
subsidy, we estimate that average per capita drug spending in CY 2006 
would be $2,936. This projection of drug spending includes cost-
management savings discussed in the next subsection, such as price 
concessions and generic substitution, or utilization effects resulting 
from the Medicare drug benefit. The Medicare drug benefit would be 
expected to pay for on average about $1,437 of prescription drug costs, 
or on average nearly half of total beneficiary drug spending in CY 
2006.\3\ Beneficiary premiums for defined standard coverage will vary 
across PDPs and MA-PDs. We estimate that the beneficiary premium to 
obtain defined standard coverage would be on average about $428 per 
year in CY 2006. Thus, we estimate that the average monthly premiums 
would be in the range of about $35. A beneficiary may pay more or less 
depending upon which PDP or MA-PD the beneficiary selects. For these 
non-low-income beneficiaries, the government is estimated to contribute 
$1,231 of the $1,659 total cost of the standard Medicare Part D benefit 
(including PDP and MA-PD administrative costs). In CY 2010, drug 
spending for Part D enrollees who do not receive the low-income subsidy 
is projected to be $3,852 on average, with the Medicare drug benefit 
paying for on average $1,890 of prescription drug costs. The average 
premium in CY 2010 for these beneficiaries is projected to be $564 per 
year or roughly $47 per month for defined standard coverage.
---------------------------------------------------------------------------

    \3\ We note that $1,437 reflects the average payout of the 
Medicare drug benefit for non-low-income beneficiaries in 2006. This 
is different from what the payout would be for a beneficiary with 
total drug spending equal to average total drug spending for all 
enrollees. For example, standard coverage under Medicare Part D 
would payout $1500 for a beneficiary with total spending of $2936. 
The difference between the average payout versus the payout for a 
beneficiary with average total drug spending is due to the 
interaction between the distribution of drug spending and the 
deductible and cost-sharing structure of the Medicare drug benefit.
---------------------------------------------------------------------------

    For enrollees who receive the low-income subsidy, we estimate that 
average per capita drug spending in 2006 would be $3,649.\4\ We 
estimate that on average the Medicare drug benefit would be expected to 
pay for about $3,476 of prescription drug costs, or approximately 95 
percent of total drug spending. In 2010, these beneficiaries would be 
expected to spend on average $4,794 per capita on prescription drugs, 
with the Medicare

[[Page 46779]]

drug benefit paying for on average about $4,518 of those drug costs. As 
discussed in the preamble, the low-income cost-sharing amounts vary 
depending upon a beneficiary's income and assets. Consequently, the 
share of drug spending paid for by the Medicare drug benefit would vary 
by subsidy eligibility category, ranging from an average of about 85 
percent for the highest-resource subsidy eligibility category (that is, 
those beneficiaries who qualify for the subsidy under the criteria that 
they have income less than 150 percent of FPL and assets up to $10,000 
per individual (or $20,000 per couple) in CY 2006) to more than 95 
percent for the most generous subsidy category (that is, full-benefit 
dual eligibles with income not in excess of 100 percent of FPL). As 
discussed in the following methodology section, these estimates do not 
take into account the waiver of cost sharing for institutionalized 
full-benefit dual eligibles, which further enhances the drug subsidy 
for this category of beneficiaries.
---------------------------------------------------------------------------

    \4\ Average drug spending for enrollees eligible for the low-
income subsidy is higher than for enrollees not eligible for the 
subsidy because a substantial portion of those eligible for the low-
income subsidy are full-benefit dual eligibles, who on average tend 
to be sicker.
---------------------------------------------------------------------------

    As noted previously, many beneficiaries who receive the low-income 
subsidy receive a full Federal subsidy of the beneficiary premium (that 
is, the beneficiary pays no premium at all), as long as they enroll in 
a PDP or MA-PD with a premium that does not exceed the greater of the 
low-income benchmark premium or the lowest PDP premium for basic 
coverage for the region and as long as they enroll during the initial 
enrollment period or have met creditable coverage requirements. For 
low-income enrollees with income between 135 percent and 150 percent of 
FPL who face a sliding scale premium based on income, we estimate that 
the premium will average $214 per year or roughly $18 per month in 
2006, and $282 per year or roughly $24 per month in 2010.\5\ The 
government contribution to the cost of Medicare Part D prescription 
drug coverage for low-income subsidy enrollees is estimated to average 
almost $3,500 in CY 2006.
---------------------------------------------------------------------------

    \5\ We note that to estimate the average sliding scale premium 
we assume a uniform distribution of income between 135 percent and 
150 percent of FPL. If the income distribution is not uniform, the 
average sliding scale premium could differ somewhat from our 
estimates.
---------------------------------------------------------------------------

b. Methodology and Assumptions Underlying Estimates

    To estimate beneficiary drug spending for the period CY 2006-2010, 
we use drug spending data from the Medicare Current Beneficiary Survey 
(MCBS) adjusted for underreporting and trended forward based on 
projected growth in per capita drug spending based on the National 
Health Expenditures projections.
    In projecting drug spending for enrollees in Medicare Part D, we 
assume that PDPs and MA-PDs will achieve a certain level of savings due 
to cost management activities such as negotiation of manufacturer 
rebates and discounts and other price concessions, and promotion of 
generic substitution. We assume discounts and cost-management savings 
of 15 percent in 2006, 17 percent in 2007, 19 percent in 2008, 21 
percent in 2009, and 23 percent in 2010. To take into account that some 
enrollees in the Medicare Part D drug benefit are likely to have had 
previous drug coverage from other sources and received some level of 
discounts and cost-management savings through that coverage, we 
adjusted the MCBS spending data upward to reflect the full retail price 
by backing out any assumed discounts and cost management savings and 
then applied the Part D savings factor. We note that some beneficiaries 
without drug coverage are currently receiving discounts through the 
Medicare-approved drug card program. Conceptually, those discounts 
should also be backed out of drug spending before applying the Part D 
savings factor; however, because the drug spending data on which our 
projections are based predate the Medicare-approved drug card program, 
such an adjustment was not necessary.
    Our assumptions related to the cost management savings take into 
account several factors. Insured products generally obtain lower drug 
prices than those available to cash paying customers. For example, an 
April 2000 study prepared by HHS entitled, ``A Report to the President: 
Prescription Drug Coverage, Spending, Utilization and Prices,'' 
indicated a significant price differential between individuals paying 
cash for prescriptions at a retail pharmacy versus individuals with 
insurance. This difference held true for both the Medicare and non-
Medicare populations. According to the study, in 1999 the price paid by 
cash customers was nearly 15 percent more than the total price paid 
under prescription drug insurance, including the enrollee cost sharing. 
For 25 percent of the most commonly prescribed drugs, this price 
difference was higher--over 20 percent. Such price concessions are 
envisioned to be an important part of the Medicare drug benefit, as the 
statute specifically requires PDPs and MA-PDs to provide beneficiaries 
with access to negotiated prices, which would reflect manufacturer 
rebates and discounts and other price concessions. Besides these types 
of price concessions, we also anticipate that PDPs and MA-PDs will 
achieve savings as a result of other cost management activities such as 
promotion of generic substitution, which Medicare will help support as 
well through providing information on opportunities for cost savings to 
beneficiaries and their health providers. As discussed elsewhere in the 
preamble, the statute requires PDPs and MA-PDs to put in place a cost-
effective drug utilization management program that would include 
incentives to reduce costs when medically appropriate. We believe that 
these various efforts are likely to increase use of generics relative 
to brand-name drugs among Medicare Part D enrollees.
    Furthermore, in developing our cost management savings assumptions, 
we also considered the nature of the drug price negotiations occurring 
under the Medicare prescription drug benefit. We expect that the 
private price negotiations between PDP sponsors and drug manufacturers 
would achieve comparable or better savings than direct price 
negotiation between the government and manufacturers, as well as 
coverage options that better reflect beneficiary preferences. This 
expectation reflects the strong incentives to obtain low prices and 
pass on the savings to beneficiaries resulting from competition, 
relevant price and quality information, Medicare oversight, and 
beneficiary assistance in choosing a drug plan that meets their needs. 
This is similar to the conclusion of other analyses, for example, CBO's 
recent statement that ``Most single-source drugs face competition from 
other drugs that are therapeutic alternatives. CBO believes that there 
is little, if any, potential savings from negotiations involving those 
single-source drugs. We expect that risk-bearing private plans will 
have strong incentives to negotiate price discounts for such drugs and 
that the Secretary would not be able to negotiate prices that further 
reduce federal spending to a significant degree.'' It also reflects 
Medicare's recent experience with drug price regulation for currently-
covered drugs, in which regulated prices for many drugs have 
significantly exceeded market averages.
    In addition, our drug spending projections assume that changes in 
beneficiary out-of-pocket costs resulting from the Medicare drug 
benefit would affect beneficiaries' utilization of drugs. For example, 
as discussed previously, beneficiaries without drug coverage fill fewer 
prescriptions and spend less in total on prescription drugs than 
beneficiaries with drug coverage. Under

[[Page 46780]]

the Medicare drug benefit, we would expect that drug utilization and 
spending would increase for beneficiaries without prior drug coverage. 
Our estimates assume that aggregate beneficiary drug spending (that is, 
total drug spending for all beneficiaries including those with and 
without drug coverage prior to 2006) would be 10.6 percent greater in 
CY 2006 than it otherwise would be, due to reduced out-of-pocket costs 
resulting from the Medicare drug benefit.
    Using our estimates of projected drug spending for enrollees in 
Medicare Part D, we estimate the amount of drug spending that would be 
paid for by the Medicare drug benefit, separately for enrollees who 
would and would not receive the low-income subsidy. For enrollees who 
receive the low-income subsidy, these estimates take into account the 
differential cost-sharing by income and assets within the low-income 
group. However, due to data limitations, our estimates do not take into 
account the fact that beneficiary cost-sharing is waived entirely for 
institutionalized full-benefit dual eligibles.
    For the purposes of this impact analysis, those beneficiaries who 
are assumed to enroll in Medicare Part D are assumed to do so within 
their initial enrollment period and face no late enrollment penalty. We 
also assume that all low-income beneficiaries with income under 135 
percent of FPL select PDP and MA-PD plans with a premium that does not 
exceed the greater of the low-income benchmark premium or the lowest 
PDP premium for basic coverage for the region, and thus face no 
beneficiary premium.

Table V-1.--Estimated Average Enrollee Total Drug Spending, Drug Spending Paid for by Medicare Drug Benefit, and
                                    Drug Benefit Premium, CY 2006 and CY 2010
----------------------------------------------------------------------------------------------------------------
                                                                Estimated
                                                             average annual
                                                Estimated     drug spending
                                             average annual    paid for by     Estimated average annual premium
                                              drug spending   the medicare
                                                              drug benefit*
----------------------------------------------------------------------------------------------------------------
2006:
    Enrollees Not Receiving Low-Income               $2,936          $1,437  $428.
     Subsidy.
    Enrollees Receiving Low-Income Subsidy.           3,649           3,476  0 or $214**.
2010:
    Enrollees Not Receiving Low-Income                3,852           1,890  $564.
     Subsidy.
    Enrollees Receiving Low-Income Subsidy.           4,794           4,518  0 or $282**.
----------------------------------------------------------------------------------------------------------------
* Average annual drug spending paid for by the Medicare drug benefit reflects on average how much the Medicare
  drug benefit will payout per beneficiary. This is different from the amount of drug costs the Medicare drug
  benefit would payout for a beneficiary with average total drug spending, due to the interaction between the
  distribution of drug spending and the deductible and cost-sharing structure of the Medicare drug benefit. We
  also note that the average drug spending paid for by the Medicare Part D plan reflects drug costs reimbursed
  by the plan and does not include PDP or MA-PD administrative costs.
** Low-income subsidy enrollees with income between 135 percent and 150 percent of FPL face a sliding scale
  premium based on income, which is estimated to average $214 per year in 2006 ($282 in 2010). Other enrollees
  in the low-income subsidy pay no beneficiary premium at all, as long as they select a PDP or MA-PD with a
  premium that does not exceed the greater of the low-income benchmark premium or the lowest PDP premium for
  basic coverage for the region and as long as they enroll within the initial enrollment period or have met
  creditable coverage requirements.

4. Positive Effects of the Medicare Retiree Drug Subsidy and Other 
Employer Options for Providing Prescription Drug Assistance
    The Medicare prescription drug benefit and retiree drug subsidy 
represent additional funding sources that can help employers and unions 
continue to provide high quality drug coverage for their retirees. We 
anticipate that these new sources of support will have many important 
positive benefits for the quality and security of drug coverage for 
retirees. In this section, we describe the Medicare retiree drug 
subsidy and several other ways that Medicare Part D offers financial 
assistance with retiree prescription drug costs to employers and 
unions.

a. Overview of the Medicare Retiree Drug Subsidy

    The positive benefits for retiree coverage from the new retiree 
drug subsidy are the result of the subsidy itself, the special tax-
favored status of the subsidy payments to the qualified retiree health 
plans, and the flexibility in using the subsidy to support retiree 
coverage. The retiree drug subsidy program has highly flexible rules 
and stands as an additional option that permits employers and unions to 
continue providing drug coverage to their Medicare-eligible retirees 
while retaining their current plan designs that are at least equivalent 
to the standard Part D benefit, and receiving a Federal subsidy that 
reduces the cost of providing this coverage. Employers retain the 
option of delivering regular supplementation to Medicare Part A and 
Part B benefits through arrangements with Medicare Advantage 
organizations offering a MA only plan without the Part D benefit, but 
then still participate in the retiree drug subsidy program and through 
a separate private contract with the MA organization arrange for an 
employer-sponsored retiree drug benefit.
    The intent of the Medicare retiree drug subsidy is to offer 
qualified retiree prescription drug plans financial assistance with a 
portion of their prescription drug costs and thereby ``help employers 
[to] retain and enhance their prescription drug coverage so that the 
current erosion in coverage would plateau or even improve'' (Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 
Conference Report, p. 53). By making a tax-free subsidy for 28 percent 
of allowable prescription drug costs (that is, drug spending between 
$250 and $5,000 for 2006) available to qualified retiree prescription 
drug plans, the Medicare retiree drug subsidy significantly reduces 
financial liabilities associated with employers' retiree drug coverage 
and encourages employers to continue assisting their retirees with 
prescription drug coverage.
    To provide a rough estimate of the per capita retiree drug subsidy, 
we used MCBS data on prescription drug spending for retirees with 
employer-sponsored coverage, adjusted for under-reporting, and trended 
these data forward based on the projected growth rate in prescription 
drug spending from the National Health Expenditures projections. We 
then applied 28 percent

[[Page 46781]]

to annual allowable costs between the cost threshold and cost limit 
($250 and $5,000, respectively, in 2006). This calculation yielded an 
estimated per capita retiree drug subsidy amount of $611 in 2006. The 
per capita subsidy amount was calculated across all beneficiaries in 
qualified retiree prescription drug plans, including both those who do 
and do not have spending high enough to qualify for a Medicare retiree 
drug subsidy payment. We are aware that there are other sources of 
information on the value of current and projected retiree coverage, and 
we seek comment on the completeness and accuracy of our MCBS-based 
projections for valuing the retiree subsidy.
    The Medicare retiree drug subsidy is excluded from the taxable 
income of the employer (just as the Medicare subsidy provided to 
beneficiaries through the Medicare prescription drug benefit is 
excluded from the taxable income of the beneficiary). The tax-free 
nature of the Medicare retiree drug subsidy generally increases its 
value to employers. As indicators of the value of this tax subsidy, we 
provide some estimates of the equivalent values of a taxable subsidy 
for employers at several corporate income tax rates. For corporations 
with taxable incomes, marginal tax rates generally range from 15 
percent to 35 percent. According to estimates by the Congressional 
Research Service, the weighted average effective tax rate for 
corporations that pay taxes is approximately 28.5 percent. Combining 
this tax rate and the estimated $611 average per capita subsidy amount 
for 2006, we estimate that the $611 tax-free retiree drug subsidy 
amount would be equivalent to a taxable subsidy of $855 for employers 
subject to taxation. The equivalent taxable subsidy for any particular 
employer with taxable income would, of course, vary depending on its 
specific marginal tax rate. For example, the tax-free $611 average 
retiree drug subsidy amount would be equivalent to about $815 of 
taxable income for employers with a marginal tax rate of 25 percent and 
about $940 of taxable income for employers with a marginal tax rate of 
35 percent. We request comments on the effect of the tax-favored 
treatment of the subsidy payments for employers and retirees, including 
further evidence on the distribution of marginal tax rates among 
employers offering or likely to offer retiree coverage.
    Another important factor in whether employers or unions will use 
the retiree subsidy is whether their contribution to the retiree 
coverage is sufficient to qualify for coverage, and if it is not 
currently sufficient, whether they will increase the generosity of 
their contribution in order to receive the cash and tax value of the 
subsidy. As we note below, we intend to implement the retiree drug 
subsidy in a manner that avoids ``windfalls'' to employers that are not 
making contributions to retiree coverage that reflect the value of the 
retiree subsidy. Because some employers appear to contribute less than 
the value of the retiree subsidy to the coverage they provide now, we 
seek comment on the current levels and trends of such limited employer 
contributions, and on how the new Medicare payments may affect 
decisions by firms to increase the generosity of their retiree health 
contributions. Such increased contributions are likely to be in the 
financial interest of some employers, because they could qualify for 
the value of the full subsidy by making an additional incremental 
contribution of less than the full value of the subsidy, thereby 
achieving net savings.

b. Additional Options Available to Employers Through Medicare Part D

    As indicated earlier, in addition to the ability to obtain Medicare 
retiree drug subsidy payments for sufficiently generous drug coverage, 
Medicare Part D also gives employers a variety of other options for 
continuing to assist their Medicare-eligible retirees in obtaining more 
generous drug coverage. For example, employers that are supporting 
retiree coverage now could also choose to provide enhanced drug 
coverage by using the new Medicare Part D subsidy directly (that is, 
encouraging their retirees to enroll in an enhanced Medicare Part D 
plan which includes a 75 percent government subsidy for the standard 
benefit) and employers providing enhanced coverage over and above the 
standard Part D benefit that maintains or exceeds the generosity of 
their current benefit designs. This can be achieved by either arranging 
for a PDP or MA-PD Part D plan to provide enhanced benefits to their 
retirees, choosing to become a Part D plan that offers enhanced 
benefits to their retirees, or providing separate supplemental drug 
coverage that wraps around a Part D plan (similar to the typical 
employer and union policies that wrap around Medicare benefits under 
Part A and Part B).
    Based on published employer surveys, reports from employers and 
benefit consultants, and other sources of evidence including the fact 
that some employers are not making contributions to coverage sufficient 
to qualify for the retiree drug subsidy, we expect that some employers 
will choose to provide prescription drug assistance to their Medicare-
eligible retirees in the form of enhanced benefit packages through Part 
D plans or separate wraparound coverage. In both cases, the employer 
contributions would augment the Medicare's subsidized coverage under 
Part D. Employers currently do this relative to Medicare Part A and 
Part B coverage, either through separate supplemental policies or 
through arrangements with Medicare Advantage plans. In fact, the 
Medicare retiree drug subsidy represents a new type of arrangement for 
employers relative to the interaction of their retiree coverage with 
Medicare. Thus, some employers may prefer to interface with the new 
Medicare prescription drug benefit in a manner similar to their 
supplementation of the basic Medicare Part A and Part B benefits. In 
addition, we anticipate that providing enhanced Part D benefits or 
separate wraparound coverage may be an attractive option to those 
employers that may not be eligible for the Medicare retiree drug 
subsidy because their retiree drug benefits, as currently structured, 
are not actuarially equivalent to the standard Medicare Part D drug 
benefit. We also expect that many of the employers and unions that 
choose to provide drug coverage through or in coordination with Part D 
will also choose to pay some or all of their retirees' Part D premiums. 
Since the Medicare Part D drug benefit includes a direct Federal 
subsidy, these approaches would allow employers to continue to provide 
a benefit package of similar or greater generosity compared to their 
existing arrangements while potentially lowering their prescription 
drug costs.
    Although the Medicare prescription drug benefit and retiree drug 
subsidy represent additional funding sources for employer-sponsored 
retiree drug coverage that can help employers to retain drug coverage 
for their retirees, there are also a number of economic forces 
unrelated to Medicare that play a role in employers' decision making 
regarding both the availability and the generosity of employer-
sponsored retiree health coverage. Many of the economic forces behind 
the ongoing erosion of retiree health benefits that are discussed 
subsequently in this impact analysis may continue to give employers a 
financial incentive to reduce the costs associated with providing 
retiree health coverage. The Employee Benefit Research Institute (EBRI) 
has estimated that additional declines in retiree drug coverage could 
potentially continue to occur, particularly for future retirees, ``due 
to existing business, accounting,

[[Page 46782]]

and cost trends,'' regardless of changes in the Medicare program 
(``EBRI Special Analysis: How Many Medicare Beneficiaries Will Lose 
Employment-Based Retiree Health Benefits if Medicare Covers Outpatient 
Prescription Drugs?'' Dallas L. Salisbury and Paul Fronstin, Employee 
Benefit Research Institute, July 18, 2003, available at http://www.ebri.org).

c. Anticipated Effects of the Medicare Retiree Drug Subsidy Program and 
Part D Assistance for Retirees

    While there is considerable uncertainty about the choices that 
employers will make regarding the form of prescription drug assistance 
that they may choose to provide for their Medicare-eligible retirees, 
we believe that employers will generally continue to provide 
prescription drug assistance to their retirees and that Medicare Part D 
will make it more affordable for them to do so.
    First, with the decline over the years in the number of employers 
offering retiree health insurance coverage, the remaining employers who 
continue to offer such coverage directly are likely those employers who 
have a contractual commitment or other interest in maintaining that 
coverage.
    Second, although employers' responses to Medicare Part D and the 
retiree drug subsidy are expected to play out over the next few years, 
initial signals suggest that there has been a positive response to the 
Medicare retiree drug subsidy. Several major employer associations, 
including the Employers' Coalition on Medicare, American Benefits 
Council, and the U.S. Chamber of Commerce, have praised the MMA for 
giving businesses flexibility in deciding how their retiree health 
plans will interact with the Medicare prescription drug benefit, and 
for offering employers a 28 percent Medicare retiree drug subsidy 
payment that would not be taxed for employers who continue to provide 
high-quality retiree coverage (``ECOM Applauds Historic Passage of 
Medicare Reform Legislation,'' Employers' Coalition on Medicare press 
release, November 25, 2003, http://www.employersandmedicare.org; 
``Senate Passes Medicare, Prescription Drug Reform Bill,'' press 
release, American Benefits Council, November 25, 2003, http://www.americanbenefitscouncil.org, ``Chamber Praises Congressional Action 
on Medicare Reforms,'' U.S. Chamber of Commerce, November 25, 2003, 
http://www.uschamber.com).
    Additionally, several major corporations have recently issued 2003 
annual reports that include estimates of the reduction in their 
accumulated benefits obligation that will occur over time due to the 
Medicare subsidy payments they anticipate receiving under the Medicare 
retiree drug subsidy program. Eighteen companies have estimated that 
they would collectively save $11.8 billion in long-term postretirement 
benefit costs, which are expected to be amortized over the full working 
life of the employees that are eligible for these benefits (``Expected 
Cost Savings From Medicare Act May Top $11.8 Billion'', Lingling Wei, 
Dow Jones Newswires, The Wall Street Journal, March 22, 2004, available 
at http://www.wsj.com). However, we are aware that some of these 
companies may need to revise their initial estimates to reflect: (1) 
The Financial Accounting Standards Board's (FASB) recently-issued Final 
Staff Position on accounting for the effects of the Medicare retiree 
drug subsidy payments, which is effective for financial statements for 
periods beginning after June 15, 2004 (``FASB Staff Position Number FAS 
106-2, Accounting and Disclosure Requirements Related to the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003,'' posted 
May 19, 2004, available at http://www.fasb.org/fasb_staff_positions/fsp_fas106-2.pdf), and (2) the regulations for the retiree drug 
subsidy.
    Although most publicly traded companies have chosen to defer 
recognizing the effects of the Medicare retiree drug subsidy payments 
pending receipt of additional accounting and regulatory guidance, these 
sources suggest that numerous large companies that offer employment-
based retiree prescription drug coverage anticipate continuing to 
provide this coverage and accepting the Medicare retiree drug subsidy 
payments. However, some employers have not yet decided whether they 
will apply for the Medicare retiree drug subsidy, and are considering 
the various other options that are available for providing prescription 
drug assistance to their Medicare-eligible retirees (See Press Releases 
and Statements, Press Room of the Employers' Coalition on Medicare, 
available at http://www.employersandmedicare.org).
    Overall, we believe that the implementation of Medicare Part D, 
including the Medicare retiree drug subsidy and the other opportunities 
it affords employers for providing continued prescription drug 
assistance to their Medicare retirees, will result in combined 
aggregate payments by employers and Medicare for drug coverage on 
behalf of retirees generally being greater--and frequently 
significantly greater--than they otherwise would have been without the 
enactment of the MMA. Furthermore, we believe that the Medicare 
prescription drug benefit and retiree drug subsidy represent a 
particularly important strengthening of health care coverage for future 
Medicare-eligible retirees, given the erosion in the availability and 
generosity of employer-sponsored retiree coverage for future Medicare 
beneficiaries that has already been taking place. In addition to 
comments on how employers are likely to view each choice of coverage, 
we also seek comment on how the several options available to employers 
to continue or increase the generosity of their retiree coverage can be 
designed together to maximize the increase in availability of high-
quality drug benefits for retirees. This includes a request for 
comments on modeling not just the choice by employers and unions of 
retiree drug subsidy, wrapping around Part D coverage, qualifying as an 
enhanced Part D plan directly, or using an enhanced PDP or MA plan, but 
also the impact of these choices on premium reductions and additional 
drug benefits for retirees and thus the impact on reducing retirees' 
net payments for drugs and other health services.

d. Historical Trends in the Availability and Generosity of Retiree Drug 
Coverage

    As additional background, we provide a discussion of trends in the 
availability and generosity of employer-sponsored retiree drug 
coverage, based on data from several different sources. We note that 
there are a limited number of data sources relating to retiree 
coverage, and some of these data sources may not be directly comparable 
to one another due to differences in the scope of analysis (for 
example, overall retiree health benefits versus specific information on 
retiree drug coverage), unit of analysis (for example, retirees versus 
firms, or firms versus establishments), as well as differences in the 
age groups, types of retirees (current versus future), and employer 
sizes that are being analyzed. For these reasons, caution should be 
exercised in making comparisons across the various data sources that 
are cited in this section.
    As noted previously, employer-sponsored insurance has been an 
important source of drug coverage for many Medicare beneficiaries. 
However, for well over a decade, the availability and generosity of 
employer-sponsored retiree health coverage has been eroding, 
particularly for future retirees. The level of employer-sponsored 
retiree health coverage has been relatively

[[Page 46783]]

stable for the nation's current retirees during recent years. However, 
the apparent stability of benefits has been changing for future 
retirees.
    For example, the trend in retiree health coverage for older 
Medicare beneficiaries (ages 70 and older) was essentially flat between 
1996 and 2000 (``Employer-Sponsored Health Insurance and Prescription 
Drug Coverage for New Retirees: Dramatic Declines in Five Years,'' 
Bruce Stuart et al, Health Affairs, July 23, 2003, available at http://www.healthaffairs.org).
    From 1988 to 1991, the percentage of firms with 200 or more workers 
offering health benefits to active workers that also offered retiree 
health benefits declined substantially from 66 percent to 46 percent 
(KPMG Survey of Employer-Sponsored Health Benefits: 1988, 1991, cited 
in Kaiser/HRET 2003 Annual Survey of Employer-Sponsored Health 
Benefits, available at http://www.kff.org) due to the implementation of 
Financial Accounting Statement No. 106 (FAS 106) as well as increasing 
costs. FAS 106, which was published in December 1990, required 
companies to make significant changes in the way that they accounted 
for future retiree health benefits on their balance sheets for fiscal 
years ending after December 15, 1992 (``Retiree Health Benefits: Trends 
and Outlook,'' Paul Fronstin, Employee Benefit Research Institute 
(EBRI) Issue Brief No. 236, August 2001; ``Statement of Financial 
Accounting Standards No. 106: Employers' Accounting for Postretirement 
Benefits Other Than Pensions,'' Financial Accounting Standards Board, 
December 1990, available at http://www.fasb.org/pdf/fas106.pdf). The 
percentage of large employers offering retiree health coverage has 
continued to decline during the past decade (General Accounting Office 
(GAO), ``Retiree Health Benefits: Employer-Sponsored Benefits May Be 
Vulnerable To Further Erosion,'' May 2001, available at http://www.gao.gov). However, the recent declines have been more gradual than 
what occurred during the early 1990s, with slightly less than 40 
percent of the nation's large firms with 200 or more workers that offer 
health benefits to active workers also offering retiree health benefits 
in 2003 (Kaiser/HRET 2003 Annual Survey of Employer-Sponsored Health 
Benefits, available at http://www.kff.org).
    Many of the changes in availability of retiree health coverage in 
the past decade have primarily affected future retirees, rather than 
current retirees. (Fronstin, August 2001). For example, the percentage 
of large employers with 500 or more employees offering retiree health 
benefits to new Medicare-age (that is, ages 65 and older) retirees 
decreased from 40 percent in 1993 to 21 percent in 2003 (data from the 
National Survey of Employer-Sponsored Health Plans, 2003 cited in a 
press release entitled ``Surprise slow-down in U.S. health benefit cost 
increase,'' Mercer Human Resource Consulting, December 8, 2003, 
available at http://www.mercerhr.com). As a result, new retirees are 
less likely to have employer-sponsored retiree drug coverage than 
current retirees.
    Availability of retiree health coverage varies depending on the 
type of employer. Employers with union workers are more likely to offer 
retiree coverage than employers without union workers. Similarly, 
public sector employers are more likely to offer coverage to retirees 
than private sector employers. (Kaiser/HRET 2003 Annual Survey of 
Employer-Sponsored Health Benefits, available at http://www.kff.org; 
``How States Are Responding to the Challenge of Financing Health Care 
for Retirees,'' Jack Hoadley, Henry J. Kaiser Family Foundation, 
September 2003, available at http://www.kff.org.)
    Availability of retiree health coverage also varies according to 
the size of the employer. Larger employers are more likely to offer 
retiree health coverage than smaller employers. For example, in 2003, 
38 percent of the nation's private sector firms with 200 or more 
workers that offered health benefits to active workers also offered 
retiree health coverage to pre-age 65 and/or Medicare-age retirees 
(Kaiser/HRET, 2003). However, very few smaller employers offer retiree 
health insurance. Recent surveys have found that only 3 to 10 percent 
of the nation's smaller private sector firms (3 to 199 workers) that 
offer health benefits to active workers also offer retiree health 
coverage (Kaiser/HRET 2001, 2002 and 2003 Annual Surveys of Employer-
Sponsored Health Benefits, available at http://www.kff.org).
    Larger employers account for the majority of the beneficiaries with 
employer-sponsored retiree coverage. In 2001, data from the Medical 
Expenditures Panel Survey indicate that less than 1 percent of the 
nation's smallest private establishments (those with a ``firm size,'' 
or total number of employees for the entire firm, of less than 50 
employees) offered health insurance to Medicare-age retirees, compared 
with 37 percent of the nation's largest private sector establishments 
(those with a firm size of 1,000 or more employees). As a result, 
within the private sector, the largest firms (1,000 or more employees) 
covered approximately 90 percent of the Medicare-age retirees who had 
employer-sponsored retiree coverage, while smaller firms (fewer than 
1,000 employees) covered only 10 percent of these retirees.
    In an effort to control costs, many employers have been changing 
their benefit packages (for example, reducing the benefit that is 
offered and/or increasing the amount that the retiree has to pay), 
resulting in gradual erosion in the generosity of this coverage over 
time. For example, since the mid-1990s, some employers have made 
changes in eligibility for retiree health coverage (for example, age 
and service requirements), reduced their subsidization of retiree 
health costs (by increasing retirees' share of premiums and increasing 
retirees' co-payments and deductibles), placed caps on the employer 
contribution to retiree health costs (aggregate or per beneficiary), or 
moved to offering a defined contribution health benefit (Fronstin, 
August 2001; GAO, May 2001). Because many employers have identified 
prescription drug costs as a major contributor to rising retiree health 
benefit costs, they have adopted cost control measures in an effort to 
manage their retiree prescription drug costs (Kaiser/HRET, 2003).
    The intent of Medicare Part D and the retiree drug subsidy is to 
provide employers and unions with a set of highly flexible options that 
are designed to make it more affordable for them to continue providing 
high-quality prescription drug assistance to their Medicare-eligible 
retirees. As discussed earlier, the MMA Conference Report indicates 
that by lowering the cost of providing retiree drug benefits and 
providing financial incentives for employers to maintain this coverage 
for their Medicare-eligible retirees through Medicare Part D and the 
retiree drug subsidy, it is hoped that the erosion in the availability 
of employer-sponsored retiree drug coverage will plateau or even 
improve.
    Overall, we expect that the implementation of Medicare Part D, 
including the Medicare retiree drug subsidy and the other opportunities 
it affords employers for providing continued prescription drug 
assistance to their Medicare retirees, will result in combined 
aggregate payments by employers and Medicare for drug coverage on 
behalf of retirees generally being greater--and frequently 
significantly greater--than they otherwise would have been without the 
enactment of the MMA. Furthermore, the Medicare prescription drug 
benefit and alternative retiree drug subsidy represent a particularly 
important

[[Page 46784]]

strengthening of health care coverage for future Medicare-eligible 
retirees, given the erosion in the availability and generosity of 
employer-sponsored retiree coverage for future Medicare beneficiaries 
that has been taking place.

G. Anticipated Effect on the Federal Budget

    The following section presents estimates of the effect of Medicare 
Part D on net Federal budgetary spending. As indicated previously there 
is a great deal of uncertainty related to making these estimates, 
including the implications of outstanding policy and administrative 
issues that are the subject of this rule making. These represent our 
current best mid-range estimates of the net Federal budgetary effects. 
We have explored various potential approaches. We believe that these 
estimates provide a reasonable representation of the likely effects of 
a variety of proposed policies and potential options.
    We expect that the Medicare drug benefit will affect several 
components of the Federal budget. Specifically, we anticipate that it 
will increase Federal spending on Medicare benefits and decrease 
Federal spending on Medicaid benefits (as dual eligibles' drug coverage 
is shifted from Medicaid to Medicare). The net effect of these changes 
on Federal spending is estimated to be about $48 billion in CY 2006 and 
$67 billion in CY 2010, with the total effect estimated to be about 
$287 billion over the period from 2006-2010. Table V-2 provides year-
by-year estimates of the net Federal budgetary effects \6\ of Medicare 
and Medicaid benefit spending. We discuss these effects subsequently, 
as well as the expected impacts of the Medicare drug benefit on Federal 
administrative costs for Medicare, Medicaid, and the Social Security 
Administration.
---------------------------------------------------------------------------

    \6\ We note that the estimated net Federal budgetary effect of 
Medicare subsidy payments excludes changes to governmental receipts 
(that is, tax collections) because we do not have sufficient data to 
estimate these effects at this time.
---------------------------------------------------------------------------

1. Federal Medicare Spending
    We estimate that the net Federal budgetary effect of Medicare 
benefit spending related to Medicare Part D, including the Medicare 
retiree drug subsidy program, will be nearly $59 billion in CY 2006 and 
$353 billion over the five-year period from CY 2006-2010. The estimated 
$353 billion in additional net Federal spending over the five-year 
period is made up of approximately $401 billion in net Federal spending 
on direct government subsidies, government reinsurance payments, low-
income subsidies, and retiree drug subsidies, with an offset of nearly 
$49 billion in additional Medicare revenues received from States to 
partially compensate for Medicare coverage of dual eligibles' drug 
costs (overall, we estimate States will save due to reduced Medicaid 
spending, as is explained subsequently).\7\
---------------------------------------------------------------------------

    \7\ For the purposes of this impact analysis, we do not assume 
any additional Medicare costs or savings related to risk corridors. 
We also do not assume any savings on Part A and Part B benefits.
---------------------------------------------------------------------------

    In addition, CMS expects to incur administrative expenses related 
to the Medicare drug benefit. Implementing a new program of the size 
and scope of the Medicare drug benefit requires substantial 
implementation expenses, including extensive computer and other systems 
changes. We are in the process of developing estimates of these 
administrative costs as the policies and operational framework for the 
program are developed through the rulemaking process and other efforts.
2. Federal Medicaid Spending
    As a result of Medicare Part D, there is expected to be a reduction 
in net Federal spending on Medicaid benefits for the period CY 2006-
2010, with the reduction estimated to be about $10 billion in CY 2006 
and about $66 billion over the five-year period from CY 2006-2010.
    With the Medicare program providing drug coverage to dual eligibles 
who had previously received drug coverage through Medicaid, State 
Medicaid spending on prescription drugs will be reduced, and as a 
result Federal spending on Medicaid matching payments will also be 
reduced. We estimate reduced Federal Medicaid spending on prescription 
drugs for full-benefit dual eligibles of about $12 billion in CY 2006 
and about $76 billion during the five-year period from CY 2006-2010.
    The reduction in Federal spending for Medicaid prescription drug 
benefits will be partially offset by an increase in Federal Medicaid 
spending for newly enrolled dual eligibles. As discussed in more detail 
in the State impacts section, the additional benefits available to low-
income beneficiaries through Medicare Part D and our outreach 
activities are likely to raise awareness of other benefits available to 
such individuals through Medicaid, including Medicare Savings (QMB/
SLMB) programs, and lead to higher enrollment in these programs. We 
assume that 1.1 million more Medicare beneficiaries will enroll in 
Medicaid, including Medicare Savings (QMB/SLMB) programs, in CY 2006 as 
a result of the Medicare drug benefit. As discussed later in the State 
impacts section, we estimate that a larger share of these beneficiaries 
will receive benefits as QMB/SLMB individuals than will receive full 
Medicaid benefits. Among beneficiaries that are eligible for, but not 
enrolled in Medicaid, we assume a smaller Medicaid uptake rate among 
those beneficiaries that are eligible for full Medicaid benefits, 
because we believe that if these beneficiaries were likely to sign up 
for the richer full Medicaid benefit package, most would have done so 
already. We assume a somewhat higher uptake rate for those 
beneficiaries that are eligible for QMB/SLMB benefits. We estimate 
Federal matching payments for State Medicaid expenditures for these 
beneficiaries will be about $1.7 billion in CY 2006, and total about 
$10 billion during the five-year period from CY 2006-2010.
    In addition, the Medicare drug benefit has implications for Federal 
spending on Medicaid administrative costs. The statute gives 
responsibility to State Medicaid programs as well as the Social 
Security Administration for conducting eligibility determinations for 
low-income benefits under Part D. In addition, States are required to 
provide CMS with data for the purposes of calculating the amounts 
States are required to pay Medicare to compensate for a portion of 
full-benefit dual eligibles' drug costs. These activities will generate 
State administrative costs. Just prior to enactment of the MMA, the 
State share of costs for these determinations was estimated at roughly 
$100 million per year beginning in FY 2005. The Federal share of costs 
would be expected to be roughly the same in any year, and we have 
projected about $106 million in Federal matching payments for these 
State administrative activities in the FY 2005 budget. We plan to 
develop an updated estimate of State administrative costs for 
eligibility determination activities once the operational processes for 
the eligibility determinations are more fully developed, including 
accounting for any efficiency gains resulting from SSA participation.
3. SSA Administrative Costs
    As noted previously, the Social Security Administration (SSA) is 
one of the entities given responsibility by the MMA for making 
eligibility determinations for low-income benefits under Part D as well 
as conducting outreach activities. In addition, SSA will be involved in 
premium collection via withholds from Social Security checks. SSA's 
administrative costs associated with these functions will be

[[Page 46785]]

paid out of the Medicare trust funds. Estimates of these administrative 
costs will be developed as the policies and operational framework for 
the program are formulated through the rulemaking process and other 
efforts.

   Table V-2.--Estimated Net Federal Budgetary Effects of Medicare and Medicaid Benefit Spending, CY 2006-2010
                                              [billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                        2006         2007         2008         2009         2010      2006-2010
----------------------------------------------------------------------------------------------------------------
Net Effect of Medicare Benefit
 Spending Related to Medicare Part
 D
    Federal Spending Related to            67.2         73.1         79.7         86.8         94.7        401.4
     Medicare Part D, including
     the Retiree Drug Subsidy.....
    State Payments to Partially            -8.5         -9.1         -9.7        -10.4        -11.1        -48.7
     Offset Medicare Drug Costs
     for Dual Eligibles...........
                                   --------------
        Subtotal..................         58.7         64.0         70.0         76.4         83.6        352.6
Net Effect of Medicaid Benefit
 Spending
    Additional Federal Matching             1.7          1.9          2.1          2.2          2.4         10.4
     Payments for Newly Enrolled
     Dual Eligibles...............
    Reduction in Federal Matching         -12.0        -13.5        -15.1        -16.9        -18.9        -76.3
     Payments for Medicaid Drug
     Expenditures for Dual
     Eligibles....................
                                   --------------
        Subtotal..................        -10.2        -11.6        -13.0        -14.6        -16.4        -65.9
Net Federal Budgetary Effects of           48.4         52.4         56.9         61.8         67.1       286.7
 Medicare and Medicaid Benefit
 Spending.........................
----------------------------------------------------------------------------------------------------------------
Note: Positive numbers denote increased spending; negative numbers denote reduced spending (that is, savings).
  Numbers may not sum to totals due to rounding and exclude effects on Federal revenues.

H. States

1. Overall State Budgetary Impacts
    We estimate that, as a result of Medicare Part D, States will 
realize net savings of $8.2 billion over the CY 2006-2010 period. 
Estimated State savings range from approximately $500 million in CY 
2006, increasing each year during the five-year period, to reach about 
$3 billion by CY 2010. The estimated $8.2 billion in net State savings 
over the five-year period are made up of $65.3 billion in State savings 
related to Medicare Part D that are partially offset by $57.1 billion 
in State costs related to Medicare Part D.
    We estimate that States will save approximately $65 billion as the 
Medicare Part D drug benefit and Medicare retiree drug subsidy provide 
financial support for prescription drug costs of full-benefit dual 
eligibles, State retirees, and participants in State prescription drug 
assistance programs. The vast majority of these State savings are the 
result of Medicare Part D replacing drug coverage for full benefit dual 
eligibles that would otherwise be paid for by Medicaid. States will 
also achieve savings due to Medicare retiree drug subsidies that will 
be available to State governments that provide qualified prescription 
drug coverage for their retirees. States that operate prescription drug 
assistance programs, as well as states with Pharmacy Plus programs, 
will also realize additional savings as Medicare Part D displaces a 
portion of their spending on prescription drug coverage for enrollees. 
Savings for State prescription drug programs are discussed in more 
detail in a separate section later in this analysis.
    The estimated $65 billion in State savings, discussed previously, 
will be partially offset by approximately $57 billion in State costs 
related to Medicare Part D over the period CY 2006-2010. Those costs 
include State payments to the Federal government to partially offset 
Medicare Part D costs for full-benefit dual eligibles, additional 
Medicaid benefit spending resulting from an anticipated increase in 
Medicaid enrollment, and reduced State premium tax revenues as some 
beneficiaries shift from drug coverage that is subject to State 
taxation to Medicare Part D which is exempt from taxation.
    The largest component of these costs are State payments to the 
Federal government to defray a portion of the Medicare drug 
expenditures for full-benefit dual eligibles, estimated at about $48.7 
billion from CY 2006-2010. As discussed in the preamble, the States and 
the District of Columbia are required to make these monthly payments 
beginning January 1, 2006. It is important to note that the data 
sources and methodology used to estimate these State payments for the 
purposes of this impact analysis differ somewhat from those that will 
be used, as stipulated by statute and described in more detail in 
Subpart S of the preamble, to calculate the actual State payment 
amounts for 2006. The expenditure data that will be used to calculate 
the actual State payment amounts are not yet available, and thus for 
the purposes of this impact analysis we relied on MCBS as the data 
source to produce an estimate of aggregate State payments.
    Another component of these costs is increased State Medicaid 
spending due to increased Medicaid enrollment. We anticipate that in 
the process of outreach and applying for the Part D low-income subsidy, 
some beneficiaries will learn of their eligibility for other low-income 
assistance such as Medicaid or Medicare Savings (QMB/SLMB) programs and 
choose to enroll in these programs. We estimate that about 1.1 million 
additional beneficiaries will enroll in Medicaid or the Medicare 
Savings programs in CY 2006; with 23 percent of those beneficiaries 
estimated to receive full Medicaid, 19 percent to receive QMB benefits, 
and 58 percent to receive SLMB benefits. We estimate that State 
Medicaid spending on benefits for these individuals will be about $7.8 
billion over the five-year period from CY 2006-2010.
    Also included in our estimate of State costs is the effect of the 
MMA's prohibition on States imposing taxes on premiums related to Part 
D coverage. As a result of this prohibition, we estimate that States 
will realize reduced premium tax revenues of approximately $535 million 
over the period CY 2006-2010.
    In addition, the statute gives responsibility to State Medicaid

[[Page 46786]]

programs as well as the Social Security Administration for conducting 
eligibility determinations for low-income benefits under Part D. We 
have not included these costs in our above estimates of net State 
savings. However, prior to enactment of the MMA, we roughly estimated 
the State share of costs for these determinations at approximately $100 
million a year, beginning in FY 2005. We plan to develop an updated 
estimate of these costs once the operational processes for the 
eligibility determinations are more fully developed. Given that our net 
savings estimate averages $1.5 billion per calendar year and exceed 
$500 million in every year, we do not believe that these administrative 
costs significantly affect the level of savings States will realize 
from implementation of Medicare Part D.
    We also note that States are generally responsible for issuing 
licenses to health insurers. While some new PDP plans will require new 
licenses, the States charge fees for licensing and the States already 
have the mechanisms in place to handle these new license applications. 
Furthermore, licensing would not affect current insurers that want to 
become PDPs if these insurers are already licensed as insurers in a 
given State; the PDP would simply be a new line of business for these 
insurers. Thus, we do not estimate any cost implications for the States 
associated with licensing insurers.
2. State Prescription Drug Assistance Programs
    As mentioned previously, one of the components of our estimate of 
net State savings resulting from Medicare Part D is savings on State 
Pharmaceutical Assistance Programs (SPAPs). We estimate that SPAPs 
spend roughly $1.45 billion of State only resources on prescription 
drug assistance for 1.2 million individuals, based largely on FY 2002 
data. Five States account for approximately 87 percent of the SPAP 
spending, and have approximately 77 percent of the enrollment. For 
Medicare beneficiaries who have income less than 135 percent of the 
Federal Poverty Level (FPL) and assets valued up to $6,000 per 
individual (or $9,000 per couple), Part D offers comprehensive drug 
coverage with a full Federal subsidy for the beneficiary premium and 
only nominal cost-sharing. Thus, SPAP expenditures on this group of 
Medicare beneficiaries will be mostly displaced by the Medicare 
prescription drug benefit. We estimate that the savings that will 
accrue to States as a result of Medicare Part D displacing SPAP 
expenditures for low-income beneficiaries will be approximately $600 
million per year, or about $3 billion over the five-year period from CY 
2006-2010.
    States with SPAPs have shown a commitment to assisting their low-
income residents with drug costs. As of Spring 2004, nineteen States 
were operating SPAPs that provide subsidized drug coverage to 
individuals who will be eligible for Medicare Part D. CMS anticipates 
that many of these States will choose to continue providing financial 
assistance with drug expenditures, because they can achieve the same or 
greater level of assistance for their beneficiaries at a lower cost to 
the States. Part D provides States with a number of options for 
continuing their provision of prescription drug assistance to Medicare 
beneficiaries, if they choose to do so. States, for example, have the 
flexibility to restructure their SPAP programs to wrap around the Part 
D benefit and pay deductibles and cost sharing for beneficiaries with 
the State's assistance counting toward the Medicare Part D annual out-
of-pocket threshold triggering protection against catastrophic drug 
costs. States can also provide assistance by paying for Part D premiums 
for beneficiaries. As part of their SPAPs, States also have the 
flexibility to make arrangements with PDPs and MA-PDs to provide 
enhanced Part D benefits.
    We believe that we are presenting a conservative estimate of the 
displacement of SPAP expenditures, because our assessment does not 
include any potential State savings for SPAP enrollees at income levels 
above 135 percent of FPL. States that choose to restructure their 
programs to complement Medicare Part D can still achieve savings 
because of the substantial Medicare displacement of SPAP spending for 
low-income beneficiaries as well as for individuals who enroll in Part 
D and do not qualify for the low-income subsidy.
    We also note that, as discussed elsewhere in the preamble, Section 
1860D-23(d) of the Act provides for the payment of transitional grants 
to States with Pharmaceutical Assistance Programs of up to $62.5 
million in each of fiscal years 2005 and 2006. In addition, the statute 
provides the authority (Section 1860D-23(a) of the Act) for the 
Secretary to establish requirements for effective coordination between 
Part D plans and SPAPs. For further discussion related to coordination 
of benefits see the section on coordination of benefits under 
Administrative Costs.
    To estimate potential SPAP savings resulting from Medicare Part D 
expenditures, we focus our analysis on SPAP expenditures that may be 
spent on individuals with income below 135 percent of FPL. We are 
primarily relying on State-published data that describe SPAPS and their 
eligibility standards (sources such as State government websites, 
program annual reports, and Governor's budget documents). Our ongoing 
work with States also provides us with certain information regarding 
enrollment and expenditures under SPAPs. Unless we have adequately 
detailed State-published data on SPAP expenditures for enrollees by 
income, we use the Census Bureau's Current Population Survey (CPS) data 
to help us estimate SPAP spending on beneficiaries with income under 
135 percent of FPL.
    We recognize that our methodology has significant limitations and 
that our estimates are imprecise. For example, our analysis does not 
take into account the effect of the Medicare Part D assets test and 
does not include an estimate of potential savings for SPAP enrollees 
with income greater than 135 percent of FPL. We believe that States, 
with their own internal data and resources, are in the best position to 
project individual State-level impacts. Therefore, we invite States to 
provide specific enrollment and expenditure data by FPL for their State 
and any State-specific savings estimates they may have developed, as 
well as comments on improvements in our methodology.
3. Pharmacy Plus Waiver Programs
    Four States under Medicaid section 1115 waivers operate Pharmacy 
Plus demonstration programs that provide assistance to Medicare 
beneficiaries with the cost of prescription drugs. Expenditures for 
these services receive Federal matching payments in the same manner as 
do services for full benefit Medicaid beneficiaries. Similar to the 
impact on State only funded SPAPs, we expect that the new Medicare drug 
benefit will be assuming a large share of the costs for prescription 
drugs previously financed through Pharmacy Plus waiver programs and 
consequently we believe States will achieve savings as a result. To be 
conservative, State savings estimates for these four Pharmacy Plus 
programs have not been included in our estimates of overall State 
savings, and would be in addition to net State savings presented in 
this analysis.
    As noted elsewhere in the preamble the statute affords State only 
funded SPAP expenditures special treatment relative to the application 
of the TrOOP, in that the SPAP expenditures can be counted toward the 
out-of-pocket

[[Page 46787]]

protection threshold. However, as previously discussed, Pharmacy Plus 
waiver programs are not considered to be SPAPs. Due to the special 
treatment SPAPs receive relative to the TrOOP, our analysis of the 
States with Pharmacy Plus waivers indicates that States that operate 
Pharmacy Plus programs and beneficiaries enrolled in those programs 
could benefit financially by States restructuring their Pharmacy Plus 
programs to use a State only SPAP design to wrap around Medicare Part 
D. Under such an approach, we believe that generally States could 
realize savings relative to their current Pharmacy Plus spending levels 
and that program participants would face lower out-of-pocket costs due 
to the generous Medicare Part D catastrophic coverage. We welcome 
comments on this, and as indicated previously we would welcome further 
data and analyses from States.

I. Administrative Costs

    There are four major areas of administrative costs associated with 
Medicare Part D that will be incurred by the private and public sector 
that merit separate discussion. These areas include the costs for PDPs 
and MA-PDs for administering the Medicare prescription drug benefit, 
the cost of creditable coverage disclosure notices that the MMA 
requires be provided to Medicare beneficiaries, the administrative 
costs associated with certain coordination of benefits as required by 
the MMA, and the administrative costs associated with obtaining the 
Medicare retiree drug subsidy. The following provides a detailed 
discussion of each of these areas.
1. Prescription Drug Plans and MA-PD Plans
    The administrative cost estimates are based on taking into account 
the normal fixed costs associated with administering a prescription 
drug benefit, for example, such functions as claims processing, 
responding to customer inquiries, information dissemination, appeals 
processes, pharmacy network negotiations and contracting, and drug 
manufacturer negotiations and contracting. In addition, we assume 
``risk-premium'' costs associated with risk-based insurance products 
that require companies to maintain certain levels of financial 
reserves. The other factor taken into account when developing our 
estimate is that PDPs and MA-PDs will likely incur slightly higher 
administrative costs during the initial few years of the Part D benefit 
due to start-up costs related to implementation and initial operations 
for a new benefit, for example more marketing and enrollment 
activities. We also assume that entities that will participate as PDPs 
will have already made the necessary changes to be HIPAA compliant 
because of the other business arrangements they will have been 
functioning in prior to choosing to participate as a PDP under the 
Medicare drug benefit program.
    As is typically done with insurance products, we express the 
average administrative costs as a percentage relative to net standard 
benefit expenses. This percentage is commonly referred to as the 
``administrative load.'' We estimate that the average administrative 
load will be 12.7 percent in CY 2006, with this declining slightly over 
time, and reaching 11.5 percent in CY 2010. The administrative load is 
expected to decline slightly over the period for two reasons: (1) 
Administrative costs are expected to grow at a somewhat slower rate 
than PDP and MA-PD plans' prescription drug costs and (2) initial 
administrative start-up costs associated with implementation are 
expected to phase out in the first few years of operations.
    Our estimates for administrative costs are similar to those seen in 
the general insurance market. Our administrative load of 12.7 percent 
in 2006 translates into administrative costs being about 11.2 of total 
Part D plan expenditures (including both benefits and administrative 
costs). This is similar to the share of total health plan spending 
accounted for by administrative costs in the private sector. For 
example, as CMS reported in its ``Health Care Industry Market Update on 
Managed Care'' Blue Cross Blue Shield health plans had average sales, 
general and administrative (SG&A) expenses ranging from 12 percent in 
1999, 11.7 percent in 2000, 11.3 percent in 2001, and 10.9 percent in 
the first half of 2002. Similarly, in examining our Medicare Advantage 
plans data we see variation in administrative costs, for example newer 
plans (less than 5 years) seem to have higher administrative costs (11 
percent) than older plans (7 percent).
    The MMA also requires PDPs and MA-PDs to pay a user fee to help 
offset ongoing beneficiary education and enrollment costs relating to 
the Medicare prescription drug benefit, which represents an expansion 
of the user fees that are currently required of MA plans. As discussed 
earlier in this preamble, the MMA authorizes up to $200 million for 
beneficiary education and enrollment activities in FY 2006 and 
thereafter, reduced by the fees that will be collected from MA 
organizations and PDP sponsors in that fiscal year. Our rough estimates 
of the user fees for beneficiary education and enrollment costs in CY 
2006 are approximately $22 million for PDPs and $50 million for MA 
organizations, with the remainder (approximately $128 million) being 
the government's share. While the user fees will actually be collected 
on a fiscal year basis, we believe that these estimates, which are 
based on calendar year data, provide a reasonable estimate of what the 
magnitude of these user fees will be during a given fiscal year. We 
assume that the cost of these user fees will be built into the 
administrative cost structure of the PDPs and MA-PDs, and will 
therefore be reflected in bids. We note that these user fees represent 
a minuscule percentage of the estimated total payments to MA 
organizations and PDP sponsors under the Medicare program.
2. Disclosure Notice Requirements
    A number of entities that provide prescription drug coverage to 
Medicare beneficiaries--Medigap plans, private and public sector 
employer or union sponsored plans that provide drug coverage to 
Medicare beneficiaries who are retired or who are active workers, State 
Medicaid programs including State Pharmacy Plus programs, and State 
Pharmacy Assistance programs (SPAPs)--are required to provide at 
certain times disclosure notices to beneficiaries on whether the 
coverage provided equals or exceeds the actuarial value of standard 
coverage. The largest cost for providing these notices is expected to 
occur in the months preceding the implementation of the drug benefit in 
January 2006. Thereafter, notices will generally only need to be 
provided by these entities if there is a change in creditable coverage 
status. Also, firms that provide drug coverage to active workers will 
have to provide disclosure notices in the future to those active 
workers who become new Medicare beneficiaries.
    With the exception of Medigap insurers and group health plans that 
provide drug coverage only to Medicare beneficiaries who are active 
workers (and not retirees), implementation of the Medicare prescription 
drug benefit and the retiree drug subsidy is expected to produce net 
savings to public and private sector entities that provide drug 
coverage to Medicare beneficiaries. For State Medicaid programs, SPAPs, 
State Pharmacy Plus programs, and private and public sector employer 
sponsored plans that provide retiree drug coverage, we estimate that 
the cost of disclosure notices will be about $29 million in 2005, with 
anticipated savings from the

[[Page 46788]]

implementation of Medicare Part D expected to far exceed the disclosure 
notice costs for each of these entities.
    For Medigap insurers and group health plans that offer coverage 
only to beneficiaries who are active workers, not retirees, the cost of 
providing disclosure notices is estimated to be approximately $69 
million in 2005 (which translates into an average of roughly $154 per 
employer that offers drug coverage to Medicare beneficiaries who are 
active workers and about $11,050 per Medigap insurer).
    We anticipate that disclosure notice costs in years after 2005 will 
generally be minimal. However, employer sponsored health plans that 
provide drug coverage to active workers are likely to expend some time 
in future years for disclosure notices for the more limited number of 
new beneficiaries who age into the Medicare program. These employer 
plans would also incur costs in the event that their plan has a 
substantial change in its benefit structure that makes a reconfirmation 
of their creditable coverage status appropriate. We estimate 
administrative costs of roughly $5 million to $6 million per year for 
these employers during the period 2006-2010.
    In brief, we take the following approach to estimate the cost of 
disclosure notices. For the various entities that are required to 
provide disclosure notices, the circumstances of these different types 
of coverage and how they will relate to the new Medicare prescription 
drug benefit differ. Consequently the nature of the disclosure notice 
and any associated actuarial valuation will vary. Beyond the cost of 
the actuarial valuation are the costs of preparing and mailing the 
notices. We generally base our cost estimates on 2005 wage data for an 
actuary and administrative personnel loaded for compensation, overhead, 
general administration, and fee.
    In terms of the basic costs of preparing and mailing the disclosure 
notice, we assume that each entity required to provide these notices 
expends 8 hours for developing the notice (with one exception), 1 hour 
per 60 notices for producing and disseminating the notices to 
beneficiaries, and 1 hour for providing a copy of the notice to CMS. 
The one exception to this is group health plans that provide drug 
coverage only to Medicare beneficiaries who are active workers, not 
retirees. We assume these entities expend less time developing the 
notice (2 hours) because we expect that this service is likely to be 
provided to them by insurers or health plan administrators who we 
anticipate will spread the cost of this service across many employers.
    In terms of the time involved in performing the actuarial valuation 
that forms the basis of the disclosure notices, we anticipate that it 
will vary somewhat by the type of entity providing the notice. In the 
case of Medicaid, we assume that the actuarial valuation costs will be 
negligible as Medicare Part D will be assuming primary responsibility 
for drug coverage for full benefit dual eligibles and we assume that 
any supplemental coverage States may provide (for example, coverage for 
drugs not covered under Medicare Part D) would not be creditable. With 
respect to SPAPs and State Pharmacy Plus programs, we expect that the 
actuarial assessment is not likely to be complex, and that the 
disclosure notice will likely focus on how the State program will work 
with the new Medicare drug benefit. We assume that each SPAP and State 
Pharmacy Plus program would expend on average 2 hours for actuarial 
work.
    The notice requirement related to Medigap drug policies we believe 
will be relatively straightforward. In accordance with section 104 of 
the MMA, CMS is developing a model disclosure notice for Medigap 
insurers in consultation with the NAIC. For standardized Medigap plans, 
we anticipate that the actuarial work involved in developing these 
notices will be negligible. As discussed elsewhere in the preamble, we 
believe that standard Medigap plans H and I are not creditable and that 
it is very unlikely that plan J would be creditable. In the case of the 
pre-standardized policies the nature of the actuarial valuation and the 
level of effort involved will likely vary with the nature of the 
benefit package. For the purposes of this analysis, we assume that on 
average an actuarial valuation for an insurer offering pre-standardized 
Medigap policies would involve 6 hours of an actuary's time. For the 
three Medigap waiver states, we assume that the actuarial valuation 
would be fairly straightforward since these States have generally 
prescribed a fixed benefits structure for Medigap drug coverage. 
Consequently, we have assumed an average of 3 hours of an actuary's 
time per insurer serving the waiver States.
    Employer sponsored retiree health plans that apply for the Medicare 
retiree subsidy will have to perform an actuarial valuation for the 
purposes of their application. We assume that those plans will simply 
use the actuarial valuation developed for the subsidy application also 
for the disclosure notices. Thus, we assume negligible costs for the 
actuarial valuation related to the disclosure notices. Estimates of the 
administrative costs related to applying for the Medicare retiree 
subsidy, including the actuarial valuation, are discussed elsewhere in 
this document.
    Disclosure notices are also required of group health plans that 
provide drug coverage to active workers who are Medicare beneficiaries 
(that is, beneficiaries where Medicare is the secondary payer). It is 
very difficult to know how many firms that provide health insurance to 
their active workers have a Medicare beneficiary in their workforce. We 
have estimated roughly as an upper bound that there may be as many as 
440,000 firms that provide drug coverage to at least one Medicare 
beneficiary who is an active worker. We emphasize that this is a very 
rough estimate that extrapolates from data from a number of sources 
(including an IRS, SSA, CMS data match, Census data, BLS data, and a 
Kaiser survey).
    We anticipate that many of these employers are purchasing standard 
health insurance products from insurers that sell these plans to 
numerous purchasers and that the cost of the actuarial valuation will 
be spread across a relatively large number of employers or third party 
purchasers. While self-insured employers may have more distinct health 
plan benefit structures, we believe that it is likely that their health 
plan administrators would be able to achieve economies of scale by 
building actuarial models that can serve a number of clients. In 
addition, the cost of the valuation for those employers that also offer 
retiree drug coverage could be incorporated into the costs required to 
do an actuarial valuation for both types of coverage and thus there may 
be some economies of scale. For these reasons, we assume that each of 
these employers will on average incur expenses for one-quarter of an 
hour of actuarial time. This relatively low number reflects our 
assumption that insurers will spread the cost of these valuations 
across a large number of purchasers.
    In years after 2005, employers that provide drug coverage to 
Medicare beneficiaries who are active workers are likely to expend some 
additional time related to disclosure notices, but we anticipate this 
time will be substantially less than in 2005. In subsequent years, we 
anticipate that these employers will provide disclosure notices to 
their workers who age into the Medicare program and continue working. 
In addition, it is possible that a portion of employers may alter their 
drug benefit design to such an extent that a reconfirmation of their 
creditable

[[Page 46789]]

coverage status may be appropriate. We assume that those active workers 
who become new Medicare beneficiaries each year require notices, that 
about 25 percent of firms per year obtain a new actuarial valuation on 
their benefit design, and that about 1 percent of firms per year have a 
change in creditable coverage status that requires a notice.
    As discussed previously, we anticipate that the disclosure notice 
cost per employer that offers drug coverage to Medicare beneficiaries 
who are active workers (and not retirees) will be relatively small--
$154 per employer on average in 2005 and substantially less in future 
years. However, we are concerned about these expenditures in relation 
to their benefits to employers and Medicare beneficiaries who are 
active workers and the number of firms that could potentially be 
affected. We seek comment on ways to minimize burden on these employers 
and whether other approaches could lower these costs.
3. Coordination of Benefits Under Employer-Sponsored Plans and SPAPs
    CMS is required under the statute to establish requirements for 
coordination of benefits between Medicare PDPs and MA-PDs and other 
insurers including SPAPs, Medicaid programs, group health plans, FEHBP, 
military coverage including TRICARE, and other coverage CMS may 
specify. Ensuring accurate and timely coordination of benefits is 
important for tracking the true out-of-pocket limit, a cornerstone of 
the benefit design. This will necessitate that an efficient and 
effective operational framework be established to track beneficiary 
out-of-pocket expenditures. As discussed elsewhere in the preamble, CMS 
is considering and seeking comment on a wide range of options related 
to coordination of benefits. For example, one of the fundamental issues 
is who should have responsibility for developing the systems 
infrastructure needed to track beneficiary out-of-pocket expenditures--
PDPs and MA-PDs or the government. If the government were to develop a 
system to facilitate tracking beneficiary out-of-pocket expenditures, 
there is the additional question of how this system should be set up 
operationally and how data flow should be structured into and out of 
the system from pharmacies, supplemental insurers, and Part D plans. 
Given that such a wide range of approaches is under consideration for 
coordination of benefits, it is not possible to estimate the 
administrative costs associated with coordination of benefits at this 
time. We seek comment on the cost implications of various options 
discussed in the preamble and will be working to develop a cost 
estimate of coordination of benefits activities for the final rule.
4. Estimated Administrative Costs in Applying for Retiree Drug Subsidy
    Qualified retiree prescription drug plans that choose to accept the 
Medicare retiree subsidy will incur some administrative costs 
associated with obtaining the subsidy. As discussed earlier in the 
preamble, sponsors will have to submit to CMS an application for the 
Medicare retiree drug subsidy, including an attestation that the 
actuarial value of the prescription drug coverage under their retiree 
plan or plans is at least equal to the actuarial value of standard 
prescription drug coverage under Medicare Part D, which must be signed 
by the plan sponsor (or a plan administrator designated by the 
sponsor). As part of this application, employers are also required to 
provide other information including data about the eligible covered 
Medicare retirees in their plan or plans. In addition, entities 
accepting the Medicare retiree drug subsidy payments will have to 
comply with certain reporting requirements and maintain records for 
purposes of audit and oversight by CMS. We also note that employer and 
union sponsored health plans that provide drug coverage to 
beneficiaries are required to provide, at certain times, creditable 
coverage disclosure notices to beneficiaries. These notices are 
required regardless of whether the plan sponsor applies for a subsidy, 
and consequently the costs of these notices are discussed in the 
section of this analysis on disclosure notices.
    In developing the proposed rule, we have tried to minimize the 
administrative burden associated with the operation of the retiree 
subsidy program, and we seek comments regarding our proposed 
administrative approaches and reporting requirements. We want to 
establish an efficient administrative structure that provides maximum 
flexibility for qualified retiree prescription drug plans, while at the 
same time providing for an appropriate level of financial 
accountability that assures the accuracy of payments and safeguards the 
interests of beneficiaries, consistent with our fiduciary 
responsibility. Thus, we are seeking public comment on appropriate 
approaches for achieving this objective.
    For purposes of the ``Collection of Information Requirements'' 
section and the accounting statement in this proposed rule, we have 
developed an estimate of the time and aggregate employer costs involved 
in the various administrative functions associated with employers 
obtaining the Medicare retiree subsidy including: subsidy application 
requirements, including performing the actuarial valuation; preparing 
the plan(s)' enrollment files to identify the eligible Medicare retiree 
population and other relevant information; assembling the application; 
and record retention. We base our cost estimates on 2005 wage data for 
an actuary and administrative personnel loaded for compensation, 
overhead, general administration, and fee.
a. Application for Retiree Drug Subsidy Including Actuarial Attestation
    In applying for the subsidy, sponsors of qualified retiree 
prescription drug plans are required to provide to CMS an attestation 
that the actuarial value of the prescription drug coverage in each such 
plan is at least equal to the actuarial value of standard Medicare Part 
D prescription drug coverage. Sponsors of qualified retiree 
prescription drug plans will need to submit this attestation on an 
annual basis, and submit an updated attestation if there is a change 
during the year that materially affects actuarial value of their drug 
coverage. As discussed earlier in the preamble, a material change means 
any change that potentially causes a plan to no longer meet the 
actuarial equivalence test (these submissions would not be required 
when non-material changes are made to the coverage).
    We are aware that many employers purchase retiree health coverage 
by paying premiums to insurance companies. Thus, one insurance company 
may be offering the same prescription drug benefit design to numerous 
employers, and consequently be able to spread the cost of the actuarial 
valuation across a number of purchasers. Similarly, many employers use 
pharmacy benefit managers (PBMs) to administer their prescription drug 
benefits, and again the same benefit design may be used by multiple 
employer plans, generating economies of scale.
    We are also aware that any given sponsor may be offering more than 
one qualified retiree prescription drug plan in which Medicare 
beneficiaries are enrolled and for which Medicare retiree drug subsidy 
payments are sought. Another factor in the cost of actuarial 
attestations, however, is that employers can potentially use one 
actuarial model to analyze multiple plans' benefit designs that, for 
example, are similar in design but use different co-payments. Thus, 
there may also be economies of scale in conducting the analyses for 
employers that have multiple plans.

[[Page 46790]]

    Because of these factors, the total time involved in preparing the 
actuarial valuation is likely to vary across qualified retiree plans. 
To develop assumptions, we had discussions with actuaries in CMS' 
Office of the Actuary and other industry experts. From these 
discussions, we developed a range of time estimates for preparing 
actuarial models, taking into consideration: The use of actual plan 
data if it is available and credible, the time to conduct the analyses, 
the issue of economies of scale in the use of one model to analyze 
multiple plans, and the time involved in preparing the written 
attestation report. Based on these discussions, our preliminary 
estimate is that total time involved in developing one actuarial model 
and preparing an analysis and report on one plan could range from 6 to 
40 hours. For the purposes of this analysis, we assume that average 
time involved in the actuarial valuation per firm ranges from one-third 
of an hour for very small firms (where the actuarial valuation is 
performed by an insurance company and its cost is spread across a large 
number of purchasers) to 100 hours for very large firms that offer 
multiple plans. Based on these assumptions and taking into account the 
time involved for firms of different sizes, we estimate that the cost 
of the actuarial valuation would on average be in the range of about 
1.8 percent of the value of the retiree subsidy.
    In addition to the actuarial valuation, plans sponsors applying for 
the retiree subsidy will need to prepare the application and related 
enrollment data and information on retirees, and ultimately sign the 
agreement if approved to receive the subsidy. We anticipate that the 
time involved in preparing the application and required enrollment 
information will vary by firm size, with the average time ranging from 
5 hours for the smallest firms with 6 retirees on average to 382 hours 
for the largest firms with more than 1,500 retirees on average. As 
discussed elsewhere, some of the information needed on eligible 
beneficiaries may not be routinely available to plan sponsors and 
consequently for initial start-up some level of effort may be needed to 
obtain this information. We have been conservative in our assumptions 
to reflect this possibility. It is important to note that a significant 
portion of the time involved would be a one-time expense. In addition, 
we estimate that each firm will expend one-half hour signing and 
submitting the final agreement. Based on these assumptions, we estimate 
that on average across large and small firms, the cost involved in 
preparing the application and related enrollment information (excluding 
the actuarial work) and ultimately signing the agreement would be in 
the range of about 3.2 percent of the value of the subsidy. It is 
important to note that after the first year, we believe these costs 
will decline as the initial work associated with identifying the 
eligible population will have been accomplished and as employers and 
their agents gain more experience with the program.
b. Reporting
    In order to obtain the subsidy, sponsors of qualified retiree 
prescription drug plans will need to submit certain data to CMS and 
maintain certain records. This proposed rule outlines a number of 
different options we are considering in terms of data reporting. At 
this time, we have not determined which option is the most efficient 
and effective method of obtaining the data and information necessary 
for administering this program and we seek public comment on the 
various options.
    As discussed in detail in the preamble and the alternatives 
considered section, the options that we are considering related to data 
reporting vary in terms of their scope, level of detail, and frequency 
of data reporting activities. Consequently, at this time it is not 
possible to estimate the administrative costs of reporting requirements 
under this proposed rule. However, we anticipate that the 
administrative costs associated with the data reporting will be small 
relative to the Medicare retiree drug subsidy payments received by 
employers. Because prescription drug data and records are highly 
automated, there are significant economies of scale related to 
reporting and audit requirements. In addition, one of our primary 
objectives in establishing the data reporting requirements will be to 
do so in as cost effective a manner as possible while upholding our 
fiduciary responsibilities. We seek public comment on the 
administrative costs associated with any of the data reporting options 
under consideration in this rule, as well as any other approaches for 
minimizing such costs.
    In addition to data reporting, employers that receive the subsidy 
will also be required to retain data and records for six years. For the 
purposes of this analysis, we assume that the time involved in record 
retention would vary by firm size, with the average time ranging from 4 
hours for the smallest firms to 20 hours for the largest firms. Based 
on these assumptions and taking into account the varied time involved 
across firms of different sizes, we estimate that on average the record 
retention would be in the range of about 0.5 percent of the value of 
the subsidy.
c. Conclusion
    Based on our analyses, we estimate that the administrative costs 
associated with obtaining the retiree subsidy (excluding the data 
reporting requirements not yet determined) will represent on average in 
the range of about 5.5 percent of the value of the subsidy in 2006 and 
are expected to decline significantly in subsequent years. After the 
first year, we believe these costs will decline as the initial work 
associated with identifying the eligible population will have been 
accomplished and as employers and their agents gain more experience 
with the program.

J. Medigap Provisions

    The MMA prohibits Medigap insurers from selling new Medigap 
policies that cover prescription drugs after December 31, 2005 and 
prohibits the renewal of existing Medigap policies with drug coverage 
for beneficiaries who enroll in Medicare Part D. Part D enrollees with 
current Medigap drug coverage have the choice of renewing their 
existing Medigap policy without drug coverage or buying certain other 
Medigap plans that do not have drug coverage if they enroll in a Part D 
plan in the initial enrollment period. We emphasize that the MMA itself 
directly restructures the role of Medigap insurance, and that it is not 
the result of this rulemaking.
    We estimate that about 1.9 million beneficiaries would be enrolled 
in Medigap plans with drug coverage in 2006, absent the law change. As 
discussed elsewhere in this analysis, we assumed nearly all of these 
beneficiaries will enroll in Medicare Part D. As a result of the 
statutory prohibition on the sale of Medigap policies with drug 
coverage to Part D enrollees, we expect these beneficiaries will move 
from Medigap policies that contain prescription drug coverage to 
Medigap policies that do not contain such coverage. We expect that the 
policies without drug coverage will have lower premiums. If all 
beneficiaries with Medigap drug coverage enrolled in the Medicare drug 
benefit, we estimate that the reduction in Medigap insurers revenues 
associated with MMA prohibition on the sale or renewal of policies with 
drug coverage would be approximately $2.5 billion in 2006, $2.6 billion 
in 2007, $2.8 billion in 2008, $3.0 billion in 2009, and $3.2 billion 
in 2010. We note, however, that some Medigap insurers may choose to 
enter the PDP or MA-PD market and offer

[[Page 46791]]

those products. This market entry might mitigate the revenue impacts on 
these insurers, and could even possibly produce a revenue gain for 
these insurers, as the Medicare prescription drug benefit would be 
subsidized and likely attract more enrollees. In addition, we believe 
that the movement of beneficiaries from Medigap drug coverage to 
Medicare Part D will generate substantial savings for these 
beneficiaries on prescription drug costs. The standard Medicare Part D 
benefit provides a 75 percent subsidized benefit, catastrophic 
coverage, and cost savings from discounts and other cost management 
activities. It also is not likely to suffer from the substantial 
adverse selection, and resulting increased premiums, that are seen in 
Medigap plans with drug coverage.
    Our estimates of Medigap enrollment in policies with drug coverage 
and the premiums associated with that drug coverage were developed 
using data from NAIC on standardized Medigap plans, and information 
gathered by a CMS contractor on pre-standardized Medigap plans and 
waiver State plans. While our estimates do not take into account 
standalone Medigap drug policies, these policies represent 
substantially less than 1 percent of the Medigap market and would not 
affect the estimates.

K. Small Business Analysis

    The Regulatory Flexibility Act (RFA) requires agencies to determine 
whether a proposed rule will have a ``significant economic impact on a 
substantial number of small entities.''
    If a rule is expected to have a significant economic impact on a 
substantial number of small entities the RFA requires that an Initial 
Regulatory Flexibility Analysis (IRFA) be performed. Under the RFA, a 
``small entity'' is defined as a small business (as determined by the 
Small Business Administration (SBA)), a non-profit entity of any size 
that is not dominant in its field, or a small government jurisdiction. 
HHS uses as its measure of significant economic impact on a substantial 
number of small entities a change in revenues of more than 3 to 5 
percent.
    With respect to the Medicare prescription drug benefit and retiree 
drug subsidy, there are three areas that we believe merit discussion 
related to small business impacts: (1) Pharmacies, (2) insurers and 
PBMs, and (3) employers. We anticipate that the pharmacy industry, 
which is comprised of both chains and a large number of independent 
pharmacies, will play a critical role in the Medicare drug benefit as 
it furnishes prescription medicines and pharmacy services to 
beneficiaries enrolled in Medicare Part D. While the Medicare 
prescription drug benefit is expected to have several effects on 
pharmacy revenues, both positive and negative, our estimate is that the 
impact on the overall pharmacy industry, including small pharmacies, 
will be positive.
    Since PDPs and MA-PDs are the principal vehicles through which the 
Medicare prescription drug benefit is administered, we also examine 
whether there are any small business impacts on the types of businesses 
expected to apply to be prescription drug plans--that is, insurers and 
PBMs. Our analysis suggests that while the statutorily created Medicare 
Part D program would increase drug utilization and thus be favorable to 
insurers and PBMs, this proposed rule as such will have little overall 
effect on the insurance and PBM industry, and certainly not a 
significant adverse impact.
    In the case of the small employers who continue to provide 
qualified prescription drug coverage for their retirees, we estimate 
that savings obtained from the Medicare retiree drug subsidy will 
greatly exceed the employer's administrative costs associated with 
obtaining the subsidy, and thus the result of the retiree drug subsidy 
provision is a net positive impact. We would like to make participation 
in the retiree drug subsidy program as simple as possible for small 
entities.
    While we believe that we could certify that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities, we provide an Initial Regulatory Flexibility Analysis (IRFA) 
and request comment on this conclusion as well as any aspects of the 
rule that might adversely affect small businesses, or that could be 
modified to increase positive impacts.
    In addition, in accordance with Section 1102(b) of the Social 
Security Act, we also address whether this rule will have an impact on 
the operations of small rural hospitals.
1. Pharmacies
    The RFA requires us to determine whether this rule will have a 
significant economic impact on a substantial number of small 
pharmacies. SBA considers pharmacies with firm revenues of less than $6 
million to be small businesses. The 1997 Economic Census (the latest 
available detailed data) indicates that there were about 21,000 firms 
operating about 41,000 retail pharmacies and drug store establishments 
(NAICS code 44661) continuously through 1997. Of these firms, about 
20,000 had revenues under $5 million (which was the small business size 
standard in 1997) and operated a total of about 21,000 establishments. 
Since over 95 percent of pharmacy firms are small businesses (as 
defined by the SBA size standards), we do expect that the statutorily-
created Medicare prescription drug benefit will have some effect on a 
substantial number of small pharmacies. However, we estimate that 
overall the revenue effect on the retail pharmacy industry, including 
small pharmacies, will be positive. Furthermore, we emphasize that this 
effect is really a result of the statutorily-created Medicare 
prescription drug benefit, and not this rulemaking.
    We anticipate that, although the Medicare prescription drug benefit 
will lead to both revenue increases and decreases for pharmacies, the 
increase in revenues is estimated to more than offset the decrease in 
revenues. First, we expect that the vast majority of beneficiaries 
currently without prescription drug coverage will choose to enroll in 
Medicare Part D. The extension of drug coverage to these individuals, 
and the resulting lower out-of-pocket costs they face when purchasing 
prescription drugs, is expected to lead to higher drug utilization and 
total expenditures, and consequently higher revenues for pharmacies. At 
the same time, some of these beneficiaries without prior drug coverage, 
as well as some beneficiaries with Medigap drug coverage, would be 
expected to realize new pharmacy discounts under Medicare Part D that 
they otherwise would not obtain. We note that the Medicare prescription 
drug benefit would not lead to any additional pharmacy discounts for 
the majority of beneficiaries who currently have drug coverage as they 
already obtain pharmacy discounts through their current insurers (for 
example, employer-sponsored health plans, Medicare Advantage plans, and 
State plans). In addition, we have examined the potential for increased 
use of mail order pharmacies among some beneficiaries, and its 
potential impact on retail pharmacies. As described in more detail 
subsequently, we estimate that the countervailing effects of increased 
utilization and new pharmacy discounts and possibly new use of mail 
order pharmacies among some beneficiaries would result in a net 
increase in retail pharmacy revenues ranging from a lower bound of 1.7 
percent to an upper bound of 3.0 percent.

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    Second, since State Medicaid programs typically pay higher 
reimbursement rates to pharmacies than private sector insurers. We 
expect that pharmacies would experience some reduction in revenues due 
to the movement of full-benefit dual eligibles from Medicaid drug 
coverage to Medicare drug coverage (through PDPs and MA-PDs). As 
discussed in more detail subsequently, our upper bound estimate of the 
average reduction in pharmacy revenues that could result from full-
benefit dual eligibles receiving drug coverage from Medicare is 1.1 
percent. We believe this is an overestimate of the revenue reduction 
because it does not take into account the effect of the Federal Upper 
Payment Limit on reducing Medicaid reimbursement rates for many multi-
source drugs. Also, to the extent that a State Medicaid program has 
adopted managed care arrangements to lower the cost of drugs for dual 
eligibles, our estimate of the revenue impact of pharmacy reimbursement 
changes for full-benefit dual eligibles would be overstated.
    Considering together the effect of increased utilization, new 
pharmacy discounts and possibly new use of mail order pharmacies among 
some beneficiaries, and reimbursement changes for full-benefit dual 
eligibles, we estimate that retail pharmacy revenues would experience a 
net increase ranging from 0.6 percent to 1.9 percent, as a result of 
the Medicare prescription drug benefit. Furthermore, while we are not 
able to provide a quantitative estimate at this time, we expect that 
pharmacies may realize additional revenues from the MMA requirement 
that PDPs and MA-PDs offer medication therapy management programs to 
targeted enrollees, which may be furnished by pharmacists. Our 
estimates also do not take into account that increased use of 
prescription drugs resulting from the Medicare drug benefit may lead to 
increased foot traffic in pharmacies and increased sales for 
pharmacies' other goods in addition to prescription medicines.
    We note that our estimate of the overall impact on small pharmacies 
represents the average effect. We recognize that the effect on any 
specific pharmacy will likely vary to some extent around the average. 
While we have estimated that the average effect on small pharmacies 
would range from 0.6 percent to 1.9 percent, it is possible that some 
individual pharmacies could experience smaller positive effects and 
even in some cases negative revenue effects. While it is possible that 
a specific pharmacy because of unique circumstances could experience a 
negative revenue impact, we believe that this will be uncommon. For 
example, it is likely that pharmacies that serve a large population of 
full-benefit dual eligibles (for which pharmacies would experience a 
revenue decrease) would tend to be located in low-income areas that 
also serve a large population of beneficiaries without drug coverage 
(for which pharmacies would experience a revenue increase). This would 
suggest that pharmacies that experience larger than average revenue 
reductions for full-benefit dual eligibles would also tend to be those 
that experience larger than average revenue increases for beneficiaries 
without prior drug coverage. However, lack of data makes estimating the 
distributional effects among small pharmacies speculative. We seek 
comments and data that can help inform this issue.
a. Expansion of Drug Coverage and Increased Access to Pharmacy 
Discounts Among Beneficiaries Previously Lacking Such Coverage or 
Discounts
    A substantial portion of beneficiaries (about 24 percent as of 
2001) lack drug coverage. As discussed in Section E, we project that 
nearly all beneficiaries without drug coverage will enroll in the 
Medicare drug benefit. The expansion of drug coverage to these 
individuals is likely to have countervailing effects on pharmacy 
revenues. First, it is likely to lead to increased drug utilization and 
spending among beneficiaries without prior drug coverage, and thus 
increased pharmacy revenues. Second, it is likely to lead to increased 
access to pharmacy discounts for some beneficiaries who previously did 
not receive such discounts (specifically, many beneficiaries without 
drug coverage and beneficiaries with Medigap drug coverage), and thus 
decreased revenues for pharmacies. Because many beneficiaries that 
currently have prescription drug coverage (for example, those in 
employer sponsored retiree health plans or Medicare Advantage plans) 
already receive pharmacy discounts through those insurers, we do not 
expect the Medicare prescription drug benefit to generate any new 
pharmacy discounts for these beneficiaries. In addition, it is possible 
that the Medicare drug benefit may lead to new use of mail order 
pharmacies among beneficiaries without prior drug coverage and 
beneficiaries with Medigap drug coverage, potentially having some 
effect on retail pharmacy revenues. Overall, we estimate that increased 
utilization for beneficiaries without prior drug coverage and new 
pharmacy discounts and possibly new use of mail order pharmacies among 
some beneficiaries will result in a net positive revenue impact for 
retail pharmacies.
    Medicare beneficiaries without prior drug coverage who enroll in 
the Medicare drug benefit will face a substantial reduction in out-of-
pocket costs for prescription medicines, and consequently we expect 
that their drug utilization and expenditures will increase. 
Beneficiaries with drug coverage fill more prescriptions and have 
higher total drug spending than beneficiaries without drug coverage. 
Based on 2001 MCBS data, beneficiaries with drug coverage have average 
total drug spending that is 109 percent greater than beneficiaries 
without drug coverage. These spending differences hold true even among 
beneficiaries with similar numbers of chronic conditions. For example, 
average spending for beneficiaries with drug coverage was higher than 
for beneficiaries without drug coverage among beneficiaries with no 
chronic conditions (247 percent higher), 1-2 chronic conditions (107 
percent higher), 3-4 chronic conditions (76 percent higher), and 5 or 
more chronic conditions (53 percent higher). Thus, we expect that the 
expansion of drug coverage to beneficiaries who previously did not have 
such coverage will lead to increased drug utilization and spending, and 
thus higher pharmacy revenues. For the purposes of this analysis, we 
assume that beneficiaries without prior drug coverage who enroll in the 
Medicare drug benefit will experience a 76 percent increase in total 
drug spending. We base this assumption on the fact that most 
beneficiaries without drug coverage fall into the category of having 1-
2 chronic conditions or 3-4 chronic conditions, and we have chosen the 
more modest use difference seen in the 3-4 chronic condition group. 
Furthermore, we believe that this is a conservative assumption because 
the average difference across the population in drug spending for 
beneficiaries with and without coverage is 109 percent. Since 
beneficiaries without drug coverage account for about 13 percent of all 
drug spending by Medicare beneficiaries (based on 2001 MCBS data), if 
we assume that all of these previously uninsured beneficiaries enroll 
in the Medicare drug benefit and experience a 76 percent increase in 
drug expenditures due to a use effect, this would represent about a 9.9 
percent increase in total drug spending by Medicare beneficiaries.
    At the same time, to the extent that beneficiaries without drug 
coverage did not receive pharmacy discounts prior to

[[Page 46793]]

Medicare Part D, we would expect that pharmacy discounts negotiated by 
PDPs and MA-PDs could result in some reduction in pharmacy revenues. 
While the vast majority of beneficiaries who currently have drug 
coverage are likely to already be receiving pharmacy discounts, and 
thus the Medicare drug benefit would not result in any change in 
pharmacy discounts for these beneficiaries, this may not be the case 
for beneficiaries without drug coverage. As mentioned previously, the 
April 2000 HHS Report ``Prescription Drug Coverage, Spending, 
Utilization, and Prices'' found that on average individuals with drug 
coverage paid a 15 percent lower price for prescription drugs at the 
point of sale than individuals without drug coverage. The discount 
insured individuals receive at the point of sale reflects a combination 
of pharmacy and manufacturer discounts. However, to take a conservative 
approach, we assume that Medicare Part D enrollees without prior drug 
coverage realize 15 percent price discounts at the point of sale, all 
of which reflect pharmacy discounts. This assumption is conservative 
not only because it assumes that the entire 15 percent discount comes 
from pharmacies, but also because some of these beneficiaries are 
likely to have received pharmacy discounts previously through the 
Medicare drug discount card, which began offering discounts in June 
2004 and which includes substantial discounts from drug manufacturers, 
and through senior pharmacy discounts previously offered by many 
pharmacies. Thus, our assumption that all Part D enrollees without 
prior drug coverage would receive new pharmacy discounts of 15 percent 
under Medicare Part D overstates the negative revenue impact on 
pharmacies. With these beneficiaries accounting for about 13 percent of 
all drug spending by Medicare beneficiaries, we estimate that extending 
a 15 percent discount to these beneficiaries would result in about a 2 
percent decrease in total drug spending by Medicare beneficiaries.
    Another group of beneficiaries who we believe may obtain new 
pharmacy discounts under Medicare Part D are beneficiaries with Medigap 
drug coverage. Some Medigap plans do not actively negotiate 
prescription drug discounts for enrollees. As a result, these 
beneficiaries who enroll in Medicare Part D may also realize new 
pharmacy discounts. As discussed elsewhere in this impact analysis, we 
estimate that 1.9 million beneficiaries would have Medigap drug 
coverage in 2006, absent the law change. To be conservative, we assume 
that all of these beneficiaries with Medigap drug coverage obtain new 
pharmacy discounts under the Medicare drug benefit. With these 
beneficiaries accounting for about 4 percent of prescription drug 
spending by all beneficiaries, we estimate that extending pharmacy 
discounts to these beneficiaries could result in about a 0.6 percent 
decline in total Medicare drug spending by beneficiaries.
    It is also possible that the Medicare prescription drug benefit may 
result in new use of mail order pharmacies by some beneficiaries. We 
believe that the new Medicare benefit is unlikely to affect the use of 
mail order pharmacies among beneficiaries currently with employer 
sponsored or Medicare Advantage drug coverage as mail order is an 
option currently available to these beneficiaries and the 
implementation of Medicare Part D makes no changes in this regard. We 
also believe that there is likely to be no effect on mail order use by 
beneficiaries who qualify for the low-income subsidy because nominal 
cost sharing exists regardless of where the beneficiary purchases the 
prescriptions (and as noted above, for those without prior drug 
coverage or less generous prior drug coverage, we expect that these 
beneficiaries will fill significantly more prescriptions). The two 
groups where it is possible that mail order usage may increase are 
beneficiaries without prior drug coverage and beneficiaries with 
Medigap drug coverage. The effect of Medicare Part D on mail order use 
by these beneficiaries, however, is uncertain. For example, Medicare 
Part D includes a provision that allows retail pharmacies (subject to 
state pharmacy laws) to provide a 90-day supply, putting them on equal 
footing with mail order pharmacies in this regard.
    To estimate the potential effect of new mail order use among 
beneficiaries without prior drug coverage and beneficiaries with prior 
Medigap drug coverage, we take the approach of making estimates based 
on two alternate assumptions. As a lower bound, we assume that there is 
no additional mail order use. As an upper bound, we assume that the 
percent of beneficiaries using mail order pharmacies among these two 
groups of beneficiaries increases to be similar to the rate of use 
among beneficiaries with private employer-based drug coverage. There is 
limited publicly available data related to mail order utilization. To 
supplement publicly available data we tried to obtain information from 
proprietary sources to help inform our upper bound estimates. For our 
upper bound assumptions, we use data from the Medical Expenditure Panel 
Survey (MEPS) to assign higher rates of mail order use (that is, the 
percentage of population that fills at least one prescription through 
mail order) to the population that gains drug coverage and to 
beneficiaries with prior Medigap drug coverage. We also tried to obtain 
data on the share of drug spending through mail order pharmacies that 
occurs among individuals who use these pharmacies. However, we were 
unable to obtain this type of information. We were able to obtain some 
proprietary information regarding the share of total plan spending 
occurring through mail order and retail pharmacies for a commercially 
insured over 65 population. Using this information in combination with 
the recognition that a number of prescriptions are unlikely to be 
filled through mail order (for example such as antibiotics and pain 
medication used to treat acute conditions, or newly prescribed 
medications), we developed an upper bound assumption that as much as 50 
percent of drug spending among new users of mail order might occur 
through mail order pharmacies. We do not expect mail order use to 
approach this level; we use it simply for purposes of estimating the 
maximum potential impact. Under this upper bound assumption, we 
estimate that as a result of mail order effects, aggregate Medicare 
drug spending in retail pharmacies could decrease by as much as 1.9 
percent. Thus, based on our lower bound and upper bound assumptions, we 
estimate that possible new use of mail order pharmacies among some 
beneficiaries could result in a decrease in retail pharmacy revenues of 
somewhere between 0 to 1.9 percent. If a shift in mail order use were 
to occur, our prior estimates of utilization and discount effects would 
be altered slightly since they are based on the assumption of no change 
in mail order use. We estimate that under our upper bound assumptions 
related to mail order, our previous estimates of the combined effect of 
utilization increases and new pharmacy discounts for some beneficiaries 
would need to be adjusted downward by as much as 1.2 percentage points. 
We note that even with these adjustments based on a very high upper 
bound assumption, the net effect for retail pharmacies remains 
positive. We welcome additional data that could help inform our 
assumptions and analysis related to new mail order use by beneficiaries 
who previously did not have drug coverage.

[[Page 46794]]

    Taken together, we estimate that the effect of expanding access to 
prescription drug coverage among beneficiaries without prior drug 
coverage and the effect of new pharmacy discounts and possibly new use 
of mail order pharmacies by some beneficiaries will result in a net 
increase in total prescription drug spending by Medicare beneficiaries 
at retail pharmacies of between 4.1 percent and 7.3 percent. We 
estimate that this would represent an average increase in retail 
pharmacy revenues of between 1.7 percent and 3.0 percent, as Medicare 
beneficiaries account for about 40.5 percent of outpatient prescription 
drug spending for the non-institutionalized population according to 
1999 MEPS data (Stagnitti MN et al., AHRQ, ``Outpatient Prescription 
Drug Expenses, 1999'', 2003). Furthermore, while not quantifiable at 
this time, we expect that pharmacies may realize additional revenues 
from the MMA requirement that PDPs and MA-PDs offer medication therapy 
management programs to targeted enrollees, which may be furnished by 
pharmacists. In addition, it is likely that increased use of 
prescription drugs by Medicare beneficiaries will lead to increased 
foot traffic in pharmacies and increased pharmacy revenues from non-
pharmaceutical products as well.
b. Medicare's Assumption of Drug Coverage for Full-Benefit Dual 
Eligibles
    Because State Medicaid programs typically pay higher reimbursement 
rates to pharmacies than private sector insurers, the movement of full-
benefit dual eligibles from Medicaid drug coverage to Medicare drug 
coverage (through PDPs and MA-PDs) has potential implications for 
pharmacy revenues. Our upper bound estimate of the average reduction in 
pharmacy revenues that could result from full-benefit dual eligibles 
receiving drug coverage from Medicare is 1.1 percent. We believe that 
this is an overestimate because it does not take into account the 
effect the Federal Upper Payment Limit has in reducing Medicaid 
reimbursement rates for multi-source drugs with at least three generic 
equivalents. Also, to the extent that a State Medicaid program has 
adopted managed care arrangements to lower the cost of drugs for dual 
eligibles, our estimate of the revenue impact of pharmacy reimbursement 
changes for full-benefit dual eligibles would be overstated.
    We conducted the following analysis to estimate how the transfer of 
dual-eligibles' drug coverage from Medicaid to Medicare would affect 
pharmacy revenues. First, we developed an estimate of the average 
Medicaid drug reimbursement rate across States. To begin, we considered 
how Medicaid reimburses pharmacies for drugs. Medicaid reimburses 
pharmacies for drugs based on the estimated acquisition costs (EAC) 
plus a dispensing fee. There is variation across States in how they 
define and the level at which they set EAC and the dispensing fee. The 
vast majority of States define EAC as the average wholesale price (AWP) 
less a certain percentage discount, while a small number define it as 
wholesale acquisition cost (WAC) plus a certain percentage or the lower 
of an AWP-based or WAC-based payment amount. Dispensing fees also vary 
by State and typically range from $3 to $5. Some States use the same 
reimbursement formula for brand and generic drugs, while others 
institute a greater discount off of AWP for generic drugs or a higher 
dispensing fee for generic drugs, and in some cases both. In addition, 
Medicaid reimbursement rates for multi-source drugs with 3 or more 
generic equivalents are generally capped by the Federal Upper Payment 
Limit.
    Based on information on the Medicaid EAC and dispensing fee for 
each State for brand and generic drugs as of January 2004, we estimated 
the overall drug reimbursement rate (EAC plus dispensing fee) as a 
percent of AWP separately for brand and generic drugs. We did this by 
estimating the dispensing fee as a percent of the average AWP, using 
unpublished Express Scripts data on the average AWP for brand drugs 
($77.42) and generic drugs ($32.57) in 2002.\8\ (It should be noted 
that under this methodology the total reimbursement rate for generic 
drugs (including the ingredient cost and the dispensing fee) as a 
percent of AWP is much greater than the reimbursement rate as a percent 
of AWP for the ingredient cost alone, because the dispensing fee 
represents a fairly high percentage of AWP for low cost generic drugs.) 
For States that set EAC based on WAC rather than AWP, we express their 
reimbursement formula in AWP terms by assuming that WAC is equivalent 
to roughly 20 percent of AWP, based on information about the typical 
relationship between WAC and AWP in the 2000 HHS Prescription Drug 
study. After estimating an overall Medicaid reimbursement amount for 
brand and generic drugs for each State, we estimate the weighted 
average reimbursement rate across States, using the number of full-
benefit dual eligibles with drug coverage in each State for weights. 
Based on this method, we estimate that average Medicaid reimbursement 
to pharmacies (for ingredient cost and dispensing fee combined) is 
roughly equivalent to AWP minus 7 percent for brand drugs and AWP for 
generic drugs. It should be noted that this likely overstates the 
Medicaid reimbursement rate for generic drugs because it does not take 
into account that Medicaid reimbursement for multi-source drugs with 3 
or more generic equivalents is generally capped by the Federal upper 
payment limit.
---------------------------------------------------------------------------

    \8\ These unpublished Express Scripts estimates of average AWP 
for brand and generic drugs in 2002 reflect the average AWP for a 
30-day equivalent weighted by the number of scripts, based on 
utilization data from a commercially insured population age 65 and 
older, with employer sponsored insurance and with an integrated 
benefit (network and mail prescription coverage).
---------------------------------------------------------------------------

    We then estimated an average Medicaid reimbursement rate across all 
drugs (brand and generic) by weighting the average reimbursement 
estimates for brand and generic drugs by the percent of Medicaid 
expenditures we assume they comprise. According to a survey of State 
Medicaid programs by the Kaiser Family Foundation, States estimate that 
80 percent of State Medicaid drug expenditures are on brand drugs and 
20 percent on generics. Using these figures for weights, we estimate an 
overall average Medicaid drug reimbursement rate (including dispensing 
fee) of roughly 5 percent off of AWP.
    Second, for the purposes of this analysis, we make assumptions 
about the average pharmacy reimbursement rate for brand and generic 
drugs under PDPs and MA-PDs. We base these assumptions on available 
literature about typical pharmacy reimbursement rates under private 
sector insured products. It must be noted that these assumptions are 
not meant to convey our expectation of the actual pharmacy 
reimbursement rates negotiated by PDPs and MA-PDs with pharmacies under 
the Medicare drug. Instead, they are assumptions made solely for this 
regulatory flexibility analysis. According to a survey sponsored by 
Takeda Lilly of employer sponsored insurance plans covering more than 
17 million lives, the average reimbursement for ingredient cost for a 
brand drug in 2002 was about 14 percent off of AWP (Takeda, ``The 
Prescription Drug Benefit Cost and Plan Design Survey Report,'' 2003). 
In addition, according to a report by Express Scripts, there tends to 
be about a three times greater discount off of AWP for generic drug 
ingredient cost than for brand drug ingredient cost (Express Scripts, 
``Drug Trends 2002

[[Page 46795]]

Report,'' June 2003). Based on these studies, we assume reimbursement 
for ingredient costs of 14 percent off of AWP for brand drugs and 42 
percent off of AWP for generic drugs. In terms of dispensing fees, the 
Novartis Pharmacy Benefit Reports, which is a survey of HMO plans, 
finds an average dispensing fee of $1.79 for brand drugs and $2.08 for 
generic drugs as of 2002 (Novartis, ``Pharmacy Benefit Report: Facts 
and Figures,'' 2003). The Takeda Lilly survey of employer-sponsored 
plans indicates an average dispensing fee of $2.13 for brand and $2.22 
for generic drugs. For the purposes of this analysis, we average the 
findings from the two studies and assume a dispensing fee of $1.96 for 
brand drugs and $2.11 for generic. Similar to the Medicaid 
reimbursement analysis, we estimate these dispensing fees as a percent 
of average AWP for brand and generic drugs and then add them to our 
ingredient cost reimbursement assumptions to arrive at average 
reimbursement estimates--11 percent off of AWP for brand drugs and 35 
percent off of AWP for generic drugs. We then weight the average 
reimbursement estimates for brand and generic drugs by the percent of 
expenditures they are assumed to comprise to arrive at an overall 
average reimbursement estimate (including dispensing fee) of 16 percent 
off AWP for all drugs.
    Third, we estimated the share of national retail prescription drug 
spending accounted for by Medicaid drug expenditures on dual eligibles. 
According to a special analysis by the Kaiser Commission on Medicaid 
and the Uninsured, Medicaid prescription drug spending on dual 
eligibles was $9.5 billion in 2000, including fee-for-service and 
managed care and netting out manufacturer rebates (Kaiser Commission on 
Medicaid and the Uninsured, ``The Proposed Medicare Prescription Drug 
Benefit: A Detailed Review of Implications for Dual Eligibles and Other 
Low-Income Medicare Beneficiaries,'' September 2003). In addition, 
national retail prescription drug spending, net of manufacturer 
rebates, was $121.5 billion in 2000 according to National Health 
Expenditures projections by our Office of the Actuary. (http://www.cms.hhs.gov/statistics/nhe/projections-2003/t11.asp). Based on the 
above figures, we estimate Medicaid drug spending on dual eligibles 
comprised about 7.8 percent of total national retail prescription drug 
spending net of rebates in 2000. While this estimate is based on drug 
spending adjusted for rebates, drug spending without adjustments for 
rebates would be a better measure of the actual amount of revenues 
flowing through pharmacies. Manufacturer rebates typically occur on the 
back end between manufacturers and third party insurers and do not 
impact pharmacy revenues. Therefore, we adjust our estimate to pre-
rebate levels of drug spending using the following method. We take 
national retail prescription drug spending net of rebates and inflate 
it based on our Office of the Actuary's estimate that national retail 
prescription drug spending in 2000 would be 6 percent higher without 
the adjustments for rebates. We also take our estimate of Medicaid 
prescription drug spending for dual eligibles and inflate it based on 
information from the Kaiser Study, which indicates that rebates reduced 
Medicaid fee-for-service drug spending in 2000 by an average of about 
19 percent. Absent information on the percent of Medicaid drug spending 
for dual eligibles that is under fee-for-service versus managed care, 
we take an extremely conservative approach and inflate Medicaid drug 
spending to pre-rebate as though all spending had been fee-for-service. 
It should be noted that we strongly believe this overstates the amount 
of Medicaid drug spending on dual eligibles, and thus overstates any 
negative revenue impact on pharmacies. Based on the above, we estimate 
that Medicaid drug spending on dual eligibles is about 9.1 percent of 
total national retail prescription drug spending. Finally, we estimate 
the potential impact on pharmacy revenues of transferring 
responsibility for drug coverage of full benefit dual eligibles from 
Medicaid to Medicare.
    Based on our previous estimates of average pharmacy drug 
reimbursement rates under Medicaid and private insurers, we estimate 
that prescription drug spending on dual eligibles would account for 
about 8.1 percent of national retail prescription drug spending if 
drugs were reimbursed at rates typical of private sector insurer rates 
rather than Medicaid.\9\ Thus, our upper bound estimate of the average 
reduction in pharmacy revenues that could result from full-benefit dual 
eligibles receiving drug coverage from Medicare is about 1.1 
percent.\10\ As mentioned previously, we believe that this is an 
overestimate of the impact on pharmacies because it does not take into 
account existing policies that reduce Medicaid reimbursement rates such 
as the Federal Upper Payment limit for multi-source drugs with at least 
three generic equivalents.
---------------------------------------------------------------------------

    \9\ The 8.1 percent figure is computed by multiplying our 
estimate of drug spending for dual eligibles as a percent of NHE 
(9.1 percent) by our estimate of pharmacy reimbursement rates 
typical of private sector insurers (AWP--16 percent, or 84 percent 
of AWP) and dividing by our estimate of average Medicaid pharmacy 
reimbursement (AWP-5 percent, or 95 percent of AWP).
    \10\ The 1.1 percent decrease does not equal 9.1 percent -8.1 
percent due to rounding.
---------------------------------------------------------------------------

c. Conclusion
    Considering together the effect of increased utilization, new 
pharmacy discounts and possibly new use of mail order pharmacies among 
some beneficiaries, and reimbursement changes for full-benefit dual 
eligibles, we estimate that retail pharmacy revenues would increase on 
average by between 0.6 percent and 1.9 percent as a result of the 
Medicare prescription drug benefit. This is the result of an increase 
in prescription drug revenues ranging from 1.7 percent to 3.0 percent 
due to the net effect of increased utilization, new pharmacy discounts, 
and possibly new use of mail order pharmacies among some beneficiaries, 
and a 1.1 percent decrease in pharmacy revenues (upper bound estimate) 
due to drug coverage for full-benefit dual eligibles shifting from 
Medicaid to Medicare.
    In addition, we believe that these estimates understate the degree 
to which pharmacy revenues increase as a result of the Medicare 
prescription drug benefit for several reasons. Our estimate of the 
revenue reduction resulting from the transfer of drug coverage for full 
benefit dual eligibles from Medicaid to Medicare is likely to be 
overstated because it does not take into account the effect of the 
Medicaid upper payment limit on reducing Medicaid reimbursement rates 
for some multi-source drugs. In addition to revenue effects we have 
estimated, the Medicare prescription drug benefit is likely to provide 
other sources of revenue increases for pharmacies; for example, through 
targeted medication therapy management programs under Medicare Part D 
which may be furnished by pharmacists, or through increased foot 
traffic in pharmacies leading to increased pharmacy sales of other 
goods in addition to prescription medicines. For these reasons, we 
estimate that the Medicare prescription drug benefit will have a 
positive revenue impact on the pharmacy industry overall.
    We believe that the program's effect on small pharmacies 
specifically will also be positive. We expect that small pharmacies 
will participate in the networks of Medicare Part D plans and 
consequently will share in the positive revenue impacts. We believe 
that given the current industry practice of broad

[[Page 46796]]

pharmacy networks, together with the special any willing provider 
provision for pharmacies under Medicare Part D, all pharmacies that 
wish to participate in the program will be able to do so. As shown 
previously, over 95 percent of pharmacy firms are small businesses, and 
these firms operate about half of all retail pharmacies. The general 
practice of PBM companies is to build large networks that encompass 
both chains and independents in an area. According to a study by 
PricewaterhouseCoopers, the average PBM has 42,000 pharmacies in its 
network and the two largest PBM networks contain approximately 57,000 
pharmacies, 98 percent of all pharmacies in the United States 
(PricewaterhouseCoopers report ``Study of Pharmaceutical Benefit 
Management'' at http://www.cms.hhs.gov/researchers/reports/2001/cms.pdf). Furthermore, a survey by the Pharmaceutical Care Management 
Association of five Medicare drug discount card programs found that on 
average the card program networks contained about 80 percent of 
pharmacies, with one of the five programs surveyed including nearly 95 
percent of pharmacies. While broad pharmacy networks are typical of 
current industry practice, the MMA includes a special ``any willing 
provider'' provision that further promotes inclusiveness in pharmacy 
networks under the Medicare drug benefit. The MMA requires that a PDP 
or MA-PD must accept a pharmacy into its network if the pharmacy is 
willing to agree to contractual terms offered by the sponsor. This type 
of arrangement is not typical of standard industry practice, and was 
not required in the Medicare Drug Discount Card program. We believe 
that it helps ensure that all pharmacies that wish to do so have the 
ability to participate in the Medicare prescription drug benefit. 
Finally, according to the PricewaterhouseCoopers study, independent 
pharmacies also have the ability to participate in pharmacy networks 
through a Pharmacy Services Administrative Organization, which gives 
them group purchasing leverage and the ability to secure PBM 
reimbursement rates that are comparable to those attained by chains. 
For these reasons, we would expect the great majority of small business 
pharmacies to share in the increased business created by the Part D 
drug benefit.
    Although we believe that the revenue effects on small pharmacies 
will be positive, we seek comments on this conclusion and on any aspect 
of this proposed rule that may adversely affect pharmacies of any size.
2. Insurers and Pharmacy Benefit Managers (PBMs)
    This proposed rule sets forth the terms and conditions that must be 
met by firms to be approved to offer the Medicare prescription drug 
benefit. Organizations sponsoring the Medicare prescription drug 
benefit can be either stand alone Prescription Drug Plans (PDPs) or 
Medicare Advantage Prescription Drug Plans (MA-PDs). The requirements 
for Medicare Advantage are discussed in our separate proposed rule. 
That proposed rule includes an IRFA specific to the Medicare Advantage 
program. Consequently the discussion here will focus on PDP sponsors. 
As discussed previously in the preamble, in order to be approved to 
offer the Medicare prescription drug benefit as a PDP an entity must be 
organized and licensed under State law as a risk bearing entity 
eligible to offer health insurance or health benefits coverage in each 
State in which it offers a prescription drug plan, or have secured a 
time-limited Federal waiver. The SBA size standard for ``small entity'' 
health insurance firms is annual revenue of $6 million or less.
    Our IRFA for the Medicare Advantage proposed rule includes an 
extensive discussion related to insurance firms that might potentially 
be eligible to be MA plans. That analysis is also applicable to 
insurance firms that might be interested in being a PDP. As noted for 
the MA market and equally applicable to the PDP market, essentially all 
of the insurance firms affected by the statute and our proposed rule 
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. 
Standalone drug insurance policies are not a typical product in the 
insurance market today. Thus, the range of insurance companies that may 
choose to enter this market is uncertain. However, we anticipate that a 
portion of the insurance firms that might be interested in being a PDP 
and thus affected by these proposed rules are ``small entities'' by 
virtue of their non-profit status.
    PDP eligibility provisions in the MMA rely on the Medicare 
Advantage enrollment provision (continued unchanged from prior law) 
that no health insurance plan is normally eligible to participate 
unless it already serves at least 5,000 enrollees. Section 1860D-
12(b)(3) of the Act provides that this minimum shall be waived during 
the first contract year in a region, since PDPs in the context of Part 
D are new entities. While there is also a 1,500 minimum standard 
enrollment for plans that predominantly serve rural populations, in the 
context of PDP services areas designed on a regional basis, we do not 
believe a predominantly rural situation would occur. Consequently, we 
have not considered this level of enrollment in our analysis. We 
welcome comment on this issue. At the 5,000-enrollee level, no 
insurance plan would fall below the SBA revenue cutoff assuming 
estimated average per enrollee revenue of approximately $1,675 in 2006, 
a revenue level similar to that of prescription drug plans under the 
standard Medicare Part D benefit. Therefore, the statutory limits 
generally prevent any insurance firm defined as ``small'' pursuant to 
the RFA's size standards from participating in the program. It is also 
important to note that PDPs will only operate on a regional basis. The 
MMA specifically states that there will be no fewer than 10 regions and 
no more than 50 regions, not including the territories. Thus, the 
statute itself envisions risk-bearing entities that are operating on a 
fairly large-scale basis.
    In our IRFA for the Medicare Advantage program, we include a 
detailed analysis on regional Medicare Advantage market and small 
entities. That discussion is applicable to the PDP market, and 
therefore we are not repeating that same discussion here. That analysis 
also reviews the local Medicare Advantage market. As is noted in that 
analysis the option to be a local MA-PD plan provides opportunity for 
health insurance entities of all types and sizes (but probably not 
below the ``small'' insurance entity cutoff level defined by the SBA, 
which is lower than appears viable for a Part D risk-bearing insurance 
plan) to participate in offering the Medicare prescription drug 
benefit, albeit as part of a comprehensive benefit offered on a local 
basis. We point out that many HMOs are non-profit entities, as are 
several dozen Blue Cross and Blue Shield plans, and conclude that on 
balance Medicare Advantage provide favorable opportunities for them, 
although regional boundaries may pose problems for some. We note that a 
number of HMOs and other insurers including a number of Blue Cross 
plans are sponsoring Medicare-endorsed drug discount cards under that 
new program, which suggests their future ability to participate as PDP 
or MA-PD participants, regardless of profit status. While this proposed 
rule extends

[[Page 46797]]

certain requirements related to the provision of Part D benefits to 
Medicare Advantage plans (for example, network adequacy standards and 
any willing pharmacy provisions), we believe that these requirements 
will not result in consequential additional costs for MA-PD plans. We 
believe that any well-designed plan would already meet or readily be 
able to accommodate these standards. For example, we believe that 
competition among plans for enrollees will necessitate that they have a 
pharmacy network that is at least as broad as those stipulated by our 
network adequacy standards.
    The other organizations that we think potentially may be interested 
in being PDP sponsors, or most certainly working closely with PDP and 
MA-PD sponsors to administer all or part of their drug programs, are 
pharmacy benefit managers (PBMs). PBMs are a relatively new player in 
the health care market. A major limitation on PBMs being PDP sponsors, 
however, is the statutory requirement for State licensure as a risk 
bearing entity, a status PBMs have not historically achieved. As 
discussed in section C (Federalism) of this Regulatory Impact Analysis, 
the MMA provides for a time-limited waiver to obtain State licensure, 
during which an organization can be approved by CMS to be a PDP 
sponsor. Since the Part D benefit is new, we do not currently have 
information on whether PBMs are considering becoming PDP sponsors, and 
would welcome comment regarding this issue.
    There are basically two types of PBMs in the market today. Some are 
subsidiaries of health plans (that is, managed care organizations or 
insurance companies), and others are independent PBMs. PBMs have 
evolved over time in the nature of services they provide. In the late 
1970s and early 1980s they offered claims processing services. In the 
late 1980s and early 1990s their services evolved to include pharmacy 
network design and management, formulary design and manufacturer rebate 
negotiations, mail order pharmacy services, drug utilization review, 
and enrollee services (for example, call centers). During the 1990s, 
PBMs generally expanded to become managers of a wide array of pharmacy 
services as plan sponsors sought to control drug costs. For example, 
some PBMs now also provide clinical services such as disease 
management, and physician and patient education.
    Under the ``carve-out'' trend by which pharmacy benefits are 
administered separately from medical benefits in employer-sponsored 
insurance, PBMs are now believed to administer roughly half of all 
pharmacy benefits for employer health plans, and this share is rising 
rapidly. The primary reasons are analyzed in a 2003 General Accounting 
Office report (``Federal Employees Health Benefits: Effects of Using 
Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies'' 
available at http://www.gao.gov; see also the CMS study on PBMs cited 
above). These reports and others conclude that PBMs help insurance 
plans achieve significant savings in their drug coverage, for example, 
through use of discounts and rebates to lower prices, through drug 
utilization review, and through shifting sales from name brands to 
generics. Obviously, insurance plans can do these things for 
themselves, but most find that PBMs substantially improve their ability 
to achieve savings.
    Because PBMs rely heavily on computerized systems to manage 
pharmacy records, they also provide safeguards against many kinds of 
medication errors through drug utilization review. Which services a PBM 
provides to a particular plan sponsor is negotiated between the PBM and 
the sponsor. Selection of a PBM (usually one, but sometimes two, one 
for mail order and one for retail) by plan sponsors is strongly 
influenced by the expected cost of drug benefits, with PBMs gaining a 
competitive advantage in contractual negotiations by offering lower 
average costs per prescription.
    There are believed to be about one hundred PBM firms. Some are 
standalone companies, but most are subsidiaries of health insurance 
firms (for example, Wellpoint and Anthem) or owned by drug store chains 
(for example, Walgreens). Although a handful of particularly large 
firms account for most of the ``covered lives'' and industry revenue, 
the industry is regarded by analysts as highly competitive. We have no 
information on the size of the smaller firms in the industry, but it is 
likely that none of them, or at most a very small number, would fall 
below the $6 million annual revenue threshold used by the SBA for 
defining ``small entities'' in the insurance industry. (The smallest 
companies are in any event most likely to be subsidiaries or components 
of health insurance companies and other large firms). This is an 
industry in which there appear to be marked advantages to larger size, 
through both economies of scale and bargaining power. Nor do we believe 
that a substantial number, if any, are non-profit entities. We do, 
however, request additional information on the characteristics of this 
industry and its firms.
    The MMA will expand PBM business in two ways. First, assuming that 
all or most PDPs and many MA-PDs will use PBMs, and that nearly all 
beneficiaries without drug coverage will enroll in a plan providing 
drug coverage, we anticipate that millions of beneficiaries will start 
purchasing their drugs using PBM-managed benefits. Second, all or most 
of those currently enrolled in plans that cover drug purchases on an 
indemnity basis (rather than through PBMs), and who sign up for PDP or 
MA-PD plans, will start using PBM services. This latter group includes 
most of the 1.9 million persons we estimate are currently enrolled in 
Medigap plans that offer drug coverage. Thus, drug insurance plans 
using PBMs are likely to enroll millions of new covered lives. Because 
these enrollees are on average much higher utilizers of drugs than most 
covered lives in the private sector, this will create positive and 
significant economic impact on the future volume of business for these 
firms.
    Obviously, the scope, timing, and nature of additional PBM business 
will depend on the future decisions of PDP and MA-PD sponsors, and the 
PBMs themselves, and ultimately on the decisions of Medicare 
beneficiaries as they make choices among their various insurance 
options. Nothing in this rule directly regulates PBMs, positively or 
negatively, or directly encourages or discourages their use over 
alternative methods of managing drug benefits. Furthermore, there are 
many other influences on the role of PBMs and on the amount of drug 
spending that they manage. Chief among these is the continuing growth 
in spending on prescription drugs and the incentives this creates to 
control costs.
    It is possible that decisions on regional boundaries (not part of 
this proposed rule) may affect the ability of some PBM firms to compete 
for PDP and MA-PD contracts, but we believe that most if not all PBMs 
that are not plan-specific will compete in broad regions or the entire 
nation. We welcome information on any possible problems that regional 
boundary decisions could create.
    For all the reasons given above, we conclude that while the 
statutorily-created Part D and Medicare Advantage programs will be 
largely favorable to PBMs, this proposed rule as such will have little 
or no direct effect on the PBM industry, and certainly not a 
significantly adverse effect on a substantial number of small entity 
PBMs. However, we request comments on this conclusion and on any 
provisions that might adversely affect such firms.

[[Page 46798]]

3. Small Employers
    In the case of the small employers, public and private, who provide 
qualified prescription drug coverage for their retirees, we estimate 
that savings obtained from the Medicare retiree drug subsidy will 
exceed by several-fold the employer's administrative costs associated 
with obtaining the subsidy, and thus the result of the retiree drug 
subsidy provision is a net positive impact. We would like to make 
participation in the retiree drug subsidy program as simple as possible 
for small entities. Accordingly, we request comments on any provisions 
of this proposed rule that may be particularly difficult for small 
entities, and on any alternatives that might lessen such burdens.
    As noted earlier, we estimate that the administrative costs 
associated with obtaining the Medicare retiree drug subsidy (excluding 
data reporting costs, which are not yet quantifiable) will represent on 
average about 5.5 percent of the Medicare retiree drug subsidy payments 
in 2006 (declining in subsequent years after initial start-up costs), 
and that the bulk of these costs will be associated with preparing the 
actuarial valuation, retiree drug subsidy application, and related 
enrollment information. It is important to note that this estimate 
reflects an average across all employers. While administrative costs 
for small employers as a percent of retiree subsidy dollars are likely 
to be somewhat higher than the average, we believe that subsidy 
payments to small employers are still likely to exceed the 
administrative costs of obtaining the subsidy by more than several-
fold. Although smaller employers will spread their administrative costs 
across fewer qualifying retirees for whom they will be receiving 
Medicare retiree drug subsidy payments than larger employers, they are 
expected to have lower costs associated with identifying their Medicare 
retirees and related enrollment information than large employers. 
Additionally, we expect that small employers that purchase retiree 
coverage from insurance companies are likely to have lower direct costs 
associated with the actuarial valuation due to the spreading of these 
costs across many employers that are purchasing the same insurance 
product. Alternatively, as discussed elsewhere in this document, 
employers (both small and large) may decide to restructure their 
prescription drug coverage to provide continued coverage by providing 
enhanced benefits or providing supplemental wraparound coverage, and 
thus will be positively impacted as a result of beneficiaries now 
receiving contributions to their drug coverage from Medicare.
    We believe that affected small businesses are unlikely to 
experience increased revenues of the magnitude that would approach 3 to 
5 percent of revenues due to the Medicare retiree drug subsidy 
payments. We arrive at this conclusion as follows. First, we estimate 
the number of covered lives per firm offering retiree coverage. To make 
this estimate, we use 2001 data from the Medical Expenditure Panel 
Survey (MEPS) on the number of establishments (by firm size), with 
retiree coverage for the over 65 population, and the number of retirees 
covered by these establishments. As a conservative approach, we assume 
two covered lives per retiree to estimate the number of covered lives 
in these establishments. This assumption overstates the number of 
covered lives as not all Medicare beneficiaries will be married, or are 
married to an individual who is also a Medicare beneficiary. Second, we 
convert the number of establishments offering age 65 and over retiree 
coverage to a firm based count using the ratio of the number of 
establishments to the number of firms, based on the U.S. Census 
Bureau's Statistics on U.S. Businesses for 2001 (see http://www.census.gov/epcd/www/smallbus.htm#EmpSize). Using this firm based 
count we then estimate the average number of age 65 and over covered 
lives per firm. For firms with fewer than 100 employees our estimated 
average number of 65 and older covered lives was 6.15; the 
corresponding figure for firms with a firm size of 100 to 999 employees 
was 44.7. Data for 2001 on the overall number of establishments, the 
overall estimated number of firms, the number of estimated firms with 
retiree coverage for retirees aged 65 and over, the number of covered 
retirees, and the estimated number of retirees and covered lives per 
firm, are shown in Table V-3.
    As an extreme example, we assume the absolute maximum subsidy per 
person that an employer can receive in 2006 is $1,330 (that is, 28 
percent of the difference between $250 and $5,000, and assuming no 
further adjustment related to netting out discounts, chargebacks or 
rebates). As discussed earlier, we estimated an average per capita 
Medicare retiree drug subsidy amount at $611 in 2006 (which, for 
example, would be equivalent to about $815 of taxable income for 
employers with a marginal tax rate of 25 percent and about $940 of 
taxable income for employers with a marginal tax rate of 35 percent). 
Using the $1,330 value, the retiree drug subsidy payments would be 
about $8,178 per firm with less than 100 employees and $59,456 for 
firms with 100 to 999 employees. These amounts almost certainly are 
overstated because they assume that every qualifying covered retiree 
would have annual allowable prescription drug costs of at least $5,000 
in 2006, and that each firm would thus receive the maximum retiree drug 
subsidy payment for every covered individual, which is unlikely.
    We compare these estimates with revenues for firms of these 
respective sizes. We trend forward 1997 revenue data by firm size, from 
the U.S. Census, to 2001 based on the annual change in the average 
Consumer Price Index (CPI). While revenues would likely grow at a 
faster rate than the CPI due to increases in the quantity of items and/
or services sold, we take a conservative approach by only accounting 
for increases in prices from 1997 to 2001 via the annual changes in the 
average CPI. The most recent year that data on revenues are available 
is for 1997. We used U.S. Census Bureau data for 2001 for estimating 
the number of firms. The estimated per firm average revenues for 2001 
are about $1.2 million for firms with a firm size of less than 100 
employees and $28 million for firms with a firm size of 100 to 499 
employees.
    The Medicare retiree drug subsidy payments, therefore, represent 
only 0.7 percent of total revenues for firms with a firm size of less 
than 100 employees, and 0.2 percent for firms with a firm size of 100 
to 999 employees. Because revenue data are not available for firms with 
100 to 999 employees, we conservatively use the per-firm revenues for 
firms with a firm size of 100 to 499 employees to represent the per 
firm revenues for firms with a firm size of 100 to 999 employees. For 
further illustrative purposes, Table V-4 shows by different firm sizes 
the revenue impacts using the maximum assumption on retiree drug 
subsidy payments. Even for the smallest firms, the revenue impacts of 
the subsidy would be less than 2 percent. The table shows that, as the 
firm size increases, the percentage of the revenues accounted for by 
the subsidy decreases. We therefore conclude that this proposed rule 
will not have a significant economic impact on a substantial number of 
small employers. This conclusion applies equally to non-profit 
employers and small local government employers, though we do not have 
detailed data on these groups (had we the data, the comparison would 
have been on a cost rather than revenue basis, but the relationships of 
retirees to active

[[Page 46799]]

employees would have been similar.) Because of the likely interest in 
the Medicare retiree drug subsidy program, however, we present some 
additional background information related to the number of small 
entities that might potentially be eligible to receive the Medicare 
retiree drug subsidy payments.
    To estimate the number of potentially eligible small businesses for 
RFA purposes, we need to determine the appropriate standards for 
identifying a small business. In general, the Small Business 
Administration (SBA) has size standards that define small businesses 
within a given industry based on either the average annual receipts 
(millions of dollars) or average employment (number of employees) of a 
firm (``Table of Size Standards Matched To North American Industry 
Classification System Codes, January 28, 2004,'' U.S. Small Business 
Administration, available at http://www.sba.gov). However, we did not 
have data available on retiree coverage among either establishments or 
firms by annual revenues, but these data are available by employee 
size. We used an alternative size standard for RFA purposes based on 
our consultation with the Office of Advocacy at the Small Business 
Administration (SBA). The alternative size standards are based on the 
number of the firm's employees, rather than the firm's annual revenues.
    Because our data from the Medical Expenditure Panel Survey (MEPS) 
on the number of establishments providing retiree drug coverage are at 
the 2-digit North American Industry Classification System (NAICS) code 
level and the MEPS industry group level (which is based on rolling-up 
2-digit NAICS codes), while the SBA size standards are at the 6-digit 
NAICS code level, we developed an approach for rolling up the size 
standards to the 2-digit NAICS code level. For the purpose of our 
analysis, we classified a business within a 2-digit NAICS code as small 
business based on the largest SBA employment size standard among all 
the six-digit NAICS codes that comprised that two-digit NAICS code. It 
is likely that this methodology overstates the number of small 
businesses because some large businesses are likely counted as small 
businesses. Our employee firm size standards ranged from 150 to 1,500 
employees.\11\
---------------------------------------------------------------------------

    \11\ We used the following alternative size standards for the 
purpose of this RFA: less than 150 employees (NAICS codes 42 and 
44), less than 500 employees (NAICS codes 11, 23, 56, 71, 72, and 
81), and less than 1,500 employees (NAICS codes 21, 22, 31, 48, 51, 
52, 53, 54, 55, 61, and 62).
---------------------------------------------------------------------------

    We estimate the number of small businesses who offer retiree drug 
coverage based on an analysis of 2001 MEPS data. We mapped the 19 two-
digit NAICS codes to nine MEPS industry groups. Where the MEPS industry 
group consisted of two or more two-digit NAICS codes, we defined a 
small business using the largest employee size standard among the two-
digit NAICS codes that crosswalked to the MEPS industry code. However, 
for each of nine MEPS industry groups, the MEPS data do have the number 
of establishments offering retiree health insurance coverage by the 
number of employees in the firm. We estimate that in 2001, there were 
399,751 establishments offering retiree coverage to their retirees age 
65 and older. Of this total, 65,208 (not shown in Table V-3) were small 
businesses, based on the small business size standards (that is, 150 to 
1,500 as noted earlier). These businesses represented 1.3 percent of 
all small establishments. These businesses also accounted for 16 
percent of all establishments offering retiree coverage to their 
retirees that were age 65 and over.
    While in the case of small businesses the number of establishments 
is very similar to our estimate of number of firms, this relationship 
is not the case for the largest firms; that is, those firms with more 
than 1,000 employees. As a result, from a firm perspective, we estimate 
that firms with less than 1,000 employees account for 93 percent of all 
firms offering coverage to retirees age 65 and over, but account for 
only 10 percent of all retirees with employer-sponsored coverage.
    While we have data on the number of small employers who offer 
retiree coverage, by industry sector, we do not have data on the number 
of retirees covered by small employers by industry sector. The only 
analysis we are able to do is the distribution of age 65 and over 
retirees between large firms with 1,000 or more employees and firms 
with less than 1,000 employees that offer retiree health coverage to 
this population. Most covered retirees receive their drug coverage from 
large employers, both because these large employers are more likely to 
provide coverage, and large employers have a large number of retirees. 
According to data from MEPS, in 2001 the largest private sector firms 
(1,000 or more employees) covered 90 percent of all the retirees who 
had employer-sponsored retiree coverage, with only 10 percent of 
retirees being covered in firms of less than 1,000 employees.
    As discussed previously, we expect that Medicare Part D will also 
positively impact those small employers that had provided retiree drug 
coverage prior to implementation of the Medicare prescription drug 
benefit but choose not to obtain the Medicare retiree drug subsidy 
payments. For example, some of these employers may choose to provide 
alternate forms of prescription drug coverage by either offering 
enhanced Medicare Part D benefits for their retirees or providing 
wraparound coverage. These employers would see reductions in their 
spending on retiree drug coverage, as the Medicare prescription drug 
benefit would partially offset their spending on drug coverage.

                            Table V-3.--Estimated Number of Covered Retirees in Private Sector Establishments and Firms, 2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Estimated                              Estimated
                                                                                         Number of     number of                              number of
                                                                                      private sector    private     Number of    Estimated     covered
                                           Number of      Number of      Ratio of     establishments     sector      covered      average     lives, per
                                         private sector    private       number of      that offer     firms that    retirees    number of     private
               Firm size                establishments,     sector    establishments    coverage to      offer     aged 65 and    retirees   sector firm
                                             2001 *      firms, 2001   to number of    retirees aged  coverage to    over **,   per private  (assuming 2
                                                              *            firms       65 and over,   retirees 65      2001     sector firm    covered
                                                                                          2001 **      and Over,                              lives per
                                                                                                          2001                                 retiree)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less 100 than employees...............      5,058,525      4,851,266           1.04          39,308        37,697      115,899          3.1         6.15
100 to 999 employees..................        418,085         93,876           4.45          29,438         6,610      147,745         22.4        44.70
1,000 or more employees...............        913,080          8,795         103.82         331,006         3,188    2,432,542        763.0     1,525.91
---------------------------------------------------------

[[Page 46800]]

 
    Total.............................      6,389,690      4,953,937            n/a         399,751        47,496    2,696,186         56.8      113.53
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: *U.S. Census Bureau, Statistics of U.S. Businesses, 2001, http://www.census.gov/epcd/www/smallbus.htm#EmpSize.
**Medical Expenditure Panel Survey (MEPS), 2001.


                          Table V-4.--Analysis of Medicare Retiree Drug Subsidy Impacts for Different Private Sector Firm Sizes
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                     Total
                                                       Number of                                         Estimated                 estimated   Estimated
                                                        private     Total revenues,    Estimated per     number of      Maximum     retiree   subsidy as
                     Firm size                          sector       2001 (in 000s)   firm revenues,   covered lives  per person     drug     percent of
                                                      firms, 2001                          2001          per firm       subsidy     subsidy    revenues
                                                                                                                                    amount     (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 to 9 employees...................................     3,716,934     $1,815,857,996        $488,535            6.15      $1,330      $8,178         1.7
10 to 19 employees.................................       616,064      1,049,691,336       1,703,867            6.15       1,330       8,178         0.5
20 to 99 emmployees................................       518,258      2,781,101,533       5,366,249            6.15       1,330       8,178         0.2
100 to 499 employees...............................        85,304      2,385,814,720      27,968,380           44.70       1,330      59,456        0.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Number of Firms, Revenues: U.S. Census Bureau, Statistics of U.S. Businesses, http://www.census.gov/epcd/www/smallbus.htm#EmpSize.

4. Rural Hospitals
    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory flexibility impact analysis if a rule may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 604 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside of a 
Metropolitan Statistical Area and has fewer than 100 beds. This rule 
will not affect small rural hospitals since the program will be 
directed at outpatient prescription drugs, not drugs provided during a 
hospital stay. Prescription drugs provided during hospital stays are 
covered under Medicare as part of Medicare payments to hospitals. 
Therefore, we are not providing an analysis.
5. Other Requirements in the Regulatory Flexibility Act
    The RFA lists five general requirements for an IRFA and four 
categories of burden reducing alternatives to be considered. We know of 
no relevant Federal rules that duplicate, overlap, or conflict with the 
proposed rule (which in any event establishes a new program). 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 prescription drug benefit is overwhelmingly a 
``performance'' system rewarding plans that operate at lower costs, 
provide better services as evaluated by enrollees and potential 
enrollees. For Part D benefits, CMS operates in a stewardship role, not 
as the promulgator of detailed design standards (except in a few areas, 
such as protections for enrollees). As to the retiree drug subsidy 
program, we likewise propose no detailed design standards, restricting 
our regulations to the minimum necessary to meet statutory requirements 
and to assure that benefits are actuarially qualified and payments to 
employers soundly administered. However, throughout the preamble we 
identify issues and options for attention by affected entities. We 
welcome comments on these and suggestions for additional steps we can 
take, consistent with the underlying statute, to minimize any 
unnecessary burdens on plans, pharmacies, employers, or other affected 
entities.
L. Accounting Statement
    In accordance with the OMB A-4 circular on regulatory impact 
analyses, we have included an accounting statement in Table V-5. The 
Medicare prescription drug benefit and retiree drug subsidy represents 
a transfer of revenues from taxpayers to Medicare beneficiaries, 
States, and retiree plans sponsored by employers and unions. The table 
provides an estimate of the annualized amount of transfers from 
taxpayers to these entities over the five-year period from 2006-2010. 
For the purposes of the accounting statement, these estimates are shown 
separately with a 3 percent and 7 percent discount rate in 2001 
dollars.
    The table also indicates that there will be some ``off-budget'' 
administrative costs associated with the Medicare prescription drug 
benefit, specifically the costs associated with disclosure notices, 
coordination of benefits, and the Medicare retiree drug subsidy. Costs 
associated with these activities are discussed in the respective 
sections of this impact analysis.
    The accounting statement also provides a summary of the effects of 
the proposed rule on State and local governments and small businesses, 
as

[[Page 46801]]

discussed in the relevant sections of the analysis.

   Table V-5.--Accounting Statement Annualized Estimates for Medicare
      Prescription Drug Benefit and Retiree Drug Subsidy, 2006-2010
                       (2001 dollars in billions)
------------------------------------------------------------------------
                               3 percent discount    7 percent discount
                                      rate                  rate
------------------------------------------------------------------------
          Transfers
Monetized Transfers: ``on
 budget'':
    From Taxpayers to         $45.9...............  $40.9
     Beneficiaries, States,
     and Employers.
Administrative Costs: ``off
 budget'':
    Notice Requirement......  $0.02...............  $0.02
    Coordination of Benefits  Not quantifiable at   Not quantifiable at
                               this time.            this time
    Administrative Costs      5.5 percent of        5.5 percent of
     Incurred by Employers     subsidy in 2006 and   subsidy in 2006 and
     to Obtain the Medicare    declining in          declining in
     Retiree Drug Subsidy      subsequent years.     subsequent years
     (Excluding Data
     Reporting Costs).
-----------------------------
          Category                              Effects
-----------------------------
Effect on State and Local     Net positive effect on State and Local
 Governments.                  Governments: $1.9 billion (3 percent
                               discount rate)
                               and $1.7 billion (7 percent discount
                               rate).
Effect on small business....  Small Pharmacies: Positive impact.
                               Estimated economic impact is not expected
                               to reach
                               the threshold for significant (3 to 5
                               percent of revenues).
                              Small PBMs: Impact favorable for PBM
                               industry, and no significant adverse
                               impact on a
                               substantial number of small entities.
                              Small Insurers: Impact favorable on
                               insurance industry, and no significant
                               adverse impact
                               on a substantial number of small entities
                               as defined by SBA.
                              Small Employers: Positive impact.
                               Estimated economic impact is not expected
                               to reach
                               the threshold for significant (3 to 5
                               percent of revenues).
------------------------------------------------------------------------

M. Alternatives Considered

1. Designation of Regions
    The MMA requires that we establish between 10 to 50 PDP regions 
within the 50 States and District of Columbia and at least one PDP 
Region covering the territories. These regions will define PDP service 
areas. PDPs that provide service in a particular region must cover that 
region entirely. PDPs can submit bids to provide services in anywhere 
from one to all regions.
    The MMA stipulates that, to the extent practicable, PDP regions 
must be consistent with MA regions. However, if we determine that 
access to Part D benefits would be improved by establishing PDP regions 
that are different than MA regions, we may do so. As discussed in the 
preamble, we anticipate designating PDP and MA regions before January 
1, 2005. The designation of regions will be made after the market study 
required by the MMA and the opportunity for public discussion and 
comment on this study.
    In designating PDP regions, our primary objective will be to ensure 
that all beneficiaries have reliable access to PDP plans at the lowest 
possible cost. The law requires that beneficiaries have a choice of 
enrolling in at least 2 qualifying plans, at least one of which is a 
PDP. If it is not possible to achieve that with PDP plans undertaking 
the standard level of risk, the law makes provision for limited risk 
PDPs, and in cases where that does not occur a fallback plan that is 
paid based on cost.
    For several reasons, we believe it is beneficial to have several 
PDP plans operating in a region. Most importantly, more plans means 
greater beneficiary ability to obtain coverage that meets their needs 
and greater competitive pressure to provide high quality and low costs. 
We also believe that PDPs that assume some financial risk, as opposed 
to a fallback plan that is paid based on cost, are likely to negotiate 
larger price concessions for beneficiaries. In addition, more 
competition for enrollees between PDPs, as well as MA-PDs, is likely to 
generate higher quality service for beneficiaries.
    Given the goal of providing beneficiary access to risk-bearing PDP 
plans in as many areas as possible, an important question is what type 
of regional configuration, or method of configuring regions, has the 
greatest likelihood of achieving this. One of the principal questions 
is whether regions should be comprised of the largest possible number 
(the 50 States, or a close approximation), or a smaller number of 
regions covering much larger geographic areas. Designating a smaller 
number of regions that cover large geographic areas might be desirable 
in the sense that areas that might be less likely to attract market 
interest could be grouped with other more sought after areas. Large 
regions might also offer PDPs a larger potential enrollee market that 
would provide more leverage in negotiating rebates and discounts with 
manufacturers. On the other hand, regions of too large a size could 
deter participation if there are concerns by PDPs about providing 
uniform benefits and bearing financial risk across large and possibly 
diverse health care markets. In addition, large regions may make it 
more difficult for small organizations to participate as PDPs, although 
there is nothing to preclude small organizations from forming joint 
ventures to participate.
    We recognize that there are a number of other 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; the number of competitors that are likely to operate in 
an area; and the goal of initiating and sustaining competition. We seek 
public comment on the various factors that may influence potential PDP 
plans' participation decisions and on how we can design regions in such 
a way to best ensure access to PDP plans.
    The experience of the Medicare drug discount card program may 
provide some preliminary information that has

[[Page 46802]]

relevance to the designation of regions and ensuring access to PDPs 
under the Medicare drug benefit. The MMA required that beneficiaries 
have a choice of at least 2 Medicare endorsed drug discount cards. Card 
sponsors were allowed to designate their own service area, which could 
be as small as one State. If any portion of a State was included in a 
card sponsor's service area, the entire State must be included.
    In total, 73 drug discount card programs were originally approved 
by Medicare. Forty of these programs were national in scope, available 
in every State and the District of Columbia (with three of these cards 
also available in the territories), exceeding the MMA requirement of 
choice of at least two discount cards per State. While there were 
numerous national cards, we believe it is uncertain whether this level 
of market entry would occur in the context of the Medicare drug benefit 
since PDPs are required to assume some financial risk unlike Medicare-
approved drug card programs. Furthermore, it is possible that some 
discount card sponsors that entered the Medicare market at the national 
level did so with the intention of gathering information and experience 
about Medicare beneficiaries' prescription drug expenditures to guide 
their decision making about what regions to focus on under the Medicare 
drug benefit.
    The remaining Medicare-approved drug cards were regional or State 
cards being offered in 42 States, including the District of Columbia. 
There was one additional card serving exclusively the territories. 
There were 25 regional cards that entered an individual State, the 
smallest possible market area. The 7 remaining regional cards entered 
at least two States. Nine States had no regional discount cards: 
Massachusetts, Rhode Island and Vermont (contiguous States); Washington 
and Oregon (contiguous States); Arkansas and Mississippi (contiguous 
States) and Alaska and Hawaii. In addition, three of these States--
Alaska, Mississippi, and Vermont--did not have Medicare Advantage drug 
card sponsors in operation. This might suggest that in the context of 
the Medicare drug benefit if regions were defined at the individual 
State level there could be a lack of PDP participation in some regions. 
However, we note that it is difficult to generalize from the experience 
of market entry in the Medicare drug discount card program to the 
Medicare drug benefit, and we note that PDP sponsors with national 
market interests can participate in multiple regions. The large number 
of national Medicare-approved discount cards may also have influenced 
market entry by potential regional card sponsors. If there are fewer 
national plans under the Medicare drug benefit, it is possible that 
more regional market entry might occur. However, the requirement that 
PDPs bear some financial risk, which is not the case with the Medicare-
approved drug card program, may result in different market entry 
behavior at both the national and regional level.
    Also noteworthy in considering the regional boundaries for the 
prescription drug benefit would be the number of risk bearing companies 
that entered the Medicare drug discount card market. There were 23 drug 
cards that were sponsored by insurance companies (21 of which are 
distinct companies). We counted Anthem and BlueCross BlueShield 
companies separately, due to the distinct drug card markets they serve, 
as well as their legal status as separate companies; but other 
insurance companies that were offering more than one national card were 
counted only once. There were 33 cards sponsored by PBMs (17 of which 
are distinct companies). While PBMs administer drug benefits, they 
historically have not been licensed as risk bearing entities although 
they are not precluded from doing so in the future. Thus, only 21 of 
the drug card sponsors were risk-bearing companies. Three of the 21 
risk bearing insurance companies developed national drug cards, two 
others entered markets of either three or five States, and the 
remaining companies were sponsoring drug cards in single States.
    Another issue to be considered in designating PDP regions is 
whether they should be the same as Medicare Advantage (MA) regions. The 
statute stipulates that to the extent practicable, PDP and MA regions 
should be the same. However, because of the nature of health plan 
markets for physician and provider services, as opposed to the kind of 
product that PDPs will be offering and the uncertainty related to 
configuring insurance pools for risk-based drug only products, we 
believe potentially it may not be feasible to have the same regional 
configurations for each of these programs. For example, as shown in the 
regional market entry for the Medicare drug discount card, there are 
States in which there are no entrants by regional based drug card 
programs, yet these are markets in which there are MA plans. Also, 
there were States in which there was market entry by regional card 
programs but in which no MA plans participate. This might suggest that 
different regions may be appropriate for PDPs and MA plans. However, as 
noted previously, it is uncertain the extent to which experience with 
market entry by Medicare-approved discount card sponsors foreshadows 
what might occur under the Medicare drug benefit. We welcome comments 
on issues that should be considered in determining whether or not PDP 
and MA regions should be the same.
    As discussed in the Medicare Advantage proposed rule, we have 
conducted a preliminary market survey (through Research Triangle 
Institute) to inform the designation of PDP and MA regions. We are 
providing opportunity for public input during the course of that work.
2. Bid Level Negotiations
    As mentioned previously, the FEHBP standard in 5 U.S.C. 8902(i) 
requires us to ascertain that a PDP's or MA-PD's bid ``reasonably and 
equitably reflects the costs of benefits provided.'' In addition, we 
note that section 1860D-11(e)(2)(c) of the Act requires that the 
portion of the bid attributable to basic prescription drug coverage 
must ``reasonably and equitably'' reflect revenue requirements * * * 
for benefits provided under that plan, less the sum * * * of the 
actuarial value of reinsurance payments.'' Analogous to the manner in 
which FEHBP views its management responsibilities, we see this 
requirement as imposing the fiduciary responsibility to evaluate the 
appropriateness of the overall bid amount.
    In general, we expect to evaluate the reasonableness of bids 
submitted by at-risk plans by means of the actuarial valuation 
analysis. This would require evaluating the plan's assumptions 
regarding the expected distribution of costs, including average 
utilization and cost by drug coverage tier, for example, in the case of 
standard coverage--(1) those with no claims; (2) those with claims up 
to deductible; (3) those with claims between the deductible and the 
initial coverage limit; (4) those with claims between the initial 
coverage limit and the catastrophic limit; and (5) those with claims in 
excess of the catastrophic limit. We could test these assumptions for 
reasonableness through actuarial analysis and comparison to industry 
standards and other comparable bids. Bid negotiation could take the 
form of negotiating changes upward or downward in the utilization and 
cost per script assumptions underlying the bid's actuarial basis.
    As discussed in greater detail in the preamble, we considered the 
circumstances and manner under which we would need to use our authority 
to carry out bid level negotiations. We anticipate that market forces 
will generally lead to efficient and

[[Page 46803]]

appropriate bid prices. In areas where there is competition for 
enrollees among a number of PDPs and MA-PDs that are at-risk for the 
provision of Part D drug coverage to beneficiaries, our strong 
expectation is that we will be able to rely on the incentives provided 
by competitive bidding, and we would use our authority for bid level 
negotiations only on the rare occasion we find that a plan's data 
differs significantly from its peers without any indication as to the 
factors accounting for this result. If there are any Regions with 
minimal competition (for example, just two Part D plans) or less 
financial risk (for example, just limited risk PDPs), we anticipate 
that it is possible that bid-level negotiations might be slightly more 
common.
    A second issue we considered is to what extent we could negotiate 
aggregate bid prices with fallback plans. As mentioned elsewhere in the 
preamble, similar to at-risk and limited-risk plans, we will evaluate 
whether a fallback plan bid is reasonably justified, and if the price 
reference points appear too high or low, we may request an explanation 
of the bidder's pricing structure and the nature of their arrangements 
with manufacturers. We would also ensure that there is no conflict of 
interest leading to higher bids.
    In addition, since fallback plans are paid on a cost basis, there 
is significantly less incentive for them to negotiate lower drug prices 
and take other steps to reduce drug expenditures. Consequently, we also 
considered options through the contracting process to provide fallback 
plans with some incentives to control cost. We are proposing to tie 
fallback plan performance payments to the plan's ability to keep drug 
costs below a certain level. We believe that this carries out Congress' 
requirement under 1860D-11(g)(5)(B)(i) of the Act that payments to 
fallback plans take into account the plan's ability to contain costs 
through mechanisms such as generic substitution or price discounts. 
Under this approach, we might include performance incentives similar to 
those used in many pharmacy benefit management contracts today, such as 
the plan achieving certain targets such as an average discount 
(including manufacturer discounts) off of AWP (or other pricing 
reference points chosen by CMS), average cost per script, average 
generic substitution rate, average dispensing fee per script, or 
average administrative fee per script. However, because these 
incentives would apply only to fallback plan performance fees, they 
would not provide as strong incentives for drug cost control as the 
incentives faced by risk-bearing plans to keep overall costs down.
3. Coordination of Benefits
    The MMA requires that beneficiaries' incurred costs be tracked to 
determine when a Medicare beneficiary enrolled in Part D is eligible 
for catastrophic coverage. The MMA provides that with respect to out-
of-pocket expenditures: ``such costs shall be treated as incurred only 
if they are paid by the part D eligible individual (or by another 
person, such as a family member, on behalf of the individual), under 
section 1860D-14, or under a State Pharmaceutical Assistance Program 
and the part D eligible individual (or other person) is not reimbursed 
through insurance or otherwise, a group health plan or other third 
party arrangement (other than under such section or such a Program) for 
such costs.'' This means that beneficiary prescription drug 
expenditures covered by supplemental insurers (other than SPAPs) are 
not considered incurred costs that count toward the true out-of-pocket 
cost limit (TrOOP) that triggers catastrophic coverage. Consequently, 
the MMA requires coordination between Part D plans and other insurers 
with respect to payment of claims for any prescription drug coverage 
that is supplemental to Medicare Part D coverage. This will necessitate 
that an efficient and effective operational framework be established to 
track beneficiary out-of-pocket expenditures. Elsewhere, the preamble 
of this rule discusses and seeks comment on a number of options that 
could be considered for developing such a framework.
    There are a number of issues to be considered. One of the principal 
issues is what entity or entities should be responsible for creating 
any infrastructure needed to track TrOOP incurred costs. Should it be 
the responsibility of PDPs and MA-PDs or should the government be 
responsible for developing a system that can collect and distribute 
information on costs reimbursed by all payors in order to facilitate 
accurate calculation of TrOOP? If the government took responsibility 
for developing such a system, there is the additional question of 
whether that system should operate in such a way that pharmacies query 
the system or that the system provides information to Part D plans 
which in turn provide information to pharmacies. Another issue is 
whether reporting of information by supplemental insurers to a 
coordination of benefits system should be mandatory or voluntary. We 
are also considering whether or not we should mandate that Part D plans 
collect information related to coordination of benefits under the Part 
D program, and whether or not we should mandate that beneficiaries 
enrolling in Part D provide third party payment information as part of 
their enrollment application (which might be validated through a HIPAA 
compliant beneficiary release of information).
    In considering these various options, we believe there are a number 
of issues to be considered. One is the extent to which the various 
alternatives would advance the goal of accurately tracking beneficiary 
out-of-pocket expenditures. Another is the cost-effectiveness and 
efficiency of various options under consideration. We also think it is 
important to consider the cost that any coordination of benefits 
approach may place on various entities and the degree to which the 
burden is shared. We seek public comment on all of the coordination of 
benefits options and issues under consideration.
4. Charitable Assistance and TrOOP
    We also consider the issue of whether beneficiary cost-sharing for 
Medicare Part D enrollees paid for by charities should be considered 
incurred costs that count toward the true out-of-pocket threshold 
(TrOOP) that triggers Medicare Part D comprehensive coverage. The MMA 
States with regard to out-of-pocket expenditures: ``such costs shall be 
treated as incurred only if they are paid by the part D eligible 
individual (or by another person, such as a family member, on behalf of 
the individual), under section 1860D-14, or under a State 
Pharmaceutical Assistance Program and the part D eligible individual 
(or other person) is not reimbursed through insurance or otherwise, a 
group health plan or other third party arrangement (other than under 
such section or such a Program) for such costs.'' This raises the 
question of how cost-sharing paid for by private charities relates to 
the true-out-of-pocket threshold.
    We believe that the statute provides discretion in terms of whether 
a charity's payment of a Part D enrollee's cost-sharing should be 
considered incurred costs that count toward the TrOOP. Many laws define 
``person'' to include corporate entities or organizations. Since 
private charities tend to be corporate entities or organizations that 
likely do not fall into the categories of ``insurance or otherwise, 
group health plan, or other third party arrangement,'' we believe there 
is statutory discretion to count a charity as ``another person'' for 
purposes of the TrOOP calculation.

[[Page 46804]]

    We have proposed in this rule that payment of Part D cost-sharing 
by a charity should be considered incurred costs that count toward the 
TrOOP, provided that charitable organization does not meet the 
definition of ``insurance or otherwise, group health plan, or other 
third party arrangement,'' as outlined in the preamble. By allowing 
charitable payment of Part D cost-sharing to count toward the TrOOP, we 
believe this will help beneficiaries who are most in need of financial 
assistance in affording prescription drugs. While this decision to 
allow charitable dollars to count toward TrOOP would increase Medicare 
program expenditures slightly by allowing more beneficiaries to qualify 
for catastrophic coverage, we would expect the additional Medicare 
costs to be quite small. The number of people helped by charity 
organizations will likely be rather modest and the impact on Medicare 
costs would be only for the subset of these people with catastrophic 
expenses. Given the very small effect on Medicare program spending and 
that many beneficiaries will have incomes or assets that exceed the 
criteria for the low-income subsidy, we feel that promoting the 
maintenance of charitable assistance to beneficiaries by counting 
charitable payments of beneficiary cost-sharing toward the TrOOP is 
important.
5. Actuarial Equivalence of Retiree Drug Subsidy and Interactions With 
Other Means of Enhancing Retiree Drug Coverage
    As mentioned previously, the MMA provides the Secretary with the 
authority to determine the standards and methods for actuarial 
equivalence. In considering the issues related to actuarial equivalence 
we have been very cognizant that the Congress has clearly and 
repeatedly articulated four key policy objectives for the Medicare 
retiree drug subsidy program and for securing and enhancing retiree 
drug coverage more generally. The first goal involves maximizing the 
number of retirees retaining employer-based drug coverage, primarily 
through the retiree drug subsidy program created by Section 1860D-22 of 
the Act but also through the other means of assuring high-quality 
retiree drug coverage that are provided by the Act (including, as 
described above, employer wraparound coverage and employer support for 
enhanced Part D plans). The second goal entails not creating windfalls, 
where retirees might receive a smaller subsidy from sponsors of their 
retiree drug plans than Medicare would pay on their behalf. The third 
goal is to minimize the administrative burdens on beneficiaries, 
employers, and unions. The final goal is to minimize costs to the 
government of providing retiree drug subsidies (and not exceed the 
budget estimates). While the first, third and fourth goals received 
extensive discussion during the creation of the MMA, the second goal 
has also emerged in response to the possibility that the MMA might 
create the potential for an unintended windfall.
    As discussed previously in the preamble, our consideration of 
various alternatives reflects the four objectives of maximizing the 
number of beneficiaries who receive high-quality retiree drug coverage, 
avoiding windfalls, minimizing administrative burden, and not exceeding 
budget estimates. The MMA provisions creating Part D provide multiple 
options for plan sponsors, ranging from participating in the retiree 
drug subsidy to various mechanisms for enrolling retirees in Part D 
prescription drug plans while offering enhanced benefits. Our goal is 
not only to protect but also to enhance coverage offered retirees. As 
discussed elsewhere in this document, prior to enactment of the MMA, 
employers have been systematically restricting drug coverage for future 
retirees. Taken together, these legal and behavioral factors introduce 
substantial uncertainty about how plan sponsors will assess their 
options and react to the new Part D benefit.
    We believe the Secretary has authority to achieve these goals. One 
key element of this authority is the requirements that plans qualifying 
for the retiree drug subsidy must offer at least actuarially equivalent 
benefits to those offered by standard Part D prescription drug plans 
(PDPs). We seek comments on how best to use the Secretary's statutory 
authority in setting the specific actuarial equivalence requirements to 
qualify for the retiree drug subsidy, recognizing any tradeoffs and 
interactions among our key goals and that our implementation of this 
definition must be consistent with the statutory authority provided the 
Secretary. As discussed previously in the preamble, there is a range of 
aspects of the actuarial equivalence definition, each of which may have 
an impact on achieving the key objectives.
a. Alternative 1: Gross Value Test
    One possible definition would stipulate that plans must meet the 
same test as for ``creditable coverage.'' The test for creditable 
coverage requires that the total or ``gross'' value of the benefit 
package offered by the employer at least equal that of the standard 
Part D benefit offered by PDPs, without regard to the financing of this 
benefit package. More specifically, under this approach the sponsor of 
a retiree prescription drug plan would be eligible for a subsidy if the 
expected amount of paid claims under the retiree prescription drug plan 
is at least equal to the expected amount of paid claims under standard 
Medicare Part D prescription drug coverage.
    However, this ``single prong'' approach to defining actuarial 
equivalence could not by itself preclude the existence of windfalls. 
This is because, without considering financing, an employer 
theoretically could impose as much as the full cost of the benefit 
package on the employee through employee premiums, and still be 
eligible for a subsidy payment if the package the employee was buying 
met the actuarial equivalence test. That is, the employer could 
contribute a smaller amount toward the financing of the package than it 
would receive in a subsidy payment. We seek comments on whether 
additional steps associated with this approach could preclude 
windfalls. In particular, some observers have argued that the forces in 
a competitive labor market, collectively bargained contracts, and 
constraints on changing state, local and other public sector retiree 
health plans obviate the likelihood of windfalls. We have serious 
reservations about the adequacy of such forces in precluding the 
existence of any windfalls without significant additional 
administrative monitoring by Medicare or others to assure that benefit 
subsidy payments are passed on to augment benefits received by 
retirees. Such approaches may create excessive administrative burdens 
on retirees, employers, and unions, and thus alternative approaches to 
precluding windfalls are likely to be preferable.
b. Alternative 2: Gross Value Test With Subsidy Not To Exceed Plan 
Sponsor Contribution
    Another possible policy option would combine the gross value test 
with a requirement that the amount of the retiree drug subsidy could 
not exceed the amount paid by plan sponsors on behalf their retirees. 
This approach would assure the elimination of windfalls: The subsidy 
provided by the employer or union to the retiree's drug coverage would 
have to exceed the Medicare subsidy payment to the employer or union. 
While this approach is simple both to describe and operationalize, we 
have questions about the adequacy of the legal basis underpinning such 
a policy.

[[Page 46805]]

c. Alternative 3: Two-Prong Actuarial Equivalence
    A third approach, which could be implemented in a variety of ways, 
would establish a ``two-prong'' test of actuarial equivalence: The 
``gross'' test assures the total value of benefits, and the ``net'' 
test reflects only the value of benefits not financed by beneficiaries. 
This third approach is also structured to preclude windfalls.
    Under this approach, in order to qualify for the subsidy a 
sponsor's plan would have to meet both prongs of the actuarial 
equivalence standard. The first prong would again be a test based 
strictly on plan design, as described in more detail previously. The 
second prong would be a ``net value'' test in which the gross value of 
the plan design would be reduced to account for the level of benefits 
financed solely by the beneficiary. For instance, the net value of the 
coverage could be calculated by subtracting the retiree premium from 
the expected amount of paid claims under the retiree drug program.
    The ``net'' prong of the two-prong test of actuarial equivalence 
has several variants. While each variant of the two-prong test 
precludes windfalls, each presents a different balance among 
potentially competing objectives. At a minimum, we believe as a policy 
matter that the net value of the creditable coverage should at least 
equal the per capita amount that Medicare would expect to pay as the 
retiree drug subsidy. As noted above, using MCBS data, we roughly 
estimate this value at $611 in 2006, though we acknowledge that other 
data sources may produce other estimates. While there may be policy 
advantages to this approach, we have questions about the adequacy of 
the legal basis underpinning such a policy. We specifically invite 
comment on the question of whether the language could reasonably be 
interpreted to support this approach.
    Alternatively, a higher threshold might be required, though as the 
threshold is raised, it would be more difficult for retiree plans to 
qualify that do not provide windfalls and that offer coverage that is 
at least as generous in overall actuarial value as the Medicare 
subsidy. Two other benchmarks are conceptually possible as alternative 
values for the net test. These two conceptually possible values would 
be tied either to a specified fraction of the expected value of the 
Medicare payment to standard Part D PDPs for retirees with enhanced 
coverage or to the value of the $611 retiree drug subsidy after taking 
taxes into account.\12\ Determining the appropriate amount for the 
threshold value poses a significant data problem because of the 
heterogeneity of the plan sponsors. For example, we estimate that at 
least 60 percent of retirees that are age 65 and older receive retiree 
health benefits from entities that are exempt from taxation (including 
both public and nonprofit entities, based on data from the 2001 Medical 
Expenditure Panel Survey); for those plan sponsors subject to taxation, 
their rates of taxation vary markedly. In addition, as mentioned above, 
we have questions about the adequacy of the legal basis underpinning 
this approach.
---------------------------------------------------------------------------

    \12\ There is special tax treatment available for the retiree 
drug subsidy. Plan sponsors get to deduct all the associated 
expenses but the value of the subsidy payments is not recognized as 
income.
---------------------------------------------------------------------------

    Similarly, the value of benefits offered by plans providing 
creditable coverage varies widely, ranging from being only marginally 
more generous than standard Part D benefits to being extremely 
generous. (Some retiree plans provide less generous coverage, but as 
noted previously, they would not be creditable for purposes of the 
subsidy.) As a result, it could be challenging to calculate appropriate 
reinsurance payments and equitably operationalize the subsidies for 
these plans.
    As noted above, adopting a two-prong test with the higher value for 
the net test could arguably provide greater protection to beneficiaries 
but might drive more sponsors out of participating in the retiree drug 
subsidy and toward using the Part D-based options for supporting and 
enhancing drug coverage Conversely, adopting a lower value for the net 
test might qualify more plan sponsors to participate in the retiree 
drug subsidy, but it might also discourage some employers and unions 
from increasing their contributions to reach the higher threshold 
level, and thereby increasing generosity of coverage.
    Finally, the employer's decision about using the retiree subsidy 
versus continuing to provide enhanced retiree coverage through other 
means (offering supplemental drug coverage that wraps around Part D, 
qualifying directly for the Part D subsidy as a Part D enhanced plan, 
and/or paying the additional costs on top of the Medicare Part D 
subsidy for enhanced benefits in PDPs or in MA plans) depends on the 
attractiveness of each of these options. We note that none of these 
alternatives permit employer windfalls. We intend for these additional 
approaches to providing generous retiree coverage to be attractive to 
employers who may not make sufficient contributions or provide 
sufficiently generous coverage on their own to qualify for the retiree 
drug subsidy. This combination of approaches will maximize the number 
of beneficiaries who receive additional drug coverage as a result of 
adding together Medicare contributions and contributions from employers 
and unions.
    Public comment would help limit uncertainty by clarifying the 
likely responses of plan sponsors to these different approaches. In 
addition, we solicit comments not just on desirability of the different 
options, but as noted above on the legal bases for possible options, 
and on the impact of the combination of approaches on increasing the 
overall generosity of drug coverage available to retirees.
6. Payment Methodology--Method and Frequency of Medicare Retiree Drug 
Subsidy Payments
    We believe that the MMA gives us broad discretion to determine the 
methodology for distributing the Medicare retiree drug subsidy 
payments. We wish to develop a payment methodology that is least 
burdensome to employers, technologically feasible, and cost-efficient. 
Additionally, our payment methodology must accommodate the exclusion of 
rebates from retiree drug subsidy payments.
    As discussed earlier in the preamble, we are considering four 
potential approaches for making Medicare retiree drug subsidy payments. 
The first alternative that we are considering is our proposed approach, 
which combines monthly payments based on actual experience with monthly 
adjustments for price concessions as they are received. We are also 
considering three potential alternatives to our proposed approach: 
annual retroactive retiree drug subsidy payments, interim payments 
throughout the year with a settlement after the end of the plan or 
calendar year, and lagged payments based on actual experience on a 
periodic basis throughout the year with a settlement after the end of 
the year. We discuss the pros and cons of these four alternatives 
further below.
a. Alternative 1: Monthly Retiree Drug Subsidy Payments Based on Actual 
Experience With Monthly Adjustments for Price Concessions
    Under the first alternative, CMS would make monthly Medicare 
retiree drug subsidy payments to employers based on actual claims 
experience throughout the year, with monthly adjustments for price 
concessions as

[[Page 46806]]

they are received, along with any adjustments to actual expenditures 
for prior months, and a final reconciliation no later than 45 days 
after the end of the calendar year (excluding outstanding rebates and 
discounts).
    Specifically, by the 15th day of each month, each qualified plan 
sponsor would submit information to CMS certifying the total amount by 
which actual retiree-beneficiary gross drug spending (based on actual 
claims experience) exceeded the cost threshold yet remained below the 
cost limit for the preceding month, and Medicare would pay 28 percent 
of the certified amount to the sponsor by the 30th of that month. As 
part of their monthly data submission to CMS, plan sponsors would also 
apply the appropriate share of any discounts, rebates, or other price 
concessions, along with any adjustments to the actual expenditures for 
prior months. Any amounts owed to the government would offset the 
retiree drug subsidy payment for that month, and to the extent that the 
amount owed to the government exceeds any applicable monthly payment, 
the plan sponsor would pay that amount to CMS. No later than 45 days 
after the end of the calendar year, the plan sponsor would submit a 
final reconciliation to CMS for payment by or, if applicable, to CMS 
(excluding any outstanding rebates and discounts, which may not be 
received until after the close of the their plan year). Plan sponsors 
or plan administrators would be required to maintain detailed records 
of claims payment and other matters.
    While this alternative is arguably the most data intensive of the 
four alternatives that we are considering here, we believe that it is 
the most straightforward option, minimizing reliance on projections and 
actuarial representations. This option would also facilitate ensuring 
that sponsors receive expeditious payment of the full retiree drug 
subsidy amounts to which they are entitled. As discussed previously, we 
are considering and seek comment on whether to require a surety bond 
type of instrument or preferred creditor status in order to address 
situations related to businesses that may terminate or experience 
bankruptcy prior to completion of a final reconciliation.
b. Alternative 2: Annual Retroactive Retiree Drug Subsidy Payments
    Under the second alternative, CMS would make an annual retroactive 
Medicare retiree drug subsidy payment to each employer after the end of 
the year. By the beginning of the fourth month after the end of the 
year, each employer would submit information to CMS on the number of 
months of coverage for each qualifying covered retiree and their gross 
and allowable costs. These costs would be based on data derived 
directly from claims payments and retiree cost-sharing for 
prescriptions dispensed during the year and discounts, chargebacks and 
rebates for that year. CMS would review this submission and make a 
payment for the year by the end of the following month. This 
alternative would be the simplest to administer of the four 
alternatives considered here and would obviate the need for interaction 
between CMS and employers other than during the review process. From 
the perspective of employers, however, this alternative may be 
problematic since payment would not be received until after the end of 
the year.
c. Alternative 3: Interim Retiree Drug Subsidy Payments With Year End 
Settlement
    Under the third alternative, CMS would make interim payments 
throughout the year with a settlement after the end of the year. 
Employers that sponsor qualified retiree plans would estimate the per 
capita Medicare retiree drug subsidy payments they would expect to 
receive, based on historical data on prescription drug claims for their 
qualifying covered retirees, along with rebates or discounts that the 
employer has received from drug manufacturers. Employers would submit 
their estimated per capita retiree drug subsidy payment and any 
supporting documentation to CMS at the same time that they submit their 
attestation of their qualified retiree prescription drug plan's 
actuarial equivalence to standard Medicare Part D coverage. CMS would 
review each employer's estimate and related documentation, and would 
determine an interim monthly per capita amount.
    In order to minimize the possibility of having to recoup large 
amounts of money at the time of settlement, CMS would pay each plan 
sponsor a percentage of this interim monthly per capita amount on a 
periodic basis for each of their qualifying covered retirees. We are 
proposing under this alternative to pay 70 percent of the interim 
monthly per capita amount in 2006 and 2007, given the significant 
uncertainty that will exist in estimating Medicare retiree drug subsidy 
payments. This alternative is more administratively complex than the 
second alternative because it entails calculating an interim payment 
amount for each employer; making periodic payments during the year; and 
conducting a settlement with each employer after the end of the year 
with actual claims data. It would, however, provide Medicare retiree 
drug subsidy payments to employers during the year, which could be 
beneficial to employers from a cash flow perspective.
d. Alternative 4: Lagged Interim Retiree Drug Subsidy Payments
    Under the fourth alternative, CMS would make lagged Medicare 
retiree drug subsidy payments to employers based on actual claims 
experience, on a periodic basis throughout the year, with a settlement 
after the end of the year that would be limited to reconciling 
estimated versus actual discounts, chargebacks, and rebates. By the 
15th day of the month after the end of the payment period, each 
qualified employer would submit information to CMS on gross and 
allowable costs for the previous payment period for each of their 
qualifying covered retirees whose gross costs to date exceeded the cost 
threshold, but did not exceed the cost limit. Employers would base the 
cost data that they submit to CMS on their actual claims experience, 
adjusted on a percentage basis for estimated discounts, chargebacks and 
rebates (each employer would also submit a justification for the 
percentage used).
    By the 15th of the following month, CMS would review the submission 
and make a Medicare retiree drug subsidy payment to the employer. By 
the beginning of the fourth month after the close of the year, the 
employer would submit documentation on actual discounts, chargebacks 
and rebates that were received for the plan, with a comparison to the 
estimated discounts, chargebacks and rebates that were used in 
calculating the payments. We would correct any underpayment or 
overpayment by adjusting the employer's subsequent periodic payments.
    Similar to the first, this fourth alternative is more 
administratively complex than the second and third alternatives 
considered here, but as with the first alternative it would provide 
employers with a payment stream that comes closer to subsidizing their 
actual plan expenditures as they occur. However in contrast to the 
first alternative, it relies on projected amounts related to 
retrospective discounts, chargebacks, and rebates, with a 
reconciliation process, and thus does not come as close as the first 
alternative to ensuring that sponsors receive expeditious payment of 
the full retiree drug subsidy amounts to which they are entitled. 
Compared with the first and third alternatives, this fourth alternative 
would reduce somewhat the risk to the government and employers

[[Page 46807]]

that substantial overpayments or underpayments would need to be 
redeemed.
e. Frequency of Retiree Drug Subsidy Payments
    If an interim payment process is chosen, then there would be the 
additional question of the frequency of the Medicare retiree drug 
subsidy payments. One could envision a system of bi-annual, quarterly 
or monthly payments under either of these alternatives. The advantage 
of making more frequent retiree drug subsidy payments is that it would 
provide a more even cash flow for employers. On the other hand, a 
disadvantage of more frequent payments may be increased administrative 
costs for both CMS and employers. This may particularly be the case for 
the first and fourth alternatives, which would require employers to 
submit actual cost data to CMS following the end of each payment period 
in order to receive the retiree drug subsidy payments.
    We are also considering a variable payment alternative in which the 
frequency of payment would vary in accordance with the size of the 
employer's plan. Under this scenario, employers with 10,000 or more 
qualifying covered retirees would receive monthly Medicare retiree drug 
subsidy payments while employers with fewer than 10,000 qualifying 
covered retirees would receive quarterly payments, and very small 
employers could choose to minimize their reporting burden by receiving 
payments on an annual basis. This alternative would enable employers 
that have very large numbers of qualifying covered retirees, for whom 
the Medicare retiree drug subsidy payments would potentially represent 
a large amount of money, to receive their periodic subsidy payments on 
a more frequent basis. Making more frequent Medicare retiree drug 
subsidy payments to employers that provide drug coverage to large 
numbers of qualifying covered retirees would balance the administrative 
workload considerations that are associated with more frequent payments 
with the desire to assist these employers by matching the distribution 
of their Medicare retiree drug subsidy payments more closely with the 
timeframe during which the related expenses were incurred. However, we 
are concerned that this alternative may be too administratively complex 
for CMS to implement. We are also seeking comment on whether to use 
more than one of the payment alternatives described above, while 
determining which payment method would apply based on the size of the 
sponsor's plan (for example, in order to minimize administrative burden 
on small businesses, sponsors with fewer than 100 qualifying covered 
retirees could receive an annual retroactive payment, while sponsors 
with larger plans could have access to one of the other payment 
alternatives).
7. Data Collection--Aggregate vs. Individual Level
    Qualified retiree prescription drug plan sponsors (or the plan 
administrators that have been designated by the sponsors) will need to 
submit cost data relating to their qualifying covered retirees so that 
CMS will be able to accurately calculate each sponsor's Medicare 
retiree drug subsidy payment. As discussed earlier, in addition to 
certain beneficiary identifying and eligibility information, each plan 
sponsor (or plan administrator that has been designated by the sponsor) 
will be required to submit cost data for each of their qualifying 
covered retirees (including information about the period of time when 
these costs was incurred). We are considering three alternatives 
relating to the level of detail of this cost data: (1) Submission of 
aggregate allowable costs data, (2) submission of beneficiary-level 
total allowable costs data, and (3) submission of actual claims data. 
We discuss these three alternatives further below.
a. Alternative 1: Submission of Aggregate Level Cost Data
    Under this alternative, CMS would require the plan sponsor (or the 
plan administrator designated by the sponsor) to submit the aggregate 
total of all allowable drug costs for all of the qualifying covered 
retirees that were enrolled in the plan during the time period in 
question. These costs would represent the allowable costs incurred 
between the cost threshold and cost limit for each qualifying covered 
retiree, with a reduction for the anticipated rebates and discounts 
(which would be calculated based upon historical data).
    Under this alternative, the plan sponsors would not submit separate 
cost data for each qualifying covered retiree. However, each plan 
sponsor (or their administrator) would have to maintain the individual-
level claims data that support its submission for audit purposes. While 
this alternative would probably be easier for the sponsors and would be 
the most protective of the individual's privacy, it may be the most 
problematic in terms of accurately calculating the Medicare retiree 
drug subsidy payments.
b. Alternative 2: Submission of Beneficiary Level Cost Data
    Under this alternative, the plan sponsor (or its plan 
administrator) would submit the total allowable costs for each 
individual qualifying covered retiree during the time period in 
question. This alternative would be more complex for the sponsor and 
would raise some privacy questions, but it would be more reliable in 
terms of calculating the Medicare retiree drug subsidy payments.
c. Alternative 3: Submission of Actual Claims Data
    Under this third alternative, each plan sponsor (or its plan 
administrator) would submit the actual claims data for each qualifying 
covered retiree during the time period in question. However, this 
alternative would be the most complex in terms of calculating the 
Medicare retiree drug subsidy payments and would be the most 
problematic in terms of privacy concerns. Accordingly, we have ruled 
out this alternative.

N. Conclusion

    We estimate that about 41 million Medicare beneficiaries will 
receive drug coverage either through a Medicare Part D plan (that is, 
by enrolling in a PDP or a MA-PD) or through an employer or union 
sponsored retiree plan that is eligible for the Medicare retiree drug 
subsidy in calendar year (CY) 2006. By CY 2010, due to growth in the 
overall Medicare population, we estimate that nearly 45 million 
Medicare beneficiaries will be receiving such coverage. The net Federal 
budgetary effect of the Medicare prescription drug benefit and retiree 
drug subsidy is estimated to be about $287 billion during CY 2006-2010. 
Medicare Part D is estimated to generate about $8.2 billion in net 
savings for States over the five-year period from 2006-2010.
    All Medicare beneficiaries will have access to a benefit that 
protects against catastrophic drug costs. On average, for non-low-
income beneficiaries the benefit will cover approximately half their 
costs, and for beneficiaries with very high drug costs it covers 
substantially more. For low-income beneficiaries coverage is 
comprehensive covering on average about 95 percent of their 
prescription drug costs.
    Medicare beneficiaries who have no drug coverage today will now be 
able to obtain an affordable benefit that provides substantial 
assistance with prescription drug costs. Those beneficiaries with 
existing private coverage through retirement benefits and Medicare 
Advantage plans will

[[Page 46808]]

receive the benefits of new Medicare subsidies to maintain and enhance 
their coverage. Beneficiaries with public coverage through Medicaid and 
State programs will have more secure (and potentially more generous) 
benefits because of the comprehensive low-income Medicare benefit. 
Beneficiaries who pay the full costs for limited Medigap drug coverage 
will now be able to obtain highly-subsidized, more generous coverage.
    Overall, we anticipate that by giving beneficiaries access to 
affordable insurance coverage that helps them to pay for their 
outpatient prescription drugs--which have become a critical component 
in the delivery of comprehensive, quality health care services--the 
Medicare prescription drug benefit will help beneficiaries to lead 
healthier, more productive lives.

List of Subjects

42 CFR Part 403

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

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping requirements

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 423

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Health 
professions, Medicare, Penalties, Privacy, Reporting and recordkeeping 
requirements
    For reasons set forth in the preamble in this proposed regulation, 
the Centers for Medicare & Medicaid Services proposes to amend 42 CFR 
chapter IV as follows:

PART 403--SPECIAL PROGRAMS AND PROJECTS

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

    Authority: 42.U.S.C. 1359b-3 and secs. 1102 and 1871 of the 
Social Security Act (42 U.S.C. 1302 and 1395hh).

Subpart B--Medicare Supplemental Policies

    2. Section 403.205 is revised to read as follows:


Sec.  403.205  Medicare supplemental policy.

    (a) Except as specified in paragraph (e) of this section, Medicare 
supplemental (or Medigap) policy means a health insurance policy or 
other health benefit plan that--
    (1) A private entity offers to a Medicare beneficiary; and
    (2) Is primarily designed, or is advertised, marketed, or otherwise 
purported to provide payment for expenses incurred for services and 
items that are not reimbursed under the Medicare program because of 
deductibles, coinsurance, or other limitations under Medicare.
    (b) The term policy includes both policy form and policy as 
specified in paragraphs (b)(1) and (b)(2) of this section.
    (1) Policy form. Policy form is the form of health insurance 
contract that is approved by and on file with the State agency for the 
regulation of insurance.
    (2) Policy. Policy is the contract'
    (i) Issued under the policy form; and
    (ii) Held by the policy holder.
    (c) Medicare supplemental policy includes--
    (1) An individual policy;
    (2) A group policy;
    (3) A rider attached to an individual or group policy; or
    (4) As of January 1, 2006, a stand-alone limited health benefit 
plan or policy that supplements Medicare benefits and is sold primarily 
to Medicare beneficiaries or that otherwise meets the definition of a 
Medicare supplemental policy as defined in this section.
    (d) Any rider attached to a Medicare supplemental policy becomes an 
integral part of the basic policy.
    (e) Medicare supplemental policy does not include a Medicare 
Advantage plan, a Prescription Drug plan under Part D, or any of the 
other types of health insurance policies or health benefit plans that 
are excluded from the definition of a Medicare supplemental policy in 
section 1882(g)(1) of the Act.

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

    3. The authority citation for part 411 is revised to read as 
follows:

    Authority: Secs.1102, 1860D-1 through 1860D-42, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, 
and 1395hh).

Subpart J--Financial Relationships Between Physicians and Entities 
Furnishing Designated Health Services

    4. In Sec.  411.351, the definition of ``Outpatient prescription 
drugs'' is revised to read as follows:
* * * * *


Sec.  411.351  Definitions

* * * * *
    Outpatient prescription drugs means all drugs covered by Medicare 
Part B and Part D.
* * * * *

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

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

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

    6. In Sec.  417.440, add paragraph (b)(1)(iii) to read as follows:


Sec.  417.440  Entitlement to health care services from an HMO or CMP.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Medicare Part D services, to the extent the HMO or CMP offers 
qualified prescription drug coverage under Part D, and the enrollee is 
entitled to benefits under Part D.
* * * * *
    7. In Sec.  417.534, add paragraph (c) to read as follows:


Sec.  417.534  Allowable costs.

* * * * *
    (c) Medicare Part D program costs. To the extent that an HMO or CMP 
provides qualified prescription drug coverage to enrollees under Part 
D, no costs related to the offering or provision of Part D benefits 
will be reimbursed under this part. These costs will be reimbursed 
solely under the applicable provisions of part 423 of this chapter.
    8. Part 423 is added as set forth below:

PART 423--VOLUNTARY MEDICARE PRESCRIPTION DRUG BENEFIT

Subpart A--General Provisions
Sec.
423.1 Basis and Scope.
423.4 Definitions.
423.6 Cost-Sharing in beneficiary education and enrollment.
Subpart B--Eligibility and Enrollment
423.30 Eligibility to enroll.
423.34 Enrollment process.

[[Page 46809]]

423.36 Enrollment periods.
423.38 Effective dates.
423.42 Coordination of enrollment and disenrollment through PDPs.
423.44 Disenrollment by the PDP.
423.46 Late enrollment penalty.
423.48 Information about Part D.
423.50 Approval of marketing materials and enrollment forms.
423.56 Procedures to determine and document creditable status of 
prescription drug coverage.
Subpart C--Benefits and Beneficiary Protections
423.100 Definitions.
423.104 Requirements related to qualified prescription drug 
coverage.
423.112 Establishment of prescription drug plan service areas.
423.120 Access to covered Part D drugs.
423.124 Special rules for access to covered Part D drugs at out-of-
network pharmacies.
423.128 Dissemination of plan information.
423.132 Public disclosure of pharmaceutical prices for equivalent 
drugs.
423.136 Privacy, confidentiality, and accuracy of enrollee records.
Subpart D--Cost Control and Quality Improvement Requirements for 
Prescription Drug Benefit Plans
423.150 Scope
423.153 Cost and utilization management, quality assurance, 
medication therapy management programs, and programs to control 
fraud, abuse, and waste.
423.156 Consumer satisfaction surveys.
423.159 Electronic prescription program.
423.162 Quality improvement organization activity.
423.165 Compliance deemed on the basis of accreditation.
423.168 Accreditation organizations.
423.171 Procedures for approval of accreditation as a basis for 
deeming compliance.
Subpart E--Reserved
Subpart F--Submission of Bids and Monthly Beneficiary Premiums; Plan 
Approval
423.251 Scope.
423.258 Definitions.
423.265 Submission of bids and related information.
423.272 Review and negotiation of bid and approval of plans 
submitted by potential PDP sponsors or MA organizations planning to 
offer MA-PD plans.
423.279 National average monthly bid amount.
423.286 Rules regarding premiums.
423.293 Collection of monthly beneficiary premiums.
Subpart G--Payments to PDP Sponsors and MA Organizations Offering MA-PD 
Plans for All Medicare Beneficiaries for Qualified Prescription Drug 
Coverage
423.301 Scope.
423.308 Definitions and terminology.
423.315 General payment provisions.
423.322 Requirement for disclosure of information.
423.329 Determination of payments.
423.336 Risk-sharing arrangements.
423.343 Retroactive adjustments and reconciliations.
423.346 Reopenings.
Subpart H--Reserved
Subpart I--Organization Compliance With State Law and Preemption by 
Federal Law
423.401 General requirements for PDP sponsors.
423.410 Waiver of certain requirements in order to expand choice.
423.420 Solvency standards for non-licensed entities.
423.425 Licensure does not substitute for or constitute 
certification.
423.440 Prohibition of State imposition of premium taxes; relation 
to State laws.
Subpart J--Coordination Under Part D With Other Prescription Drug 
Coverage
423.452 Scope.
423.453 Definitions and terminology.
423.458 Application of Part D rules to MA-PD plans on and after 
January 1, 2006.
423.462 Medicare secondary payer procedures.
423.464 Coordination of benefits with other providers of 
prescription drug coverage.
Subpart K--Application Procedures and Contracts With PDP Sponsors
423.501 Definitions.
423.503 Evaluation and determination procedures for applications to 
be a sponsor.
423.504 General provisions.
423.505 Contract provisions.
423.506 Effective date and term of contract.
423.507 Non renewal of contract.
423.508 Modification or termination of contract by mutual consent.
423.509 Termination of contract by CMS.
423.510 Termination of contract by PDP sponsor.
423.512 Minimum enrollment requirements.
423.414 Reporting requirements.
Subpart L--Effect of Change of Ownership or Leasing of Facilities 
During Term of Contract
423.551 General provisions.
423.552 Novation agreement requirements.
423.553 Effect of leasing a PDP sponsor's facilities.
Subpart M--Grievances, Coverage Determinations, and Appeals
423.560 Definitions.
423.562 General provisions.
423.564 Grievance procedures.
423.566 Coverage determinations.
423.570 Expediting certain coverage determinations.
423.572 Timeframes and notice requirements for expedited coverage 
determinations.
423.576 Effect of a coverage determination.
423.578 Exceptions process.
423.580 Right to a redetermination.
423.582 Request for a standard redetermination.
423.584 Expediting certain redeterminations.
423.586 Opportunity to submit evidence.
423.590 Timeframes and responsibility for making redeterminations.
423.600 Reconsideration by an independent review entity.
423.602 Notice of reconsideration determination by the independent 
review entity.
423.604 Effect of a reconsideration determination.
423.610 Right to an ALJ hearing.
423.612 Request for an ALJ hearing.
423.620 Medicare Appeals Council review
423.630 Judicial review.
423.634 Reopening and revising determinations and decisions.
423.636 How a PDP sponsor must effectuate standard 
predeterminations, reconsideration determinations, or decisions.
423.638 How a PDP sponsor must effectuate expedited redeterminations 
or reconsidered determinations.
Subpart N--Medicare Contract Determinations and Appeals
423.641 Contract determinations.
423.642 Notice of contract determination.
423.643 Effect of contract determination.
423.644 Reconsideration: Applicability.
423.645 Request for reconsideration.
423.646 Opportunity to submit evidence.
423.647 Reconsidered determination.
423.648 Notice of reconsidered determination.
423.649 Effect of reconsidered determination.
423.650 Right to a hearing.
423.651 Request for hearing.
423.652 Postponement of effective date of a contract determination 
when a request for a hearing for a contract determination is filed 
timely.
423.653 Designation of hearing officer.
423.654 Disqualification of hearing officer.
423.655 Time and place of hearing.
423.656 Appointment of representatives.
423.657 Authority of representatives.
423.658 Conduct of hearing.
423.659 Evidence.
423.660 Witnesses.
423.661 Discovery.
423.662 Pre-hearing.
423.663 Record of hearing.
423.664 Authority of hearing officer.
423.665 Notice and effect of hearing decision.
423.666 Review by Administrator.
423.667 Effect of Administrator's decision.
423.668 Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.
423.669 Effect of revised determination.
Subpart O--Intermediate Sanctions
423.750 Kinds of sanctions.
423.752 Basis for imposing sanctions.
423.756 Procedures for imposing sanctions.
423.758 Maximum amount of civil money penalties imposed by CMS.
423.760 Other applicable provisions.
Subpart P--Premium and Cost-Sharing Subsidies for Low-Income 
Individuals
423.771 Basis and Scope.
423.772 Definitions.
423.773 Requirements for eligibility.

[[Page 46810]]

423.774 Eligibility determinations, redeterminations, and 
applications.
423.780 Premium subsidy.
423.782 Cost-sharing subsidy.
423.800 Administration of subsidy program.
Subpart Q--Guaranteeing Access to a Choice of Coverage (Fallback Plans)
423.851 Scope.
423.855 Definitions.
423.859 Assuring access to a choice of coverage.
423.863 Submission and approval of bids.
423.867 Rules regarding premiums.
423.871 Contract terms and conditions.
423.875 Payments to fallback plans.
Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans
423.880 Basis and scope.
423.882 Definitions.
423.884 Requirements for qualified retiree prescription drug plans.
423.886 Retiree drug subsidy amounts.
423.888 Payment methods, including provision of necessary 
information.
423.890 Appeals.
423.892 Change in Ownership.
423.894 Construction.
Subpart S--Special Rules for States--Eligibility Determinations for 
Subsidies and General Payment Provisions
423.900 Basis and Scope.
423.902 Definitions.
423.904 Eligibility determinations for low-income subsidies.
423.906 General payment provisions.
423.907 Treatment of territories.
423.908 Phased-down State contribution to drug benefit costs assumed 
by Medicare.
423.910 Requirements.

    Authority: Secs 1102, 1860D-1 through 1860D-42, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, 
and 1395hh).

Subpart A--General Provisions


Sec.  423.1  Basis and scope.

    (a) Basis. (1) This part is based on the indicated provisions of 
the following sections of the Social Security Act:

1860D-1. Eligibility, enrollment, and information.
1860D-2. Prescription drug benefits.
1860D-3. Access to a choice of qualified prescription drug coverage.
1860D-4. Beneficiary protections for qualified prescription drug 
coverage.
1860D-11. PDP regions; submission of bids; plan approval.
1860D-12. Requirements for and contracts with prescription drug plan 
(PDP) sponsors.
1860D-13. Premiums; late enrollment penalty.
1860D-14. Premium and cost-sharing subsidies for low-income 
individuals.
1860D-15. Subsidies for Part D eligible individuals for qualified 
prescription drug coverage.
1860D-16. Medicare Prescription Drug Account in the Federal 
Supplementary Medical Insurance Trust Fund.
1860D-21. Application to Medicare Advantage program and related managed 
care programs.
1860D-23. State pharmaceutical assistance programs.
1860D-24. Coordination requirements for plans providing prescription 
drug coverage.
1860D-31. Medicare prescription drug discount card and transitional 
assistance program.
1860D-41. Definitions; treatment of references to provisions in Part C.
1860D-42. Miscellaneous provisions.

    (2) The following specific sections of the Medicare Modernization 
Act also address the prescription drug benefit program:

Sec. 102 Medicare Advantage conforming amendments.
Sec. 103 Medicaid amendments.
Sec. 104 Medigap.
Sec. 109 Expanding the work of Medicare Quality Improvement 
Organizations to include Parts C and D.
    (b) Scope. This part establishes standards for beneficiary 
eligibility, access, benefits, protections, and low-income subsidies in 
Part D, as well as establishes standards and sets forth requirements, 
limitations, procedures and payments for organizations participating in 
the Voluntary Medicare Prescription Drug Program.


Sec.  423.4  Definitions.

    The following definitions apply to this part, unless the context 
indicates otherwise:
    Actuarial equivalence means a state of equivalent value 
demonstrated through the use of generally accepted actuarial principles 
and in accordance with section 1860D-11(c) of the Act and with CMS 
guidelines described at Sec.  423.265(c)(3).
    Brand name drug means a drug for which an application is approved 
under section 505(c) of the Federal Food, Drug, and Cosmetic Act (21 
U.S.C. 355(c)), including an application referred to in section 
505(b)(2) of the Act (21 U.S.C. 355(b)(2))
    Fallback prescription drug plan means a prescription drug plan 
offered by a fallback entity that--
    (1) Offers only standard prescription drug coverage;
    (2) Provides access to negotiated prices; and
    (3) Meets other requirements as specified by CMS in subpart Q of 
this part.
    Formulary means the entire list of Part D drugs covered by a PDP 
sponsor's or Medicare Advantage organization's drug plan.
    Full-benefit dual eligible beneficiary means an individual who 
meets the criteria established in Sec.  423.772, regarding coverage 
under both Part D and Medicaid.
    Generic drug means a drug for which an application under section 
505(j) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(j)) 
is approved.
    Insurance risk means, for a participating pharmacy, risk of the 
type commonly assumed only by insurers licensed by a State and does not 
include payment variations designed to reflect performance-based 
measures of activities within the control of the pharmacy, such as 
formulary compliance and generic drug substitutions, nor does it 
include elements potentially in the control of the pharmacy (for 
example, labor costs or productivity).
    MA stands for Medicare Advantage, which refers to the program 
authorized under Part C of the Act.
    MA plan means health benefits coverage offered under a policy or 
contract with Medicare by an MA organization as defined in Sec.  422.2.
    MA-PD plan means an MA plan that provides qualified prescription 
drug coverage.
    Medicare prescription drug account means the account created within 
the Federal Supplementary Medical Insurance Trust Fund for purposes of 
Medicare Part D.
    Part D eligible individual means an individual who is entitled to 
or enrolled in Medicare benefits under Part A and/or Part B.
    PDP region means a prescription drug plan region as determined by 
CMS under Sec.  423.112.
    PDP sponsor means a nongovernmental entity that is certified under 
this part as meeting the requirements and standards of this part that 
apply to entities that offer prescription drug plans.
    Prescription drug plan or PDP means prescription drug coverage that 
is offered under a policy, contract, or plan that has been approved as 
specified in Sec.  423.272 and that is offered by a PDP sponsor that 
has a contract with CMS that meets the contract requirements under 
subpart K of this part.
    Service area means, for purposes of eligibility to enroll to 
receive Part D benefits, (1) for a prescription drug plan, an area 
established in Sec.  423.112(a)

[[Page 46811]]

within which access standards under Sec.  423.120 are met; and (2) for 
an MA-PD plan, an area that meets the definition of MA service area as 
described in Sec.  422.2, and within which access standards under Sec.  
423.120 are met.
    State Pharmaceutical Assistance Program (SPAP) means a program 
(other than the Medicaid program) operated by a State (or under 
contract with a State) that--
    (1) Provides financial assistance for the purchase or provision of 
supplemental prescription drug coverage or benefits on behalf of Part D 
eligible individuals;
    (2) Provides assistance to Part D eligible individuals in all Part 
D plans without discriminating based upon the Part D plan in which an 
individual enrolls;
    (3) Meets the benefit coordination requirements specified in 
subpart J of this part; and
    (4) Does not change or affect the primary payor status of a Part D 
plan.
    Subsidy-eligible individual means a Part D eligible individual who 
is enrolled in a PDP or MA-PD plan and who has an income below 150 
percent of the poverty level as applicable to a family of the size 
involved and who meets the resource requirements specified in subpart P 
of this part.
    Tiered cost-sharing means a process of grouping Part D drugs into 
different cost sharing levels within a PDP sponsor's formulary.


Sec.  423.6  Cost-sharing in beneficiary education and enrollment-
related costs.

    The requirements of section 1857(e)(2) of the Act and Sec.  422.6 
with regard to the payment of fees established by CMS for cost sharing 
of enrollment related costs apply to PDP sponsors under Part D.

Subpart B--Eligibility and Enrollment


Sec.  423.30  Eligibility to enroll.

    (a) Enrollment in a PDP. Except as otherwise provided in paragraph 
(b) of this section, a Part D eligible individual is eligible to enroll 
in a PDP or fallback plan if he or she lives in the plan's service 
area.
    (b) MA enrollees are not eligible to enroll in a PDP except as 
follows:
    (1) A Part D eligible individual is eligible to enroll in a PDP if 
the individual is enrolled in a MA private fee-for-service plan (as 
defined in section 1859(b)(2) of the Act) that does not provide 
qualified prescription drug coverage; and
    (2) A Part D eligible individual is eligible to enroll in a PDP if 
the individual is enrolled in a MSA plan (as defined in section 
1859(b)(3) of the Act).
    (c) Enrollment in a MA-PD Plan. A Part D eligible individual 
enrolled in a MA-PD plan must obtain qualified prescription drug 
coverage through that plan.


Sec.  423.34  Enrollment process.

    (a) General Rule. A PDP sponsor must enroll in its PDP all Part D 
eligible individuals who are eligible to enroll in its plan under Sec.  
423.30(a) and who elect to enroll in the plan during the individual's 
initial enrollment period, the annual coordinated election period, or a 
special enrollment period as specified in Sec.  423.36.
    (b) Enrollment. (1) A Part D eligible individual seeking to enroll 
in a PDP must complete the PDP's enrollment form or other enrollment 
process permitted by CMS.
    (2) The PDP sponsor must process an individual's enrollment request 
in accordance with CMS enrollment guidelines.
    (c) Notice requirement. The PDP sponsor must provide the individual 
with prompt notice of acceptance or denial of the individual's 
enrollment request, in a format and manner specified by CMS.
    (d) Enrollment requirement for full benefit dual eligibles. (1) 
General rule. Full benefit dual eligible individuals who fail to enroll 
in a PDP or a MA-PD plan during their initial enrollment period or 
special enrollment period under Sec.  423.36(c)(4) will be 
automatically enrolled into--
    (i) A PDP offering basic prescription drug coverage in the PDP 
region where the individual resides that has a monthly beneficiary 
premium that does not exceed the premium subsidy amount, or,
    (ii) In the case of an individual enrolled in an MA plan without 
qualified prescription drug coverage, a MA-PD plan offered by the same 
MA organization that has a monthly beneficiary premium that does not 
exceed the premium subsidy amount, in accordance with procedures 
established by CMS.
    (2) When there is more than one PDP in a PDP region. In the event 
that there is more than one PDP in a PDP region with a monthly 
beneficiary premium at or below the premium subsidy amount, full 
benefit dual eligible individuals subject to automatic enrollment under 
this paragraph will be enrolled in such PDPs on a random basis.
    (3) Declining enrollment & disenrollment. Nothing in this paragraph 
shall be deemed to prevent these full benefit dual eligible individuals 
from--
    (i) Affirmatively declining enrollment in a PDP or MA-PDP, or
    (ii) Disenrolling from the PDP or MA-PDP in which they have been 
automatically enrolled and electing a new PDP or MA-PD plan, pursuant 
to the special election period, as provided for under Sec.  423.42.


Sec.  423.36  Enrollment periods.

    (a) Initial enrollment period for Part D--Basic rule. The initial 
enrollment period is the period during which an individual is first 
eligible to enroll in a Part D plan.
    (1) In 2005. An individual who is first eligible to enroll in a 
Part D plan on or prior to January 31, 2006, has an initial enrollment 
period from November 15, 2005 through May 15, 2006.
    (2) February 2006. An individual who is first eligible to enroll in 
a Part D plan in February 2006 has an initial enrollment period from 
November 15, 2005 through May 31, 2006.
    (3) March 2006 and subsequent months. (i) Except as provided in 
(3)(ii) below, the initial enrollment period for an individual who is 
first eligible to enroll in a Part D plan on or after March 2006 is the 
same as the initial enrollment period for Medicare Part B under Sec.  
407.14.
    (ii) Exception. For those individuals who are not eligible to 
enroll in a Part D plan at any time during their initial enrollment 
period for Medicare Part B, their initial enrollment period under this 
Part will be the 3 months before becoming eligible for Part D, the 
month of eligibility, and the three months following eligibility to 
Part D.
    (b) Annual coordinated election period. (1) For 2006. This period 
begins on November 15, 2005 and ends on May 15, 2006.
    (2) For 2007 and subsequent years. For coverage beginning 2007 or 
any subsequent year, the annual coordinate election period is November 
15th through December 31st for coverage beginning the following 
calendar year.
    (c) Special enrollment periods. An individual eligible to enroll in 
a Part D plan enroll in a PDP or disenroll from a PDP and enroll in 
another PDP, as applicable, at any time under any of the following 
circumstances--
    (1) The individual involuntarily loses creditable prescription drug 
coverage or such coverage is involuntarily reduced so that it is no 
longer creditable coverage under Sec.  423.56(a). Loss of credible 
prescription drug coverage due to failure to pay any required premium 
shall not be considered involuntary loss of such coverage.

[[Page 46812]]

    (2) The individual was not adequately informed, as required by 
standards established by CMS under Sec.  423.56, that he or she has 
lost his or her creditable prescription drug coverage, never had 
credible prescription drug coverage, or the coverage is involuntarily 
reduced so that it is no longer creditable prescription drug coverage.
    (3) The individual's enrollment or nonenrollment in Part D is 
unintentional, inadvertent, or erroneous because of the error, 
misrepresentation, or inaction of a Federal employee, or any person 
authorized by the Federal government to act on its behalf.
    (4) The individual is a full-benefit dual eligible individual as 
defined under section 1935(c)(6) of the Act.
    (5) The individual elects to disenroll from a MA-PD plan and elects 
coverage under Medicare Part A and Part B in accordance with Sec.  
422.62(c).
    (6) The PDP sponsor's contract is terminated by the PDP sponsor or 
by CMS, as provided under Sec.  422.507 through Sec.  422.510.
    (7) The individual is no longer eligible for the PDP because of a 
change in his or her place of residence to a location outside of the 
PDP region(s) in which the PDP is offered.
    (8) The individual demonstrates to CMS, in accordance with 
guidelines issued by CMS, that--
    (i) The PDP sponsor offering the PDP substantially violated a 
material provision of its contract under this part in relation to the 
individual, including, but not limited to the following--
    (A) Failure to provide the individual on a timely basis benefits 
available under the plan;
    (B) Failure to provide benefits in accordance with applicable 
quality standards; or
    (C) The PDP (or its agent, representative, or plan provider) 
materially misrepresented the plan's provisions in marketing the plan 
to the individual.
    (ii) The individual meets other exceptional circumstances as CMS 
may provide.


Sec.  423.38  Effective dates.

    (a) Initial enrollment period. An enrollment made prior to the 
month of entitlement to or enrollment in Medicare benefits under Part A 
and/or enrollment in Part B is effective the first day of the month the 
individual is entitled to or enrolled in Part A or enrolled in Part B. 
An enrollment made during or after the month of entitlement to or 
enrollment in Part A and/or enrollment in Part B is effective the first 
day of the calendar month following the month in which the enrollment 
in Part D is made. If the individual is not eligible to enroll in Part 
D on the first day of the calendar month following the month in which 
the election to enroll in Part D is made, the enrollment in Part D will 
be effective the first day of the month the individual is eligible for 
Part D. In no case will an enrollment in Part D be effective before 
January 1, 2006 or before entitlement to or enrollment in Part A and/or 
Part B.
    (b) Annual coordinated election periods. (1) General Rule. Except 
as provided under paragraph (b)(2) of this section, for an enrollment 
or change of enrollment in Part D made during an annual coordinated 
election period as described in Sec.  423.36(a)(2), the coverage or 
change in coverage is effective as of first day of the following 
calendar year.
    (2) Exception for January 1, 2006-May 15, 2006. Enrollment 
elections made during the annual election period between January 1, 
2006 and May 15, 2006 will be effective the first day of the calendar 
month following the month in which the enrollment in Part D is made.
    (c) Special enrollment periods. For an enrollment or change of 
enrollment in Part D made during a special enrollment period specified 
in Sec.  423.36(a)(3), the effective date shall be determined by CMS, 
which, to the extent practicable, will be determined in a manner 
consistent with protecting the continuity of health benefits coverage.


Sec.  423.42  Coordination of enrollment and disenrollment through 
PDPs.

    (a) Enrollment. An individual who wishes to enroll in a PDP may 
enroll during the enrollment periods specified in Sec.  423.36, by 
filing the appropriate enrollment form with the PDP or through other 
mechanisms CMS determines are appropriate.
    (b) Disenrollment. An individual who wishes to disenroll from a PDP 
may disenroll during the periods specified in Sec.  423.36 in either of 
the following manners:
    (1) Enroll in a different PDP plan;
    (2) Submit a disenrollment request to the PDP in the form and 
manner prescribed by CMS; or
    (3) File the appropriate disenrollment request through other 
mechanisms as determined by CMS.
    (c) Responsibilities of the PDP sponsor. The PDP sponsor must--
    (1) Submit a disenrollment notice to CMS within timeframes CMS 
specifies;
    (2) Provide the enrollee with a notice of disenrollment as CMS 
determines and approves; and
    (3) File and retain disenrollment requests for the period specified 
in CMS instructions.
    (d) Retroactive disenrollment. CMS may grant retroactive 
disenrollment in the following cases:
    (1) There never was a legally valid enrollment;
    or, (2) A valid request for disenrollment was properly made but not 
processed or acted upon.
    (e) Maintenance of Enrollment. An individual who is enrolled in a 
PDP will remain enrolled in that PDP until one of the following occurs:
    (i) The individual successfully enrolls in another PDP;
    (ii) The individual voluntarily disenrolls from the PDP;
    (iii) The individual is involuntarily disenrolled from the PDP or;
    (iv) The PDP is discontinued and no longer serves the area in which 
the individual resides.


Sec.  423.44  Disenrollment by the PDP.

    (a) General Rule. Except as provided in paragraphs (b) through (d) 
of this section, a PDP sponsor may not--
    (1) Involuntarily disenroll an individual from any PDP it offers; 
or
    (2) Orally or in writing, or by any action or inaction, request or 
encourage an individual to disenroll.
    (b) Basis for disenrollment. (1) Optional involuntary 
disenrollment. A PDP sponsor may disenroll an individual from a PDP it 
offers in any of the following circumstances:
    (i) Any monthly premium is not paid on a timely basis, as specified 
under paragraph (d)(1) of this section; or
    (ii) The individual has engaged in disruptive behavior, as 
specified under paragraph (d)(2) of this section.
    (2) Required involuntary disenrollment. A PDP sponsor must 
disenroll an individual from a PDP it offers in any of the following 
circumstances:
    (i) The individual no longer resides in the PDP's service area.
    (ii) The individual loses entitlement or enrollment to Medicare 
benefits under Part A and/or Part B.
    (iii) Death of the individual.
    (iv) The PDP sponsor's contract is terminated by CMS or that 
terminates a PDP. The PDP sponsor must disenroll affected enrollees in 
accordance with the procedures for disenrollment set forth at Sec.  
423.507 through Sec.  423.510.
    (v) The individual materially misrepresents information, as 
determined by CMS, to the PDP sponsor that the individual has or 
expects to receive reimbursement for third-party coverage.
    (c) Notice Requirement. (1) If the disenrollment is for any of the 
reasons specified in paragraphs (b)(1), (b)(2)(i), or (b)(iv) of this 
section (that is, other

[[Page 46813]]

than death or loss of entitlement or enrollment to benefits under Part 
A and/or enrollment in Part B), the PDP sponsor must give the 
individual timely notice of the disenrollment with an explanation of 
why the PDP is planning to disenroll the individual.
    (2) Notices for reasons specified in paragraphs (b)(1) through 
(b)(2)(i) and (b)(2)(iv) of this section must--
    (i) Be provided to the individual before submission of the 
disenrollment notice to CMS; and
    (ii) Include an explanation of the individual's right to a hearing 
under the PDP's grievance procedures.
    (d) Process for Disenrollment. (1) Monthly PDP premiums that are 
not paid timely. A PDP sponsor may disenroll an individual from the PDP 
for failure to pay any monthly premium under the following 
circumstances:
    (i) The PDP sponsor can demonstrate to CMS that it made reasonable 
efforts to collect the unpaid premium amount.
    (ii) The PDP sponsor gives the enrollee notice of disenrollment 
that meets the requirements set forth in paragraph (c) of this section.
    (iii) Reenrollment in the PDP. If an individual is disenrolled from 
the PDP for failure to pay monthly PDP premiums, the PDP sponsor has 
the option to decline future enrollment by such individual in any of 
its PDPs until the individual has paid any past premiums due to the PDP 
sponsor.
    (2) Disruptive or threatening behavior. (i) Basis for 
disenrollment. A PDP sponsor may disenroll an individual from its PDP 
if the individual's behavior is disruptive, unruly, abusive, 
uncooperative or threatening. Disruptive behavior may not be based upon 
noncompliance with medical advice. An individual may be deemed to 
engage in disruptive or threatening behavior if the individual exhibits 
any of the following:
    (A) Behavior that jeopardizes his or her health or safety, or the 
health and safety of others; or
    (B) Behavior that impairs the PDP sponsor (or a network pharmacy'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 material terms of the enrollment agreement.
    (ii) Effort to resolve the problem. The PDP sponsor must make a 
good faith effort to resolve the problems the individual presents, 
including the use (or attempted use) of the PDP's grievance procedures. 
The beneficiary has a right to submit any information or explanation 
that he or she may wish to submit to the PDP.
    (iii) Documentation. The PDP sponsor must document the enrollee's 
behavior, its own efforts to resolve any problems, as described in 
paragraphs (d)(2)(i) through (d)(2)(iii) of this section and any 
extenuating circumstances. The PDP sponsor must also submit to CMS such 
documentation, as well as any documentation received by the 
beneficiary.
    (iv) CMS review of the proposed disenrollment. CMS decides after 
reviewing the documentation submitted by the PDP sponsor whether the 
sponsor has met the criteria for disenrollment for disruptive or 
threatening behavior.
    (v) Effective date of disenrollment. If CMS permits a PDP to 
disenroll an individual for disruptive behavior, the termination is 
effective the first day of the calendar month after the month in which 
the PDP gives the individual written notice of the disenrollment that 
meets the requirements set forth in paragraph (c) of this section.
    (vi) Reenrollment in the PDP. Once an individual is disenrolled 
from the PDP for disruptive behavior, the PDP sponsor has the option to 
decline future enrollment by the individual in any of its PDPs for a 
period of time CMS specifies.
    (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 PDP from providing services, CMS may 
consider allowing an expedited disenrollment process in accordance with 
procedures established by CMS.
    (3) Loss of entitlement or enrollment in Part A and Part B 
benefits. If an individual is no longer entitled or enrolled to 
Medicare benefits under Part A and enrolled in Part B, CMS will notify 
the PDP that the disenrollment is effective the first day of the 
calendar month following the last month of entitlement or enrollment to 
benefits under Part A or Part B.
    (4) Death of the individual. If the individual dies, disenrollment 
is effective the first day of the calendar month following the month of 
death.
    (5) Plan termination.
    (i) When a PDP contract terminates as provided in Sec.  423.507 
through 423.510 as the PDP sponsor must give each affected PDP enrollee 
notice of the effective date of the plan termination and a description 
of alternatives for obtaining benefits under Part D, as specified by 
CMS.
    (ii) The notice must be sent before the effective date of the plan 
termination or area reduction, and in the timeframes specified by CMS.
    (6) Misrepresentation of third-party reimbursement. (i) If CMS 
determines an individual has materially misrepresented information to 
the PDP regarding whether the individual has or expects to receive 
reimbursement from group health plans, insurers or otherwise, or 
similar third party arrangements for incurred costs for covered Part D 
drugs under Sec.  423.44(b)(2)(v), the termination is effective the 
first day of the calendar month after the month in which the PDP gives 
the individual written notice of the disenrollment that meets the 
requirements set forth in paragraph (c) of this section.
    (ii) Reenrollment in the PDP. Once an individual is disenrolled 
from the PDP for misrepresentation of third party reimbursement, the 
PDP sponsor has the option to decline future enrollment by the 
individual in any of its PDPs for a period of time CMS specifies.
    (iii) Ineligibility for SEP. An individual who is disenrolled for 
misrepresentation of third party reimbursement is not eligible for an 
SEP. The individual may enroll in a PDP during the next annual 
coordinated election period as provided in Sec.  423.36(b)


Sec.  423.46  Late enrollment penalty.

    (a) General. A Part D eligible individual must pay the late penalty 
described under Sec.  423.286(d)(3) if there is a continuous period of 
63 days or longer at any time after termination of the individual's 
initial enrollment period during all of which the individual meets the 
following conditions:
    (1) The individual was eligible to enroll in a PDP or MA-PD plan;
    (2) The individual was not covered under any creditable 
prescription drug coverage; and
    (3) The individual was not enrolled in a PDP or MA-PD plan.
    (b) [Reserved]


Sec.  423.48  Information about Part D.

    Each PDP and MA-PD plan must provide, on an annual basis, and in a 
format and using standard terminology that CMS may specify in guidance, 
the information necessary to enable CMS to provide to current and 
potential Part D eligible individuals the information they need to make 
informed decisions among the available choices for Part D coverage.


Sec.  423.50  Approval of marketing materials and enrollment forms.

    (a) CMS review of marketing materials. (1) Except as provided in 
paragraph (a)(2) of this section, a PDP may not distribute any 
marketing materials (as defined in paragraph (b) of

[[Page 46814]]

this section), or enrollment forms, or make such materials or forms 
available to Part D eligible individuals, unless--
    (i) At least 45 days (or 10 days if using marketing materials that 
use, without modification, proposed model language as specified by CMS) 
before the date of distribution, the PDP sponsor submits the material 
or form to CMS for review under the guidelines in paragraph (c) of this 
section; and
    (ii) CMS does not disapprove the distribution of the material or 
form.
    (2) If the PDP sponsor is deemed by CMS to meet certain performance 
requirements established by CMS, the PDP sponsor may distribute 
designated marketing materials 5 days following their submission to 
CMS.
    (b) Definition of marketing materials. Marketing materials include 
any informational materials targeted to Medicare beneficiaries which--
    (1) Promote the PDP;
    (2) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in a PDP;
    (3) Explain the benefits of enrollment in a PDP, or rules that 
apply to enrollees;
    (4) Explain how Medicare services are covered under a PDP, 
including conditions that apply to such coverage;
    (5) Examples of marketing materials include, but are not limited 
to--
    (i) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the Internet.
    (ii) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (iii) Presentation materials such as slides and charts.
    (iv) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (for example, physicians or 
other providers).
    (v) Membership communication materials such as membership rules, 
subscriber agreements, member handbooks and wallet card instructions to 
enrollees.
    (vi) Letters to members about contractual changes; changes in 
providers, premiums, benefits, plan procedures etc.
    (vii) Membership or claims processing activities.
    (c) Guidelines for CMS review. In reviewing marketing material or 
enrollment forms under paragraph (a) of this section, CMS determines 
(unless otherwise specified in additional guidance) that the marketing 
materials--
    (1) Provide, in a format (and, where appropriate, print size), and 
using standard terminology that may be specified by CMS, the following 
information to Medicare beneficiaries interested in enrolling--
    (i) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (ii) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (iii) Any other information necessary to enable beneficiaries to 
make an informed decision about enrollment.
    (2) Notify the general public of its enrollment period in an 
appropriate manner, through appropriate media, throughout its service 
area.
    (3) Include in the written materials notice that the PDP is 
authorized by law to refuse to renew its contract with CMS, that CMS 
also may refuse to renew the contract, and that termination or non-
renewal may result in termination of the beneficiary's enrollment in 
the PDP.
    (4) Are not materially inaccurate or misleading or otherwise make 
material misrepresentations.
    (5) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.
    (d) Deemed approval. If CMS has not disapproved the distribution of 
a marketing materials or form submitted by a PDP sponsor with respect 
to a PDP plan in a region, CMS is deemed not to have disapproved the 
distribution of the marketing material or form in all other regions 
covered by the PDP, with the exception of any portion of the material 
or form that is specific to the particular region.
    (e) Standards for PDP marketing. (1) In conducting marketing 
activities, a PDP may not--
    (i) Provide for cash or other remuneration as an inducement for 
enrollment or otherwise. This does not prohibit explanation of any 
legitimate benefits the beneficiary might obtain as an enrollee of the 
PDP.
    (ii) Engage in any discriminatory activity such as, 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 PDP sponsor or its PDP. The PDP 
organization may not claim that 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 PDP. It may, however, explain that the 
organization is approved for participation in Medicare.
    (v) Use providers or provider groups to distribute printed 
information comparing the benefits of different PDPs unless the 
materials have the concurrence of all PDP sponsors involved and have 
received prior approval by CMS.
    (vi) Accept PDP enrollment forms in provider offices or other 
places where health care is delivered.
    (vii) Employ PDP plan names that suggest that a plan is not 
available to all Medicare beneficiaries
    (viii) Engage in any other marketing activity prohibited by CMS in 
its marketing guidance.
    (2) In its marketing, the PDP organization must--
    (i) Demonstrate to CMS's satisfaction that marketing resources are 
allocated to marketing to the disabled Medicare population as well as 
beneficiaries age 65 and over.
    (ii) Establish and maintain a system for confirming that enrolled 
beneficiaries have in fact enrolled in the PDP and understand the rules 
applicable under the plan.


Sec.  423.56  Procedures to determine and document creditable status of 
prescription drug coverage.

    (a) Definition. Creditable prescription drug coverage means any of 
the following types of coverage, but only if the actuarial value of the 
coverage equals or exceeds the actuarial value of defined standard 
prescription drug coverage as demonstrated through the use of generally 
accepted actuarial principles and in accordance with the requirements 
of Sec.  423.265(c)(3):
    (1) Prescription drug coverage under a PDP or MA-PD plan.
    (2) Medicaid coverage under title XIX of the Act or under a waiver 
under section 1115 of the Act.
    (3) Coverage under a group health plan, including the Federal 
employees health benefits program, and qualified retiree prescription 
drug plans as defined in section 1860D-22(a)(2) of the Act.
    (4) Coverage under programs that provide financial assistance for 
the purchase or provision of supplemental prescription drug coverage or 
benefits on behalf of Part D eligible individuals.
    (5) Coverage of prescription drugs for veterans, survivors and 
dependents under chapter 17 of title 38, U.S.C.

[[Page 46815]]

    (6) Coverage under a Medicare supplemental policy (Medigap policy) 
under section 1882 of the Act, and as specified in 42 CFR 403.205, that 
provides prescription drug benefits, whether or not the coverage was 
issued pursuant to standardization requirements under section 
1882(p)(1) of the Act.
    (7) Military coverage under chapter 55 of title 10, U.S.C., 
including TRICARE.
    (8) Individual health insurance coverage (as defined in section 
2791(b)(5) of the Public Health Service Act) that includes coverage for 
outpatient prescription drugs and that does not meet the definition of 
an excepted benefit (as defined in section 2791(c) of the Public Health 
Service Act).
    (9) Coverage provided by the medical care program of the Indian 
Health Service, Tribe or Tribal organization, or Urban Indian 
organization (I/T/U).
    (b) General. With the exception of PDPs and MA-PD plans under 
423.56(a)(1), each entity that offers prescription drug coverage under 
any of the types described in Sec.  423.56(a), must disclose to all 
Part D eligible individuals enrolled in or seeking to enroll in such 
coverage whether such coverage meets the requirements of actuarial 
equivalence of Sec.  423.265.
    (c) Disclosure of non-creditable coverage. In the case that the 
coverage does not meet the actuarial equivalence requirements at Sec.  
423.265 the disclosure described in paragraph (b) of this section to 
Part D eligible individuals must include:
    (1) The fact that the coverage does not meet the actuarial 
equivalence requirement under 423.265;
    (2) That there are limitations on the periods in a year in which 
the individual may enroll under a PDP or MA-PD plan; and
    (3) That the individual may be subject to a late enrollment 
penalty, under Sec.  423.46.
    (d) Disclosure to CMS. Each entity must disclose the creditable 
coverage status to CMS in a form and manner described by CMS.
    (e) Notification. Notification to Part-D eligible individuals must 
be provided in a form and manner prescribed by CMS.
    (f) When an individual is not adequately informed of coverage. If 
an individual establishes to CMS that he or she was not adequately 
informed that his or her prescription drug coverage was not creditable, 
the individual may apply to CMS to have such coverage treated as 
creditable coverage for purposes of applying Sec.  423.46.

Subpart C--Benefits and Beneficiary Protections


Sec.  423.100  Definitions.

    As used in this subpart, unless otherwise specified--
    Alternative prescription drug coverage means coverage of covered 
Part D drugs other than standard prescription drug coverage that meets 
the requirements of Sec.  423.104(f). The term ``alternative 
prescription drug coverage'' must be either--
    (1) Basic alternative coverage (alternative coverage that is 
actuarially equivalent to defined standard coverage), as determined 
through processes and methods established under Sec.  423.265; or
    (2) Enhanced alternative coverage (alternative coverage that meets 
the requirements of Sec.  423.104(g)(1)).
    Basic prescription drug coverage means coverage of covered Part D 
drugs that is either standard prescription drug coverage or basic 
alternative coverage.
    Bioequivalent has the meaning given such term in section 505(j)(8) 
of the Food, Drug, and Cosmetic Act.
    Covered Part D drug means--
    (1) Unless excluded under number (2) of this definition, any of the 
following if used for a medically accepted indication (as defined in 
section 1927(k)(6) of the Act)--
    (i) A drug that may be dispensed only upon a prescription and that 
is described in sections 1927(k)(2)(A)(i) through (iii) of the Act;
    (ii) A biological product described in sections 1927(k)(2)(B)(i) 
through (iii) of the Act;
    (iii) Insulin described in section 1927(k)(2)(C) of the Act;
    (iv) The following medical supplies associated with the injection 
of insulin: syringes, needles, alcohol swabs, and gauze; or
    (v) A vaccine licensed under section 351 of the Public Health 
Service Act.
    (2) Does not include--
    (i) Drugs for which payment as so prescribed and dispensed or 
administered to an individual is available with respect to that 
individual under Parts A or B (even though a deductible may apply, or 
even though the individual is eligible for coverage under Parts A or B 
but has declined to enroll in Parts A or B); and
    (ii) Drugs or classes of drugs, or their medical uses, which may be 
excluded from coverage or otherwise restricted under Medicaid pursuant 
to sections 1927(d)(2) or (d)(3) of the Act, except for smoking 
cessation agents.
    Group health plan has the meaning given such term in Sec.  411.101 
of this chapter.
    Incurred costs means costs incurred by a Part D enrollee for 
covered part D drugs covered under (or treated as covered under) a 
prescription drug plan or MA-PD plan--
    (1) That are not paid for under the prescription drug plan or MA-PD 
as a result of application of any annual deductible or other cost-
sharing rules for covered part D drugs prior to the Part D enrollee 
satisfying the out-of-pocket threshold under Sec.  423.104(e)(5)(iii), 
including any price differential for which the Part D enrollee is 
responsible under Sec.  423.120(a)(6) and Sec.  423.124(b)(2); and
    (2) That are paid for--
    (i) By the Part D enrollee or on behalf of the Part D enrollee by 
another person, and the Part D enrollee (or person paying on behalf of 
the Part D enrollee) is not reimbursed through insurance or otherwise, 
a group health plan, or other third party payment arrangement, or the 
person paying on behalf of the Part D enrollee is not paying under 
insurance or otherwise, a group health plan, or third party payment 
arrangement;
    (ii) Under a State Pharmaceutical Assistance Program as described 
in Sec.  423.454); or
    (iii) Under Sec.  423.782.
    Insurance or otherwise means a plan (other than a group health 
plan) or program that provides, or pays the cost of, medical care (as 
defined in section 2791(a)(2) of the Public Health Service Act, 42 
U.S.C. 300gg-91(a)(2)), including any of the following:
    (1) Health insurance coverage as defined in 42 U.S.C. 300gg-
91(b)(1);
    (2) An MA plan as described in Sec.  422.2 of this chapter.
    (3) A program of all-inclusive care for the elderly (PACE) under 
titles XVIII and XIX of the Act;
    (4) An approved State child health plan under title XXI of the Act 
providing benefits for child health assistance that meet the 
requirements of section 2103 of the Act;
    (5) The Medicaid program under title XIX of the Act or a waiver 
pursuant to section 1115 of the Act;
    (6) The veterans health care program under chapter 17 of title 38 
of the U.S.C.
    (7) Any other government-funded program whose principal activity is 
the direct provision of health care to individuals.
    I/T/U pharmacy means a pharmacy operated by the Indian Health 
Service, an Indian tribe or tribal organization, or an urban Indian 
organization, all of which are defined in section 4 of the Indian 
Health Care Improvement Act, 25 U.S.C. 1603.
    Long-term care facility means a skilled nursing facility, as 
defined in

[[Page 46816]]

section 1819(a) of the Act, or nursing facility, as defined in section 
1919(a) of the Act.
    Long-term care pharmacy means a pharmacy owned by or under contract 
with a long-term care facility to provide prescription drugs to the 
facility's residents.
    Long-term care network pharmacy means a long-term care pharmacy 
that is a network pharmacy.
    Negotiated prices means prices for covered Part D drugs that--
    (1) Are available to beneficiaries at the point of sale at network 
pharmacies; and
    (2) Take into account discounts, direct or indirect subsidies, 
rebates, other price concessions, and direct or indirect remunerations 
and include any dispensing fees.
    Network pharmacy means a licensed pharmacy that is not a mail order 
pharmacy and that is under contract with a PDP sponsor or MA 
organization offering an MA-PD plan to provide negotiated prices to its 
prescription drug plan or MA-PD plan enrollees.
    Non-preferred pharmacy means a network pharmacy that offers Part D 
enrollees higher cost-sharing for covered Part D drugs than a preferred 
pharmacy.
    Out-of-network pharmacy means a licensed pharmacy that is not under 
contract with a PDP sponsor or MA organization offering an MA-PD plan 
to provide negotiated prices to its prescription drug plan or MA-PD 
plan enrollees.
    Person means a natural person, corporation, mutual company, 
unincorporated association, partnership, joint venture, limited 
liability company, trust, estate, foundation, not-for-profit 
corporation, unincorporated organization, government or governmental 
subdivision or agency.
    Plan allowance means the amount prescription drug plans and MA-PD 
plans use to determine their payment and Part D enrollees' cost-sharing 
for covered Part D drugs purchased at out-of-network pharmacies in 
accordance with the requirements of Sec.  423.124(b).
    Preferred drug means a covered part D drug on a prescription drug 
plan or MA-PD plan's formulary for which beneficiary cost-sharing is 
lower than for a non-preferred drug in the plan's formulary.
    Preferred pharmacy means a network pharmacy that offers Part D 
enrollees lower cost-sharing for covered Part D drugs than a non-
preferred pharmacy.
    Qualified prescription drug coverage means any standard 
prescription drug coverage or alternative prescription drug coverage 
that meets the requirements of Sec.  423.104(d).
    Required prescription drug coverage means coverage of covered Part 
D drugs under an MA-PD plan that consists of either--
    (1) Basic prescription drug coverage; or
    (2) Enhanced alternative coverage, provided there is no MA monthly 
supplemental beneficiary premium applied under the plan due to the 
application of a credit against the premium of a rebate under Sec.  
422.266(b) of this chapter.
    Rural means a five-digit ZIP code in which the population density 
is less than 1,000 individuals per square mile.
    Standard prescription drug coverage means coverage of covered Part 
D drugs that meets the requirements of Sec.  423.104(e). The term 
``standard prescription drug coverage'' must be either--
    (1) Defined standard coverage (standard prescription drug coverage 
that provides for cost-sharing as described in Sec. Sec.  
423.104(e)(2)(i)(A) and (e)(5)(i)); or
    (2) Actuarially equivalent standard coverage (standard prescription 
drug coverage that provides for cost-sharing as described in Sec.  
423.104(e)(2)(i)(B) or cost-sharing as described in Sec.  
423.104(e)(5)(ii), or both).
    Suburban means a five-digit ZIP code in which the population 
density is between 1,000 and 3,000 individuals per square mile.
    Supplemental benefits means benefits that meet the requirements of 
Sec.  423.104(g)(1)(ii).
    Therapeutically equivalent refers to drugs that are rated as 
therapeutic equivalents under the Food and Drug Administration's most 
recent publication of ``Approved Drug Products with Therapeutic 
Equivalence Evaluations.''
    Third party payment arrangement means any contractual or similar 
arrangement under which a person has a legal obligation to pay for 
covered Part D drugs.
    Urban means a five-digit ZIP code in which the population density 
is greater than 3,000 individuals per square mile.
    Usual and customary (U&C) price means the price that a pharmacy 
charges a customer who does not have any form of prescription drug 
coverage.


Sec.  423.104  Requirements related to qualified prescription drug 
coverage.

    (a) General. Subject to the conditions and limitations set forth in 
this subpart, a PDP sponsor offering a prescription drug plan or an MA 
organization offering an MA-PD plan must provide enrollees with 
coverage of the benefits described in paragraph (c) of this section. 
The benefits may be provided directly by the PDP sponsor or MA 
organization or through arrangements with other entities. CMS reviews 
and approves these benefits consistent with Sec.  423.272, and using 
written policy guidelines and requirements in this part and other CMS 
instructions.
    (b) Availability of plans. Except as provided in Sec.  422.60(b) of 
this chapter, a PDP sponsor offering a prescription drug plan must 
offer that plan to all Part D eligible beneficiaries residing in the 
plan's service area.
    (c) Types of benefits. A prescription drug plan or MA-PD plan must 
include qualified prescription drug coverage.
    (d) Qualified prescription drug coverage. Qualified prescription 
drug coverage includes--
    (1) Standard prescription drug coverage consistent with paragraph 
(e) of this section; or
    (2) Alternative prescription drug coverage consistent with 
paragraph (f) of this section.
    (e) Standard prescription drug coverage. Standard prescription drug 
coverage includes access to negotiated prices as described under 
paragraph (h)(1) of this section, provides coverage of covered Part D 
drugs, and must meet the following requirements--
    (1) Deductible. An annual deductible equal to--
    (i) For 2006. $250; or
    (ii) For years subsequent to 2006. The amount specified in this 
paragraph for the previous year, increased by the annual percentage 
increase specified in paragraph (e)(5)(iv) of this section, and rounded 
to the nearest multiple of $5.
    (2) Cost-sharing under the initial coverage limit.
    (i) 25 Percent coinsurance. Coinsurance for costs for covered Part 
D drugs covered under the plan above the annual deductible specified in 
paragraph (e)(1) of this section, and up to the initial coverage limit 
under paragraph (e)(3) of this section, that is--
    (A) Equal to 25 percent for defined standard coverage; or
    (B) Actuarially equivalent to an average expected coinsurance of no 
more than 25 percent, as determined through processes and methods 
established under Sec.  423.265, for actuarially equivalent standard 
coverage.
    (ii) Tiered copayments. A prescription drug plan or MA-PD plan may 
apply tiered copayments without limit, provided that any tiered 
copayments are consistent with paragraph (e)(2)(i)(B) of this section 
and are reviewed as described in Sec.  423.272(b)(2).
    (3) Initial coverage limit. The initial coverage limit is equal 
to--

[[Page 46817]]

    (i) For 2006. $2,250.
    (ii) For years subsequent to 2006. The amount specified in this 
paragraph for the previous year, increased by the annual percentage 
increase specified in paragraph (e)(5)(iv) of this section, and rounded 
to the nearest multiple of $10.
    (4) Cost-sharing between the initial coverage limit and the annual 
out-of-pocket threshold. Coinsurance for costs for covered Part D drugs 
covered under the plan above the initial coverage limit described in 
paragraph (e)(3) of this section and annual out-of-pocket threshold 
described in paragraph (e)(5)(iii) of this section that is equal to 100 
percent.
    (5) Protection against high out-of-pocket expenditures. (i) After 
an enrollee's incurred costs exceed the annual out-of-pocket threshold 
described in paragraph (e)(5)(iii) of this section, cost-sharing equal 
to the greater of--
    (A) Copayments. (1) In 2006, $2 for a generic drug or preferred 
drug that is a multiple source drug (as defined in section 
1927(k)(7)(A)(i) of the Act) and $5 for any other drug; and
    (2) For subsequent years, the copayment amounts specified in this 
paragraph for the previous year increased by the annual percentage 
increase described in paragraph (e)(5)(iv) of this section and rounded 
to the nearest multiple of 5 cents; or
    (B) Coinsurance. Five percent coinsurance.
    (ii) As determined through processes and methods established under 
Sec.  423.265, a prescription drug plan or MA-PD plan may substitute 
for cost-sharing under paragraph (e)(5)(i) of this section an amount 
that is actuarially equivalent to expected cost-sharing under paragraph 
(e)(5)(i) of this section.
    (iii) Annual out-of-pocket threshold. For purposes of this part, 
the annual out-of-pocket threshold equals--
    (A) For 2006. $3,600.
    (B) For years subsequent to 2006. The amount specified in this 
paragraph for the previous year, increased by the annual percentage 
increase specified in paragraph (e)(5)(iv) of this section, and rounded 
to the nearest multiple of $50.
    (iv) Annual percentage increase. The annual percentage increase for 
each year is equal to the annual percentage increase in average per 
capita aggregate expenditures for covered Part D drugs in the United 
States for Part D eligible individuals and is based on data for the 12-
month period ending in July of the previous year.
    (f) Alternative prescription drug coverage. Alternative 
prescription drug coverage includes access to negotiated prices as 
described under paragraph (h)(1) of this section, provides coverage of 
covered Part D drugs, and must meet the following requirements--
    (1) Has an annual deductible that does not exceed the annual 
deductible specified in paragraph (e)(1) of this section;
    (2) Imposes cost-sharing no greater than that specified in 
paragraph (e)(5)(i) or (ii) of this section once the annual out-of-
pocket threshold described in paragraph (e)(5)(iii) is met;
    (3) Has an unsubsidized value that is at least equal to the 
unsubsidized value of standard prescription drug coverage. For purposes 
of this subparagraph, the unsubsidized value of coverage is the amount 
by which the actuarial value of the coverage exceeds the actuarial 
value of the subsidy payments under Sec.  423.782 with respect to such 
coverage; and
    (4) Provides coverage that is designed, based upon an actuarially 
representative pattern of utilization, to provide for the payment, with 
respect to costs incurred that are equal to the initial coverage limit 
under paragraph (e)(3) of this section, of an amount equal to at least 
the product of--
    (i) The amount by which the initial coverage limit described in 
paragraph (e)(3) of this section for the year exceeds the deductible 
described in paragraph (e)(1) of this section; and
    (ii) 100 percent minus the coinsurance percentage specified in 
paragraph (e)(2)(i) of this section.
    (g) Enhanced alternative coverage. (1) Enhanced alternative 
coverage must meet the requirements under paragraph (f) of this section 
and includes--
    (i) Basic prescription drug coverage, as defined in Sec.  423.100; 
and
    (ii) Supplemental benefits, which include--
    (A) Coverage of drugs other than covered Part D drugs; and/or
    (B) Any of the following changes or combination of changes that 
increase the actuarial value of benefits above the actuarial value of 
defined standard prescription drug coverage, as determined through 
processes and methods established under Sec.  423.265--
    (1) A reduction in the annual deductible described in paragraph 
(e)(1) of this section;
    (2) A reduction in the cost-sharing described in paragraphs (e)(2) 
or (e)(5) of this section, or
    (3) An increase in the initial coverage limit described in 
paragraph (e)(3) of this section.
    (2) Restrictions on the offering of enhanced alternative coverage 
by PDP sponsors. A PDP sponsor may not offer enhanced alternative 
coverage in a service area unless the PDP sponsor also offers a 
prescription drug plan in that service area that provides basic 
prescription drug coverage.
    (3) Restrictions on the offering of enhanced alternative coverage 
by MA organizations. Effective January 1, 2006, an MA organization--
    (i) May not offer an MA coordinated care plan, as defined in Sec.  
422.4 of this chapter, in an area unless either that plan (or another 
MA plan offered by the MA organization in that same service area) 
includes required prescription drug coverage; and
    (ii) May not offer prescription drug coverage (other than that 
required under Parts A and B of Title XVIII of the Act) to an 
enrollee--
    (A) Under an MSA plan, as defined in Sec.  422.2 of this chapter; 
or
    (B) Under another MA plan (including a private fee-for-service 
plan, as defined in Sec.  422.4 of this chapter) unless the drug 
coverage under such other plan provides qualified prescription drug 
coverage and unless the requirements of paragraph (g)(3)(i) of this 
section are met.
    (h) Negotiated prices. (1) Access to negotiated prices. Under 
qualified prescription drug coverage offered by a PDP sponsor or an MA 
organization, the PDP sponsor or MA organization is required to provide 
its enrollees with access to negotiated prices for covered Part D drugs 
included in its plan's formulary. Negotiated prices must be provided 
even if no benefits are payable to the beneficiary for covered Part D 
drugs because of the application of any deductible or 100 percent 
coinsurance requirement following satisfaction of any initial coverage 
limit.
    (2) Interaction with Medicaid best price. Prices negotiated with a 
pharmaceutical manufacturer, including discounts, subsidies, rebates, 
and other price concessions, for covered Part D drugs by the following 
entities will not be taken into account in establishing Medicaid's best 
price under section 1927(c)(1)(C) of the Act--
    (i) A prescription drug plan;
    (ii) An MA-PD plan; or
    (iii) A qualified retiree prescription drug plan (as defined in 
Sec.  423.882) for Part D eligible individuals.
    (3) Disclosure. (i) A PDP sponsor or an MA organization offering 
qualified prescription drug coverage is required to disclose to CMS 
data on aggregate negotiated price concessions obtained from 
pharmaceutical manufacturers and passed through to beneficiaries, via 
pharmacies and other dispensers, in the form of lower subsidies paid by 
CMS on behalf of low-income individuals described in Sec.  423.782, or 
in the form of lower monthly beneficiary premiums

[[Page 46818]]

and/or lower covered Part D drug prices at the point of sale, as 
specified in Sec.  423.336(c)(1) and Sec.  423.343(c)(1).
    (ii) Information on negotiated prices disclosed to CMS under 
paragraph (h)(3) of this section is protected under the confidentiality 
provisions applicable under section 1927(b)(3)(D) of the Act.
    (4) Audits. CMS may conduct periodic audits of the financial 
statements and all records of PDP sponsors and MA organizations 
pertaining to any qualified prescription drug coverage they may offer 
under either a prescription drug plan or an MA-PD plan.


Sec.  423.112  Establishment of prescription drug plan service areas.

    (a) Service area for prescription drug plans. The service area for 
a prescription drug plan consists of one or more PDP regions as 
established under paragraphs (b) and (c) of this section.
    (b) Establishment of PDP regions. (1) General. CMS establishes PDP 
regions in a manner consistent with the requirements for the 
establishment of MA regions as described at Sec.  422.455 of this 
chapter.
    (2) Relation to MA regions. To the extent practicable, PDP regions 
are the same as MA regions. CMS may establish PDP regions that are not 
the same as MA regions if CMS determines that the establishment of 
these regions improves access to prescription drug plan benefits for 
Part D eligible individuals.
    (c) Authority for territories. CMS establishes a PDP region or 
regions for States that are not within the 50 States and the District 
of Columbia.
    (d) Revision of PDP regions. CMS may revise the PDP regions 
established under paragraphs (b) and (c) of this section.
    (e) Regional or national plan. Nothing in this section prevents a 
prescription drug plan from being offered in two or more PDP regions in 
their entirety or in all PDP regions in their entirety.


Sec.  423.120  Access to covered Part D drugs.

    (a) Assuring pharmacy access. (1) Convenient access to network 
pharmacies. Except as provided in paragraph (a)(3) of this section, a 
prescription drug plan or MA-PD plan must have a contracted pharmacy 
network, consisting of pharmacies other than mail-order pharmacies, 
sufficient to ensure that for beneficiaries residing in the 
prescription drug plan's service area, as described in Sec.  423.112, 
or the MA-PD plan's service area, as described in Sec.  422.2 of this 
chapter, the following requirements are satisfied:
    (i) At least 90 percent of Medicare beneficiaries, on average, in 
urban areas served by the prescription drug plan or MA-PD plan live 
within 2 miles of a network pharmacy;
    (ii) At least 90 percent of Medicare beneficiaries, on average, in 
suburban areas served by the prescription drug plan or MA-PD plan live 
within 5 miles of a network pharmacy; and
    (iii) At least 70 percent of Medicare beneficiaries, on average, in 
rural areas served by the prescription drug plan or MA-PD plan live 
within 15 miles of a network pharmacy.
    (2) Access to mail-order pharmacies. A prescription drug plan's or 
MA-PD plan's contracted pharmacy network may be supplemented by 
pharmacies offering home delivery via mail-order, provided the 
requirements of paragraph (a)(1) of this section are met.
    (3) Waiver of pharmacy access requirements. CMS waives the 
requirements under paragraph (a)(1) of this section in the case of--
    (i) An MA-PD plan that provides its enrollees with access to 
covered Part D drugs through pharmacies owned and operated by the MA 
organization, provided the organization's pharmacy network is 
sufficient to provide access to its enrollees that is comparable to the 
standard set forth under paragraph (a)(1) of this section.
    (ii) An MA private fee-for-service plan described in Sec.  422.4 of 
this chapter that--
    (A) Offers qualified prescription drug coverage;
    (B) Provides plan enrollees with access to covered Part D drugs 
dispensed at all pharmacies, without regard to whether they are 
contracted network pharmacies and without charging cost-sharing in 
excess of that described in Sec. Sec.  423.104(e)(2) and (5).
    (4) Pharmacy network contracting requirements. In establishing its 
contracted pharmacy network, a PDP sponsor or MA organization offering 
qualified prescription drug coverage--
    (i) Must contract with any pharmacy that meets the prescription 
drug plan's or MA-PD plan's terms and conditions; and
    (ii) May not require a pharmacy to accept insurance risk as a 
condition of participation in the PDP plan's or MA-PD plan's network.
    (5) Discounts for preferred pharmacies. A PDP sponsor or MA 
organization offering a prescription drug plan or an MA-PD plan that 
provides coverage other than defined standard coverage may reduce 
copayments or coinsurance for covered Part D drugs (relative to the 
copayments or coinsurance applicable when those covered Part D drugs 
are obtained through a non-preferred pharmacy) when a Part D eligible 
individual enrolled in its prescription drug plan or MA-PD plan obtains 
the covered Part D drug through a preferred pharmacy. If the 
prescription drug plan or MA-PD plan provides actuarially equivalent 
standard coverage, the plan must still meet the requirements under 
Sec. Sec.  423.104(e)(2) and (5). Any cost-sharing reduction must not 
increase CMS payments under Sec.  423.329.
    (6) Level playing field between mail-order and network pharmacies. 
A PDP sponsor or MA organization must permit its prescription drug plan 
or MA-PD plan enrollees to receive benefits, which may include a 90-day 
supply of covered Part D drugs, at a network retail pharmacy instead of 
a network mail-order pharmacy, provided an enrollee obtaining a covered 
Part D drug a network retail pharmacy pays for any differential in the 
negotiated price for the covered Part D drug at the network retail 
pharmacy and network mail-order pharmacy.
    (b) Formulary requirements. A PDP sponsor or MA organization that 
uses a formulary under its qualified prescription drug coverage must 
meet the following requirements--
    (1) Development and revision by a pharmacy and therapeutic 
committee. A PDP sponsor or MA organization's formulary must be 
reviewed by a pharmacy and therapeutic committee that--
    (i) Includes a majority of members who are practicing physicians 
and/or practicing pharmacists.
    (ii) Includes at least one practicing physician and at least one 
practicing pharmacist who are independent and free of conflict with 
respect to the PDP sponsor and prescription drug plan, or MA 
organization and MA-PD plan, and who are experts regarding care of 
elderly or disabled individuals.
    (iii) Bases clinical decisions on the strength of scientific 
evidence and standards of practice, including assessing peer-reviewed 
medical literature, pharmacoeconomic studies, outcomes research data, 
and other such information as it determines appropriate.
    (iv) Considers whether the inclusion of a particular covered Part D 
drug in a formulary or formulary tier has any therapeutic advantages in 
terms of safety and efficacy.
    (v) Documents in writing its decisions regarding formulary 
development and revision.
    (2) Inclusion of drugs in all therapeutic categories and classes. A 
prescription drug plan's or MA-PD plan's formulary must include at 
least two covered Part D drugs within each therapeutic category and 
class of

[[Page 46819]]

covered Part D drugs, with different strengths and doses available for 
those drugs. Only one covered Part D drug must be included in a 
particular category or class of covered Part D drugs if the category or 
class includes only one covered Part D drug.
    (3) Limitation on changes in therapeutic classification. Except as 
CMS may permit to account for new therapeutic uses and newly approved 
covered Part D drugs, a PDP sponsor or MA organization offering an MA-
PD plan may not change the therapeutic categories and classes in a 
formulary other than at the beginning of each plan year.
    (4) Periodic evaluation of protocols. A PDP sponsor or MA 
organization offering an MA-PD plan must periodically evaluate and 
analyze treatment protocols and procedures related to its plan's 
formulary.
    (5) Provision of notice regarding formulary changes. A PDP sponsor 
or MA organization offering an MA-PD plan must provide at least 30 days 
notice to CMS, affected enrollees, authorized prescribers, pharmacies, 
and pharmacists prior to removing a covered Part D drug from its plan's 
formulary, or making any change in the preferred or tiered cost-sharing 
status of a covered Part D drug.
    (6) Limitation on formulary changes prior to the beginning of a 
contract year. A PDP sponsor or MA organization offering an MA-PD plan 
may not remove a covered Part D drug from its plan's formulary, or make 
any change in the preferred or tiered cost-sharing status of a covered 
Part D drug, between the beginning of the annual coordinated election 
period described in Sec.  423.36(b) and 30 days after the beginning of 
the contract year associated with that annual coordinated election 
period.
    (7) Provider and patient education. A PDP sponsor or MA 
organization offering an MA-PD plan must establish policies and 
procedures to educate and inform health care providers and enrollees 
concerning its formulary.
    (c) Use of standardized technology. A PDP sponsor or MA 
organization offering an MA-PD plan must issue and reissue, as 
necessary, a card or other type of technology that its enrollees may 
use to access negotiated prices for covered Part D drugs as provided 
under Sec.  423.104(h). The card or other technology must comply with 
standards CMS establishes.


Sec.  423.124  Special rules for access to covered Part D drugs at out-
of-network pharmacies

    (a) Out-of-network access to covered part D drugs. A PDP sponsor or 
MA organization offering an MA-PD plan must assure that Part D 
enrollees have adequate access to covered Part D drugs dispensed at 
out-of-network pharmacies when such enrollees cannot reasonably be 
expected to obtain such drugs at a network pharmacy.
    (b) Financial responsibility for out-of-network access to covered 
Part D drugs. A Part D enrollee is financially responsible for the sum 
of the following costs of a covered Part D drug obtained as provided in 
paragraph (a) of this section--
    (1) Any deductible or cost-sharing (relative to the plan allowance, 
as described in Sec.  423.100, for that covered Part D drug); and
    (2) Any differential between the out-of-network pharmacy's usual 
and customary price and the PDP sponsor or MA organization's plan 
allowance (including any applicable beneficiary cost-sharing) for that 
covered Part D drug.


Sec.  423.128  Dissemination of plan information.

    (a) Detailed description. A PDP sponsor or MA organization offering 
an MA-PD plan must disclose the information specified in paragraph (b) 
of this section--
    (1) To each enrollee of a prescription drug plan offered by the PDP 
sponsor or the MA-PD plan offered by the MA organization under this 
part;
    (2) In a clear, accurate, and standardized form; and
    (3) At the time of enrollment and at least annually thereafter.
    (b) Content of plan description. The plan description must include 
the following information about the qualified prescription drug 
coverage offered under a prescription drug plan or an MA-PD plan--
    (1) Service area. The plan's service area.
    (2) Benefits. The benefits offered under the plan, including--
    (i) Applicable conditions and limitations.
    (ii) Premiums.
    (iii) Cost-sharing (such as copayments, deductibles, and 
coinsurance), and cost-sharing for subsidy eligible individuals.
    (iv) Any other conditions associated with receipt or use of 
benefits.
    (3) Cost-sharing. A description of how a Part D eligible individual 
may obtain more information on cost-sharing requirements, including 
tiered or other copayment levels applicable to each drug (or class of 
drugs), in accordance with paragraph (d) of this section.
    (4) Formulary. The manner in which any formulary (including any 
tiered formulary structure) functions, including--
    (i) The process for obtaining an exception to a prescription drug 
plan's or MA-PD plan's tiered cost-sharing structure;
    (ii) A description of how a Part D eligible individual may obtain 
additional information on the formulary, including the formulary 
itself, in accordance with paragraph (d) of this section.
    (5) Access. The number, mix, and distribution (addresses) of 
network pharmacies from which enrollees may reasonably be expected to 
obtain covered Part D drugs and how the prescription drug plan sponsor 
or MA organization meets the requirements of Sec.  423.120(a)(1) for 
access to covered Part D drugs;
    (6) Out-of-network coverage. Provisions for access to covered Part 
D drugs at out-of-network pharmacies, consistent with Sec.  423.124(a).
    (7) Grievance, coverage determinations, reconsideration, 
exceptions, and appeals procedures. All grievance, coverage 
determination, reconsideration, exceptions, and appeal rights and 
procedures required under Sec.  423.564 et seq.
    (8) Quality assurance program. A description of the quality 
assurance program required under Sec.  423.153(c), including the 
medication therapy management program required under Sec.  423.153(d).
    (9) Disenrollment rights and responsibilities.
    (c) Disclosure upon request of general coverage information, 
utilization, and grievance information. Upon request of a Part D 
eligible individual, a PDP sponsor or MA organization offering an MA-PD 
plan must provide the following information--
    (1) General coverage information. General coverage information, 
including--
    (i) Enrollment procedures. Information and instructions on how to 
exercise election options under this part;
    (ii) Rights. A general description of procedural rights (including 
grievance, coverage determination, reconsideration, exceptions, and 
appeals procedures) under this part;
    (iii) Potential for contract termination. The fact that a PDP 
sponsor or MA organization may terminate or refuse to renew its 
contract, or, in the case of an MA organization, reduce the service 
area included in its contract, and the effect that any of those actions 
may have on individuals enrolled in a prescription drug plan or MA-PD 
plan;

[[Page 46820]]

    (iv) Benefits. (A) Covered services under the prescription drug 
plan;
    (B) Any beneficiary cost-sharing, such as deductibles, coinsurance, 
and copayment amounts, including cost-sharing for subsidy eligible 
individuals;
    (C) Any maximum limitations on out-of-pocket expenses;
    (D) The extent to which an enrollee may obtain benefits from out-
of-network providers;
    (E) The types of pharmacies that participate in the prescription 
drug plan's or MA-PD plan's network and the extent to which an enrollee 
may select among those pharmacies; and
    (F) Out-of-network pharmacy access.
    (v) Premiums;
    (vi) The prescription drug plan's or MA-PD plan's formulary;
    (vii) The prescription drug plan's or MA-PD plan's service area; 
and
    (viii) Quality and performance indicators for benefits under a plan 
as determined by CMS.
    (2) The procedures the PDP sponsor or MA organization offering an 
MA-PD plan uses to control utilization of services and expenditures.
    (3) The number of disputes, and the disposition in the aggregate, 
in a manner and form described by CMS. These disputes are categorized 
as--
    (i) Grievances according to Sec.  422.564 of this chapter;
    (ii) Rights to a reconsideration according to Sec.  422.578 et seq 
of this chapter.
    (4) Financial condition of the PDP sponsor or MA organization, 
including the most recently audited information regarding, at a 
minimum, a description of the financial condition of the PDP sponsor or 
MA organization offering the prescription drug plan or MA-PD plan.
    (d) Provision of specific information. Each PDP sponsor or MA 
organization offering qualified prescription drug coverage must have 
mechanisms for providing specific information on a timely basis to 
current and prospective enrollees upon request. These mechanisms must 
include--
    (1) A toll-free customer call center that--
    (i) Is open during usual business hours.
    (ii) Provides customer telephone service, including to pharmacists, 
in accordance with standard business practices.
    (2) An Internet Web site that--
    (i) Includes, at a minimum, the information required in paragraph 
(b) of this section.
    (ii) Includes a current formulary for its PDP plan or MA-PD plan, 
updated at least weekly.
    (iii) Provides current and prospective Part D enrollees with at 
least 30 days notice regarding the removal or change in the preferred 
or tiered cost-sharing status of a covered Part D drug on its 
prescription drug plan's or MA-PD plan's formulary.
    (3) The provision of information in writing, upon request.
    (e) Claims information. A PDP sponsor or MA organization offering 
qualified prescription drug coverage must furnish to enrollees, in a 
form easily understandable to such enrollees, an explanation of 
benefits when prescription drug benefits are provided under qualified 
prescription drug coverage. The explanation of benefits must--
    (1) List the item or service for which payment was made and the 
amount of the payment for each item or service.
    (2) Include a notice of the individual's right to request an 
itemized statement.
    (3) Include the cumulative, year-to-date total amount of benefits 
provided, in relation to--
    (i) The deductible for the current year.
    (ii) The initial coverage limit for the current year.
    (iii) The annual out-of-pocket threshold for the current year.
    (4) Include the cumulative, year-to-date total of incurred costs to 
the extent practicable.
    (5) Include any applicable formulary changes as described in Sec.  
423.120(b)(5).
    (6) Be provided during any month when prescription drug benefits 
are provided under this part.


Sec.  423.132  Public disclosure of pharmaceutical prices for 
equivalent drugs.

    (a) General requirements. Except as provided under paragraph (c) of 
this section, a PDP sponsor or an MA organization offering an MA-PD 
plan must require a pharmacy that dispenses a covered Part D drug to 
inform an enrollee of any differential between the price of that drug 
and the price of the lowest priced generic version of that drug 
available at that pharmacy, unless the particular covered Part D drug 
being purchased is the lowest-priced generic version of that drug 
available at that pharmacy.
    (b) Timing of notice. Subject to paragraph (d) of this section, the 
information under paragraph (a) of this section must be provided at the 
point of sale or, in the case of dispensing by mail order, at the time 
of delivery of the drug.
    (c) Waiver of public disclosure requirement. CMS waives the 
requirement under paragraph (a) of this section in the case of--
    (1) An MA private fee-for-service plan described in Sec.  422.4 of 
this chapter that--
    (i) Offers qualified prescription drug coverage and provides plan 
enrollees with access to covered Part D drugs dispensed at all 
pharmacies, without regard to whether they are contracted network 
pharmacies; and
    (ii) Does not charge additional cost-sharing for access to covered 
Part D drugs dispensed at out-of-network pharmacies.
    (2) An out-of-network pharmacy;
    (3) An I/T/U network pharmacy; and
    (4) A network pharmacy that is located in any of the U.S. 
territories; and
    (5) Such other circumstances where CMS deems compliance with the 
requirements of paragraph (a) of this section to be impossible or 
impracticable.
    (d) Modification of timing requirement. CMS modifies the 
requirement under paragraph (b) of this section as follows--
    (1) For long-term care network pharmacies, which must meet the 
requirement in paragraph (a) of this section within a time period 
specified by CMS; and
    (2) Under such other circumstances where CMS deems compliance with 
the requirement under paragraph (b) of this section to be impossible or 
impracticable.


Sec.  423.136  Privacy, confidentiality, and accuracy of enrollee 
records.

    The provisions of Sec.  422.118 of this chapter apply to a PDP 
sponsor and prescription drug plan in the same manner as they apply to 
an MA organization and an MA plan.

Subpart D--Cost Control and Quality Improvement Requirements for 
Prescription Drug Benefit Plans


Sec.  423.150  Scope.

    The regulations in this subpart specify requirements relating to 
the following:
    (a) Cost and utilization management programs, quality assurance 
programs, medication therapy management programs (MTMP), and programs 
to control fraud, abuse, and waste for PDP sponsors and MA 
organizations offering MA-PD plans.
    (b) CMS consumer satisfaction surveys of prescription drug plan and 
MA-PD.
    (c) Electronic prescription program.
    (d) Compliance deemed on the basis of accreditation.
    (e) Accreditation organizations.
    (f) Procedures for the approval of accreditation organizations as a 
basis for deeming compliance.

[[Page 46821]]

Sec.  423.153  Cost and utilization management, quality assurance, 
medication therapy management programs, and programs to control fraud, 
abuse, and waste.

    (a) General rule. Each PDP sponsor or MA organization offering an 
MA-PD plan must have established, for covered Part D drugs, furnished 
through a prescription drug plan or MA-PD plan, a cost-effective drug 
utilization management program, a quality assurance program, an MTMP, 
and a program to control fraud, abuse, and waste as described in Sec.  
423.153(b), Sec.  423.153(c), Sec.  423.153(d), and Sec.  423.153(e) of 
this section.
    (b) Cost-effective drug utilization management. A cost-effective 
drug utilization management program must--
    (1) Include incentives to reduce costs when medically appropriate; 
and
    (2) Maintain policies and systems to assist in preventing over-
utilization and under-utilization of prescribed medications.
    (c) Quality assurance program. A quality assurance program must 
include measures and systems to reduce medication errors and adverse 
drug interactions and improve medication use. The program must 
establish processes for--
    (1) Drug utilization review;
    (2) Patient counseling; and
    (3) Patient information record-keeping
    (d) Medication therapy management program. (1) General rule. A 
medication therapy management program--
    (i) Must assure that drugs prescribed to targeted beneficiaries 
described in paragraph (d)(2) of this section are appropriately used to 
optimize therapeutic outcomes through improved medication use;
    (ii) Must, for the targeted beneficiaries described in paragraph 
(d)(2) of this section, reduce the risk of adverse events, including 
adverse drug interactions;
    (iii) May be furnished by a pharmacist; and
    (iv) May distinguish between services in ambulatory and 
institutional settings.
    (2) Targeted beneficiaries. Targeted beneficiaries for the 
medication therapy management program described in paragraph (d)(1) of 
this section are enrolled Part D eligible individuals who--
    (i) Have multiple chronic diseases;
    (ii) Are taking multiple covered Part D drugs; and
    (iii) Are likely to incur annual costs for covered Part D drugs 
that exceed a predetermined level that CMS determines.
    (3) Use of experts. The MTMP must be developed in cooperation with 
licensed and practicing pharmacists and physicians.
    (4) Coordination with care management plans. The MTMP must be 
coordinated with any care management plan established for a targeted 
individual under a chronic care improvement program under section 1807 
of MMA.
    (5) Considerations in pharmacy fees. An applicant to become a PDP 
sponsor or an MA organization wishing to offer an MA-PD plan must--
    (i) Describe in its application how it will take into account the 
resources used and time required to implement the MTMP it chooses to 
adopt in establishing fees for pharmacists or others providing 
medication therapy management services for covered Part D drugs under a 
prescription drug plan.
    (ii) Disclose to CMS upon request the amount of the management and 
dispensing fees and the portion paid for medication therapy management 
services to pharmacists and others upon request. Reports of these 
amounts are protected under the provisions of section 1927(b)(3)(D) of 
the Act.
    (e) Program to control fraud, abuse, and waste. PDP sponsors and MA 
organizations offering MA-PD plans must develop performance standards 
to evaluate, prevent, and investigate fraud, abuse, and waste. These 
standards will apply to the PDP sponsor's or MA organization's 
evaluation of PDPs, MA-PDs, pharmacy benefit managers, or other 
subcontractors managing or coordinating the benefit for the 
organization or sponsor, pharmacies, physicians, and any other 
providers with whom the PDP sponsor or MA organizations does business.
    (f) Exception for private fee-for-service MA plans offering 
qualified prescription drug coverage. In the case of an MA plan 
described in Sec.  422.4(a)(3) of this chapter, the requirements under 
paragraphs (b) and (d) of this section do not apply.


Sec.  423.156  Consumer satisfaction surveys.

    CMS conducts consumer satisfaction surveys of PDP and MA-PD 
enrollees similar to the surveys it conducts of MA enrollees under 
Sec.  422.152 (b) of this chapter.


Sec.  423.159  Electronic prescription program.

    (a) Electronic prescription standards. PDP sponsors and MA 
organizations offering qualified prescription drug coverage must have 
the capacity to support and must comply with electronic prescription 
standards relating to covered Part D drugs, for Part D eligible 
individuals, developed by CMS, once final standards are effective.
    (b) Promotion of electronic prescribing by MA-PD plans. An MA 
organization offering an MA-PD plan may provide for a separate or 
differential payment to a participating physician that prescribes 
covered Part D drugs in accordance with electronic prescription 
standards, including voluntary standards promulgated by CMS as well as 
final standards established by CMS once final standards are effective.


Sec.  423.162  Quality Improvement Organization activities.

    (a) General rule. Quality Improvement Organizations (QIOs) are 
required to offer providers, practitioners, MA organizations, and PDP 
sponsors quality improvement assistance pertaining to health care 
services, including those related to prescription drug therapy. QIOs 
offer assistance according to contracts established with the Secretary.
    (b) Collection of information. Information collected, acquired, or 
generated by a QIO in the performance of its responsibilities under 
this section is subject to the confidentiality provisions of 42 CFR 
Part 480. PDP sponsors and MA organizations offering MA-PD plans are 
required to provide specified information to CMS for distribution to 
the QIOs as well as directly to QIOs.
    (c) MA organizations and PDP sponsors. For purposes of 42 CFR Parts 
476 and 480, MA organizations and PDP sponsors are included in the 
definition of ``health care facility.''


Sec.  423.165  Compliance deemed on the basis of accreditation.

    (a) General rule. A PDP sponsor or MA organization offering an MA-
PD plan is deemed to meet all of the requirements of any of the areas 
described in paragraph (b) of this section if--
    (1) The PDP sponsor or MA organization is fully accredited (and 
periodically reaccredited) for the standards related to the applicable 
area under paragraph (b) of this section by a private, national 
accreditation organization approved by CMS; and
    (2) The accreditation organization uses the standards approved by 
CMS for the purposes of assessing the PDP sponsor or MA organization's 
compliance with Medicare requirements.
    (b) Deemable requirements. The requirements relating to the 
following areas are deemable:
    (1) Access to covered drugs, as provided under Sec.  423.120 and 
Sec.  423.124.
    (2) Cost and utilization management, quality assurance, medication 
therapy management programs, and programs to

[[Page 46822]]

control fraud, abuse, and waste, as provided under Sec.  423.153.
    (3) Privacy, confidentiality, and accuracy of enrollee records, as 
provided under Sec.  423.136.
    (c) Effective date of deemed status. The date the PDP sponsor or MA 
organization offering an MA-PD plan is deemed to meet the applicable 
requirements is the later of the following:
    (1) The date the accreditation organization is approved by CMS.
    (2) The date the PDP sponsor or MA organization is accredited by 
the accreditation organization.
    (d) Obligations of deemed PDP sponsors and MA organizations 
offering MA-PD plans. A PDP sponsor or MA organization offering an MA-
PD plan deemed to meet Medicare requirements must--
    (1) Submit to surveys by CMS to validate its accreditation 
organization's accreditation process; and
    (2) Authorize its accreditation organization to release to CMS a 
copy of its most recent accreditation survey, together with any survey-
related information that CMS may require (including corrective action 
plans and summaries of unmet CMS requirements).
    (e) Removal of deemed status. CMS removes part or all of a PDP 
sponsor or MA organization's deemed status for any of the following 
reasons--
    (1) CMS determines, on the basis of its own investigation, that the 
PDP sponsor or MA organization does not meet the Medicare requirements 
for which deemed status was granted.
    (2) CMS withdraws its approval of the accreditation organization 
that accredited the PDP sponsor or MA organization.
    (3) The PDP sponsor or MA organization fails to meet the 
requirements of paragraph (d) of this section.
    (f) Enforcement authority. CMS retains the authority to initiate 
enforcement action against any PDP sponsor or MA organization offering 
an MA-PD plan that it determines, on the basis of its own survey or the 
results of an accreditation survey, no longer meets the Medicare 
requirements for which deemed status was granted.


Sec.  423.168  Accreditation organizations.

    (a) Conditions for approval. CMS may approve an accreditation 
organization for a given standard under this part if it meets the 
following conditions:
    (1) In accrediting PDP sponsors and MA organizations offering MA-PD 
plans, it applies and enforces standards that are at least as stringent 
as Medicare requirements for the standard or standards in question.
    (2) It complies with the application and reapplication procedures 
set forth in Sec.  423.171.
    (3) It ensures that--
    (i) Any individual associated with it, who is also associated with 
an entity it accredits, does not influence the accreditation decision 
concerning that entity;
    (ii) The majority of the membership of its governing body is not 
comprised of managed care organizations, PDP sponsors or their 
representatives; and
    (iii) Its governing body has a broad and balanced representation of 
interests and acts without bias.
    (b) Notice and comment. (1) Proposed notice. CMS publishes a notice 
in the Federal Register whenever it is considering granting an 
accreditation organization's application for approval. The notice--
    (i) Announces CMS's receipt of the accreditation organization's 
application for approval;
    (ii) Describes the criteria CMS uses in evaluating the application; 
and
    (iii) Provides at least a 30-day comment period.
    (2) Final notice. (i) After reviewing public comments, CMS 
publishes a final notice in the Federal Register indicating whether it 
has granted the accreditation organization's request for approval.
    (ii) If CMS grants the request, the final notice specifies the 
effective date and the term of the approval that may not exceed 6 
years.
    (c) Ongoing responsibilities of an approved accreditation 
organization. An accreditation organization approved by CMS must 
undertake the following activities on an ongoing basis:
    (1) Provide to CMS in written form and on a monthly basis all of 
the following:
    (i) Copies of all accreditation surveys, together with any survey-
related information that CMS may require (including corrective action 
plans and summaries of unmet CMS requirements).
    (ii) Notice of all accreditation decisions.
    (iii) Notice of all complaints related to deemed PDP sponsors or MA 
organizations.
    (iv) Information about any PDP sponsor or MA organization against 
which the accrediting organization has taken remedial or adverse 
action, including revocation, withdrawal, or revision of the PDP 
sponsor's or MA organization's accreditation. (The accreditation 
organization must provide this information within 30 days of taking the 
remedial or adverse action.)
    (v) Notice of any proposed changes in its accreditation standards 
or requirements or survey process. If the organization implements the 
changes before or without CMS approval, CMS may withdraw its approval 
of the accreditation organization.
    (2) Within 30 days of a change in CMS requirements, submit the 
following to CMS--
    (i) An acknowledgment of CMS's notification of the change.
    (ii) A revised crosswalk reflecting the new requirements.
    (iii) An explanation of how the accreditation organization plans to 
alter its standards to conform to CMS's new requirements, within the 
timeframes specified in the notification of change it receives from 
CMS.
    (3) Permit its surveyors to serve as witnesses if CMS takes an 
adverse action based on accreditation findings.
    (4) Within 3 days of identifying, in an accredited PDP sponsor or 
MA organization, a deficiency that poses immediate jeopardy to the 
organization's enrollees or to the general public, give CMS written 
notice of the deficiency.
    (5) Within 10 days of CMS's notice of withdrawal of approval, give 
written notice of the withdrawal to all accredited PDP sponsors and MA 
organizations.
    (6) On an annual basis, provide summary data specified by CMS that 
relate to the past year's accreditation activities and trends.
    (d) Continuing Federal oversight of approved accreditation 
organizations. Specific criteria and procedures for continuing 
oversight and for withdrawing approval of an accreditation organization 
include the following:
    (1) Equivalency review. CMS compares the accreditation 
organization's standards and its application and enforcement of those 
standards to the comparable CMS requirements and processes when--
    (i) CMS imposes new requirements or changes its survey process;
    (ii) An accreditation organization proposes to adopt new standards 
or changes in its survey process; or
    (iii) The term of an accreditation organization's approval expires.
    (2) Validation review. CMS or its agent may conduct a survey of an 
accredited organization, examine the results of the accreditation 
organization's own survey, or attend the accreditation organization's 
survey to validate the organization's accreditation process. At the 
conclusion of the review, CMS identifies any

[[Page 46823]]

accreditation programs for which validation survey results indicate--
    (i) A 20 percent rate of disparity between certification by the 
accreditation organization and certification by CMS or its agent on 
standards that do not constitute immediate jeopardy to patient health 
and safety if unmet;
    (ii) Any disparity between certification by the accreditation 
organization and certification by CMS or its agent on standards that 
constitute immediate jeopardy to patient health and safety if unmet; or
    (iii) That, regardless of the rate of disparity, there are 
widespread or systematic problems in an organization's accreditation 
process that accreditation no longer provides assurance that the 
Medicare requirements are met or exceeded.
    (3) Onsite observation. CMS may conduct an onsite inspection of the 
accreditation organization's operations and offices to verify the 
organization's representations and assess the organization's compliance 
with its own policies and procedures. The onsite inspection may 
include, but is not limited to the following:
    (i) Reviewing documents.
    (ii) Auditing meetings concerning the accreditation process.
    (iii) Evaluating survey results or the accreditation status 
decision-making process.
    (iv) Interviewing the organization's staff.
    (4) Notice of intent to withdraw approval. If an equivalency 
review, validation review, onsite observation, or CMS's daily 
experience with the accreditation organization suggests that the 
accreditation organization is not meeting the requirements of this 
subpart, CMS will give the organization written notice of its intent to 
withdraw approval.
    (5) Withdrawal of approval. CMS may withdraw its approval of an 
accreditation organization at any time if CMS determines that--
    (i) Deeming, based on accreditation, no longer guarantees that the 
PDP sponsor or MA organization meets the requirements for offering 
qualified prescription drug coverage, and failure to meet those 
requirements may jeopardize the health or safety of Medicare enrollees 
and constitute a significant hazard to the public health; or
    (ii) The accreditation organization has failed to meet its 
obligations under this section or under Sec.  423.158 or Sec.  423.162.
    (6) Reconsideration of withdrawal of approval. An accreditation 
organization dissatisfied with a determination to withdraw CMS approval 
may request a reconsideration of that determination in accordance with 
subpart D of part 488 of this chapter.


Sec.  423.171  Procedures for approval of accreditation as a basis for 
deeming compliance.

    (a) Required information and materials. A private, national 
accreditation organization applying for approval must furnish to CMS 
all of the following information and materials (when reapplying for 
approval, the organization need furnish only the particular information 
and materials requested by CMS):
    (1) The types of prescription drug plans and MA-PD plans that it 
reviews as part of its accreditation process.
    (2) A detailed comparison of the organization's accreditation 
requirements and standards with the Medicare requirements (for example, 
a crosswalk).
    (3) Detailed information about the organization's survey process, 
including the following:
    (i) Frequency of surveys and whether surveys are announced or 
unannounced.
    (ii) Copies of survey forms, and guidelines and instructions to 
surveyors.
    (iii) Descriptions of--
    (A) The survey review process and the accreditation status decision 
making process;
    (B) The procedures used to notify accredited PDP sponsors and MA 
organizations of deficiencies and to monitor the correction of those 
deficiencies; and
    (C) The procedures used to enforce compliance with accreditation 
requirements.
    (4) Detailed information about the individuals who perform surveys 
for the accreditation organization, including the--
    (i) Size and composition of accreditation survey teams for each 
type of plan reviewed as part of the accreditation process;
    (ii) Education and experience requirements surveyors must meet;
    (iii) Content and frequency of the in-service training provided to 
survey personnel;
    (iv) Evaluation systems used to monitor the performance of 
individual surveyors and survey teams; and
    (v) Organization's policies and practice for the participation, in 
surveys or in the accreditation decision process by an individual who 
is professionally or financially affiliated with the entity being 
surveyed.
    (5) A description of the organization's data management and 
analysis system for its surveys and accreditation decisions, including 
the kinds of reports, tables, and other displays generated by that 
system.
    (6) A description of the organization's procedures for responding 
to and investigating complaints against accredited organizations, 
including policies and procedures regarding coordination of these 
activities with appropriate licensing bodies and ombudsmen programs.
    (7) A description of the organization's policies and procedures for 
the withholding or removal of accreditation for failure to meet the 
accreditation organization's standards or requirements, and other 
actions the organization takes in response to noncompliance with its 
standards and requirements.
    (8) A description of all types (for example, full or partial) and 
categories (for example, provisional, conditional, or temporary) of 
accreditation offered by the organization, the duration of each type 
and category of accreditation, and a statement identifying the types 
and categories that serve as a basis for accreditation if CMS approves 
the accreditation organization.
    (9) A list of all currently accredited PDP sponsors and MA 
organizations and the type, category, and expiration date of the 
accreditation held by each of them.
    (10) A list of all full and partial accreditation surveys scheduled 
to be performed by the accreditation organization as requested by CMS.
    (11) The name and address of each person with an ownership or 
control interest in the accreditation organization.
    (b) Required supporting documentation. A private, national 
accreditation organization applying or reapplying for approval also 
must submit the following supporting documentation--
    (1) A written presentation that demonstrates its ability to furnish 
CMS with electronic data in CMS compatible format.
    (2) A resource analysis that demonstrates that it's staffing, 
funding, and other resources are adequate to perform the required 
surveys and related activities.
    (3) A statement acknowledging that, as a condition for approval, it 
agrees to comply with the ongoing responsibility requirements of Sec.  
423.168(c).
    (c) Additional information. If CMS determines that it needs 
additional information for a determination to grant or deny the 
accreditation organization's request for approval, it notifies the 
organization and allows time for the

[[Page 46824]]

organization to provide the additional information.
    (d) Onsite visit. CMS may visit the accreditation organization's 
offices to verify representations made by the organization in its 
application, including, but not limited to, review of documents and 
interviews with the organization's staff.
    (e) Notice of determination. CMS gives the accreditation 
organization, within 210 days of receipt of its completed application, 
a formal notice that--
    (1) States whether the request for approval has been granted or 
denied;
    (2) Gives the rationale for any denial; and
    (3) Describes the reconsideration and reapplication procedures.
    (f) Withdrawal. An accreditation organization may withdraw its 
application for approval at any time before it receives the formal 
notice specified in paragraph (e) of this section.
    (g) Reconsideration of adverse determination. An accreditation 
organization that has received a notice of denial of its request for 
approval may request a reconsideration in accordance with subpart D of 
part 488 of this chapter.
    (h) Request for approval following denial. (1) Except as provided 
in paragraph (h)(2) of this section, an accreditation organization that 
has received notice of denial of its request for approval may submit a 
new request if it--
    (i) Has revised its accreditation program to correct the 
deficiencies on which the denial was based.
    (ii) Can demonstrate that the PDP sponsors and MA organizations 
that it has accredited meet or exceed applicable Medicare requirements; 
and
    (iii) Resubmits the application in its entirety.
    (2) An accreditation organization that has requested 
reconsideration of CMS' denial of its request for approval may not 
submit a new request until the reconsideration is administratively 
final.

Subpart F--Submission of Bids and Monthly Beneficiary Premiums; 
Plan Approval


Sec.  423.251  Scope.

    This section sets forth the requirements and limitations on 
submission, review, negotiation and approval of competitive bids for 
prescription drug plans and MA-PD plans; the calculation of the 
national average bid amount; and the determination of enrollee 
premiums.


Sec.  423.258  Definitions.

    For the purposes of this part, the following definitions apply:
    Full risk plan means a prescription drug plan that is not a limited 
risk plan or a fallback prescription drug plan.
    Limited risk plan means a prescription drug plan that provides 
basic prescription drug coverage and for which the PDP sponsor includes 
a modification of risk level described in Sec.  423.265(d) in its bid 
submitted for the plan. This term does not include a fallback 
prescription drug plan.
    Standardized bid amount means, for a prescription drug plan that 
provides basic prescription drug coverage, the PDP approved bid; for a 
prescription drug plan that provides supplemental prescription drug 
coverage, the portion of the PDP approved bid that is attributable to 
basic prescription drug coverage; for a MA-PD plan, the portion of the 
accepted bid amount that is attributable to basic prescription drug 
coverage.


Sec.  423.265  Submission of bids and related information.

    (a) Eligibility for bidding. (1) Eligible entities. With the 
exception set forth in paragraph (a)(2) of this section, an applicant 
may submit a bid to become a PDP sponsor or to become an MA 
organization offering an MA-PD plan
    (2) Limitation on entities offering fallback prescription drug 
plans. CMS will not accept a bid from a potential PDP sponsor for the 
offering of a full risk or limited risk prescription drug plan in a PDP 
region for a year if the applicant--
    (i) Submitted a bid under Sec.  423.863 for the year (as the first 
year of a contract period under Sec.  423.863) to offer a fallback 
prescription drug plan in any PDP region;
    (ii) Offers a fallback prescription drug plan in any PDP region 
during the year; or
    (iii) Offered a fallback prescription drug plan in that PDP region 
during the previous year.
    (3) Construction. For purposes of this paragraph, an entity is 
treated as submitting a bid for a prescription drug plan or offering a 
fallback prescription drug plan if the entity is acting as a 
subcontractor of a PDP sponsor that is offering a plan. The previous 
sentence does not apply to entities that are subcontractors of an MA 
organization except insofar as the MA organization is applying to act 
as a PDP sponsor of a prescription drug plan.
    (b) Bid Submission. Not later than the first Monday in June, each 
potential PDP sponsor or MA organization planning to offer an MA-PD 
plan must submit bids and supplemental information described in this 
section for each prescription drug or MA-PD plan it intends to offer in 
the subsequent calendar year.
    (c) Basic rule for bid. Each potential PDP sponsor or MA 
organization must submit a bid in a format to be specified by CMS for 
each prescription drug plan or MA-PD plan it offers. Each bid must 
reflect a uniform benefit package, including premium (except as 
provided for the late enrollment penalty described in Sec.  
423.286(d)(3)) and all applicable cost sharing, for all individuals 
enrolled in the plan. Each bid must reflect the applicant's estimate of 
its average monthly revenue requirements to provide qualified 
prescription drug coverage (including any supplemental coverage) for a 
Part D eligible individual with a national average risk profile for the 
factors described in Sec.  423.329(b)(1).
    (1) Included costs. The bid includes costs (including 
administrative costs and return on investment/profit) for which the 
plan is responsible in providing basic and supplemental benefits.
    (2) Excluded costs. The bid does not include costs associated with 
payments by the enrollee for deductible, copayments, coinsurance, 
payments projected to be made by CMS for reinsurance, or any other 
costs for which the sponsor is not responsible.
    (3) Actuarial valuation. The bid must be prepared in accordance 
with CMS actuarial guidelines based on generally accepted actuarial 
principles. A qualified actuary must certify the plan's actuarial 
valuation (which may be prepared by others under his/her direction or 
review), and must be a member of the American Academy of Actuaries to 
be deemed qualified. Applicants may use qualified outside actuaries to 
prepare their bids.
    (d) Specific requirements for bids. The bid submission must include 
the following information:
    (1) Coverage. A description of the coverage to be provided under 
the plan, including any supplemental coverage and the deductible and 
other cost sharing.
    (2) Actuarial value of bid components. The applicant must provide 
the following information on bid components, as well as actuarial 
certification that the values are calculated according to CMS 
guidelines on actuarial valuation, including adjustment for the effect 
that providing alternative prescription drug coverage (rather than 
defined standard prescription drug coverage) has on drug utilization, 
if applicable.

[[Page 46825]]

    (i) The actuarial value of the qualified prescription drug coverage 
to be offered under each plan for a Part D eligible individual with a 
national average risk profile for the factors described in Sec.  
423.329(b)(1) and the basis for the estimate.
    (ii) The portion of the bid attributable to basic prescription drug 
coverage and the portion (if any) attributable to supplemental 
benefits.
    (iii) The assumptions regarding reinsurance amounts payable under 
Sec.  423.329(c) used in calculating the bid.
    (iv) The assumptions regarding low-income cost-sharing payable 
under Sec.  423.329(d) used in calculating the bid.
    (v) The amount of administrative costs and return on investment or 
profit included in the bid.
    (3) Service area. A description of the service area of the plan.
    (4) Level of risk assumed. For a potential PDP sponsor, the level 
of risk assumed in the bid specified in paragraph (e) of this section.
    (5) Plan Average Risk Score. An estimate of the plan's average 
prescription drug risk score (as established under Sec.  423.329(b)) 
for all projected enrollees for purposes of risk adjusting any 
supplemental premium.
    (6) Additional information. Additional information CMS requests to 
support bid amounts and facilitate negotiation.
    (e) Special rule for PDP sponsors. Bids for all plans offered by a 
potential PDP sponsor in a region, but not those of potential MA 
organizations offering MA-PD plans, may include a uniform modification 
of the amount of risk assumed (based on a process to be specified) as 
described in one or more of the following paragraphs. Any such 
modification will apply to all plans offered by the PDP sponsor in a 
PDP region.
    (1) Increase in Federal percentage assumed in initial risk 
corridor. An equal percentage point increase in the percents applied 
for costs between the first and second threshold limits under Sec.  
423.336(b)(2)(i) and (b)(2)(ii)(A) and Sec.  423.336 (b)(3)(i) and 
(b)(3)(ii)(A). This provision does not affect the application of a 
higher percentage for plans in 2006 or 2007 under Sec.  
423.336(b)(2)(iii).
    (2) Increase in Federal percentage assumed in second risk corridor. 
An equal percentage point increase in the percents applied for costs 
above the second threshold upper limit or below the second threshold 
upper limit under paragraphs Sec.  423.336(b)(2)(ii)(B) and 
(b)(3)(ii)(B).
    (3) Decrease in size of risk corridors. A decrease in the size of 
the risk corridors by means of reductions in the threshold risk 
percentages specified in Sec.  423.336(a)(2)(ii)(A) and/or 
(a)(2)(ii)(B).
    (f) Special rule for fallback plans. Fallback plan bids are not 
subject to the rules in this section. They must follow requirements 
specified in Sec.  423.863.


Sec.  423.272  Review and negotiation of bid and approval of plans 
submitted by potential PDP sponsors or MA organizations planning to 
offer MA-PD plans.

    (a) Review and negotiation regarding information, terms and 
conditions. CMS reviews the information filed under Sec.  423.265(c) in 
order to conduct negotiations regarding the terms and conditions of the 
proposed bid and benefit plan using authority similar to that of the 
Director of the Office of Personnel Management for health benefit plans 
under Chapter 89 of title 5, U.S.C.
    (b) Approval of proposed plans. CMS will approve the prescription 
drug plan or MA-PD plan only if the plan and the PDP sponsor or MA 
organization offering the plan comply with all applicable CMS Part D 
requirements, including those related to the provision of qualified 
prescription drug coverage and actuarial determinations.
    (1) Application of revenue requirements standard. CMS only approves 
a bid if it determines that the portions of the bid attributable to 
basic and supplemental prescription drug coverage are supported by the 
actuarial bases provided and reasonably and equitably reflect the 
revenue requirements (as used for purposes of section 1302(8)(C) of the 
Public Health Service Act) for benefits provided under that plan, less 
the sum (determined on a monthly per capita basis) of the actuarial 
value of the reinsurance payments under section Sec.  423.329(c).
    (2) Plan design. CMS does not approve a bid if it finds that the 
design of the plan and its benefits (including any formulary and tiered 
formulary structure) are likely to substantially discourage enrollment 
by certain Part D eligible individuals under the plan. If the design of 
the categories and classes within a formulary is consistent with the 
model guidelines (if any) established by the United States 
Pharmacopeia, that formulary may not be found to discourage enrollment 
on the basis of its categories and classes alone.
    (c) Limited risk plans. (1) Application of limited risk plans. 
There is no limit on the number of full risk plans that CMS approves 
under paragraph (b) of this section. CMS only approves a limited risk 
plan in accordance with paragraphs (c)(2) and (c)(3) of this section if 
the access requirements under Sec.  423.859 are not otherwise met for a 
PDP region.
    (2) Maximizing assumption of risk. CMS gives priority in approval 
for those limited risk plans bearing the highest level of risk, but may 
take into account the level of the bids submitted by the plans and is 
not required to accept the plan with the highest assumption of risk. In 
no case does CMS approve a limited risk plan under which the 
modification of risk level provides for no (or a minimal) level of 
financial risk.
    (3) Limited exercise of authority. CMS only approves the minimum 
number of limited risk plans needed to meet the access requirements.
    (d) Special rules for private fee-for-service (PFFS) plans that 
offer prescription drug coverage. PFFS plans choosing to offer 
prescription drug coverage are subject to all MA-PD bid submission and 
approval requirements with the following exceptions:
    (1) Exemption from negotiations. These plans are exempt from the 
review and negotiation process in paragraph (a) of this section, and 
are not held to the revenue requirements standard in paragraph (b)(1) 
of this section.
    (2) Requirements regarding negotiated prices. These plans are not 
required to provide access to negotiated prices. However, if they do, 
they must meet the applicable requirements of Sec.  423.104(h).
    (3) Modification of pharmacy access standard and disclosure 
requirement. If the plan provides coverage for drugs purchased from all 
pharmacies, without charging additional cost sharing and without regard 
to whether they are participating providers, Sec. Sec.  423.120(a) and 
423.132 requiring certain network access standards and the disclosure 
of the availability of lower cost bioequivalent generic drugs does not 
apply to the plan.


Sec.  423.279  National average monthly bid amount.

    (a) Bids included. For each year (beginning with 2006) CMS computes 
a national average monthly bid amount from approved bids in order to 
calculate the base beneficiary premium, as provided in Sec.  
423.286(c). The national average monthly bid amount is equal to a 
weighted average of the standardized bid amounts for each prescription 
drug plan and for each MA-PD plan described in section 1851(a)(2)(A)(i) 
of the Act. The calculation does not include bids submitted for MSA 
plans, MA private fee-for-service plans, specialized MA plans for 
special needs individuals, PACE programs under section 1894, and under 
reasonable cost reimbursement contracts under section 1876(h) of the 
Act.

[[Page 46826]]

    (b) Calculation of weighted average. The national average monthly 
bid amount is a weighted average, with the weight for each plan equal 
to a percentage with the numerator equal to the number of Part D 
eligible individuals enrolled in the plan in the reference month (as 
defined in Sec.  422.258(c)(1)) and the denominator equal to the total 
number of Part D eligible individuals enrolled in all the Part D plans 
included in the calculation of the national average bid amount in the 
reference month. For purposes of calculating the monthly national 
average monthly bid amount for 2006, CMS determines the weighted 
average for 2005.
    (c) Geographic adjustment. (1) CMS establishes an appropriate 
methodology for adjusting the national average monthly bid amount to 
take into account differences in prices for covered Part D drugs among 
PDP regions.
    (2) CMS does not apply any geographic adjustments if CMS determines 
that price variations among PDP regions are negligible.
    (3) CMS applies any geographic adjustment in a budget neutral 
manner so as to not result in a change in the aggregate payments that 
may have been made if CMS had not applied an adjustment.


Sec.  423.286  Rules regarding premiums.

    (a) General rule. Except as provided in paragraphs (d)(3) and (e) 
of this section, and in Sec.  423.463(b) with regard to employer group 
waivers, the monthly beneficiary premium for a prescription drug plan 
or MA-PD plan in a PDP region is the same for all part D eligible 
individuals enrolled in the plan. The monthly beneficiary premium for a 
prescription drug plan or MA-PD plan is the base beneficiary premium, 
as determined in paragraph (c) of this section, adjusted as described 
in paragraph (d) of this section for the difference between the bid and 
the national average monthly bid amount, any supplemental benefits and 
for any late enrollment penalties.
    (b) Beneficiary premium percentage. The beneficiary premium 
percentage for any year is a fraction, the--
    (1) Numerator of which is 25.5 percent; and
    (2) Denominator of which is as follows:
    (i) 100 percent minus the percentage established in paragraph 
(b)(2)(ii) of this section.
    (ii) The percentage established in this paragraph equals:
    (A) The total reinsurance payments that CMS estimates will be paid 
under Sec.  423.329(c) for the coverage year; divided by--
    (B) The amount estimated under paragraph (b)(2)(ii)(A) of this 
section for the year plus total payments that CMS estimates will be 
paid to prescription drug plans and MA-PD plans that are attributable 
to the standardized bid amount during the year, taking into account 
amounts paid by both CMS and enrollees.
    (c) Base beneficiary premium. The base beneficiary premium for a 
prescription drug plan for a month is equal to the product of the--
    (1) Beneficiary premium percentage as specified in paragraph (b) of 
this section; and
    (2) National average monthly bid amount (computed under Sec.  
423.279) for the month.
    (d) Adjustments to base beneficiary premium. The base beneficiary 
premium may be adjusted to reflect any of the following scenarios, if 
applicable.
    (1) Adjustment to reflect difference between bid and national 
average bid. If the amount of the standardized bid amount exceeds the 
amount of the adjusted national average monthly bid amount, the monthly 
base beneficiary premium is increased by the amount of the excess. If 
the amount of the adjusted national average monthly bid amount exceeds 
the standardized bid amount, the monthly base beneficiary premium is 
decreased by the amount of the excess.
    (2) Increase for supplemental prescription drug benefits. The 
portion of the PDP or MA-PD plan approved bid that is attributable to 
supplemental prescription drug benefits increases the beneficiary 
premium. This supplemental portion of the bid may be adjusted to 
reflect the average risk score of the plan by multiplying by the plan 
average risk score provided in Sec.  423.265(d)(5).
    (3) Increase for late enrollment penalty. The base beneficiary 
premium is increased on a monthly basis by the amount of any late 
enrollment penalty.
    (i) Late Enrollment Penalty Amount. The penalty amount for a Part D 
eligible individual for a continuous period of eligibility (as provided 
in Sec.  423.46(a)) is the greater of--
    (A) An amount that CMS determines is actuarially sound for each 
uncovered month in the same continuous period of eligibility; or
    (B) 1 percent of the base beneficiary premium (computed under 
paragraph (c) of this section) for each uncovered month in the period.
    (ii) Special rule for 2006 and 2007. In 2006 and 2007 the penalty 
amount discussed in paragraph (d)(3) will equal the amount referenced 
in paragraph (d)(3)(i)(B) of this section unless another amount is 
specified in a separate issuance based on available analysis or other 
information as determined by the Secretary.
    (e) Decrease in monthly beneficiary premium for low-income 
assistance. The monthly beneficiary premium may be eliminated or 
decreased in the case of a subsidy-eligible individual under Sec.  
423.780.
    (f) Special rules for fallback plans. The monthly beneficiary 
premium charged under a fallback plan is calculated under Sec.  
423.867(a).


Sec.  423.293  Collection of monthly beneficiary premium.

    (a) General rule. Subject to paragraphs (c) and (d) of this 
section, the provisions of section 1854(d) of the Act (as specified in 
Sec.  422.262(b) on the consolidated monthly premium and paragraph (f) 
of this section on beneficiary payment options), apply to PDP sponsors 
and premiums (and any late enrollment penalty) under this part in the 
same manner as they apply to MA organizations and beneficiary premiums 
under Part C except that any reference to a Trust Fund is deemed for 
this purpose a reference to the Medicare Prescription Drug Account.
    (b) Crediting of late enrollment penalty. CMS estimates and 
specifies the portion of the late enrollment penalty imposed under 
Sec.  423.286(d)(3) attributable to increased actuarial costs assumed 
by the PDP sponsor or MA organization (and not taken into account 
through risk adjustment provided under Sec.  423.329(b)(1) or through 
reinsurance payments under Sec.  423.329(c)) as a result of the late 
enrollment.
    (c) Collection of late enrollment penalty.
    (1) Collection through withholding. In the case of a late 
enrollment penalty that is collected from a Part D eligible individual 
in the manner described in Sec.  422.262(f)(1), CMS pays only the 
portion of the late enrollment penalty described in paragraph (b) of 
this section to the PDP sponsor or MA organization offering the Part D 
plan in which the individual is enrolled
    (2) Collection by plan. In the case of a late enrollment penalty 
collected from a Part D eligible individual in a manner other than the 
manner described in Sec.  422.262(f)(1), CMS reduces payments otherwise 
made to the PDP sponsor or MA organization by an amount equal to this 
portion of the late enrollment penalty.
    (d) Special rule for fallback plans. The collection requirements of 
this section do not apply to fallback

[[Page 46827]]

prescription drug plans. The fallback plans follow the requirements set 
forth in Sec.  423.867(b).

Subpart G--Payments to PDP Sponsors and MA Organizations Offering 
MA-PD Plans For All Medicare Beneficiaries For Qualified 
Prescription Drug Coverage


Sec.  423.301  Scope.

    This section sets forth rules for the calculation and payment of 
CMS direct and reinsurance subsidies for prescription drug plans and 
MA-PD plans; the application of risk corridors and risk-sharing 
adjustments to payments; and retroactive adjustments and 
reconciliations to actual enrollment and interim payments.


Sec.  423.308  Definitions and terminology.

    For the purposes of this part, the following definitions apply--
    Actually paid means that the costs must be actually incurred by the 
sponsor and must be net of any direct or indirect remuneration 
(including discounts, chargebacks or average percentage rebates, cash 
discounts, free goods contingent on a purchase agreement, up-front 
payments, coupons, goods in kind, free or reduced-price services, 
grants, or other price concessions or similar benefits offered to some 
or all purchasers) from any source (including manufacturers, 
pharmacies, enrollees, or any other person) that would serve to 
decrease the costs incurred by the sponsor for the drug.
    Allowable reinsurance costs means the subset of gross covered 
prescription drug costs that are attributable to basic or standard 
benefits only and that are actually paid by the sponsor or organization 
or by (or on behalf of) an enrollee under the plan. The costs for any 
plan offering enhanced alternative coverage must be adjusted not only 
to exclude any costs attributable to benefits beyond basic coverage, 
but also to exclude any basic coverage costs determined to be 
attributable to increased utilization over the standard benefit as the 
result of the insurance effect of enhanced alternative coverage in 
accordance with CMS guidelines on actuarial valuation.
    Allowable risk corridor costs means the subset of prescription drug 
costs (not including administrative costs, but including costs directly 
related to the dispensing of covered Part D drugs during the year) that 
are attributable to basic or standard benefits only and that are 
incurred and actually paid by the sponsor or organization under the 
plan. Costs may be based upon imposition of the maximum amount of 
copayments permitted under Sec.  423.782. The costs for any plan 
offering enhanced alternative coverage must be adjusted not only to 
exclude any costs attributable to benefits beyond basic coverage, but 
also to exclude any basic coverage costs determined to be attributable 
to increased utilization over the standard benefit as the result of the 
insurance effect of enhanced alternative coverage in accordance with 
CMS guidelines on actuarial valuation.
    Coverage year means a calendar year in which covered Part D drugs 
are dispensed if the claim for those drugs (and payment on the claim) 
is made not later than 3 months after the end of the year.
    Gross covered prescription drug costs means those costs incurred 
under a Part D plan, excluding administrative costs, but including 
costs related to the dispensing of covered Part D drugs during the year 
and costs relating to the deductible. They equal--
    (1) All reimbursement paid by a PDP sponsor or an MA organization 
offering an MA-PD plan to a pharmacy (or other intermediary) or to 
indemnify an enrollee when the reimbursement is associated with an 
enrollee obtaining drugs under the plan; plus
    (2) All amounts paid under the plan by or on behalf of an enrollee 
(such as the deductible, coinsurance, cost-sharing, or amounts between 
the initial coverage limit and the out-of-pocket threshold) in order to 
obtain drugs covered under the plan. These costs are determined 
regardless of whether the coverage under the plan exceeds basic 
prescription drug coverage.
    Target amount for any prescription drug plan or MA-PD plan equals 
the total amount of payments (from CMS and enrollees) to that plan for 
the year for all standardized bid amounts as risk adjusted under Sec.  
423.329(b)(1), less the administrative expenses (including return on 
investment) assumed in the standardized bids.


Sec.  423.315  General payment provisions.

    (a) Source of payments. CMS payments under this section are made 
from the Medicare Prescription Drug Account.
    (b) Monthly payments. CMS provides a direct subsidy in the form of 
advance monthly payments equal to the plan's standardized bid, risk 
adjusted for health status as provided in Sec.  423.329(b), minus the 
beneficiary monthly premium as determined in Sec.  423.286.
    (c) Reinsurance subsidies. CMS provides reinsurance subsidy 
payments described in Sec.  423.329(c) through payments of amounts on 
an as-incurred basis as provided under Sec.  423.329(c)(2)(i) and final 
reconciliation to actual allowable reinsurance costs as provided in 
Sec.  423.343(c).
    (d) Low-income subsidies. CMS makes payments for premium and cost 
sharing subsidies, including additional coverage above the initial 
coverage limit, on behalf of certain subsidy-eligible enrollees as 
provided in Sec.  423.780 and Sec.  423.782. CMS provides low-income 
cost-sharing subsidy payments described in Sec.  423.782 through 
interim payments of amounts as provided under Sec.  423.329(d)(2)(i) 
and reconciliation to actual allowable reinsurance costs as provided in 
Sec.  423.343(d).
    (e) Risk-sharing arrangements. CMS may issue lump-sum payments or 
adjust monthly payments in the following payment year based on the 
relationship of the plan's adjusted allowable risk corridor costs to 
predetermined risk corridor thresholds in the coverage year as provided 
in Sec.  423.336.
    (f) Retroactive adjustments and reconciliations. CMS reconciles 
payment year disbursements with updated enrollment and health status 
data, actual low-income cost-sharing costs and actual allowable 
reinsurance costs as provided in Sec.  423.343.
    (g) Special rules for private fee-for-service plans.
    (1) Application of reinsurance. For private fee-for-service plans, 
CMS determines the amount of reinsurance payments as provided under 
Sec.  423.329(c)(3).
    (2) Exemption from risk corridor provisions. The provisions of 
Sec.  423.336 regarding risk sharing do not apply.
    (h) Special rules for fallback plans. In lieu of the amounts 
otherwise payable under Sec.  423.329, the amount payable to a PDP 
sponsor offering a fallback prescription drug plan is the amount 
determined under the contract for the plan in accordance with Sec.  
423.871(e).


Sec.  423.322  Requirement for disclosure of information.

    (a) Payment conditional upon provision of information. Payments to 
a PDP sponsor or MA organization are conditioned upon provision of 
information to CMS that is necessary to carry out this subpart, or as 
required by law.
    (b) Restriction on use of information. Officers, employees and 
contractors of the Department of Health and Human Services may use the 
information disclosed or obtained in accordance with the provisions of 
this subpart only for the purposes of, and to the extent necessary in, 
carrying out this subpart

[[Page 46828]]

including, but not limited to, determination of payments and payment-
related oversight and program integrity activities. This restriction 
does not limit OIG authority to conduct audits and evaluations 
necessary for carrying out these regulations.


Sec.  423.329  Determination of payment.

    (a) Subsidy payments. (1) Direct subsidy. CMS makes a direct 
subsidy payment for each eligible beneficiary enrolled in a 
prescription drug plan or MA-PD plan for a month equal to the amount of 
the plan's approved standardized bid, adjusted for health status (as 
determined under Sec.  423.329(b)(1)), and reduced by the base 
beneficiary premium for the plan (as determined under Sec.  423.286(c) 
and adjusted in Sec.  423.286(d)(1)).
    (2) Subsidy through reinsurance. CMS makes reinsurance subsidy 
payments as provided under paragraph (c) of this section.
    (3) Low-income cost-sharing subsidy. CMS makes low-income cost-
sharing subsidy payments as provided under paragraph (d) of this 
section.
    (b) Health status risk adjustment. (1) Establishment of risk 
factors. CMS establishes an appropriate methodology for adjusting the 
standardized bid amount under paragraph (a)(1) of this section, to take 
into account variation in costs for basic prescription drug coverage 
among prescription drug plans and MA-PD plans based on the differences 
in actuarial risk of different enrollees being served. Any risk 
adjustment is designed in a manner so as to be budget neutral in the 
aggregate to the risk of the Part D eligible individuals who enroll in 
Part D plans.
    (2) Considerations. In establishing the methodology under paragraph 
(b)(1) of this section, CMS takes into account the similar 
methodologies used under Sec.  422.308(c)(1) to adjust payments to MA 
organizations for benefits under the original Medicare fee-for-service 
program option.
    (3) Data collection. In order to carry out this paragraph, CMS 
requires--
    (i) PDP sponsors to submit data regarding drug claims that can be 
linked at the individual level to Part A and Part B data in a form and 
manner similar to the process provided under Sec.  422.310 and other 
information as CMS determines necessary; and
    (ii) MA organizations that offer MA-PD plans to submit data 
regarding drug claims that can be linked at the individual level to 
other data that the organizations are required to submit to CMS in a 
form and manner similar to the process provided under Sec.  422.310 and 
other information as CMS determines necessary.
    (4) Publication. At the time of publication of risk adjustment 
factors under Sec.  422.312(a)(1)(ii), CMS publishes the risk adjusters 
established under this paragraph of this section for the upcoming 
calendar year.
    (c) Reinsurance payment amount. (1) General rule. The reinsurance 
payment amount for a Part D eligible individual enrolled in a 
prescription drug plan or MA-PD plan for a coverage year is an amount 
equal to 80 percent of the allowable reinsurance costs attributable to 
that portion of gross covered prescription drug costs incurred in the 
coverage year after the individual has truly incurred out-of-pocket 
costs that exceed the annual out-of-pocket threshold specified in Sec.  
423.108(b)(4)(iii).
    (2) Payment method. Payments under this section are based on a 
method as CMS determines.
    (i) Payments during the coverage year. CMS establishes a payment 
method by which monthly payments of amounts under this section are made 
during a year based on allowable reinsurance costs incurred in each 
month of the coverage year.
    (ii) Final payments. CMS reconciles the payments made during the 
coverage year to final actual allowable reinsurance costs as provided 
in Sec.  423.343(c).
    (3) Special rules for private fee-for-service Plans offering 
prescription drug coverage. CMS determines the amount of reinsurance 
payments for private fee-for-service plans offering prescription drug 
coverage using a methodology that--
    (i) Bases the amount on CMS' estimate of the amount of the payments 
that are payable if the plan were an MA-PD plan described in section 
1851(a)(2)(A)(i); and
    (ii) Takes into account the average reinsurance payments made under 
Sec.  423.329(c) for populations of similar risk under MA-PD plans 
described in the section.
    (d) Low-income cost sharing subsidy payment amount.
    (1) General rule. The low-income cost-sharing subsidy payment 
amount on behalf of a low-income subsidy eligible individual enrolled 
in a prescription drug plan or MA-PD plan for a coverage year is the 
amount described in Sec.  423.782.
    (2) Payment method. Payments under this section are based on a 
method that CMS determines.
    (i) Interim payments. CMS establishes a payment method by which 
interim payments of amounts under this section are made during a year 
based on the low-income cost-sharing assumptions submitted with plan 
bids under Sec.  423.265(d)(2)(iv) and negotiated and approved under 
Sec.  423.272.
    (ii) Final payments. CMS reconciles the interim payments to actual 
incurred low-income cost-sharing costs as provided in Sec.  423.343(d).


Sec.  423.336  Risk-sharing arrangements.

    (a) Portion of total payments to a sponsor or organization subject 
to risk. (1) Adjusted allowable risk corridor costs. For purposes of 
this paragraph, the term adjusted allowable risk corridor costs means--
    (i) The allowable risk corridor costs for the plan for the coverage 
year, reduced by--
    (ii) The sum of--
    (A) The total reinsurance payments made under Sec.  423.329(c) to 
the sponsor of the plan for the year; and
    (B) The total non-premium subsidy payments made under Sec.  423.782 
to the sponsor of the plan for the coverage year.
    (2) Establishment of risk corridors. (i) Risk corridors. For each 
year, CMS establishes a risk corridor for each prescription drug plan 
and each MA-PD plan. The risk corridor for a plan for a year is equal 
to a range as follows:
    (A) First threshold lower limit. The first threshold lower limit of 
the corridor is equal to--
    (1) The target amount for the plan; minus
    (2) An amount equal to the first threshold risk percentage for the 
plan (as determined under paragraph (a)(2)(ii)(A) of this section) of 
the target amount.
    (B) Second threshold lower limit. The second threshold lower limit 
of the corridor is equal to--
    (1) The target amount for the plan; minus
    (2) An amount equal to the second threshold risk percentage for the 
plan (as determined under paragraph (a)(2)(ii)(B) of this section) of 
the target amount.
    (C) First threshold upper limit. The first threshold upper limit of 
the corridor is equal to the sum of--
    (1) The target amount; and
    (2) An amount equal to the first threshold risk percentage for the 
plan (as determined under paragraph (a)(2)(ii)(A) of this section) of 
the target amount.
    (D) Second threshold upper limit. The second threshold upper limit 
of the corridor is equal to the sum of--
    (1) The target amount; and
    (2) An amount equal to the second threshold risk percentage for the 
plan

[[Page 46829]]

(as determined under paragraph (a)(2)(ii)(B) of this section) of the 
target amount.
    (ii) First and second threshold risk percentage defined. (A) First 
threshold risk percentage. Subject to paragraph (a)(2)(iii) of this 
section, the first threshold risk percentage is for--
    (1) 2006 and 2007, and 2.5 percent;
    (2) 2008 through 2011, 5 percent; and
    (3) 2012 and subsequent years, a percentage CMS establishes, but in 
no case less than 5 percent.
    (B) Second threshold risk percentage. Subject to paragraph 
(a)(2)(iii) of this section, the second threshold risk percentage is 
for--
    (1) 2006 and 2007, 5.0 percent;
    (2) 2008 through 2011, 10 percent
    (3) 2012 and subsequent years, a percentage CMS establishes that is 
greater than the percent established for the year under paragraph 
(a)(2)(ii)(A)(3) of this section, but in no case less than 10 percent.
    (iii) Reduction of risk percentage to ensure two Plans in an area. 
In accordance with Sec.  423.265(e), a PDP sponsor may submit a bid 
that requests a decrease in the applicable first or second threshold 
risk percentages or an increase in the percents applied under paragraph 
(b) of this section.
    (3) Plans at risk for entire amount of supplemental prescription 
drug coverage. A PDP sponsor and MA organization that offer a plan that 
provides supplemental prescription drug benefits are at full financial 
risk for the provision of the supplemental benefits.
    (b) Payment adjustments. (1) No adjustment if adjusted allowable 
risk corridor costs within risk corridor. If the adjusted allowable 
risk corridor costs for the plan for the year are at least equal to the 
first threshold lower limit of the risk corridor (specified in 
paragraph (a)(2)(i)(A) of this section) but not greater than the first 
threshold upper limit of the risk corridor (specified in paragraph 
(a)(2)(i)(C) of this section) for the plan for the year, CMS makes no 
payment adjustment.
    (2) Increase in payment if adjusted allowable risk corridor costs 
above upper limit of risk corridor.
    (i) Costs between first and second threshold upper limits. If the 
adjusted allowable risk corridor costs for the plan for the year are 
greater than the first threshold upper limit, but not greater than the 
second threshold upper limit, of the risk corridor for the plan for the 
year, CMS increases the total of the payments made to the sponsor or 
organization offering the plan for the year under this section by an 
amount equal to 50 percent (or, for 2006 and 2007, 75 percent or 90 
percent if the conditions described in paragraph (b)(2)(iii) of this 
section are met for the year) of the difference between the adjusted 
allowable risk corridor costs and the first threshold upper limit of 
the risk corridor.
    (ii) Costs above second threshold upper limits. If the adjusted 
allowable risk corridor costs for the plan for the year are greater 
than the second threshold upper limit of the risk corridor for the plan 
for the year, CMS increases the total of the payments made to the 
sponsor or organization offering the plan for the year under this 
section by an amount equal to the sum of--
    (A) 50 percent (or, for 2006 and 2007, 75 percent or 90 percent if 
the conditions specified in paragraph (b)(2)(iii) of this section are 
met for the year) of the difference between the second threshold upper 
limit and the first threshold upper limit; and
    (B) 80 percent of the difference between the adjusted allowable 
risk corridor costs and the second threshold upper limit of the risk 
corridor.
    (iii) Conditions for application of higher percentage for 2006 and 
2007. The conditions specified in this paragraph are met for 2006 or 
2007 if CMS determines for the year that--
    (A) At least 60 percent of prescription drug plans and MA-PD plans 
to which this paragraph applies have adjusted allowable risk corridor 
costs for the plan for the year that are more than the first threshold 
upper limit of the risk corridor for the plan for the year; and
    (B) The plans represent at least 60 percent of Part D eligible 
individuals enrolled in any prescription drug plan or MA-PD plan.
    (3) Reduction in payment if adjusted allowable risk corridor costs 
below lower limit of risk corridor.
    (i) Costs between first and second threshold lower limits. If the 
adjusted allowable risk corridor costs for the plan for the year are 
less than the first threshold lower limit, but not less than the second 
threshold lower limit, of the risk corridor for the plan for the year, 
CMS reduces the total of the payments made to the sponsor or 
organization offering the plan for the year under this section by an 
amount (or otherwise recovers from the sponsor or organization an 
amount) equal to 50 percent (or, for 2006 and 2007, 75 percent) of the 
difference between the first threshold lower limit of the risk corridor 
and the adjusted allowable risk corridor costs.
    (ii) Costs below second threshold lower limit. If the adjusted 
allowable risk corridor costs for the plan for the year are less the 
second threshold lower limit of the risk corridor for the plan for the 
year, CMS reduces the total of the payments made to the sponsor or 
organization offering the plan for the year under this section by an 
amount (or otherwise recovers from the sponsor or organization an 
amount) equal to the sum of--
    (A) 50 percent (or, for 2006 and 2007, 75 percent) of the 
difference between the first threshold lower limit and the second 
threshold lower limit; and
    (B) 80 percent of the difference between the second threshold upper 
limit of the risk corridor and the adjusted allowable risk corridor 
costs.
    (c) Payment methods. CMS makes payments after a coverage year after 
obtaining all of the cost data information in paragraph (c)(1) of this 
section necessary to determine the amount of payment. CMS will not make 
payments under this section if the PDP sponsor or MA organization fails 
to provide the cost data information in paragraph (c)(1) of this 
section.
    (1) Submission of cost data. Within 6 months of the end of a 
coverage year, the PDP sponsor or MA organization offering a MA-PD plan 
sponsor must provide to CMS the following information:
    (i) The gross covered prescription drug costs segregated by 
enrollee and date of service.
    (ii) The allowable risk corridor costs (defined in Sec.  423.308) 
for the coverage year.
    (iii) The adjusted allowable risk corridor costs for the coverage 
year.
    (iv) Costs incurred for supplemental benefits distinguished from 
those for basic coverage.
    (v) Other information stipulated by CMS.
    (2) Lump sum and adjusted monthly payments. CMS at its discretion 
makes either lump-sum payments or adjusts monthly payments in the 
following payment year based on the relationship of the plan's adjusted 
allowable risk corridor costs to the predetermined risk corridor 
thresholds in the coverage year, as determined under paragraph (a) of 
this section.
    (d) No effect on monthly premium. No adjustment in payments made by 
reason of this section may affect the monthly beneficiary premium or 
the MA monthly prescription drug beneficiary premium.


Sec.  423.343  Retroactive adjustments and reconciliations.

    (a) Application of enrollee adjustment. The provisions of Sec.  
422.308 apply to payments to PDP sponsors under this section in the 
same manner as they apply to payments to MA

[[Page 46830]]

organizations under section 1853(a) of the Act.
    (b) Health status. CMS makes adjustments to payments made under 
Sec.  423.329(a)(1) to account for updated health status risk 
adjustment data as provided under Sec.  422.310(g)(2). CMS may recover 
payments associated with health status adjustments if the MA 
organization or PDP sponsor fails to provide the information described 
in Sec.  423.329(b)(3).
    (c) Reinsurance. CMS makes final payment for reinsurance after a 
coverage year after obtaining all of the information necessary to 
determine the amount of payment.
    (1) Submission of cost data. Within 6 months after the end of a 
coverage year, the PDP sponsor or MA organization offering a MA-PD plan 
must provide CMS the following information:
    (i) The gross covered prescription drug costs segregated by 
enrollee and date of service.
    (ii) The allowable reinsurance costs segregated by enrollee and 
date of service.
    (iii) The costs incurred by the plan delineated separately from 
those incurred by or on behalf of the enrollee for purposes of 
determining out-of-pocket expenditures.
    (iv) Costs incurred for supplemental benefits distinguished from 
those for basic coverage.
    (v) Other information stipulated by CMS.
    (2) Payments. CMS at its discretion either makes lump-sum payments 
or adjusts monthly payments throughout the remainder of the payment 
year following the coverage year based on the difference between 
monthly reinsurance payments made during the coverage year and the 
amount payable in Sec.  423.329(c) for the coverage year. CMS may 
recover payments made through a lump sum recovery or by adjusting 
monthly payments throughout the remainder of the coverage year if the 
monthly reinsurance payments made during the coverage year exceed the 
amount payable under Sec.  423.329(c) or if the PDP sponsor or MA 
organization does not provide the data in paragraph (c)(1) of this 
section.
    (d) Low-income cost-sharing subsidy. CMS makes final payment for 
low-income cost-sharing subsidies after a coverage year after obtaining 
all of the information necessary to determine the amount of payment.
    (1) Submission of cost data. Within 6 months after the end of a 
coverage year, the PDP sponsor or MA organization offering a MA-PD plan 
must provide CMS the following information:
    (i) The gross covered prescription drug costs segregated by 
enrollee and date of service.
    (ii) The costs incurred by the plan delineated separately than 
those incurred by or on behalf of the enrollee for purposes of 
determining out-of-pocket expenditures.
    (iii) Other information stipulated by CMS.
    (2) Payments. CMS at its discretion either makes lump-sum payments 
or adjusts monthly payments throughout the remainder of the payment 
year following the coverage year based on the difference between 
interim low-income cost-sharing subsidy payments and total low-income 
cost-sharing subsidy costs eligible for subsidy under Sec.  423.782 
submitted by the plan for the coverage year. CMS may recover payments 
made through a lump sum recovery or by adjusting monthly payments 
throughout the remainder of the coverage year if interim low-income 
cost-sharing subsidy payments exceed the amount payable under Sec.  
423.782 or if the PDP sponsor or MA organization does not provide the 
data in paragraph (d)(1) of this section.


Sec.  423.346  Reopening

    (a) CMS may reopen and revise a final payment determination 
(including a determination on the final amount of direct subsidy 
described in Sec.  423.329(a)(1), final reinsurance payments described 
in Sec.  423.329(c), the final amount of the low income subsidy 
described in Sec.  423.329(d), or final risk corridor payments as 
described in Sec.  423.336)--
    (1) For any reason, within 12 months from the date of the notice of 
the final determination to the PDP sponsor or MA organization;
    (2) After that 12-month period, but within 4 years after the date 
of the notice of the initial determination to the individual, upon 
establishment of good cause for reopening; or
    (3) At any time when the determination or decision was procured by 
fraud or similar fault of the PDP sponsor, MA organization, or any 
subcontractor of such sponsor or organization.
    (b) For purposes of this section, CMS will find good cause if--
    (1) New and material evidence that was not readily available at the 
time the final determination was made is furnished;
    (2) A clerical error in the computation of payments was made; or
    (3) The evidence that was considered in making the determination 
clearly shows on its face that an error was made.
    (c) For purposes of this section, CMS will not find good cause if 
the only reason for reopening is a change of legal interpretation or 
administrative ruling upon which the final determination was made.

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


Sec.  423.401  General requirements for PDP sponsors.

    (a) General requirements. Each PDP sponsor of a prescription drug 
plan must meet the following requirements:
    (1) Licensure. Except in cases where there is a waiver as specified 
at Sec.  423.410, the sponsor is organized and licensed under State law 
as a risk bearing entity eligible to offer health insurance or health 
benefits coverage in each State in which it offers a prescription drug 
plan. If not commercially licensed, the sponsor obtains certification 
from the State that the organization meets a level of financial 
solvency and other standards as the State may require for it to operate 
as a PDP sponsor.
    (2) Assumption of financial risk for unsubsidized coverage. The 
entity assumes financial risk on a prospective basis for benefits that 
it offers under a prescription drug plan and that is not covered under 
1860D-15(b) of the Act.
    (b) Reinsurance permitted. The plan sponsor may obtain insurance or 
make other arrangements for the cost of coverage provided to any 
enrollee to the extent that the sponsor is at risk for providing the 
coverage.
    (c) Solvency for unlicensed sponsors. In the case of a PDP sponsor 
that is not described in Sec.  423.401(a)(1) and for which a waiver is 
approved under Sec.  423.410, the sponsor must meet Sec.  423.420.


Sec.  423.410  Waiver of certain requirements to expand choice.

    (a) Authorizing waiver. In the case of an entity that seeks to 
offer a prescription drug plan in a State, CMS waives the licensure 
requirement at Sec.  423.401(a)(1), which requires that the entity be 
licensed in that State if CMS determines, based on the application and 
other evidence presented, that any of the grounds for approval of the 
application described in paragraphs (c), (d), or (e) of this section 
are met.
    (b) Application of regional plan waiver rule. In addition to the 
waiver available under paragraphs (c), (d) and (e) of this section, the 
following waiver may be requested--
    (1) In general. Subject to paragraphs (b)(2) and (b)(3) of this 
section, if an

[[Page 46831]]

applicant seeking to become a PDP sponsor operates in more than one 
State in a region, and is licensed as a risk bearing entity in at least 
one State in such region, then the applicant may receive a regional 
plan waiver for the States in which it is not licensed.
    (2) Filing of application. The applicant must demonstrate to the 
satisfaction of CMS that it filed the necessary licensure applications 
with each State in the region for which it does not already have State 
licensure, except that no such application is necessary if CMS 
determines that the State does not have a licensing process for 
potential PDP sponsors.
    (3) Time limit. The waiver will expire at the end of the time 
period that the Secretary determines is appropriate for timely 
processing of the application, but in no case will a waiver extend 
beyond the end of the calendar year.
    (c) Grounds for approval of waivers. Subject to the waiver 
requirements specified in Sec.  423.410(f), waivers may be granted 
under any of the following conditions:
    (1) Failure to act on licensure application on a timely basis. The 
State failed to complete action on the licensing application within 90 
days of the date that the State received a substantially complete 
application.
    (2) Denial of application based on discriminatory treatment. The 
State has--
    (i) Denied the license application on the basis of material 
requirements, procedures, or standards (other than solvency 
requirements) not generally applied by the State to other entities 
engaged in a substantially similar business; or
    (ii) Required, as a condition of licensure that the organization 
offer any product or plan other than a prescription drug plan.
    (3) Denial of application based on application of solvency 
requirements.
    (i) The State has denied the licensure application, in whole or in 
part, on the basis of the PDP sponsor's failure to meet solvency 
requirements that are different from the solvency standards CMS 
established under 423.420; or
    (ii) CMS determines that the State has imposed, as a condition of 
licensing, any documentation or information requirements relating to 
solvency that are different from the standards CMS establishes pursuant 
to Sec.  423.420.
    (4) Grounds other than those required by federal law. The 
application by a State of any grounds other than those required under 
Federal law.
    (d) Waiver when licensing process not in effect. The grounds for 
approval specified in paragraph(c)(1) of this section are deemed met if 
the State does not have a licensing process in effect with respect to 
PDP sponsors.
    (e) Special waiver for plan years beginning before January 1, 2008. 
For plan years beginning before January 1, 2008, if the State has a 
prescription drug plan or PDP sponsor licensing process in effect, CMS 
grants a waiver upon a demonstration that a PDP sponsor has submitted a 
substantially complete licensure application to the State.
    (f) Waiver requirements. Except for the waivers described in 
paragraph (b) of this section, the following rules apply to waiver 
applications or waivers granted under this section.
    (1) Treatment of waiver. The waiver applies only to that State, is 
effective only for 36 months and cannot be renewed.
    (2) Prompt action on application. CMS grants or denies a waiver 
application under this section within 60 days after CMS determines that 
a substantially complete waiver application is received by CMS.
    (3) In the case of a State that does not have a PDP sponsor 
licensing process, the 36 month deadline on the waiver discussed in 
paragraph (f)(1) of this section does not apply, and the waiver may 
continue in effect for a given State as long as the State does not have 
a PDP sponsor licensing process in effect.


Sec.  423.420  Solvency standards for non-licensed entities.

    (a) Establishment and publication. CMS establishes and publishes 
reasonable financial solvency and capital adequacy standards for 
entities specified in paragraph (b) of this section.
    (b) Compliance with standards. A PDP sponsor that is not licensed 
by a State and for which a waiver application is approved by CMS under 
Sec.  423.410 (b), (c), (d), or (e) must maintain reasonable financial 
solvency and capital adequacy in accordance with the standards 
established by CMS under paragraph(a) of this section.


Sec.  423.425  Licensure does not substitute for or constitute 
certification.

    The fact that a PDP sponsor is State licensed or has a waiver 
application approved under Sec.  423.410 does not deem the sponsor to 
meet other requirements imposed under this part for a PDP sponsor.


Sec.  423.440  Prohibition of State imposition of premium taxes; 
relation to State laws.

    (a) 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 
prescription drug plans offered by PDP sponsors and MA-PD plans offered 
by MA organizations.
    (b) State premium taxes prohibited.
    (1) 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, the 
Mariana Islands or any of their political subdivisions or other 
governmental authorities with respect to any payment CMS makes on 
behalf of MA-PD plan or prescription drug plan enrollees under subpart 
G of this part; or with respect to any payment made to prescription 
drug plans or MA-PD plans by a beneficiary or by a third party on 
behalf of a beneficiary.
    (2) Construction. Nothing in this section shall be construed to 
exempt any PDP sponsor from taxes, fees, or other monetary assessments 
related to the net income or profit that accrues to, or is realized by, 
the organization from business conducted under this part, if that tax, 
fee, or payment is applicable to a broad range of business activity.

Subpart J--Coordination Under Part D With Other Prescription Drug 
Coverage


Sec.  423.452  Scope.

    This section sets forth the application of Part D rules to Part C 
plans, establishes waivers for employer-sponsored group prescription 
drug plans, and establishes requirements for coordination of benefits 
with State Pharmaceutical Assistance Programs and other providers of 
prescription drug coverage.


Sec.  423.454  Definitions and Terminology.

    For purposes of this subpart, the following definitions apply--
    Part D plan or Medicare Part D plan is a prescription drug plan or 
an MA-PD plan.
    Employer-sponsored group prescription drug plan means a 
prescription drug plan under a contract between a PDP sponsor or an MA 
organization offering an MA-PD plan and employers, labor organizations, 
or the trustees of funds established by one or more employers or labor 
organizations to furnish prescription drug benefits under employment-
based retiree health coverage (as defined in Sec.  423.822). (Published 
elsewhere in this Federal Register.)
    State Pharmaceutical Assistance Program (SPAP) means a State 
program (operated by or under contract with a State) that meets the 
requirements described under Sec.  423.464(c).

[[Page 46832]]

Sec.  423.458  Application of Part D rules to MA-PD plans on and after 
January 1, 2006.

    (a) Relationship to Part C. Except as otherwise provided in this 
Part, the requirements of this Part apply to prescription drug coverage 
provided by Medicare Advantage prescription drug plans offered by 
Medicare Advantage organizations.
    (b) MA Waiver. CMS waives any provision of this Part as applied to 
MA-PD plans to the extent CMS determines that the provision duplicates, 
or is in conflict with, provisions otherwise applicable to the MA 
organization or MA-PD plan under Part C of Medicare or as may be 
necessary in order to improve coordination of this part with the 
benefits under Part C.
    (1) Application of Waiver. Any waiver or modification granted by 
CMS under this section will apply to any other similarly situated 
organization offering or seeking to offer a MA-PD plan that meets the 
conditions of the waiver.
    (2) Request for waivers. Organizations offering or seeking to offer 
a Medicare Advantage-Prescription Drug plan may request from CMS in 
writing--
    (i) A waiver of those requirements under Part D of Medicare that 
are duplicative of, or that are in conflict with provisions otherwise 
applicable to the MA-PD plan, or proposed MA-PD plan, under Part C of 
Medicare.
    (ii) A waiver of a requirement under Medicare Part D, if such 
waiver would improve coordination of benefits provided under Part C of 
Medicare with the benefits under Part D.
    (c) Employer Group Waiver. (1) General rule. Prescription drug 
plans may request, in writing, a waiver or modification of those 
requirements under Part D of Medicare that hinder the design of, the 
offering of, or the enrollment in, an employer-sponsored group 
prescription drug plan. This provision applies to prescription drug 
plans in the same manner that the provisions of section 1857(i) of the 
Act apply to an MA plan or MA-PD plan in relation to employer-sponsored 
group MA plans or MA-PD plans, including authorizing the establishment 
of separate premium amounts for enrollees of the employer-sponsored 
group prescription drug plan and limitations on enrollment in such plan 
to Part D eligible individuals participating in the employment-based 
retiree health coverage sponsored by the employer, labor organization, 
or the trustees of a fund established by one or more employers or labor 
organizations.
    (2) Use of waiver. Waivers or modifications approved by CMS under 
this section apply to any similarly situated prescription drug plan 
meeting the conditions of the waiver or modification.
    (d) Other Waivers. CMS waives any provision of this Part as applied 
to a section 1876 cost HMO/CMP (as defined in Sec.  417.401) or PACE 
organization (as defined in Sec.  460.6) that offers qualified 
prescription drug coverage under Part D to the extent CMS determines 
that the provision duplicates, or is in conflict with, provisions 
otherwise applicable to the 1876 cost HMO/CMP under section 1876 of the 
Act or provisions applicable to PACE organizations under sections 1894 
and 1934 of the Act or as may be necessary in order to improve 
coordination of this Part with the benefits offered by 1876 cost HMOs/
CMPs or PACE organizations.
    (1) Application of Waiver. Any waiver or modification granted by 
CMS under this section will apply to any other similarly situated 
organization offering or seeking to offer qualified prescription drug 
coverage as an 1876 cost HMO/CMP or as a PACE organization that meets 
the conditions of the waiver.
    (2) Request for waivers. Section 1876 cost HMOs/CMPs or PACE 
organizations seeking to offer qualified prescription drug coverage may 
request from CMS in writing--
    (i) A waiver of those requirements under Part D of Medicare that 
are duplicative of, or that are in conflict with provisions otherwise 
applicable to 1876 cost HMOs/CMPs or PACE organizations.
    (ii) A waiver of a requirement under Medicare Part D, if such 
waiver would improve coordination of benefits provided by the section 
1876 cost HMO/CMP or PACE organization with the benefits under Part D.


Sec.  423.462  Medicare secondary payer procedures.

    The provisions of Sec.  422.108 of this chapter regarding Medicare 
secondary payer procedures apply to PDP sponsors in the same way as 
they apply to MA organizations under Part C of Title XVIII of the Act, 
except all references to MA organizations are considered references to 
PDP sponsors.


Sec.  423.464  Coordination of Benefits With Other Providers of 
Prescription Drug Coverage.

    (a) General rule. A PDP sponsor and Medicare Advantage organization 
offering a MA-PD plan must permit State Pharmaceutical Assistance 
Programs described in paragraph (e) of this section and the plans 
described in paragraph (f) of this section to coordinate benefits with 
the prescription drug plan or MA-PD plan and must comply with all 
administrative processes and requirements established by CMS to ensure 
effective exchange of information and coordination between a Part D 
plan and a State pharmaceutical assistance program and other plans 
providing prescription drug coverage for--
    (1) Payment of premiums and coverage; and
    (2) Payment for supplemental prescription drug benefits as 
described in Sec.  423.104(g)(1)(ii) (including payment to a Medicare 
Part D plan on a lump sum per capita basis) for Part D eligible 
individuals enrolled in the Part D plan and the SPAP or other plan.
    (b) Medicare as primary payer. The requirements of this subpart do 
not change or affect the primary or secondary payor status of a 
Medicare Part D plan and a SPAP or other plan. A Medicare Part D plan 
is always the primary payor relative to a State Pharmaceutical 
Assistance Program.
    (c) User fees. CMS may impose user fees for the transmittal of 
information necessary for benefit coordination in accordance with 
administrative processes and requirements established by CMS to ensure 
effective exchange of information and coordination between a Part D 
plan and a State Pharmaceutical Assistance Program and other plans 
providing prescription drug coverage in a manner similar to the manner 
in which user fees are imposed under section 1842(h)(3)(B), except that 
CMS may retain a portion of user fees to defray costs in carrying out 
such procedures. CMS will not impose user fees under this subpart for a 
State pharmaceutical assistance program.
    (d) Cost management tools. The requirements of this subpart do not 
prevent an organization sponsoring a Medicare Part D plan from using 
cost management tools (including differential payments) under all 
methods of operation.
    (e) Coordination with State Pharmaceutical Assistance Programs.
    (1) Requirements to be a State Pharmaceutical Assistance Program 
(SPAP). A program operated by or under contract with a State will be 
considered to be a State Pharmaceutical Assistance Program for purposes 
of this part if it--
    (i) Provides financial assistance for the purchase or provision of 
supplemental prescription drug coverage or benefits on behalf of Part D 
eligible individuals;
    (ii) Provides assistance to Part D eligible individuals in all Part 
D plans without discriminating based upon the Part D plan in which an 
individual enrolls;
    (iii) Meets the benefit coordination requirements specified in this 
part; and

[[Page 46833]]

    (iv) Does not follow or adopt rules that change or affect the 
primary payor status of a Part D plan. The definition of SPAP excludes 
State Medicaid programs, section 1115 demonstration programs, and any 
other program where the majority of the funding is from Federal grants, 
awards, contracts, entitlement programs, or other Federal sources of 
funding.
    (2) Special treatment under out-of-pocket rule. A PDP sponsor and 
Medicare Advantage organization offering a MA-PD plan shall collect 
information on and apply expenditures made by SPAPs for costs of 
covered Part D drugs meeting the definition of incurred costs (as 
described in Sec.  423.100) for purposes of reaching the out-of-pocket 
threshold provided under Sec.  423.104(e)(5)(iii).
    (3) Use of a single card. A card that is issued under Sec.  
423.120(c) for use under a Medicare Part D plan may also be used in 
connection with coverage of benefits provided under a State 
pharmaceutical assistance program and, in such a case, may contain an 
emblem or symbol indicating such connection.
    (4) Construction. Nothing in this subpart requires a State 
Pharmaceutical Assistance Program to coordinate with, or provide 
financial assistance to enrollees in, any Medicare Part D plan.
    (f) Coordination with other plans. (1) Definition of other plans. 
Other plans that provide prescription drug coverage include any of the 
following:
    (i) Medicaid programs. A State plan under title XIX of the Act, 
including such a plan operating under a waiver under section 1115 of 
the Act, if it meets the requirements of paragraph (e)(1)(ii) of this 
section.
    (ii) Group health plans. An employer group health plan as defined 
in Sec.  411.101.
    (iii) FEHBP. The Federal employees' health benefits plan under 
chapter 89 of title 5, United States Code.
    (iv) Military coverage (including TRICARE). Coverage under chapter 
55 of title 10, United States Code.
    (v) Other health benefit plans or programs. Other health benefit 
plans or programs that provide coverage or financial assistance for the 
purchase or provision of prescription drug coverage on behalf of 
Medicare Part D eligible individuals as CMS may specify.
    (2) Treatment under out-of-pocket rule. A PDP sponsor and Medicare 
Advantage organization offering a MA-PD plan shall exclude expenditures 
made by other plans for costs of covered Part D drugs for purposes of 
reaching the out-of-pocket threshold provided under Sec.  
423.104(e)(5)(iii).
    (3) Imposition of fees. A prescription drug plan sponsor or an 
organization offering an MA-PD plan may not impose fees on other plans 
that are unrelated to the cost of the coordination of benefits.

Subpart K--Application Procedures and Contracts With PDP Sponsors


Sec.  423.501  Definitions.

    For purposes of this subpart, the following definitions apply:
    Business transaction means any of the following kinds of 
transactions:
    (1) Sale, exchange, or lease of property.
    (2) Loan of money or extension of credit.
    (3) Goods, services, or facilities furnished for a monetary 
consideration, including management services, but not including--
    (i) Salaries paid to employees for services performed in the normal 
course of their employment; or
    (ii) Health services furnished to the PDP sponsor's enrollees by 
pharmacies and other providers, by PDP sponsor staff, medical groups, 
or independent practice associations, or by any combination of those 
entities.
    Significant business transaction means any business transaction or 
series of transactions of the kind specified in the above definition of 
business transaction that, during any fiscal year of the PDP sponsor, 
have a total value that exceeds $25,000 or 5 percent of the PDP 
sponsor's total operating expenses, whichever is less.
    Downstream entity means any party that enters into an acceptable 
written arrangement below the level of the arrangement between a PDP 
sponsor (or contract applicant) and a first tier entity. These written 
arrangements continue down to the level of the ultimate provider of 
both health and administrative services.
    First tier entity means any party that enters into an acceptable 
written arrangement with a PDP sponsor or contract applicant to provide 
administrative services or health care services for a Medicare eligible 
individual under Part D.
    Party in interest means the following:
    (1) Any director, officer, partner, or employee responsible for 
management or administration of a PDP sponsor.
    (2) Any person who is directly or indirectly the beneficial owner 
of more than 5 percent of the organization's equity; or the beneficial 
owner of a mortgage, deed of trust, note, or other interest secured by 
and valuing more than 5 percent of the organization.
    (3) In the case of a PDP sponsor organized as a nonprofit 
corporation, an incorporator or member of the corporation under 
applicable State corporation law.
    (4) Any entity in which a person specified in paragraphs (1), (2), 
or (3) of this definition--
    (i) Is an officer, director, or partner; or
    (ii) Has the kind of interest described in paragraphs (1), (2), or 
(3) of this definition.
    (5) Any person that directly or indirectly controls, is controlled 
by, or is under common control with the PDP sponsor.
    (6) Any spouse, child, or parent of an individual specified in 
paragraphs (1), (2), or (3) of this definition.
    Related entity means any entity that is related to the PDP sponsor 
by common ownership or control and--
    (1) Performs some of the PDP sponsor's management functions under 
contract or delegation;
    (2) Furnishes services to Medicare enrollees under an oral or 
written agreement; or
    (3) Leases real property or sells materials to the PDP sponsor at a 
cost of more than $2,500 during a contract period.


Sec.  423.502  Application requirements.

    (a) Scope. This section sets forth application requirements for an 
entity that seeks a contract with CMS as a PDP sponsor.
    (b) Completion of an application. (1) In order to obtain a 
determination on whether it meets the requirements to become a PDP 
sponsor, 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 as 
specified in subpart I of this part; or
    (ii) A Federal waiver as specified in subpart I of this part.
    (2) The authorized individual must describe thoroughly how the 
entity meets, or plans to meet, the requirements described in this 
part.
    (c) Responsibility for making determinations. CMS is responsible 
for determining whether an entity qualifies as a PDP sponsor and meets 
the requirements of this part.
    (d) 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

[[Page 46834]]

exceptions provided in 45 CFR part 5 (the Department's regulations 
providing exceptions to disclosure), must label the material 
``privileged'' and include an explanation of the applicability of an 
exception specified in 45 CFR part 5.


Sec.  423.503  Evaluation and determination procedures for applications 
to be a sponsor.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
entity's application for a contract as a PDP sponsor on the basis of 
information contained in the application itself and any additional 
information that CMS obtains through on-site visits, publicly available 
information, and any other appropriate procedures.
    (2) If the application is incomplete, CMS notifies the contract 
applicant and allows 10 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 specified in Sec.  423.504.
    (b) Use of information from a prior contracting period. If a PDP 
sponsor, Medicare Advantage Organization, or Medicare cost plan fails 
to comply with the terms of a previous year's contract with CMS under 
title XVIII of the Act, or fails 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. CMS notifies each applicant that 
applies for a contract as a PDP sponsor, under this part, of its 
determination on the application and the basis for the determination. 
The determination may be one of the following:
    (1) Approval of application. If CMS approves the application, it 
gives written notice to the contract applicant, indicating that it 
meets the requirements for a contract as a PDP sponsor.
    (2) Intent to deny. (i) If CMS finds that the contract applicant 
does not appear to meet the requirements for a PDP sponsor contract, it 
gives the contract applicant notice of intent to deny the application 
for a PDP contract and a summary of the basis for this preliminary 
finding.
    (ii) Within 10 days from the date of the notice, the contract 
applicant may respond in writing to the issues or other matters that 
were the basis for CMS's preliminary finding and may revise its 
application to remedy any defects CMS identified.
    (d) 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 D 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 Sec.  423.644.
    (e) Oversight of continuing compliance. (1) CMS oversees a PDP 
sponsor's continued compliance with the requirements for a PDP sponsor.
    (2) If a PDP sponsor no longer meets those requirements, CMS 
terminates the contract in accordance with Sec.  423.509.


Sec.  423.504  General provisions.

    (a) General rule. Subject to the provisions at Sec.  423.265(a)(1) 
concerning submission of bids, to enroll beneficiaries in any 
prescription drug plan it offers and be paid on behalf of Medicare 
beneficiaries enrolled in those plans, a PDP sponsor must enter into a 
contract with CMS. The contract may cover more than one prescription 
drug plan.
    (b) Conditions necessary to contract as a PDP sponsor. Any entity 
seeking to contract as a PDP sponsor must--
    (1) Complete an application as described in Sec.  423.502.
    (2) Be organized and licensed under State law as a risk bearing 
entity eligible to offer health insurance or health benefits coverage 
in each State in which it offers a prescription drug plan, or have 
secured a Federal waiver, as described in subpart I of this part.
    (3) Meet the minimum enrollment requirements of Sec.  423.512(a) 
unless waived under Sec.  423.512(b) or (c).
    (4) Have administrative and management arrangements satisfactory to 
CMS, as demonstrated by at least the following:
    (i) A policy making body that exercises oversight and control over 
the PDP sponsor's policies and personnel to ensure that management 
actions are in the best interest of the organization and its enrollees.
    (ii) Personnel and systems sufficient for the PDP sponsor to 
organize, implement, control, and evaluate financial and marketing 
activities, the furnishing of prescription drug services, the quality 
assurance, medical therapy management, and drug and or utilization 
management programs, and the administrative and management aspects of 
the organization.
    (iii) At a minimum, an executive manager whose appointment and 
removal are under the control of the policy making body.
    (iv) A fidelity bond or bonds, procured and maintained by the PDP 
sponsor, in an amount fixed by its policymaking body but not less than 
$100,000 per individual, covering each officer and employee entrusted 
with the handling of its funds. The bond may have reasonable 
deductibles, based upon the financial strength of the PDP sponsor.
    (v) Insurance policies or other arrangements, secured and 
maintained by the PDP sponsor and approved by CMS to insure the PDP 
sponsor against losses arising from professional liability claims, 
fire, theft, fraud, embezzlement, and other casualty risks.
    (vi) A compliance plan that consists of the following--
    (A) Written policies, procedures, and standards of conduct 
articulating the organization's commitment to comply with all 
applicable Federal and State standards.
    (B) The designation of a compliance officer and compliance 
committee accountable to senior management.
    (C) Effective training and education between the compliance officer 
and organization employees.
    (D) Effective lines of communication between the compliance officer 
and the organization's employees.
    (E) Enforcement of standards through well-publicized disciplinary 
guidelines.
    (F) Procedures for internal monitoring and auditing.
    (G) Procedures for ensuring prompt responses to detected offenses 
and development of corrective action initiatives relating to the 
organization's contract as a PDP sponsor.
    (1) If the PDP sponsor discovers from any source evidence of 
misconduct related to payment or delivery of prescription drug items or 
services under the contract, it must conduct a timely, reasonable 
inquiry into that misconduct;
    (2) If, after reasonable inquiry, the PDP sponsor 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 Act), or related statutes enforced by the HHS Office of

[[Page 46835]]

Inspector General, the report must be made to that Office.
    (3) The PDP sponsor must conduct appropriate corrective actions 
(for example, repayment of overpayments and disciplinary actions 
against responsible employees) in response to the potential violation 
referenced above.
    (4) The PDP sponsor's contract must not have been non-renewed under 
Sec.  422.507 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 PDP sponsor payments in the payment 
area or areas at issue; or
    (ii) CMS has otherwise determined that circumstances warrant 
special consideration.
    (c) Contracting authority. Under section 1860D-12 (b)(3)(B) of the 
Act, CMS may enter into contracts under this part, or in order to carry 
out this part, without regard to Federal and Departmental acquisition 
regulations set forth in Title 48 of the CFR and provisions of law or 
other regulations relating to the making, performance, amendment, or 
modification of contracts of the United States if CMS determines that 
those provisions are inconsistent with the efficient and effective 
administration of the Medicare program. Some of the FAR provisions may 
apply to fallback plans. See subparts F and Q of this part for any 
contracting provisions unique to fallback plans.
    (d) Protection against fraud and beneficiary protections. (1) CMS 
annually audits the financial records (including, but not limited to, 
data relating to Medicare utilization and costs, including allowable 
reinsurance and risk corridor costs as well as low income subsidies and 
other costs) under this part of at least one-third of the PDP sponsors 
(including fallback plans) offering prescription drug plans.
    (2) Each contract under this section must provide that CMS, or any 
person or organization designated by CMS, has the right to--
    (i) Inspect or otherwise evaluate the quality, appropriateness, and 
timeliness of services performed under the PDP sponsor's contract;
    (ii) Inspect or otherwise evaluate the facilities of the 
organization when there is reasonable evidence of some need for the 
inspection; and
    (iii) Audit and inspect any books, contracts, and records of the 
PDP sponsor that pertain to--
    (A) The ability of the organization or its first tier or downstream 
providers to bear the risk of potential financial losses; or
    (B) Services performed or determinations of amounts payable under 
the contract.
    (e) Severability of contracts. The contract must provide that, upon 
CMS' request--
    (1) The contract could be amended to exclude any State-licensed 
entity, or a PDP plan specified by CMS; and
    (2) A separate contract for any excluded plan or entity must be 
deemed to be in place when a request is made.


Sec.  423.505  Contract provisions.

    (a) General rule. The contract between the PDP sponsor and CMS must 
contain the provisions specified in paragraph (b) of this section.
    (b) Specific provisions. The PDP sponsor agrees to comply with the 
following:
    (1) All the applicable requirements and conditions set forth in 
this part and in general instructions.
    (2) To accept new enrollments, make enrollments effective, process 
voluntary disenrollments, and limit involuntary disenrollments, as 
provided in subpart B of this part.
    (3) To comply with the prohibition in Sec.  423.34(a) on 
discrimination in beneficiary enrollment.
    (4) To provide the basic benefits as required under Sec.  423.108 
and, to the extent applicable, supplemental benefits under Sec.  
423.112.
    (5) To disclose information to beneficiaries in the manner and the 
form specified by CMS under Sec.  423.128.
    (6) To operate quality assurance, cost and utilization management, 
medication therapy management, and fraud, abuse and waste programs as 
required under subpart D of this part.
    (7) To comply with all requirements in subpart M of this part 
governing coverage determinations, grievances, and appeals.
    (8) To comply with the reporting requirements in Sec.  423.514 and 
the requirements in Sec.  423.329(b)(3) for submitting drug claims and 
related information to CMS for its use in risk adjustment calculations.
    (9) Each contract under this part provides that--(i) The PDP 
sponsor offering a prescription drug plan must provide CMS with the 
information CMS determines is necessary to carry out payment provisions 
in subpart G of this part.
    (ii) CMS has the right, as applied under section 1860D-12(b)(3)(C) 
of the Act and in accordance with section 1857(d)(2)(B) of the Act, to 
inspect and audit any books and records of a PDP sponsor that pertain 
to the information regarding costs provided to CMS under 
paragraph(9)(i) of this section.
    (10) To be paid under the contract in accordance with the payment 
rules in subpart G of this part.
    (11) To submit its bid, including all required information on 
premiums, benefits, and cost-sharing, by the due date, as provided in 
subpart F of this part.
    (12) That its contract may not be renewed or may be terminated in 
accordance with this subpart and subpart N of this part.
    (13) To comply with the confidentiality and enrollee record 
accuracy specified in Sec.  423.136.
    (14) To comply with State law and preemption by Federal law 
requirements described in subpart I of this part.
    (15) To comply with the coordination requirements with plans and 
programs that provide prescription drug coverage as described in 
subpart J of this part.
    (16) To provide benefits by means of point of service systems to 
adjudicate drug claims, except when necessary to provide access in 
underserved areas, I/T/U pharmacies (as defined in Sec.  423.100), and 
long-term care pharmacies.
    (c) Communication with CMS. The PDP sponsor must have the capacity 
to communicate with CMS electronically in accordance with CMS 
requirements.
    (d) Maintenance of records. The PDP sponsor agrees to maintain, for 
6 years, books, records, documents, and other evidence of accounting 
procedures and practices that--
    (1) Are sufficient to do the following:
    (i) Accommodate periodic auditing of the financial records 
(including data related to Medicare utilization, costs, and computation 
of the bid of PDP sponsors).
    (ii) Enable CMS to inspect or otherwise evaluate the quality, 
appropriateness, and timeliness of services performed under the 
contract and the facilities of the organization.
    (iii) Enable CMS to audit and inspect any books and records of the 
PDP sponsor that pertain to the ability of the organization to bear the 
risk of potential financial losses, or to services performed or 
determinations of amounts payable under the contract.
    (iv) Properly reflect all direct and indirect costs claimed to have 
been incurred and used in the preparation of the PDP sponsor's bid and 
necessary for the calculation of gross covered prescription drug costs, 
allowable reinsurance costs, and allowable risk corridor costs (as 
defined in Sec.  423.308).

[[Page 46836]]

    (v) Establish the basis for the components, assumptions, and 
analysis used by the PDP in determining the actuarial valuation of 
standard, basic alternative, or enhanced alternative coverage offered 
in accordance with the CMS guidelines specified in Sec.  423.265(b)(3).
    (2) Include records of the following:
    (i) Ownership and operation of the PDP sponsor's financial, 
medical, and other record keeping systems.
    (ii) Financial statements for the current contract period and 6 
prior periods.
    (iii) Federal income tax or informational returns for the current 
contract period and 6 prior periods.
    (iv) Asset acquisition, lease, sale, or other action.
    (v) Agreements, contracts, and subcontracts.
    (vi) Franchise, marketing, and management agreements.
    (vii) Matters pertaining to costs of operations.
    (viii) Amounts of income received by source and payment.
    (ix) Cash flow statements.
    (x) Any financial reports filed with other Federal programs or 
State authorities.
    (xi) All prescription drug claims for the current contract period 
and 6 prior periods.
    (xii) All price concessions (including concessions offered by 
manufacturers) for the current contract period and 6 prior periods 
accounted for separately from other administrative fees.
    (e) Access to facilities and records. The PDP sponsor agrees to the 
following:
    (1) HHS, the Comptroller General, or their designee may evaluate, 
through inspection or other means--
    (i) The quality, appropriateness, and timeliness of services 
furnished to Medicare enrollees under the contract;
    (ii) The facilities of the PDP sponsor; and
    (iii) The enrollment and disenrollment records for the current 
contract period and 6 prior periods.
    (2) HHS, the Comptroller General, or their designees may audit, 
evaluate, or inspect any books, contracts, medical records, patient 
care documentation, and other records of the PDP sponsor, related 
entity(s), contractor(s), subcontractor(s), or its transferee that 
pertain to any aspect of services performed, reconciliation of benefit 
liabilities, and determination of amounts payable under the contract, 
or as the Secretary may deem necessary to enforce the contract.
    (3) The PDP sponsor agrees to make available, for the purposes 
specified in paragraph (d) of this section, its premises, physical 
facilities and equipment, records relating to its Medicare enrollees, 
and any additional relevant information that CMS may require.
    (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--
    (i) CMS determines there is a special need to retain a particular 
record or group of records for a longer period and notifies the PDP 
sponsor at least 30 days before the normal disposition date;
    (ii) There is a termination, dispute, or allegation of fraud or 
similar fault by the PDP sponsor, in which case the retention may be 
extended to 6 years from the date of any resulting final resolution of 
the termination, dispute, or fraud or similar fault; or
    (iii) CMS determines that there is a reasonable possibility of 
fraud or similar fault, in which case CMS may inspect, evaluate, and 
audit the PDP sponsor at any time.
    (f) Disclosure of information. The PDP sponsor agrees to submit to 
CMS--
    (1) Certified financial information that must include the 
following:
    (i) Information as CMS may require demonstrating that the 
organization has a fiscally sound operation.
    (ii) Information as CMS may require pertaining to the disclosure of 
ownership and control of the PDP sponsor.
    (2) All information to CMS that is necessary for CMS to administer 
and evaluate the program and to simultaneously establish and facilitate 
a process for current and prospective beneficiaries to exercise choice 
in obtaining prescription drug coverage. This information includes, but 
is not limited to:
    (i) The benefits covered under a prescription drug plan.
    (ii) The PDP monthly basic beneficiary premium and PDP monthly 
supplemental beneficiary premium, if any, for the plan.
    (iii) The service area of each plan.
    (iv) Plan quality and performance indicators for the benefits under 
the plan including--
    (A) Disenrollment rates for Medicare enrollees electing to receive 
benefits through the plan for the previous 2 years;
    (B) Information on Medicare enrollee satisfaction;
    (C) The recent records regarding compliance of the plan with 
requirements of this part, as determined by CMS; and
    (D) Other information determined by CMS to be necessary to assist 
beneficiaries in making an informed choice regarding PDP plans.
    (v) Information about beneficiary appeals and their disposition.
    (vi) Information regarding all formal actions, reviews, findings, 
or other similar actions by States, other regulatory bodies, or any 
other certifying or accrediting organization.
    (vii) Any other information deemed necessary to CMS for the 
administration or evaluation of the Medicare program.
    (3) To its enrollees, all informational requirements under Sec.  
423.128(b) and, upon an enrollee's request, the financial disclosure 
information required under Sec.  423.128(c)(4).
    (g) Beneficiary financial protections. The PDP sponsor agrees to 
comply with the following requirements:
    (1) Each PDP sponsor must adopt and maintain arrangements 
satisfactory to CMS to protect its enrollees from incurring liability 
for payment of any fees that are the legal obligation of the PDP 
sponsor. To meet this requirement, the PDP sponsor must--
    (i) Ensure that all contractual or other written arrangements 
prohibit the organization's contracting agents from holding any 
beneficiary enrollee liable for payment of any such fees; and
    (ii) Indemnify the beneficiary enrollee for payment of any fees 
that are the legal obligation of the PDP sponsor for covered 
prescription drugs furnished by non-contracting pharmacists, or that 
have not otherwise entered into an agreement with the PDP sponsor, to 
provide services to the organization's beneficiary enrollees.
    (2) In meeting the requirements of this paragraph, other than the 
provider contract requirements specified in paragraph (g)(1)(i) of this 
section, the PDP sponsor may use--
    (i) Contractual arrangements;
    (ii) Insurance acceptable to CMS;
    (iii) Financial reserves acceptable to CMS; or
    (iv) Any other arrangement acceptable to CMS.
    (h) Requirements of other laws and regulations. The PDP sponsor 
agrees to comply with--
    (1) Title VI of the Civil Rights Act of 1964 as implemented by 
regulations at 45 CFR part 84.
    (2) The Age Discrimination Act of 1975 as implemented by 
regulations at 45 CFR part 91.
    (3) The Rehabilitation Act of 1973.
    (4) The Americans with Disabilities Act.
    (5) HIPAA Administrative Simplification rules at 45 CFR Parts 160, 
162, and 164.

[[Page 46837]]

    (6) Other laws applicable to recipients of Federal funds.
    (7) All other applicable laws and rules.
    (8) PDP sponsors receiving Federal payments under PDP sponsor 
contracts, and related entities, contractors, and subcontractors paid 
by a PDP sponsor to fulfill its obligations under its contract with 
CMS, are subject to certain laws that are applicable to individuals and 
entities receiving Federal funds. PDP sponsors must inform all related 
entities, contractors and subcontractors that payments they receive 
are, in whole or in part, from Federal funds.
    (i) PDP sponsor relationship with related entities, contractors, 
and subcontractors. (1) Notwithstanding any relationship(s) that the 
PDP sponsor may have with related entities, contractors, or 
subcontractors, the PDP sponsor maintains ultimate responsibility for 
adhering to and otherwise fully complying with all terms and conditions 
of its contract with CMS.
    (2) The PDP sponsor agrees to require all related entities, 
contractors, or subcontractors to agree that--
    (i) HHS, the Comptroller General, or their designees have the right 
to inspect, evaluate, and audit any pertinent contracts, books, 
documents, papers, and records of the related entity(s), contractor(s), 
or subcontractor(s) involving transactions related to CMS' contract 
with the PDP sponsor; and
    (ii) HHS', the Comptroller General's, or their designee's right to 
inspect, evaluate, and audit any pertinent information for any 
particular contract period exists through 6 years from the final date 
of the contract period or from the date of completion of any audit, 
whichever is later.
    (3) All contracts or written arrangements between PDP sponsors and 
providers, related entities, contractors, subcontractors, first tier 
and downstream entities must contain the following:
    (i) Enrollee protection provisions that provide, consistent with 
paragraph (g)(1) of this section, arrangements that prohibit pharmacies 
from holding an enrollee liable for payment of any fees that are the 
obligation of the PDP sponsor.
    (ii) Accountability provisions that indicate that the PDP sponsor 
may only delegate activities or functions to a pharmacy, related 
entity, contractor, or subcontractor in a manner consistent with 
requirements set forth at paragraph (i)(4) of this section.
    (iii) A provision requiring that any services or other activity 
performed by a related entity, contractor, subcontractor, or first-tier 
or downstream entity in accordance with a contract or written agreement 
are consistent and comply with the PDP sponsor's contractual 
obligations.
    (4) If any of the PDP sponsors' activities or responsibilities 
under its contract with CMS is delegated to other parties, the 
following requirements apply to any related entity, contractor, 
subcontractor, or pharmacy:
    (i) Written arrangements must specify delegated activities and 
reporting responsibilities.
    (ii) Written arrangements must either provide for revocation of the 
delegation activities and reporting requirements or specify other 
remedies in instances when CMS or the PDP sponsor determine that the 
parties have not performed satisfactorily.
    (iii) Written arrangements must specify that the PDP sponsor on an 
ongoing basis monitors the performance of the parties.
    (iv) All contracts or written arrangements must specify that the 
related entity, contractor, or subcontractor must comply with all 
applicable Federal laws, regulations, and CMS instructions.
    (5) If the PDP sponsor delegates selection of its prescription drug 
providers to another organization, the PDP sponsor's written 
arrangements with that organization must state that the CMS-contracting 
PDP sponsor retains the right to approve, suspend, or terminate any 
such arrangement.
    (j) Additional contract terms. The PDP sponsor agrees to include in 
the contract other terms and conditions as CMS may find necessary and 
appropriate in order to implement requirements in this part.
    (k) Severability of contracts. The contract must provide that, upon 
CMS's request--
    (1) The contract is amended to exclude any State-licensed entity, 
or PDP sponsor specified by CMS; and
    (2) A separate contract for any excluded plan or entity is deemed 
to be in place when the request is made.
    (l) Certification of data that determine payment. (1) General rule. 
As a condition for receiving a monthly payment under subpart G of this 
part, the PDP sponsor agrees that its chief executive officer (CEO), 
chief financial officer (CFO), or an individual delegated the authority 
to sign on behalf of one of these officers, and who reports directly to 
the officer, must request payment under the contract on a document that 
certifies (based on best knowledge, information, and belief) the 
accuracy, completeness, and truthfulness of all data related to 
payment. The data may include specified enrollment information, claims 
data, bid submission data, and other data that CMS specifies.
    (2) Certification of enrollment and payment information. The CEO, 
CFO, or an individual delegated the authority to sign on behalf of one 
of these officers, and who reports directly to the officer, must 
certify (based on best knowledge, information, and belief) that each 
enrollee for whom the organization is requesting payment is validly 
enrolled in a program offered by the organization and the information 
CMS relies on in determining payment is accurate, complete, and 
truthful and acknowledge that this information will be used for the 
purposes of obtaining Federal reimbursement.
    (3) Certification of claims data. The CEO, CFO, or an individual 
delegated with the authority to sign on behalf of one of these 
officers, and who reports directly to the officer, must certify (based 
on best knowledge, information, and belief) that the claims data it 
submits under Sec.  423.329(b)(3) are accurate, complete, and truthful 
and acknowledge that the claims data will be used for the purpose of 
obtaining Federal reimbursement. If the claims data are generated by a 
related entity, contractor, or subcontractor of a PDP sponsor, the 
entity, contractor, or subcontractor must similarly certify (based on 
best knowledge, information, and belief) the accuracy, completeness, 
and truthfulness of the data and acknowledge that the claims data will 
be used for the purposes of obtaining Federal reimbursement.
    (4) Certification of bid submission information. The CEO, CFO, or 
an individual delegated the authority to sign on behalf of one of these 
officers, and who reports directly to the officer, must certify (based 
on best knowledge, information, and belief) that the information in its 
bid submission and assumptions related to projected reinsurance and low 
income cost sharing subsidies is accurate, complete, and truthful and 
fully conforms to the requirements in Sec.  423.265.
    (5) Certification of allowable costs for risk corridor and 
reinsurance information. The CEO, CFO, or an individual delegated the 
authority to sign on behalf of one of these officers, and who reports 
directly to the officer, must certify (based on best knowledge, 
information, and belief) that the information provided for purposes of 
supporting allowable costs, as defined in Sec.  423.308, is accurate, 
complete, and truthful and fully conforms to the requirements in Sec.  
423.336(c) and Sec.  423.343(c) and acknowledge that this information 
will be used for the

[[Page 46838]]

purposes of obtaining Federal reimbursement.
    (6) Certification of Accuracy of Data for Price Comparison. The 
CEO, CFO, or an individual delegated the authority to sign on behalf of 
one of these officers, and who reports directly to the officer, must 
certify (based on best knowledge, information, and belief) that the 
information provided for purposes of price comparison is accurate, 
complete, and truthful.


Sec.  423.506  Effective date and term of contract.

    (a) Effective date. The contract is effective on the date specified 
in the contract between the PDP sponsor and CMS.
    (b) Term of contract. Each contract is for a period of 12 months. 
The contract period for a fallback plan is specified in Sec.  
423.871(b).
    (c) Renewal of contract. In accordance with Sec.  423.507 of this 
subpart, contracts are renewed annually only if--
    (1) CMS informs the PDP sponsor that it authorizes a renewal; and
    (2) The PDP sponsor has not provided CMS with a notice of intention 
not to renew.


Sec.  423.507  Nonrenewal of Contract.

    (a) Nonrenewal by a PDP sponsor. (1) A PDP sponsor may elect not to 
renew its contract with CMS as of the end of the term of the contract 
for any reason provided it meets the timeframes for doing so set forth 
in paragraphs (a)(2) and (a)(3) of this section.
    (2) If a PDP sponsor does not intend to renew its contract, it must 
notify--
    (i) CMS in writing by the first Monday of June in the year in which 
the contract ends;
    (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 
prescription drug services within the PDP region, including MA-PDs, and 
other PDPs, and must receive CMS approval prior to issuance; and
    (iii) The general public, at least 90 days before the end of the 
current calendar year, by publishing a notice in one or more newspapers 
of general circulation in each community or county located in the PDP 
sponsor's service area.
    (3) If a PDP sponsor does not renew a contract under paragraph (a) 
of this section, CMS cannot enter into a contract with the organization 
for 2 years unless there are special circumstances that warrant special 
consideration, as determined by CMS.
    (b) CMS decision not to renew. (1) CMS may elect not to authorize 
renewal of a contract for any of the following reasons:
    (i) For any of the reasons listed in Sec.  423.509(a) that also 
permits CMS to terminate the contract.
    (ii) The PDP sponsor has committed any of the acts in Sec.  423.752 
that supports the imposition of intermediate sanctions or civil money 
penalties under Sec.  423.750.
    (2) Notice of decision. CMS provides notice of its decision whether 
to authorize renewal of the contract as follows:
    (i) To the PDP sponsor by May 1 of the contract year.
    (ii) If CMS decides not to authorize a renewal of the contract, to 
the PDP sponsor's Medicare enrollees by mail at least 90 days before 
the end of the current calendar year.
    (iii) If CMS decides not to authorize a renewal of the contract, to 
the general public at least 90 days before the end of the current 
calendar year, by publishing a notice in one or more newspapers of 
general circulation in each community or county located in the PDP 
sponsor's service area.
    (3) Notice of appeal rights. CMS gives the PDP sponsor written 
notice of its right to appeal the decision not to renew in accordance 
with Sec.  423.642(b).


Sec.  423.508  Modification or termination of contract by mutual 
consent.

    (a) General rule. A contract may be modified or terminated at any 
time by written mutual consent.
    (b) Notification of termination. If the contract is terminated by 
mutual consent, the PDP sponsor must provide notice to its Medicare 
enrollees and the general public as provided in paragraph (c) of this 
section.
    (c) Notification of modification. If the contract is modified by 
mutual consent, the PDP sponsor must notify its Medicare enrollees of 
any changes that CMS determines are appropriate for notification within 
timeframes specified by CMS.


Sec.  423.509  Termination of contract by CMS.

    (a) Termination by CMS. CMS may terminate a contract for any of the 
following reasons if the PDP sponsor--
    (1) Failed substantially to carry out the terms of its contract 
with CMS;
    (2) Is carrying out its contract with CMS in a manner that is 
inconsistent with the effective and efficient implementation of this 
part;
    (3) No longer meets the requirements of this part for being a 
contracting organization;
    (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;
    (5) Experiences financial difficulties so severe that its ability 
to provide necessary prescription drug coverage is impaired to the 
point of posing an imminent and serious risk to the health of its 
enrollees, or otherwise fails to make services available to the extent 
that a risk to health exists;
    (6) Substantially fails to comply with the requirements in subpart 
M of this part relating to grievances and appeals;
    (7) Fails to provide CMS with valid risk adjustment, reinsurance 
and risk corridor related data as required under Sec.  423.329;
    (8) Substantially fails to comply with the service access 
requirements in Sec.  423.120;
    (9) Substantially fails to comply with the marketing requirements 
in Sec.  423.128;
    (10) Substantially fails to comply with the coordination with plans 
and programs that provide prescription drug coverage as described in 
subpart J of this part; or
    (11) Substantially fails to comply with the cost and utilization 
management, quality improvement, medication therapy management and 
fraud, abuse and waste program requirements as specified in subpart D 
of this part.
    (b) Notice of termination. If CMS decides to terminate a contract 
for reasons other than the grounds specified in Sec.  423.509(a)(4) or 
(a)(5) of this section, it gives notice of the termination as follows:
    (1) Termination of contract by CMS. (i) CMS notifies the PDP 
sponsor in writing 90 days before the intended date of the termination.
    (ii) The PDP sponsor notifies its Medicare enrollees of the 
termination by mail at least 30 days before the effective date of the 
termination.
    (iii) The PDP sponsor notifies the general public of the 
termination at least 30 days before the effective date of the 
termination by publishing a notice in one or more newspapers of general 
circulation in each community or county located in the PDP sponsor's 
service area.
    (2) Immediate termination of contract by CMS. (i) For terminations 
based on violations specified in Sec.  423.509(a)(4) or Sec.  
423.509(a)(5) of this section, CMS notifies the PDP sponsor in writing 
that its contract is terminated effective the date of the termination 
decision by CMS. If termination is effective in the middle of a month, 
CMS has the right to recover the prorated share of the prospective 
monthly payments made to the PDP sponsor covering the period of

[[Page 46839]]

the month following the contract termination.
    (ii) CMS notifies the PDP sponsor's Medicare enrollees in writing 
of CMS's decision to terminate the PDP sponsor's contract. This notice 
occurs no later than 30 days after CMS notifies the plan of its 
decision to terminate the PDP sponsor's contract. CMS simultaneously 
informs the Medicare enrollees of alternative options for obtaining 
prescription drug coverage, including alternative PDP sponsors and MA-
PDs in a similar geographic area.
    (iii) CMS notifies the general public of the termination no later 
than 30 days after notifying the plan of CMS's decision to terminate 
the PDP sponsor's contract. This notice is published in one or more 
newspapers of general circulation in each community or county located 
in the PDP sponsor's service area.
    (c) Corrective action plan. (1) General rule. Before terminating a 
contract for reasons other than the grounds specified in paragraph 
(a)(4) or (a)(5) of this section, CMS provides the PDP sponsor with 
reasonable opportunity to develop and receive CMS approval of a 
corrective action plan to correct the deficiencies that are the basis 
of the proposed termination.
    (2) Exception. If a contract is terminated under Sec.  
423.509(a)(4) or Sec.  423.509(a)(5) of this section, the PDP sponsor 
does not have the opportunity to submit a corrective action plan.
    (d) Appeal rights. If CMS decides to terminate a contract, it sends 
written notice to the PDP sponsor informing it of its termination 
appeal rights in accordance with Sec.  423.642.


Sec.  423.510  Termination of contract by the PDP sponsor.

    (a) Cause for termination. The PDP sponsor may terminate its 
contract if CMS fails to substantially carry out the terms of the 
contract.
    (b) Notice of termination. The PDP sponsor must give advance notice 
as follows:
    (1) To CMS, at least 90 days before the intended date of 
termination. This notice must specify the reasons why the PDP sponsor 
is requesting contract termination.
    (2) To its Medicare enrollees, at least 60 days before the 
termination effective date. This notice must include a written 
description of alternatives available for obtaining Medicare drug 
services within the services area, including alternative PDPs, MA-PDPs, 
and original Medicare and must receive CMS approval.
    (3) To the general public, at least 60 days before the termination 
effective date by publishing a CMS-approved notice in one or more 
newspapers of general circulation in each community or county located 
in the PDP sponsor's geographic area.
    (c) Effective date of termination. The effective date of the 
termination is determined by CMS and is at least 90 days after the date 
CMS receives the PDP sponsor's notice of intent to terminate.
    (d) CMS's liability. CMS's liability for payment to the PDP sponsor 
ends as of the first day of the month after the last month for which 
the contract is in effect.
    (e) Effect of termination by the organization. CMS will not enter 
into an agreement with an organization that has terminated its contract 
within the preceding 2 years unless there are circumstances that 
warrant special consideration, as determined by CMS.


Sec.  423.512  Minimum enrollment requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this 
section, CMS will not enter into a contract under this subpart unless 
the organization meets the following minimum enrollment requirement:
    (1) At least 5,000 individuals are enrolled for the purpose of 
receiving prescription drug benefits from the organization; or
    (2) At least 1,500 individuals are enrolled for purposes of 
receiving prescription drug benefits from the organization and the 
organization primarily serves individuals residing outside of urbanized 
areas as defined in Sec.  412.62(f) of this chapter;
    (3) Except as provided for in paragraph (b) of this section, a PDP 
sponsor must maintain a minimum enrollment as defined in paragraphs 
(a)(1) and (a)(2) of this section for the duration of its contract.
    (b) Minimum enrollment waiver. CMS waives the requirement of 
paragraphs (a)(1) and (a)(2) of this section during the first contract 
year for an organization in a region.


Sec.  423.514  Reporting requirements.

    (a) Required information. Each PDP sponsor must have an effective 
procedure to develop, compile, evaluate, and report to CMS, to its 
enrollees, and to the general public, at the times and in the manner 
that CMS requires statistics indicating the following--
    (1) The cost of its operations.
    (2) The patterns of utilization of its services.
    (3) The availability, accessibility, and acceptability of its 
services.
    (4) Information demonstrating that the PDP sponsor has a fiscally 
sound operation.
    (5) Other matters that CMS may require.
    (b) Significant business transactions. Each PDP sponsor must report 
to CMS annually, within 120 days of the end of its fiscal year (unless, 
for good cause shown, CMS authorizes an extension of time), the 
following:
    (1) A description of significant business transactions, as defined 
in Sec.  423.501, between the PDP sponsor and a party in interest, 
includes the following:
    (i) Indication that the costs of the transactions listed in 
paragraph (c) of this section do not exceed the costs that are incurred 
if these transactions were with someone who is not a party in interest; 
or
    (ii) If they do exceed, a justification that the higher costs are 
consistent with prudent management and fiscal soundness requirements.
    (2) A combined financial statement for the PDP sponsor and a party 
in interest if either of the following conditions is met:
    (i) Thirty five percent or more of the costs of operation of the 
PDP sponsor go to a party in interest.
    (ii) Thirty five percent or more of the revenue of a party in 
interest is from the PDP sponsor.
    (c) Requirements for combined financial statements.
    (1) The combined financial statements required by paragraph (b)(2) 
of this section must display in separate columns the financial 
information for the PDP sponsor and each of the parties in interest.
    (2) Inter-entity transactions must be eliminated in the 
consolidated column.
    (3) The statements must be examined by an independent auditor in 
accordance with generally accepted accounting principles and must 
include appropriate opinions and notes.
    (4) Upon written request from a PDP sponsor showing good cause, CMS 
may waive the requirement that the organization's combined financial 
statement include the financial information required in this paragraph 
(c) of this section for a particular entity.
    (d) Reporting and disclosure under Employee Retirement Income 
Security Act of 1974 (ERISA). (1) For any employees' health benefits 
plan that includes a PDP sponsor in its offerings, the PDP sponsor must 
furnish, upon request, the information the plan needs to fulfill its 
reporting and disclosure obligations (for the particular PDP sponsor) 
under the Employee

[[Page 46840]]

Retirement Income Security Act of 1974 (ERISA).
    (2) The PDP sponsor must furnish the information to the employer or 
the employer's designee, or to the plan administrator, as the term 
``administrator'' is defined in ERISA.
    (e) Loan information. Each organization must notify CMS of any 
loans or other special financial arrangements it makes with 
contractors, subcontractors and related entities.
    (f) Enrollee access to information. Each PDP sponsor must make the 
information reported to CMS under this section available to its 
enrollees upon reasonable request.


Sec.  423.516  Prohibition of midyear implementation of significant new 
regulatory requirements.

    CMS may not implement, other than at the beginning of a calendar 
year, regulations under this section that impose new, significant 
regulatory requirements on a PDP sponsor or a prescription drug plan.

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


Sec.  423.551  General provisions.

    (a) Change of ownership. The following constitute a change of 
ownership:
    (1) Partnership. The removal, addition, or substitution of a 
partner, unless the partners expressly agree otherwise as permitted by 
applicable State law, constitutes a change of ownership.
    (2) Asset sale. Transfer of substantially all the assets of the 
sponsor to another party constitutes a change of ownership.
    (3) Corporation. The merger of the PDP sponsor's corporation into 
another corporation or the consolidation of the PDP sponsor's 
organization with one or more other corporations, resulting in a new 
corporate body.
    (b) Change of ownership, exception. Transfer of corporate stock or 
the merger of another corporation into the PDP sponsor's corporation, 
with the PDP sponsor surviving, does not ordinarily constitute change 
of ownership.
    (c) Advance notice requirement. (1) A PDP sponsor that has a 
Medicare contract in effect under Sec.  423.502 and is considering or 
is negotiating a change in ownership must notify CMS at least 60 days 
before the anticipated effective date of the change. The PDP sponsor 
must also provide updated financial information and a discussion of the 
financial and solvency impact of the change of ownership on the 
surviving organization.
    (2) If the PDP sponsor fails to give CMS the required notice in a 
timely manner, it continues to be liable for payments that CMS makes to 
it on behalf of Medicare enrollees after the date of change of 
ownership.
    (d) Novation agreement defined. A novation agreement is an 
agreement among the current owner of the PDP sponsor, the prospective 
new owner, and CMS--
    (1) That is embodied in a document executed and signed by all 3 
parties;
    (2) That meets the requirements of Sec.  423.552; and
    (3) Under which CMS recognizes the new owner as the successor in 
interest to the current owner's Medicare contract.
    (e) Effect of change of ownership without novation agreement. 
Except to the extent provided in paragraph (c)(2) of this section, the 
effect of a change of ownership without a novation agreement is that--
    (1) The existing contract becomes invalid; and
    (2) If the new owner wishes to participate in the Medicare program, 
it must apply for, and enter into, a contract in accordance with 
subpart K of this part.
    (f) Effect of change of ownership with novation agreement. If the 
PDP sponsor submits a novation agreement that meets the requirements of 
Sec.  423.552 and CMS signs it, the new owner becomes the successor in 
interest to the current owner's Medicare contract under Sec.  423.502.


Sec.  423.552  Novation agreement requirements.

    (a) Conditions for CMS approval of a novation agreement. CMS 
approves a novation agreement if the following conditions are met:
    (1) Advance notification. The PDP sponsor notifies CMS at least 60 
days before the date of the proposed change of ownership. The PDP 
sponsor also provides CMS with updated financial information and a 
discussion of the financial and solvency impact of the change of 
ownership on the surviving organization.
    (2) Advance submittal of agreement. The PDP sponsor submits to CMS, 
at least 30 days before the proposed change of ownership date, three 
signed copies of the novation agreement containing the provisions 
specified in paragraph (b) of this section, and one copy of other 
relevant documents required by CMS.
    (3) CMS's determination. When reviewing a novation agreement, CMS 
makes a determination concerning the following--
    (i) The proposed new owner is in fact a successor in interest to 
the contract.
    (ii) Recognition of the new owner as a successor in interest to the 
contract is in the best interest of the Medicare program.
    (iii) The successor organization meets the requirements to qualify 
as a PDP sponsor under subpart K of this part.
    (b) Provisions of a novation agreement. A valid novation agreement 
requires the following:
    (1) Assumption of contract obligations. The new owner must assume 
all obligations under the contract.
    (2) Waiver of right to reimbursement. The previous owner must waive 
its rights to reimbursement for covered services furnished during the 
rest of the current contract period.
    (3) Guarantee of performance. The previous owner must--
    (i) Guarantee performance of the contract by the new owner during 
the contract period; or
    (ii) Post a performance bond that is satisfactory to CMS.
    (4) Records access. The previous owner must agree to make its books 
and records and other necessary information available to the new owner 
and to CMS to permit an accurate determination of costs for the final 
settlement of the contract period.


Sec.  423.553  Effect of leasing of a PDP sponsor's facilities.

    (a) General effect of leasing. If a PDP sponsor leases all or part 
of its facilities to another entity, the other entity does not acquire 
PDP sponsor status under section 1860D-12(b) of the Act.
    (b) Effect of lease of all facilities. (1) If a PDP sponsor leases 
all of its facilities to another entity, the contract terminates.
    (2) If the other entity wishes to participate in Medicare as a PDP 
sponsor, it must apply for and enter into a contract in accordance with 
Sec.  423.502.
    (c) Effect of partial lease of facilities. If the PDP sponsor 
leases part of its facilities to another entity, its contract with CMS 
remains in effect while CMS surveys the PDP sponsor to determine 
whether it continues to be in compliance with the applicable 
requirements and qualifying conditions specified in subpart K of this 
part.

Subpart M--Grievances, Coverage Determinations, and Appeals


Sec.  423.560  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Appeal means any of the procedures that deal with the review of 
adverse

[[Page 46841]]

coverage determinations made by the PDP sponsor on the benefits under a 
prescription drug plan the enrollee believes he or she is entitled to 
receive, including delay in providing or approving the drug coverage 
(when a delay would adversely affect the health of the enrollee), or on 
any amounts the enrollee must pay for the drug coverage, as defined in 
Sec.  423.566(b). These procedures include redeterminations by the PDP 
sponsor, and if necessary, appeals to an independent review entity, 
hearings before ALJs, review by the Medicare Appeals Council (MAC), and 
judicial review. An appeal does not include a grievance or a request 
for an exception to a tiered cost-sharing structure or formulary.
    Authorized representative means an individual authorized by an 
enrollee, or under State law, to act on his or her behalf in obtaining 
a coverage determination or in dealing with any of the levels of the 
appeals process, subject to the rules described in part 422, subpart M 
of this chapter, to the extent they are appropriate, unless otherwise 
stated in this subpart.
    Drug Use means an enrollee is receiving the drug in the course of 
treatment, including time off if it is part of the treatment.
    Enrollee means a Part D eligible individual, or his or her 
authorized representative, who has elected a prescription drug plan 
offered by a PDP sponsor.
    Grievance means any complaint or dispute, other than one that 
involves a coverage determination, expressing dissatisfaction with any 
aspect of a PDP sponsor's operations, activities, or behavior, 
regardless of whether remedial action is requested.
    Physician has the meaning given the term in section 1861(r) of the 
Act.
    Reconsideration means a review of an adverse coverage determination 
by an independent review entity (IRE), the evidence and findings upon 
which it was based, and any other evidence the enrollee submits or the 
IRE obtains.
    Redetermination means a review of an adverse coverage determination 
by a PDP sponsor, the evidence and findings upon which it is based, and 
any other evidence the enrollee submits or the PDP sponsor obtains.


Sec.  423.562  General provisions.

    (a) Responsibilities of the PDP sponsor. A PDP sponsor must meet 
all of the following requirements.
    (1) A PDP sponsor, for each prescription drug plan that it offers, 
must establish and maintain--
    (i) A grievance procedure as described in Sec.  423.564 for 
addressing issues that do not involve coverage determinations;
    (ii) A procedure for making timely coverage determinations;
    (iii) A procedure for handling exceptions to a tiered cost-sharing 
structure;
    (iv) A procedure for handling exceptions to a formulary; and
    (v) Redetermination and appeal procedures that meet the 
requirements of this subpart for issues that involve coverage 
determinations.
    (2) A PDP sponsor must ensure that all enrollees receive written 
information about the--
    (i) Grievance and appeal procedures that are available to them 
through the PDP sponsor; and
    (ii) Complaint process available to the enrollee under the QIO 
process as set forth under section 1154(a)(14) of the Act.
    (3) In accordance with subpart K of this part, if the PDP sponsor 
delegates any of its responsibilities under this subpart to another 
entity or individual through which the sponsor provides covered 
benefits, the PDP sponsor is ultimately responsible for ensuring that 
the entity or individual satisfies the relevant requirements of this 
subpart.
    (b) Rights of PDP enrollees. In accordance with the provisions of 
this subpart, enrollees have all of the following rights in relation to 
PDP sponsors:
    (1) The right to have grievances between the enrollee and the PDP 
sponsor heard and resolved by the sponsor, as described in Sec.  
423.564.
    (2) The right to a timely coverage determination by the sponsor, as 
specified in Sec.  423.566.
    (3) The right to request from the sponsor an expedited coverage 
determination, as specified in Sec.  423.570.
    (4) The right to request from the sponsor an exception to a PDP's 
tiered cost-sharing structure or formulary, as specified in Sec.  
423.578.
    (5) If dissatisfied with any part of a coverage determination, all 
of the following appeal rights:
    (i) The right to a redetermination of the adverse coverage 
determination by the PDP sponsor, as specified in Sec.  423.580.
    (ii) The right to request an expedited redetermination, as provided 
under Sec.  423.584.
    (iii) If, as a result of a redetermination, a PDP sponsor affirms, 
in whole or in part, its adverse coverage determination, the right to a 
reconsideration by an independent review entity (IRE) contracted by 
CMS, as specified in Sec.  423.600.
    (iv) The right to an ALJ hearing if the amount in controversy meets 
the requirements in Sec.  423.610 and part 422, subpart M of this 
chapter.
    (v) The right to request MAC review of the ALJ hearing decision, as 
specified in Sec.  423.620.
    (vi) The right to judicial review of the hearing decision if the 
amount in controversy meets the requirements in Sec.  423.630 and part 
422, subpart M of this chapter.
    (c) Limits on when this subpart applies. (1) If an enrollee has no 
further liability to pay for prescription drugs furnished through a 
PDP, a determination regarding these items or services is not subject 
to appeal.
    (2) If an enrollee seeks coverage of prescription drugs received 
from a non-network provider (that is, a non-network pharmacy), except 
in those situations in which, under subpart C of this part, the PDP is 
obligated to cover such drugs, a determination regarding the 
prescription drugs is not subject to appeal.
    (d) When other regulations apply. Unless this subpart provides 
otherwise, the regulations in part 422, subpart M of this chapter 
(concerning the administrative review and hearing processes under 
titles II and XVIII, and representation of parties under title XVIII of 
the Act) and any interpretive rules or CMS rulings issued under these 
regulations, apply under this subpart to the extent they are 
appropriate.


Sec.  423.564  Grievance procedures.

    (a) General rule. Each PDP sponsor must provide meaningful 
procedures for timely hearing and resolving grievances between 
enrollees and the sponsor or any other entity or individual through 
whom the sponsor provides covered benefits under any PDP it offers.
    (b) Distinguished from appeals. Grievance procedures are separate 
and distinct from appeal procedures, which address coverage 
determinations as defined in Sec.  423.566(b). Upon receiving a 
complaint, a PDP sponsor must promptly determine and inform the 
enrollee whether the complaint is subject to its grievance procedures 
or its appeal procedures.
    (c) Distinguished from the quality improvement organization 
complaint process. Under section 1154(a)(14) of the Act, the quality 
improvement organization (QIO) must review enrollees' written 
complaints about the quality of services they have received under the 
Medicare program. This process is separate and distinct from the 
grievance procedures of the PDP sponsor. For quality of care issues, an 
enrollee may file a grievance with the

[[Page 46842]]

PDP sponsor, file a written complaint with the QIO, or both. For any 
complaint submitted to a QIO, the PDP sponsor must cooperate with the 
QIO in resolving the complaint.
    (d) Expedited grievances. A PDP sponsor must respond to an 
enrollee's grievance within 24 hours if--
    (1) The complaint involves a PDP sponsor's decision to invoke an 
extension relating to a coverage determination or redetermination.
    (2) The complaint involves a PDP sponsor's refusal to grant an 
enrollee's request for an expedited coverage determination under Sec.  
423.570 or expedited redetermination under Sec.  423.584, and the 
enrollee has not yet purchased or received the drug that is in dispute.
    (e) Record keeping. The PDP sponsor must have an established 
process to track and maintain records on all grievances received both 
orally and in writing, including, at a minimum, the date of receipt, 
final disposition of the grievance, and the date that the PDP sponsor 
notified the enrollee of the disposition.


Sec.  423.566  Coverage determinations.

    (a) Responsibilities of the PDP sponsor. Each PDP sponsor must have 
a procedure for making timely coverage determinations in accordance 
with the requirements of this subpart regarding the prescription drug 
benefits an enrollee is entitled to receive under a PDP, including 
basic coverage as specified in Sec.  423.108 and supplemental coverage 
as specified in Sec.  423.112, and the amount, if any, that the 
enrollee is required to pay for a drug. The PDP sponsor must have a 
standard procedure for making determinations, in accordance with Sec.  
423.568, and an expedited procedure for situations in which applying 
the standard procedure may seriously jeopardize the enrollee's life, 
health, or ability to regain maximum function, in accordance with Sec.  
423.570.
    (b) Actions that are coverage determinations. The following actions 
by a PDP sponsor are coverage determinations:
    (1) Failure to provide or pay for a covered Part D drug (including 
failure to pay because the drug is not on the plan's formulary, because 
the drug is determined not to be medically necessary, because the drug 
is furnished by an out-of-network pharmacy, or because the sponsor 
determines that the drug is otherwise excluded under section 1862(a) of 
the Act) that the enrollee believes may be furnished by the PDP.
    (2) Failure to provide a coverage determination in a timely manner, 
when a delay would adversely affect the health of the enrollee.
    (3) A decision on the amount of cost sharing for a drug.
    (4) A decision on whether a drug is a preferred drug for an 
enrollee.
    (c) Who can request a coverage determination. Individuals who can 
request a standard or expedited coverage determination are--
    (1) The enrollee, including his or her authorized representative; 
or
    (2) The prescribing physician, on behalf of the enrollee.


Sec.  423.568  Standard timeframe and notice requirements for coverage 
determinations.

    (a) Timeframe for requests for drug benefits.
    (1) When a party makes a request for a drug benefit, the PDP 
sponsor must notify the enrollee of its determination as expeditiously 
as the enrollee's health condition requires, but no later than 14 
calendar days after receipt of the request.
    (2) The PDP sponsor may extend the timeframe by up to 14 calendar 
days under the following circumstances:
    (i) If the enrollee requests the extension.
    (ii) If the sponsor justifies a need for additional information and 
explains how the delay is in the interest of the enrollee (for example, 
the receipt of additional medical evidence may change a sponsor's 
decision to deny).
    (3) If the PDP sponsor 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 sponsor's decision to invoke an extension.
    (4) For extensions, the PDP sponsor must notify the enrollee of its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than upon expiration of the extension.
    (b) Timeframe for requests for payment. When a party makes a 
request for payment, the PDP sponsor must notify the enrollee of its 
determination no later than 30 calendar days after receipt of the 
request.
    (c) Written notice for PDP sponsor denials. If a PDP sponsor 
decides to deny a drug benefit, in whole or in part, it must give the 
enrollee written notice of the determination.
    (d) Form and content of the denial notice. The notice of any denial 
under paragraph (c) of this section must--
    (1) Use approved notice language in a readable and understandable 
form;
    (2) State the specific reasons for the denial;
    (3) Inform the enrollee of his or her right to a redetermination;
    (i) For drug coverage denials, describe both the standard and 
expedited redetermination processes, including the enrollee's right to, 
and conditions for, obtaining an expedited redetermination and the rest 
of the appeal process;
    (ii) For payment denials, describe the standard redetermination 
process and the rest of the appeal process; and
    (4) Comply with any other notice requirements specified by CMS.
    (e) Effect of failure to provide timely notice. If the PDP sponsor 
fails to provide the enrollee with timely notice of a coverage 
determination as specified in subparagraph (a) of this section, this 
failure itself constitutes an adverse determination and may be 
appealed.


Sec.  423.570  Expediting certain coverage determinations.

    (a) Request for expedited determination. An enrollee or an 
enrollee's prescribing physician may request that a PDP sponsor 
expedite a coverage determination involving issues described in Sec.  
423.566(b). This does not include requests for payment of prescription 
drugs already furnished.
    (b) How to make a request. (1) To ask for an expedited 
determination, an enrollee or an enrollee's prescribing physician on 
behalf of the enrollee must submit an oral or written request directly 
to the PDP sponsor, or if applicable, to the entity responsible for 
making the determination, as directed by the PDP sponsor.
    (2) A prescribing physician may provide oral or written support for 
an enrollee's request for an expedited determination.
    (c) How the PDP sponsor must process requests. The PDP sponsor must 
establish and maintain the following procedures for processing requests 
for expedited determinations:
    (1) An efficient and convenient means for individuals to submit 
oral or written requests.
    (2) Documentation of all oral requests in writing and maintain the 
documentation in the case file.
    (3) Prompt decisions on expediting a determination, based on the 
following requirements:
    (i) For a request made by an enrollee, provide an expedited 
determination if it determines that applying the standard timeframe for 
making a determination may seriously jeopardize the life or health of 
the enrollee or the enrollee's ability to regain maximum function.
    (ii) For a request made or supported by an enrollee's prescribing 
physician, provide an expedited determination if

[[Page 46843]]

the physician indicates that applying the standard timeframe for making 
a determination may seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial. If a PDP sponsor denies a request for 
expedited determination, it must take the following actions:
    (1) Automatically transfer the request to the standard timeframe 
and make the determination within the 14-calendar day timeframe 
established in Sec.  423.568(a) for a standard determination. The 14-
calendar day period begins with the day the PDP sponsor receives the 
request for expedited determination.
    (2) Give the enrollee prompt oral notice of the denial and 
subsequently deliver, within 3 calendar days, a written letter that--
    (i) Explains that the PDP sponsor must process the request using 
the 14-calendar day timeframe for standard determinations;
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the PDP sponsor's decision not to 
expedite;
    (iii) Informs the enrollee of the right to resubmit a request for 
an expedited determination with the prescribing physician's support; 
and
    (iv) Provides instructions about the grievance process and its 
timeframes.
    (e) Actions on accepted requests for expedited determination. If a 
PDP sponsor grants a request for expedited determination, it must make 
the determination and give notice in accordance with Sec.  423.572.


Sec.  423.572  Timeframes and notice requirements for expedited 
coverage determinations.

    (a) Timeframe for determinations and notification. Except as 
provided in paragraph (b) of this section, a PDP sponsor that approves 
a request for expedited determination must make its determination and 
notify the enrollee (and the prescribing physician involved, as 
appropriate) of its decision, whether adverse or favorable, as 
expeditiously as the enrollee's health condition requires, but no later 
than 72 hours after receiving the request.
    (b) Extensions of timeframe. (1) General rule. The PDP sponsor may 
extend the 72-hour timeframe by up to 14 calendar days if the enrollee 
requests the extension or if the sponsor 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 may 
change a PDP sponsor's decision to deny).
    (2) Notification of extension. When the PDP sponsor extends the 
deadline, 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 sponsor's decision to invoke 
an extension.
    (3) Timeframe for notification of extension. The PDP sponsor must 
notify the enrollee of its determination as expeditiously as the 
enrollee's health condition requires, but no later than upon expiration 
of the extension.
    (c) Confirmation of oral notice. If the PDP sponsor 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.
    (d) Content of the notice of expedited determination.
    (1) The notice of any expedited determination must state the 
specific reasons for the determination in understandable language.
    (2) If the determination is not completely favorable to the 
enrollee, the notice must--
    (i) Inform the enrollee of his or her right to a redetermination;
    (ii) Describe both the standard and expedited redetermination 
processes, including the enrollee's right to request, and conditions 
for obtaining, an expedited redetermination, and the rest of the appeal 
process; and
    (iii) Comply with any other requirements specified by CMS.
    (e) Effect of failure to provide a timely notice. If the PDP 
sponsor fails to provide the enrollee with timely notice of an 
expedited coverage determination as specified in this section, this 
failure constitutes an adverse coverage determination and may be 
appealed.


Sec.  423.576  Effect of a coverage determination.

    The coverage determination is binding on the PDP sponsor and the 
enrollee unless it is reconsidered under Sec.  423.580 through Sec.  
423.630 or is reopened and revised under Sec.  423.634.


Sec.  423.578  Exceptions process.

    (a) Requests for exceptions to a PDP's tiered cost-sharing 
structure. Each PDP sponsor that provides prescription drug benefits 
for Part D drugs and manages this benefit through the use of a tiered 
formulary must establish and maintain an exceptions process.
    (1) The sponsor's exceptions process must address each of the 
following circumstances:
    (i) The enrollee is using a drug and the applicable tiered cost-
sharing structure changes mid-year;
    (ii) The enrollee is using a drug and the applicable tiered cost-
sharing structure changes at the beginning of a new plan year; or
    (iii) There is no pre-existing use of the drug by the enrollee.
    (2) A PDP sponsor's exception criteria must include, but are not 
limited to--
    (i) A description of the criteria a PDP sponsor uses to evaluate a 
determination made by the enrollee's prescribing physician under 
paragraph (a)(3) of this section.
    (ii) Consideration of the cost difference between the preferred 
drug and the requested prescription drug that is the subject of the 
exceptions request.
    (iii) Consideration of whether the requested prescription drug that 
is the subject of the exceptions request is the therapeutic equivalent 
of any other drug on the sponsor's formulary. For purposes of this 
subpart, drug products evaluated as ``therapeutically equivalent'' can 
be expected to have equal effect and no difference when substituted for 
the requested drug.
    (iv) Consideration of the number of drugs on the sponsor's 
formulary that are in the same class and category as the requested 
prescription drug that is the subject of the exceptions request.
    (3) An enrollee, the enrollee's authorized representative, or the 
enrollee's prescribing physician may file a request for an exception.
    (4) A PDP sponsor may require a written certification from the 
enrollee's prescribing physician that the preferred drug on the 
sponsor's formulary is not as effective for the enrollee as the 
requested drug that is the subject of the requested exception, or that 
the preferred drug on the sponsor's formulary may have adverse effects 
for the enrollee, or both.
    (5) The PDP sponsor may require the written certification to 
include only the following information:
    (i) The enrollee's name, group or contract number, subscriber 
number or other information necessary to identify the enrollee.
    (ii) The enrollee's patient history.
    (iii) The primary diagnosis related to the requested prescription 
drug that is the subject of the exceptions request.
    (iv) Why the ``preferred drug'' is not acceptable for the enrollee.
    (v) Why the prescription drug that is the subject of the exceptions 
request is needed for the enrollee.
    (vi) Any other information reasonably necessary to evaluate the 
medical necessity of the exceptions request.
    (b) Request for exceptions involving a nonformulary drug. Each PDP 
sponsor

[[Page 46844]]

that provides prescription drug benefits for Part D drugs and manages 
this benefit through the use of a formulary must establish and maintain 
an exceptions process. Formulary use includes the application of a dose 
restriction that causes a particular drug not to be covered for the 
number of doses prescribed or a step therapy requirement that causes a 
particular drug not to be covered until the requirements of the 
sponsor's coverage policy are met.
    (1) The sponsor's exceptions process must address each of the 
following circumstances:
    (i) Coverage of a prescription drug that is not covered based on 
the PDP sponsor's formulary.
    (ii) Continued coverage of a particular prescription drug that the 
sponsor is discontinuing coverage on the formulary for reasons other 
than safety or because the prescription drug cannot be supplied by or 
was withdrawn from the market by the drug's manufacturer.
    (iii) An exception to a sponsor's coverage policy that causes a 
prescription drug not to be covered until the step therapy requirement 
is satisfied or not to be covered at the prescribed number of doses.
    (2) A PDP sponsor's exception procedures must include, but are not 
limited to--
    (i) A description of the criteria a PDP sponsor uses to evaluate a 
prescribing physician's determination made under paragraph (b)(3) of 
this section;
    (ii) A process for comparing applicable medical and scientific 
evidence on the safety and effectiveness of the requested nonformulary 
drug with the formulary drug for the enrollee; and
    (iii) A description of the cost-sharing scheme that will be applied 
when coverage is provided for a non-formulary drug.
    (iv) If the sponsor covers a non-formulary drug, the cost(s) 
incurred by the enrollee for that drug are treated as being included 
for purposes of calculating and meeting the annual out-of-pocket 
threshold.
    (3) An enrollee, the enrollee's authorized representative, or the 
prescribing physician (on behalf of the enrollee) may file a request 
for an exception request.
    (4) A PDP sponsor may require a written certification from the 
enrollee's prescribing physician that the requested prescription drug 
is medically necessary to treat the enrollee's disease or medical 
condition because--
    (i) There is not a prescription drug listed on the formulary to 
treat the enrollee's disease or medical condition that is an acceptable 
clinical alternative;
    (ii) The prescription drug alternative(s) listed on the formulary 
or required to be used in accordance with step therapy requirements--
    (A) Has been ineffective in the treatment of the enrollee's disease 
or medical condition or, based on both sound clinical evidence and 
medical and scientific evidence and the known relevant physical or 
mental characteristics of the enrollee and known characteristics of the 
drug regimen, is likely to be ineffective or adversely affect the 
drug's effectiveness or patient compliance; or
    (B) Has caused or based on sound clinical evidence and medical and 
scientific evidence is likely to cause an adverse reaction or other 
harm to the enrollee; or
    (iii) The number of doses that is available under a dose 
restriction for the prescription drug has been ineffective in the 
treatment of the enrollee's disease or medical condition or, based on 
both sound clinical evidence and medical and scientific evidence and 
the known relevant physical or mental characteristics of the enrollee 
and known characteristics of the drug regimen, is likely to be 
ineffective or adversely affect the drug's effectiveness or patient 
compliance.
    (5) The PDP sponsor may require the written certification to 
include only the following information:
    (i) The enrollee's name, group or contract number, subscriber 
number or other information necessary to identify the enrollee.
    (ii) Patient history.
    (iii) The primary diagnosis related to the requested prescription 
drug that is the subject of the exceptions request.
    (iv) Based on paragraph (b)(4) of this section, the reason--
    (A) Why the formulary drug is not acceptable for the enrollee;
    (B) If the medical exceptions request involves a step therapy 
requirement, why the prescription drug required to be used is not 
acceptable for the enrollee; or
    (C) If the medical exceptions request involves a dose restriction, 
why the available number of doses for the prescription drug is not 
acceptable for the enrollee;
    (D) The reason why the prescription drug that is the subject of the 
exceptions request is needed for the enrollee; and
    (E) Any other information reasonably necessary to evaluate the 
medical necessity of the medical exceptions request.
    (c) PDP sponsor requirements for exceptions determinations. (1) 
General rule. A PDP sponsor's decision concerning an exceptions request 
under this section constitutes a PDP coverage determination as 
specified at Sec.  423.566.
    (2) When a sponsor does not make a timely decision. If the PDP 
sponsor fails to make a decision on an exceptions request for continued 
coverage of a drug the sponsor is removing from its formulary (for 
reasons other than safety or because the drug cannot be supplied or is 
withdrawn from the market by the manufacturer) and to provide notice of 
the decision within the timeframe required under Sec.  423.568(a)--
    (i) The enrollee is entitled to have coverage for up to 1 month's 
supply of the prescription drug that is the subject of the request; and
    (ii) The PDP sponsor must make a decision on the exceptions request 
before the enrollee's completion of the supply in paragraph (c)(2)(i) 
of this section.
    (iii) If the PDP sponsor fails to make a decision on the exceptions 
request and provide notice of the decision before to the enrollee's 
completion of the supply provided in paragraph (c)(2)(i) of this 
section, the sponsor must maintain coverage, as specified in paragraph 
(c)(2)(i) of this section, unless--
    (A) There is a material change in the enrollee's terms of coverage 
or the applicable benefit limits have been exhausted;
    (B) The drug is no longer prescribed for the enrollee or is not 
considered safe for the treatment of the enrollee's disease or medical 
condition; or
    (C) A decision is made on the exceptions request and notice of that 
decision is provided.
    (3) When an exceptions request is approved. Whenever an exceptions 
request made under Sec.  423.578 is approved, the PDP sponsor must 
provide coverage for the approved prescription drug and must not--
    (i) Require the enrollee to request approval for a refill or a new 
prescription to continue using the prescription drug after the refills 
for the initial prescription are exhausted, as long as--
    (A) The enrollee's prescribing physician continues to prescribe the 
drug; and
    (B) The drug continues to be considered safe for treating the 
enrollee's disease or medical condition.
    (ii) Establish a special formulary tier or copayment or other cost-
sharing requirement that is applicable only to prescription drugs 
approved for coverage under this section.
    (d) Nothing in this section will be construed to allow an enrollee 
to use the exceptions processes set out in this

[[Page 46845]]

section to request coverage for a prescription drug that is not a 
covered Part D drug.


Sec.  423.580  Right to a redetermination.

    An enrollee who has received a coverage determination (including 
one that is reopened and revised as described in Sec.  423.634) may 
request that it be redetermined under the procedures described in Sec.  
423.582, which address requests for a standard redetermination. An 
enrollee or an enrollee's prescribing physician (acting on behalf of an 
enrollee) may request an expedited redetermination specified in Sec.  
423.584.


Sec.  423.582  Request for a standard redetermination.

    (a) Method and place for filing a request. An enrollee must ask for 
a redetermination by making an oral or written request with the PDP 
sponsor that made the coverage determination.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, an enrollee must file a request for a 
redetermination within 60 calendar days from the date of the notice of 
the coverage determination.
    (c) Extending the time for filing a request. (1) General rule. If 
an enrollee shows good cause, the PDP sponsor may extend the timeframe 
for filing a request for redetermination.
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for a redetermination has expired, an 
enrollee may file a request for redetermination and extension of time 
frame with the PDP sponsor. The request for redetermination and to 
extend the timeframe must--
    (i) Be in writing; and
    (ii) State why the request for redetermination was not filed on 
time.
    (d) Withdrawing a request. The person who files a request for 
redetermination may withdraw it by filing a written request for 
withdrawal at one of the places listed in paragraph (a) of this 
section.


Sec.  423.584  Expediting certain redeterminations.

    (a) Who may request an expedited redetermination. An enrollee or an 
enrollee's prescribing physician may request that a PDP sponsor 
expedite a redetermination that involves the issues specified in Sec.  
423.566(b)(1) and (b)(2). (This does not include requests for payment 
of drugs already furnished.)
    (b) How to make a request.
    (1) To ask for an expedited redetermination, an enrollee or a 
prescribing physician acting on behalf of an enrollee must submit an 
oral or written request directly to the PDP sponsor or, if applicable, 
to the entity responsible for making the redetermination, as directed 
by the PDP sponsor.
    (2) A prescribing physician may provide oral or written support for 
an enrollee's request for an expedited redetermination.
    (c) How the PDP sponsor must process requests. The PDP sponsor must 
establish and maintain the following procedures for processing requests 
for expedited redetermination:
    (1) Handling of requests. The PDP sponsor must establish an 
efficient and convenient means for individuals to submit oral or 
written requests, document all oral requests in writing, and maintain 
the documentation in the case file.
    (2) Prompt decision. The PDP sponsor must promptly decide on 
whether to expedite the redetermination or follow the timeframe for 
standard redetermination based on the following requirements:
    (i) For a request made by an enrollee, the PDP sponsor must provide 
an expedited redetermination if it determines that applying the 
standard timeframe for making a redetermination may seriously 
jeopardize the life or health of the enrollee or the enrollee's ability 
to regain maximum function.
    (ii) For a request made or supported by a prescribing physician, 
the PDP sponsor must provide an expedited redetermination if the 
physician indicates that applying the standard timeframe for conducting 
a redetermination may seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial of a request. If a PDP sponsor denies 
a request for expedited redetermination, it must take the following 
actions:
    (1) Automatically transfer a request to the standard timeframe and 
make the determination within the 30-day timeframe established in Sec.  
423.590(a). The 30-day period begins the day the PDP sponsor receives 
the request for expedited redetermination.
    (2) Give the enrollee prompt oral notice, and subsequently deliver, 
within 3 calendar days, a written letter that--
    (i) Explains that the PDP sponsor processes the enrollee's request 
using the 30-day timeframe for standard redetermination;
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the sponsor's decision not to 
expedite;
    (iii) Informs the enrollee of the right to resubmit a request for 
an expedited redetermination with the prescribing physician's support; 
and
    (iv) Provides instructions about the grievance process and its 
timeframes.
    (e) Action following acceptance of a request. If a PDP sponsor 
grants a request for expedited redetermination, it must conduct the 
redetermination and give notice in accordance with Sec.  423.590(d).


Sec.  423.586  Opportunity to submit evidence.

    The PDP sponsor must provide the enrollee or the prescribing 
physician, as appropriate, with a reasonable opportunity to present 
evidence and allegations of fact or law, related to the issue in 
dispute, in person as well as in writing. In the case of an expedited 
redetermination, the opportunity to present evidence is limited by the 
short timeframe for making a decision. Therefore, the PDP sponsor must 
inform the enrollee or the prescribing physician of the conditions for 
submitting the evidence.


Sec.  423.590  Timeframes and responsibility for making 
redeterminations.

    a. Standard redetermination--request for covered drug benefits. (1) 
If the PDP sponsor makes a redetermination that is completely favorable 
to the enrollee, the PDP sponsor must issue the redetermination (and 
effectuate it in accordance with Sec.  423.636(a)(1)) as expeditiously 
as the enrollee's health condition requires, but no later than 30 
calendar days from the date it receives the request for a standard 
redetermination.
    (2) If the PDP sponsor makes a redetermination that affirms, in 
whole or in part, its adverse coverage determination, it must notify 
the enrollee in writing of its redetermination as expeditiously as the 
enrollee's health condition requires, but no later than 30 calendar 
days from the date it receives the request for a standard 
redetermination.
    (3) The PDP sponsor may extend the timeframe by up to 14 calendar 
days if the enrollee requests the extension or if the sponsor 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 may change a PDP sponsor's decision to deny).
    (4) When the PDP sponsor 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 PDP sponsor's decision to invoke an extension.
    (5) For extensions, the PDP sponsor must issue its determination as

[[Page 46846]]

expeditiously as the enrollee's health condition requires, but no later 
than upon expiration of the extension.
    (b) Standard redetermination--request for payment. (1) If the PDP 
sponsor makes a redetermination that is completely favorable to the 
enrollee, the PDP sponsor must issue its redetermination to the 
enrollee (and effectuate it in accordance with Sec.  423.636(a)(2)) no 
later than 60 calendar days from the date it receives the request for 
redetermination.
    (2) If the PDP sponsor affirms, in whole or in part, its adverse 
coverage determination, it must notify the enrollee in writing of its 
redetermination no later than 60 calendar days from the date it 
receives the request for redetermination.
    (c) Effect of failure to meet timeframe for standard 
redetermination. If the PDP sponsor fails to provide the enrollee with 
a redetermination within the timeframes specified in paragraphs (a) or 
(b) of this section, this failure constitutes an affirmation of its 
adverse coverage determination and is subject to appeal to the IRE.
    (d) Expedited redetermination. (1) Timeframe. Except as provided in 
paragraph (d)(2) of this section, a PDP sponsor that approves a request 
for expedited redetermination must complete its redetermination and 
give the enrollee (and the prescribing physician involved, as 
appropriate) notice of its decision as expeditiously as the enrollee's 
health condition requires but no later than 72 hours after receiving 
the request.
    (2) Extensions. The PDP sponsor may extend the 72-hour deadline by 
up to 14 calendar days if the enrollee requests the extension or if the 
sponsor 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 may change a PDP sponsor's decision to 
deny).
    (3) Notification of extension. (i) Timeframe. The PDP sponsor 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.
    (ii) Content of notification. When the PDP sponsor 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 PDP sponsor's decision to 
invoke an extension.
    (4) How the PDP sponsor must request additional information. If the 
PDP sponsor must receive medical information, the PDP sponsor must 
request the necessary information within 24 hours of the initial 
request for an expedited redetermination. Regardless of whether the PDP 
sponsor must request additional information, the PDP sponsor is 
responsible for meeting the timeframe and notice requirements.
    (5) Affirmation of an adverse expedited coverage determination. If, 
as a result of its redetermination, the PDP sponsor affirms, in whole 
or in part, its adverse expedited coverage determination, the PDP 
sponsor must give the enrollee (and the prescribing physician involved, 
as appropriate) notice of its decision as expeditiously as the 
enrollee's health condition requires, but no later than 72 hours after 
receiving the request (or no later than the expiration of an extension 
specified in paragraph (d)(2) of this section).
    (e) Failure to meet timeframe for expedited redetermination. If the 
PDP sponsor fails to provide the enrollee or the prescribing physician, 
as appropriate, with the results of its expedited redetermination 
within the timeframe described in paragraph (d) of this section, this 
failure constitutes an affirmation of its adverse expedited coverage 
determination and is subject to appeal to the IRE.
    (f) Who must reconsider an adverse coverage determination. (1) A 
person or persons who were not involved in making the coverage 
determination must conduct the redetermination.
    (2) When the issue is the denial of coverage based on a lack of 
medical necessity (or any substantively equivalent term used to 
describe the concept of medical necessity), the redetermination must be 
made by a physician with expertise in the field of medicine that is 
appropriate for the services at issue. The physician making the 
redetermination need not, in all cases, be of the same specialty or 
subspecialty as the prescribing physician.


Sec.  423.600  Reconsideration by an independent review entity (IRE).

    (a) An enrollee who is dissatisfied with the redetermination of a 
PDP sponsor has a right to a reconsideration by an independent review 
entity that contracts with CMS. An enrollee must file a written request 
for reconsideration at one of the places listed in Sec.  423.582(a) or 
with the IRE within 60 days of the date of the sponsor's 
redetermination.
    (b) When an enrollee files an appeal, the IRE is required to 
solicit the views of the prescribing physician.
    (c) In order for an enrollee to request an IRE reconsideration of a 
PDP sponsor's determination not to provide for a covered Part D drug 
that is not on the PDP formulary, the prescribing physician must 
determine that all covered Part D drugs on any tier of the formulary 
for treatment of the same condition is not as effective for the 
individual as the nonformulary drug, has adverse effects for the 
individual, or both.
    (d) The independent review entity must conduct the reconsideration 
as expeditiously as the enrollee's health condition requires but must 
not exceed the deadlines specified in its contract.


Sec.  423.602  Notice of reconsideration determination by the 
independent review entity.

    (a) Responsibility for the notice. When the IRE makes its 
reconsideration determination, it is responsible for mailing a notice 
of its determination to the enrollee and PDP sponsor, and for sending a 
copy to CMS.
    (b) Content of the notice. The notice must--
    (1) State the specific reasons for the IRE's decision in 
understandable language;
    (2) If the reconsideration determination is adverse (that is, does 
not completely reverse the PDP sponsor's adverse coverage 
determination), inform the enrollee of his or her right to an ALJ 
hearing if the amount in controversy meets the threshold requirement 
under Sec.  423.610;
    (3) Describe the procedures that must be followed to obtain an ALJ 
hearing; and
    (4) Comply with any other requirements specified by CMS.


Sec.  423.604  Effect of a reconsideration determination.

    A reconsideration determination is final and binding on the 
enrollee and the PDP sponsor, unless the enrollee files a request for a 
hearing under the provisions of Sec.  423.612.


Sec.  423.610  Right to an ALJ hearing.

    (a) If the amount remaining in controversy after the IRE 
reconsideration meets the threshold requirement established annually by 
the Secretary, an enrollee who is dissatisfied with the IRE 
reconsideration determination has a right to a hearing before an ALJ.
    (b) If the basis for the appeal is the PDP sponsor's refusal to 
provide drug benefits, CMS uses the projected value of those benefits 
to compute the amount remaining in controversy.
    (c) Aggregating appeals to meet the amount in controversy. (1) 
Enrollee. Two or more appeals may be aggregated by an enrollee to meet 
the amount in controversy for an ALJ hearing if--

[[Page 46847]]

    (i) The appeals have previously been reconsidered by an IRE;
    (ii) The request for ALJ hearing lists all of the appeals to be 
aggregated and is filed within 60 days after all of the IRE 
reconsideration determinations being appealed have been received; and
    (iii) The ALJ determines that the appeals the enrollee seeks to 
aggregate involve the delivery of prescription drugs to a single 
enrollee.
    (2) Multiple enrollees. Two or more appeals may be aggregated by 
multiple enrollees to meet the amount in controversy for an ALJ hearing 
if--
    (i) The appeals have previously been reconsidered by an IRE;
    (ii) The request for ALJ hearing lists all of the appeals to be 
aggregated and is filed within 60 days after all of the IRE 
reconsideration determinations being appealed have been received; and
    (iii) The ALJ determines that the appeals the enrollees seek to 
aggregate involve the same prescription drug.


Sec.  423.612  Request for an ALJ hearing.

    (a) How and where to file a request. The enrollee must file a 
written request for a hearing at one of the places specified in Sec.  
423.582(a) or with the IRE. The organizations specified in Sec.  
423.582(a) forward the request to the independent review entity, which 
is responsible for transferring the case to the appropriate ALJ office.
    (b) When to file a request. Except when an ALJ extends the 
timeframe as provided in part 422, subpart M of this chapter, the 
enrollee must file a request for a hearing within 60 days of the date 
of the notice of an IRE reconsideration determination.
    (c) 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.  423.610, 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.  423.610, 
the ALJ discontinues the hearing and does not rule on the substantive 
issues raised in the appeal.


Sec.  423.620  Medicare Appeals Council (MAC) review.

    An enrollee who is dissatisfied with an ALJ hearing decision may 
request that the MAC review the ALJ's decision or dismissal. The 
regulations under part 422, subpart M of this chapter regarding MAC 
review apply to matters addressed by this subpart.


Sec.  423.630  Judicial review.

    (a) Review of ALJ's Decision. The enrollee may request judicial 
review of an ALJ's decision if--
    (1) The MAC denied the enrollee's request for review; and
    (2) The amount in controversy meets the threshold requirement 
established annually by the Secretary.
    (b) Review of MAC decision. The enrollee may request judicial 
review 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, an enrollee must file a civil action in a district court of the 
United States in accordance with section 205(g) of the Act. (See part 
422, subpart M of this chapter, for a description of the procedures to 
follow in requesting judicial review.)


Sec.  423.634  Reopening and revising determinations and decisions.

    (a) A coverage determination or reconsideration made by a PDP 
sponsor, a reconsideration made by the independent review entity 
specified in Sec.  423.600, 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 
422, subpart M of this chapter.
    (b) The filing of a request for reopening does not relieve the PDP 
sponsor of its obligation to make payment or provide benefits as 
specified in Sec.  423.636 or Sec.  423.638.
    (c) Once an entity issues a revised determination or decision, the 
revisions made by the decision may be appealed.
    (d) A decision of a PDP sponsor or any other entity not to reopen 
is not subject to review.


Sec.  423.636  How a PDP sponsor must effectuate standard 
predeterminations, reconsideration determinations, or decisions.

    (a) Reversals by the PDP sponsor. (1) Requests for benefits. If, on 
redetermination of a request for benefit, the PDP sponsor completely 
reverses its coverage determination, the sponsor must authorize or 
provide the benefit under dispute as expeditiously as the enrollee's 
health condition requires, but no later than 30 calendar days after the 
date the PDP sponsor receives the request for redetermination (or no 
later than upon expiration of an extension described in Sec.  
423.590(a)(3)).
    (2) Requests for payment. If, on redetermination of a request for 
payment, the PDP sponsor completely reverses its coverage 
determination, the sponsor must pay for the benefit no later than 60 
calendar days after the date the PDP sponsor receives the request for 
redetermination.
    (b) Reversals by the independent review entity. (1) Requests for 
benefits. If, on reconsideration of a request for benefit, the PDP 
sponsor's determination is reversed in whole or in part by the 
independent review entity, the PDP sponsor must authorize the benefit 
under dispute within 72 hours from the date it receives notice 
reversing the determination, or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires, but no later 
than 14 calendar days from that date. The PDP sponsor must inform the 
independent review entity that the sponsor has effectuated the 
decision.
    (2) Requests for payment. If, on reconsideration of a request for 
payment, the PDP sponsor's determination is reversed in whole or in 
part by the independent review entity, the PDP sponsor must pay for the 
benefit no later than 30 calendar days from the date it receives notice 
reversing the coverage determination. The PDP sponsor must inform the 
independent review entity that the sponsor has effectuated the 
decision.
    (c) Reversals other than by the PDP sponsor or the independent 
review entity. If the IRE's determination is reversed in whole or in 
part by the ALJ, or at a higher level of appeal, the PDP sponsor must 
pay for, authorize, or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires, but no later 
than 60 calendar days from the date it receives notice reversing the 
determination. The PDP sponsor must inform the independent review 
entity that the sponsor has effectuated the decision.


Sec.  423.638  How a PDP sponsor must effectuate expedited 
redeterminations or reconsidered determinations.

    (a) Reversals by the PDP sponsor. If, on redetermination of an 
expedited request for benefits, the PDP sponsor completely reverses its 
coverage determination, the PDP sponsor must authorize or provide the 
benefit under dispute as expeditiously as the enrollee's health 
condition requires, but no later than 72 hours after the date the PDP 
sponsor receives the request for redetermination (or no later than upon 
expiration of an extension specified in Sec.  423.590(d)(2)).
    (b) Reversals by the independent review entity. If the PDP 
sponsor's determination is reversed in whole or in part by the 
independent review entity, the PDP sponsor must authorize or provide 
the benefit under dispute as expeditiously as the enrollee's health

[[Page 46848]]

condition requires but no later than 72 hours from the date it receives 
notice reversing the determination. The PDP sponsor must inform the 
independent review entity that the sponsor has effectuated the 
decision.
    (c) Reversals other than by the PDP sponsor or the independent 
review entity. If the IRE's expedited determination is reversed in 
whole or in part by the ALJ, or at a higher level of appeal, the PDP 
sponsor must authorize or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires, but no later 
than 60 days from the date it receives notice reversing the 
determination. The PDP sponsor must inform the independent review 
entity that the sponsor has effectuated the decision.

Subpart N--Medicare Contract Determinations and Appeals


Sec.  423.641  Contract determinations.

    This subpart establishes the procedures for making and reviewing 
the following contract determinations:
    (a) A determination that an entity is not qualified to enter into a 
contract with CMS under Part D of Title XVIII of the Act.
    (b) A determination to terminate a contract with a PDP sponsor in 
accordance with Sec.  423.509.
    (c) A determination not to authorize a renewal of a contract with a 
PDP sponsor in accordance with Sec.  423.507(b).


Sec.  423.642  Notice of contract determination.

    (a) When CMS makes a contract determination, it gives the PDP 
sponsor written notice.
    (b) The notice specifies the--
    (1) Reasons for the determination; and
    (2) PDP sponsor's right to request reconsideration.
    (c) For CMS-initiated terminations, CMS mails notice 90 days before 
the anticipated effective date of the termination. For terminations 
based on initial determinations described at Sec.  423.509(a)(4) or 
(a)(5), CMS immediately notifies the PDP sponsor of its decision to 
terminate the organization's PDP contract.
    (d) When CMS determines that it is not going to authorize a 
contract renewal, CMS mails the notice to the PDP sponsor by May 1 of 
the current contract year.


Sec.  423.643  Effect of contract determination.

    The contract determination is final and binding unless--
    (a) The determination is reconsidered in accordance with Sec.  
423.644 through Sec.  423.649;
    (b) A timely request for a hearing is filed under Sec.  423.651; or
    (c) The reconsideration decision is revised as a result of a 
reopening under Sec.  423.668.


Sec.  423.644  Reconsideration: Applicability.

    (a) Reconsideration is the first step for appealing a contract 
determination specified in Sec.  423.641.
    (b) CMS reconsiders the specified determinations if the contract 
applicant or the PDP sponsor files a written request in accordance with 
Sec.  423.645.


Sec.  423.645  Request for reconsideration.

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


Sec.  423.646  Opportunity to submit evidence.

    CMS provides the PDP sponsor or contract applicant and the CMS 
official or officials who made the contract determination reasonable 
opportunity, not to exceed the timeframe in which a PDP sponsor chooses 
to request a hearing as described at Sec.  423.651, to present as 
evidence any documents or written statements that are relevant and 
material to the matters at issue.


Sec.  423.647  Reconsidered determination.

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


Sec.  423.648  Notice of reconsidered determination.

    (a) CMS gives the PDP sponsor or contract applicant written notice 
of the reconsidered determination.
    (b) The notice--
    (1) Contains findings for the contract applicant's qualifications 
to enter into, or the PDP sponsor's qualifications to remain under, a 
contract with CMS under Part D of the Act;
    (2) States the specific reasons for the reconsidered determination; 
and
    (3) Informs the PDP sponsor or contract applicant of its right to a 
hearing if it is dissatisfied with the determination.


Sec.  423.649  Effect of reconsidered determination.

    A reconsidered determination is final and binding unless a request 
for a hearing is filed in accordance with Sec.  423.651 or it is 
revised in accordance with Sec.  423.668.


Sec.  423.650  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) A contract applicant that is determined in a reconsidered 
determination to be unqualified to enter into a contract with CMS under 
Part D of title XVIII of the Act.
    (b) A PDP sponsor whose contract with CMS is terminated or is not 
renewed as a result of a contract determination as provided in Sec.  
423.641.


Sec.  423.651  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed by an authorized official of the 
contract applicant or PDP sponsor that was the party to the 
determination under appeal. The request for a hearing must be filed 
with any CMS office.
    (b) Time for filing a request. A request for a hearing must be 
filed within 15 days after the date of the reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec.  423.650;
    (2) At the discretion of the hearing officer, any interested 
parties who make a showing that their rights may be prejudiced by the 
decision to be rendered at the hearing; and
    (3) CMS.


Sec.  423.652  Postponement of effective date of a contract 
determination when a request for a hearing for a contract determination 
is filed timely.

    (a) CMS postpones the proposed effective date of the contract 
determination to terminate a contract with a PDP sponsor until a 
hearing decision is reached and affirmed by the Administrator following 
review under Sec.  423.666 in instances where a PDP sponsor requests 
review by the Administrator; and

[[Page 46849]]

    (b) CMS extends the current contract at the end of the contract 
period (in the case of a determination not to renew) only--
    (1) If CMS finds that an extension of the contract is consistent 
with the purpose of this part; and
    (2) For the period as CMS and the PDP sponsor agree.
    (c) Exception: A contract terminated in accordance with Sec.  
423.509(a)(4) or (a)(5) is immediately terminated and is not postponed 
if a hearing is requested.


Sec.  423.653  Designation of hearing officer.

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


Sec.  423.654  Disqualification of hearing officer.

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


Sec.  423.655  Time and place of hearing.

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


Sec.  423.656  Appointment of representatives.

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


Sec.  423.657  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec.  423.656, on behalf of the represented party--
    (1) Gives or accepts any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Presents evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtains information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it is sent to the party.


Sec.  423.658  Conduct of hearing.

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


Sec.  423.659  Evidence.

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


Sec.  423.660  Witnesses.

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


Sec.  423.661  Discovery.

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


Sec.  423.662  Prehearing.

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


Sec.  423.663  Record of hearing.

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


Sec.  423.664  Authority of hearing officer.

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


Sec.  423.665  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the 
hearing officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions 
of law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reversed 
or modified by the Administrator following review under Sec.  423.666, 
or reopened and revised in accordance with Sec.  423.668.


Sec.  423.666  Review by the Administrator.

    (a) Request for review by Administrator. A PDP sponsor that 
receives a hearing decision upholding a contract termination 
determination may request review by the Administrator within 15 days of 
receiving the hearing decision as provided under Sec.  423.665(b).
    (b) Review by the Administrator. The Administrator must review the 
hearing officer's decision, and determine, based upon this decision, 
the hearing record, and any written arguments submitted by the PDP 
sponsor, whether the termination decision must be upheld, reversed, or 
modified.
    (c) Decision by the Administrator. The Administrator issues a 
written decision, and furnishes the decision to the PDP sponsor 
requesting review.


Sec.  423.667  Effect of Administrator's decision.

    A decision by the Administrator under section Sec.  423.666(c) is 
final and binding unless it is reopened and revised in accordance with 
Sec.  423.668.


Sec.  423.668  Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.

    (a) Initial or reconsidered determination. CMS may reopen and 
revise an initial or reconsidered determination upon its own motion 
within 1 year of the date of the notice of determination.
    (b) Decision of hearing officer. A decision of a hearing officer 
that is

[[Page 46850]]

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


Sec.  423.669  Effect of revised determination.

    The revision of a contract or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec.  423.651.


Sec.  423.650  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) A contract applicant that is determined in a reconsidered 
determination to be unqualified to enter into a contract with CMS under 
Part D of title XVIII of the Act.
    (b) A PDP sponsor whose contract with CMS is terminated or is not 
renewed as a result of a contract determination as provided in Sec.  
423.641.


Sec.  423.651  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed by an authorized official of the 
contract applicant or PDP sponsor that was the party to the 
determination under appeal. The request for a hearing must be filed 
with any CMS office.
    (b) Time for filing a request. A request for a hearing must be 
filed within 15 days after the date of the reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec.  423.650;
    (2) At the discretion of the hearing officer, any interested 
parties who make a showing that their rights may be prejudiced by the 
decision to be rendered at the hearing; and
    (3) CMS.


Sec.  423.652  Postponement of effective date of a contract 
determination when a request for a hearing for a contract determination 
is filed timely.

    (a) CMS postpones the proposed effective date of the contract 
determination to terminate a contract with a PDP sponsor until a 
hearing decision is reached and affirmed by the Administrator following 
review under Sec.  423.666 in instances where a PDP sponsor requests 
review by the Administrator; and
    (b) CMS extends the current contract at the end of the contract 
period (in the case of a determination not to renew) only--
    (1) If CMS finds that an extension of the contract is consistent 
with the purpose of this part; and
    (2) For the period as CMS and the PDP sponsor agree.
    (c) Exception: A contract terminated in accordance with Sec.  
423.509 (a)(4) or (a)(5) is immediately terminated and is not postponed 
if a hearing is requested.


Sec.  423.653  Designation of hearing officer.

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


Sec.  423.654  Disqualification of hearing officer.

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


Sec.  423.655  Time and place of hearing.

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


Sec.  423.656  Appointment of representatives.

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


Sec.  423.657  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec.  423.656, on behalf of the represented party--
    (1) Gives or accepts any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Presents evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtains information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it is sent to the party.


Sec.  423.658  Conduct of hearing.

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


Sec.  423.659  Evidence.

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


Sec.  423.660  Witnesses.

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


Sec.  423.661  Discovery.

    (a) Prehearing discovery is permitted upon timely request of a 
party.
    (b) A request is timely if it is made before the beginning of the 
hearing.

[[Page 46851]]

    (c) A reasonable time for inspection and reproduction of documents 
is provided by order of the hearing officer.
    (d) The hearing officer's order on all discovery matters is final.


Sec.  423.662  Prehearing.

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


Sec.  423.663  Record of hearing.

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


Sec.  423.664  Authority of hearing officer.

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


Sec.  423.665  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the 
hearing officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions 
of law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reversed 
or modified by the Administrator following review under Sec.  423.666, 
or reopened and revised in accordance with Sec.  423.668.


Sec.  423.666  Review by the Administrator.

    (a) Request for review by Administrator. A PDP sponsor that 
receives a hearing decision upholding a contract termination 
determination may request review by the Administrator within 15 days of 
receiving the hearing decision as provided under Sec.  423.665(b).
    (b) Review by the Administrator. The Administrator must review the 
hearing officer's decision, and determine, based upon this decision, 
the hearing record, and any written arguments submitted by the PDP 
sponsor, whether the termination decision must be upheld, reversed, or 
modified.
    (c) Decision by the Administrator. The Administrator issues a 
written decision, and furnishes the decision to the PDP sponsor 
requesting review.


Sec.  423.667  Effect of Administrator's decision.

    A decision by the Administrator under section Sec.  423.666(c) is 
final and binding unless it is reopened and revised in accordance with 
Sec.  423.668.


Sec.  423.668  Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.

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


Sec.  423.669  Effect of revised determination.

    The revision of a contract or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec.  423.651.


Sec.  423.650  Right to a hearing.

    The following parties are entitled to a hearing:
    (a) A contract applicant that is determined in a reconsidered 
determination to be unqualified to enter into a contract with CMS under 
Part D of title XVIII of the Act.
    (b) A PDP sponsor whose contract with CMS is terminated or is not 
renewed as a result of a contract determination as provided in Sec.  
423.641.


Sec.  423.651  Request for hearing.

    (a) Method and place for filing a request. A request for a hearing 
must be made in writing and filed by an authorized official of the 
contract applicant or PDP sponsor that was the party to the 
determination under appeal. The request for a hearing must be filed 
with any CMS office.
    (b) Time for filing a request. A request for a hearing must be 
filed within 15 days after the date of the reconsidered determination.
    (c) Parties to a hearing. The parties to a hearing must be--
    (1) The parties described in Sec.  423.650;
    (2) At the discretion of the hearing officer, any interested 
parties who make a showing that their rights may be prejudiced by the 
decision to be rendered at the hearing; and
    (3) CMS.


Sec.  423.652  Postponement of effective date of a contract 
determination when a request for a hearing for a contract determination 
is filed timely.

    (a) CMS postpones the proposed effective date of the contract 
determination to terminate a contract with a PDP sponsor until a 
hearing decision is reached and affirmed by the Administrator following 
review under Sec.  423.666 in instances where a PDP sponsor requests 
review by the Administrator; and
    (b) CMS extends the current contract at the end of the contract 
period (in the case of a determination not to renew) only--
    (1) If CMS finds that an extension of the contract is consistent 
with the purpose of this part; and
    (2) For the period as CMS and the PDP sponsor agree.
    (c) Exception: A contract terminated in accordance with Sec.  
423.509(a)(4) or (a)(5) is immediately terminated and is not postponed 
if a hearing is requested.


Sec.  423.653  Designation of hearing officer.

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


Sec.  423.654  Disqualification of hearing officer.

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

[[Page 46852]]

another hearing officer. The objections must be submitted in writing to 
CMS.


Sec.  423.655  Time and place of hearing.

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


Sec.  423.656  Appointment of representatives.

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


Sec.  423.657  Authority of representatives.

    (a) A representative appointed and qualified in accordance with 
Sec.  423.656, on behalf of the represented party--
    (1) Gives or accepts any notice or request pertinent to the 
proceedings set forth in this subpart;
    (2) Presents evidence and allegations as to facts and law in any 
proceedings affecting that party; and
    (3) Obtains information to the same extent as the party.
    (b) A notice or request sent to the representative has the same 
force and effect as if it is sent to the party.


Sec.  423.658  Conduct of hearing.

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


Sec.  423.659  Evidence.

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


Sec.  423.660  Witnesses.

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


Sec.  423.661  Discovery.

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


Sec.  423.662  Prehearing.

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


Sec.  423.663  Record of hearing.

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


Sec.  423.664  Authority of hearing officer.

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


Sec.  423.665  Notice and effect of hearing decision.

    (a) As soon as practical after the close of the hearing, the 
hearing officer issues a written decision that--
    (1) Is based upon the evidence of record; and
    (2) Contains separately numbered findings of fact and conclusions 
of law.
    (b) The hearing officer provides a copy of the hearing decision to 
each party.
    (c) The hearing decision is final and binding unless it is reversed 
or modified by the Administrator following review under Sec.  423.666, 
or reopened and revised in accordance with Sec.  423.668.


Sec.  423.666  Review by the Administrator.

    (a) Request for review by Administrator. A PDP sponsor that 
receives a hearing decision upholding a contract termination 
determination may request review by the Administrator within 15 days of 
receiving the hearing decision as provided under Sec.  423.665(b).
    (b) Review by the Administrator. The Administrator must review the 
hearing officer's decision, and determine, based upon this decision, 
the hearing record, and any written arguments submitted by the PDP 
sponsor, whether the termination decision must be upheld, reversed, or 
modified.
    (c) Decision by the Administrator. The Administrator issues a 
written decision, and furnishes the decision to the PDP sponsor 
requesting review.


Sec.  423.667  Effect of Administrator's decision.

    A decision by the Administrator under section Sec.  423.666(c) is 
final and binding unless it is reopened and revised in accordance with 
Sec.  423.668.


Sec.  423.668  Reopening of contract or reconsidered determination or 
decision of a hearing officer or the Administrator.

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


Sec.  423.669  Effect of revised determination.

    The revision of a contract or reconsidered determination is binding 
unless a party files a written request for hearing of the revised 
determination in accordance with Sec.  423.651.

Subpart O--Intermediate Sanctions


Sec.  423.750  Kinds of sanctions.

    (a) The following intermediate sanctions and civil money penalties 
may be imposed:
    (1) Civil money penalties ranging from $10,000 to $100,000 
depending upon the violation.
    (2) Suspension of enrollment of Medicare beneficiaries.

[[Page 46853]]

    (3) Suspension of payment to the PDP sponsor for Medicare 
beneficiaries who enroll.
    (4) Suspension of all PDP marketing activities to Medicare 
beneficiaries for the MA plan subject to the intermediate sanctions.
    (b) The enrollment, payment, and marketing sanctions continue in 
effect until CMS is satisfied that the deficiency on which the 
determination was based is corrected and is not likely to recur.


Sec.  423.752  Basis for imposing sanctions.

    (a) All intermediate sanctions. For the violations listed below, 
CMS may impose any of the sanctions specified in Sec.  423.750 on any 
PDP sponsor that has a contract in effect. The PDP sponsor may also be 
subject to other applicable remedies available under law.
    (1) Fails substantially to provide, to a PDP enrollee, medically 
necessary services that the organization is required to provide (under 
law or under the contract) to a PDP enrollee, and that failure 
adversely affects (or is substantially likely to adversely affect) the 
enrollee.
    (2) Imposes on PDP enrollees premiums in excess of the monthly 
basic and supplemental beneficiary premiums permitted under section 
1860D of the Act and subpart F of this part.
    (3) Acts to expel or refuses to reenroll a beneficiary in violation 
of the provisions of this part.
    (4) Engages in any practice that may reasonably be expected to have 
the effect of denying or discouraging enrollment of individuals whose 
medical condition or history indicates a need for substantial future 
medical services.
    (5) Misrepresents or falsifies information that it furnishes--
    (i) To CMS; or
    (ii) To an individual or to any other entity under the Part D drug 
benefit program.
    (6) 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 an individual 
or entity) for the provision of any of the following:
    (i) Health care.
    (ii) Utilization review.
    (iii) Medical social work.
    (iv) Administrative services.
    (b) Suspension of enrollment and marketing. If CMS makes a 
determination that could lead to a contract termination under Sec.  
423.509(a), CMS may instead impose the intermediate sanctions in Sec.  
423.756(c)(1) and (c)(3).


Sec.  423.756  Procedures for imposing sanctions.

    (a) Notice of sanction and opportunity to respond.
    (1) Notice of sanction. Before imposing the intermediate sanctions 
specified in paragraph (c) of this section CMS--
    (i) Sends a written notice to the PDP sponsor stating the nature 
and basis of the proposed sanction; and
    (ii) Sends the Office of the Inspector General a copy of the 
notice.
    (2) Opportunity to respond. CMS allows the PDP sponsor 15 days from 
receipt of the notice to provide evidence that it has not committed an 
act or failed to comply with the requirements described in Sec.  
423.752, as applicable. CMS may allow a 15-day addition to the original 
15 days upon receipt of a written request from the PDP sponsor. To be 
approved, the request must provide a credible explanation of why 
additional time is necessary and be received by CMS before the end of 
the 15-day period following the date of receipt of the sanction notice. 
CMS does not grant an extension if it determines that the PDP sponsor's 
conduct poses a threat to an enrollee's health and safety.
    (b) Informal reconsideration. If, consistent with paragraph (a)(2) 
of this section, the PDP sponsor submits a timely response to CMS' 
notice of sanction, CMS conducts an informal reconsideration that--
    (1) Consists of a review of the evidence by an CMS official who did 
not participate in the initial decision to impose a sanction; and
    (2) Gives the PDP sponsor a concise written decision setting forth 
the factual and legal basis for the decision that affirms or rescinds 
the original determination.
    (c) Specific sanctions. If CMS determines that a PDP sponsor has 
acted or failed to act as specified in Sec.  423.752 and affirms this 
determination in accordance with paragraph (b) of this section, CMS 
may--
    (1) Require the PDP sponsor to suspend acceptance of applications 
made by Medicare beneficiaries for enrollment in the sanctioned plan 
during the sanction period;
    (2) In the case of a violation under Sec.  423.752(a), suspend 
payments to the PDP sponsor for Medicare beneficiaries enrolled in the 
sanctioned plan during the sanction period; and
    (3) Require the PDP sponsor to suspend all marketing activities for 
the sanctioned plan to Medicare enrollees.
    (d) Effective date and duration of sanctions. (1) Effective date. 
Except as provided in paragraph (d)(2) of this section, a sanction is 
effective 15 days after the date that the organization is notified of 
the decision to impose the sanction or, if the PDP sponsor seeks 
reconsideration in a timely manner under paragraph (b) of this section, 
on the date specified in the notice of CMS' reconsidered determination.
    (2) Exception. If CMS determines that the PDP sponsor's conduct 
poses a serious threat to an enrollee's health and safety, CMS may make 
the sanction effective on a date before issuance of CMS' reconsidered 
determination.
    (3) Duration of sanction. The sanction remains in effect until CMS 
notifies the PDP sponsor that CMS is satisfied that the basis for 
imposing the sanction is corrected and is not likely to recur.
    (e) Termination by CMS. In addition to or as an alternative to the 
sanctions described in paragraph (c) of this section, CMS may decline 
to authorize the renewal of an organization's contract in accordance 
with Sec.  423.507(b)(2) and (b)(3), or terminate the contract in 
accordance with Sec.  423.509.
    (f) Civil money penalties. (1) If CMS determines that a PDP sponsor 
has committed an act or failed to comply with a requirement described 
in Sec.  423.752, CMS notifies the OIG of this determination, and also 
notifies OIG when CMS reverses or terminates a sanction imposed under 
this part.
    (2) In the case of a violation described in Sec.  423.752(a), or a 
determination under Sec.  423.752(b) based upon a violation under Sec.  
423.509(a)(4) (involving fraudulent or abusive activities), in 
accordance with the provisions of part 1005 of this chapter, the OIG 
may impose civil money penalties on the PDP sponsor in accordance with 
part 1005 of this chapter in addition to, or in place of, the sanctions 
that CMS may impose under paragraph (c) of this section.
    (3) In the case of a determination under Sec.  423.752(b) other 
than a determination based upon a violation under Sec.  423.509(a)(4), 
in accordance with the provisions of part 1005 of this chapter, CMS may 
impose civil money penalties on the PDP sponsor in the amounts 
specified in Sec.  423.758 in addition to, or in place of, the 
sanctions that CMS may impose under paragraph (c) of this section.


Sec.  423.758  Maximum amount of civil money penalties imposed by CMS.

    If CMS makes a determination under Sec.  423.752(b), based on any 
determination under Sec.  423.509(a) except a determination under Sec.  
423.509(a)(4), CMS may impose civil money penalties in the following 
amounts:
    (a) If the deficiency on which the determination is based has 
directly

[[Page 46854]]

adversely affected (or has the substantial likelihood of adversely 
affecting) one or more PDP enrollees--up to $25,000 for each 
determination.
    (b) For each week that a deficiency remains uncorrected after the 
week in which the PDP sponsor receives CMS' notice of the 
determination--up to $10,000 per week.
    (c) If CMS makes a determination under Sec.  423.752(b) and Sec.  
423.756(f)(3), based on a determination under Sec.  423.509(a)(1) that 
a PDP sponsor has terminated its contract with CMS in a manner other 
than described under Sec.  423.510--$250 per Medicare enrollee from the 
terminated PDP plan or plans at the time the PDP sponsor terminated its 
contract, or $100,000, whichever is greater.


Sec.  423.760  Other applicable provisions.

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

Subpart P--Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals

    Note: Regulations concerning the low-income premium and cost-
sharing subsidy under Medicaid can be found at Subpart S, Special 
Rules for States--Eligibility Determinations for Subsidies and 
General Payment Provisions.

Sec.  423.771  Basis and scope.

    (a) Basis. This subpart is based on section 1860D-14 of the Act.
    (b) Scope. This subpart sets forth the requirements and limitations 
for payments by and on behalf of low-income Medicare beneficiaries who 
enroll in a prescription drug plan or MA-PD plan.


Sec.  423.772  Definitions.

    For purposes of this subpart, the following definitions apply:
    Family size means the applicant, the spouse who is living in the 
same household, if any, and the number of individuals who are related 
to the applicant or applicants, who are living in the same household 
and who are dependent on the applicant or the applicant's spouse for at 
least one-half of their financial support.
    Federal poverty line (FPL) has the meaning given that term in 
section 673(2) of the Community Services Block Grant Act (42 U.S.C. 
9902(2)), including any revision required by that section.
    Full benefit dual eligible individual means an individual who, for 
any month--
    (1) Has coverage for the month under a prescription drug plan under 
Part D of title XVIII, or under an MA-PD plan under Part C of title 
XVIII; and
    (2) Is determined eligible by the State for medical assistance for 
full benefits under title XIX for the month under any eligibility 
category covered under the State plan or comprehensive benefits under a 
demonstration under section 1115 of the Act. (This does not include 
individuals under Pharmacy Plus program demonstrations.) It also 
includes any individual who is determined by the State to be eligible 
for medical assistance under section 1902(a)(10)(C) of the Act 
(medically needy) or section 1902(f) of the Act (States that use more 
restrictive eligibility criteria than are used by the SSI program) for 
any month if the individual was eligible for medical assistance in any 
part of the month.
    Full subsidy eligible individuals means individuals meeting the 
eligibility requirements under Sec.  423.773(b).
    Income means income as described under section 1905(p)(1) of the 
Act without use of any more liberal disregards under section 1902(r)(2) 
of the Act (that is, as defined by section 1612 of the Act). This 
definition includes the income of the applicant and spouse who is 
living in the same household, if any, regardless of whether the spouse 
is also an applicant.
    Institutionalized individual means a full-benefit dual eligible 
individual who is an inpatient in a medical institution or nursing 
facility for which payment is made under Medicaid throughout a month, 
as defined under section 1902(q)(1)(B) of the Act.
    Other subsidy eligible individuals means those individuals meeting 
the eligibility requirements under Sec.  423.773(d).
    Personal representatives means--
    (1) Individuals who are authorized to act on behalf of the 
applicant;
    (2) If the applicant is incapacitated; or incompetent, someone 
acting responsibly on their behalf, or
    (3) An individual of the applicant's choice who is requested by the 
applicant to act as his or her representative in the application 
process.
    Resources means liquid resources of the individual (and his or her 
spouse if the individual is married, who is living in the same 
household), such as checking and savings accounts, stocks, bonds, and 
other resources that can be readily converted to cash within 20 days, 
that are not excluded from resources in section 1613 of the Act, and 
real estate that is not the applicant's primary residence or the land 
on which the primary residence is located.
    State means for purposes of this subpart each of the 50 States and 
the District of Columbia.
    Subsidy eligible individuals means those individuals meeting the 
eligibility requirements under Sec.  423.773.


Sec.  423.773  Requirements for eligibility

    (a) Subsidy eligible individual. A subsidy eligible individual is a 
Part D eligible individual residing in a State who is enrolled in a 
prescription drug plan or MA-PD plan and meets the following 
requirements:
    (1) Has income below 150 percent of the FPL applicable to the 
individual's family size.
    (2) Has resources at or below the resource thresholds set forth in 
Sec.  423.773(b)(2) or (d)(2).
    (b) Full subsidy eligible individual. A full subsidy eligible 
individual is a subsidy eligible individual who--
    (1) Has income below 135 percent of the FPL applicable to the 
individual's family size; and
    (2) Has resources that do not exceed--
    (i) For 2006, 3 times the amount of resources an individual may 
have and still be eligible for benefits under the SSI program 
(including the assets or resources of the individual's spouse).
    (ii) For subsequent years, the amount of resources allowable for 
the previous year under this paragraph (b)(2) increased by the annual 
percentage increase in the consumer price index (all items, U.S. city 
average) as of September of that previous year, rounded to the nearest 
multiple of $10.
    (c) Individuals treated as full subsidy eligible. An individual 
must be treated as meeting the eligibility requirements for full 
subsidy eligible individuals under paragraph (b) of this section if the 
individual is a--
    (1) Full benefit dual eligible individual;
    (2) Recipient of SSI benefits under title XVI of the Act; or
    (3) Eligible for Medicaid as a Qualified Medicare Beneficiary 
(QMB), Specified Low Income Medicare Beneficiary (SLMB), or a 
Qualifying Individual (QI) under a State's plan. The State agency must 
notify an individual treated as a full benefit dual eligible that the 
individual is eligible for a full subsidy of Part D premiums and 
deductibles and must either enroll with a PDP or MA-PD or be randomly 
assigned to a PDP or MA-PD.
    (d) Other low-income subsidy individuals. Other low-income subsidy

[[Page 46855]]

individuals are subsidy eligible individuals who--
    (1) Have income less than 150 percent of the FPL applicable to the 
individual's family size; and
    (2) Have resources that do not exceed--
    (i) For 2006, $10,000 if single or $20,000 if married (including 
the assets or resources of the individual's spouse).
    (ii) For subsequent years, the resource amount allowable for the 
previous year under this paragraph (d)(2), increased by the annual 
percentage increase in the consumer price index (all items, U.S. city 
average) as of September of the previous year, rounded to the nearest 
multiple of $10.


Sec.  423.774  Eligibility determinations, redeterminations, and 
applications.

    (a) Determinations of whether an individual is a subsidy eligible 
individual. Determinations of eligibility for subsidies under this 
section are made by the State under its State plan under title XIX if 
the individual applies with the Medicaid agency, or if the individual 
applies with SSA, the Commissioner of Social Security in accordance 
with the requirements of section 1860D-14(a)(3) of the Act.
    (b) Effective date of initial eligibility determinations. 
Eligibility determinations are effective beginning with the first day 
of the month in which the individual applies, or January 1, 2006 if the 
application was taken in advance of that date, and remain in effect for 
a period not to exceed 1 year.
    (c) Redeterminations and appeals of low-income subsidy eligibility. 
(1) Redeterminations and appeals of low-income subsidy eligibility 
determinations--eligibility determinations made by States. 
Redeterminations and appeals of low-income subsidy eligibility 
determinations by States must be made in the same manner and frequency 
as the redeterminations and appeals are made under the State's plan.
    (2) Redeterminations and appeals of low-income subsidy 
eligibility--eligibility determinations made by Commissioner. 
Redeterminations and appeals of eligibility determinations made by the 
Commissioner must be made in the manner specified by the Commissioner.
    (d) Application requirements. (1) In order for low-income subsidy 
applications to be considered complete, individuals applying for the 
low-income subsidy, or personal representatives applying on the 
individual's behalf, must--
    (i) Complete all required elements of the application;
    (ii) Provide any statements from financial institutions, as 
requested, to support information in the application; and
    (iii) Certify, under penalty of perjury or similar sanction for 
false statements, as to the accuracy of the information provided on the 
application form.
    (d)(2) [Reserved]


Sec.  423.780  Premium subsidy.

    (a) Full subsidy eligible individuals. Full subsidy individuals are 
entitled to a premium subsidy equal to 100 percent of the ``premium 
subsidy amount,'' not to exceed the basic premium for coverage under 
the prescription drug plan selected by the beneficiary, and the greater 
of the low-income benchmark premium or the lowest monthly beneficiary 
premium for a prescription drug plan that offers basic prescription 
drug coverage in the PDP region. (The premium subsidy determined in 
this way applies regardless of whether the individual enrolls in a PDP 
or MA-PD.) In the event the low-income benchmark premium is less than 
the lowest monthly beneficiary premium for basic prescription drug 
coverage offered by a PDP sponsor in a PDP region, in accordance with 
section 1860D-14(b)(3) of the Act, the premium subsidy will be equal to 
the lowest monthly beneficiary premium for basic prescription drug 
coverage offered by a PDP sponsor in the PDP region. The low-income 
benchmark premium amount for a region equals either--
    (1) If all PDPs in the PDP region are offered by the same PDP 
sponsor, the weighted average of the monthly beneficiary premiums for 
basic prescription drug coverage; or
    (2) If the PDPs in the region are offered by more than one PDP 
sponsor, the weighted average of the monthly beneficiary premiums for 
basic prescription drug coverage for all PDP and MA-PD plans in the 
region (excluding section 1876 cost plans, PACE plans, specialized MA 
plans for special needs individuals, and private fee-for-service plans) 
and the portion of the monthly beneficiary premium for alternative 
prescription drug coverage attributable to basic prescription drug 
coverage for all PDPs and MA-PD plans in the region. Fallback plans 
will be treated the same as risk-bid plans for the calculation of the 
low-income benchmark premium. The weighted average is determined based 
on enrollment in PDPs and MA-PDs in the region.
    (b) Other low-income subsidy eligible individuals--sliding scale 
premium. Other low-income subsidy eligible individuals are entitled to 
a premium subsidy based on a linear sliding scale ranging from 100 
percent of the amount described in paragraph (a) of this section, for 
individuals with incomes at or below 135 percent of the FPL applicable 
to their family size, to 0 percent for individuals with incomes at 150 
percent of the FPL applicable to their family size.
    (c) Premium subsidy for late enrollment penalty. Full subsidy 
eligible individuals who are subject to late enrollment penalties under 
Sec.  423.46 are entitled to an additional premium subsidy equal to 80 
percent of the late penalty for the first 60 months during which the 
penalty is imposed and 100 percent of the penalty thereafter.


Sec.  423.782  Cost-sharing subsidy.

    (a) Full subsidy eligible individuals. Full subsidy eligible 
individuals are entitled to the following:
    (1) Elimination of the annual deductible under Sec.  423.104(e)(1).
    (2) Reduction in cost-sharing for all covered Part D drugs covered 
under the PDP or MA-PD plan below the out-of-pocket limit (under Sec.  
423.104), including Part D drugs covered under the PDP or MA-PD plan 
obtained after the initial coverage limit (under Sec.  423.104(e)(4)), 
as follows:
    (i) Except as provided under paragraphs (a)(2)(ii) and (a)(2)(iii) 
of this section, copayment amounts not to exceed the copayment amounts 
specified in Sec.  423.104. This applies to those full benefit dual 
eligible individuals who are not institutionalized and who have income 
above 100 percent of the Federal poverty line applicable to the 
individual's family size.
    (ii) Institutionalized individuals have no cost-sharing for covered 
Part D drugs covered under their PDP or MA-PD plans.
    (iii) Non-institutionalized full benefit dual eligible individuals 
with incomes that do not exceed 100 percent of the Federal poverty line 
applicable to the individual's family size are subject to cost-sharing 
for covered drugs equal to the lesser of a copayment amount of $1 for a 
generic drug or preferred multiple source drug of $3 for any other 
drug, or the amount charged to other individuals with income below 135 
percent of the FPL and resources not greater than 3 times the amount an 
individual may have and still be eligible for benefits under the SSI 
program. These amounts are increased each year beginning in 2007 by the 
percentage increase in CPI, rounded to the nearest multiple of 5 cents 
or 10 cents, respectively.
    (iv) Non-institutionalized full benefit dual eligible individuals 
with incomes

[[Page 46856]]

that exceed 100 percent of the Federal poverty line applicable to the 
individual's family size are subject to cost-sharing for covered drugs 
equal to the lesser of a copayment amount of $2 for a generic drug or 
preferred multiple source drug or $5 for any other drug, or the amount 
charged to other individuals with income below 135 percent of the FPL 
and resources not greater than 3 times the amount an individual may 
have and still be eligible for benefits under the SSI program.
    (3) Elimination of all cost-sharing for covered Part D drugs 
covered under the PDP or MA-PD plan above the out-of-pocket limit 
(under Sec.  423.104(e)(5).
    (b) Other low-income subsidy eligible individuals. Other low-income 
subsidy eligible individuals are entitled to the following:
    (1) Reduction in the annual deductible under Sec.  423.104 to $50. 
This amount is increased each year beginning in 2007 by the annual 
percentage increase in average per capita aggregate expenditures for 
covered Part D drugs, rounded to the nearest multiple of $1.
    (2) 15 percent coinsurance for all covered drugs covered under the 
individual's PDP or MA-PD plan obtained after the initial coverage 
limit (under Sec.  423.104), up to the out-of-pocket limit (under Sec.  
423.104).
    (3) For covered drugs above the out-of-pocket limit (under Sec.  
423.104), copayments not to exceed $2 for a generic drug or preferred 
multiple source and $5 for any other drug. These amounts are increased 
each year beginning in 2007 by the annual percentage increase in 
average per capita aggregate expenditures for covered Part D drugs, 
rounded to the nearest multiple of 5 cents.


Sec.  423.800  Administration of subsidy program.

    (a) Notification of eligibility for low-income subsidy. CMS 
notifies the PDP sponsor offering the PDP or the MA organization 
offering the MA-PD plan, in which a subsidy eligible individual is 
enrolled, of the individual's eligibility for a subsidy and the amount 
of the subsidy.
    (b) Reduction of premium or cost-sharing by PDP sponsor or 
organization. The PDP sponsor offering the PDP, or the MA organization 
offering the MA-PD plan, in which a subsidy eligible individual is 
enrolled must reduce the individual's premiums and cost-sharing as 
applicable, and provide information to CMS on the amount of those 
reductions, in a manner determined by CMS. The PDP sponsor and MA-PD 
organization must track the application of the low-income cost-sharing 
subsidies to be applied to the out-of-pocket threshold.
    (c) Reimbursement to sponsor or organization for the amount of the 
reductions. CMS reimburses sponsors and MA organizations for reductions 
under paragraph (b) of this section, or, if a PDP sponsor or MA 
organization elects to be paid on a capitated basis under paragraph (e) 
of this section, the capitated amounts under paragraph (e) of this 
section, in the manner determined by CMS.
    (d) Reimbursement for cost-sharing on a capitated basis. 
Reimbursement for cost-sharing subsidies may be computed on a capitated 
basis, taking into account the actuarial value of the subsidies and 
making appropriate adjustments to reflect differences in the risks 
actually involved.
    (e) Reimbursement for cost-sharing paid before notification of 
eligibility for low-income subsidy. The PDP sponsor offering the PDP 
plan, or MA-PD organization offering the MA-PD plan, must reimburse 
low-income subsidy eligible individuals any out-of-pocket costs 
relating to excess premiums and cost-sharing paid before the date the 
individual is notified of subsidy eligibility and after the date 
subsidy eligibility is effective.

Subpart Q--Guaranteeing Access to a Choice of Coverage (Fallback 
Plans)


Sec.  423.851  Scope.

    This section sets forth--the rights of beneficiaries to a choice of 
at least two sources of prescription drug coverage; requirements and 
limitations on the bid submission, review and approval of fallback 
prescription drug plans, and the determination of enrollee premium and 
plan payments for these plans.


Sec.  423.855  Definitions.

    As used in this subpart, unless specified otherwise--
    Eligible Fallback Entity or Fallback Entity means an entity that, 
with respect to a particular contract period--
    (1) meets all the requirements to be a PDP sponsor except that it 
does not have to be a risk-bearing entity; and
    (2) does not submit a bid under Sec.  423.265 for any prescription 
drug plan for any PDP region for the first year of that contract 
period. An entity is treated as submitting a bid if the entity is 
acting as a subcontractor for an integral part of the drug benefit 
management activities of a PDP sponsor. An entity is not treated as 
submitting a bid if it is a subcontractor of an MA organization, unless 
that organization is acting as a PDP sponsor for a prescription drug 
plan.
    Fallback Prescription Drug Plan means a plan offered by a fallback 
entity that--
    (1) Offers only actuarially equivalent standard prescription drug 
coverage as defined in Sec.  423.100;
    (2) Provides access to negotiated prices, including discounts from 
manufacturers; and
    (3) Meets other requirements as specified by CMS.
    Qualifying Plan means a full-risk or limited-risk prescription drug 
plan, as defined in Sec.  423.258, or an MA plan described in section 
1851(a)(2)(A)(i) of the Act, that either provides basic prescription 
drug coverage, as defined in Sec.  423.100, or provides alternative 
prescription drug coverage for no additional premium because it applies 
a premium rebate under Part C of Medicare as a credit against the 
supplemental coverage premium, as described under Sec.  422.266(b)(1). 
An MA-PD plan must be open for enrollment and not operating under a 
capacity waiver to be counted as a qualifying plan.


Sec.  423.859  Assuring access to a choice of coverage.

    (a) Choice of at least 2 qualifying plans in each area. Each Part D 
eligible individual must have available a choice of enrollment in at 
least 2 qualifying plans (as defined in Sec.  423.855) in the area in 
which the individual resides. This requirement is not satisfied if only 
one entity offers all the qualifying plans in the area. At least 1 of 
the 2 qualifying plans must be a prescription drug plan.
    (b) Fallback service area. (1) For coverage year. Before the start 
of each coverage year CMS determines if Part D eligible individuals 
residing in a PDP region have access to a choice of enrollment in a 
minimum of 2 qualifying plans, as described in paragraph (a) of this 
section. If CMS determines that Part D eligible individuals in a PDP 
region, or some portion of the region, do not have available a choice 
of enrollment in a minimum of two qualified plans, CMS designates the 
region or portion of a region as a fallback service area. Each Part D 
eligible individual in a fallback service area is given the opportunity 
to enroll in a fallback prescription drug plan.
    (2) For mid-year changes. If a contract with a qualifying plan is 
terminated in the middle of a contract year (as provided for in 
Sec. Sec.  423.508, 423.509, or 423.510), CMS determines if Part D 
eligible individuals residing in the affected PDP region still have 
access to

[[Page 46857]]

a choice of enrollment in a minimum of 2 qualifying plans. If CMS 
determines that Part D eligible individuals in a PDP region, or some 
portion of the region, no longer have available a choice of enrollment 
in a minimum of two qualifying plans, CMS designates the region or 
portion of a region as a fallback service area.
    (c) Access to coverage in the territories. CMS may waive or modify 
the requirements of this part if--
    (1) CMS determines that waiver or modification is necessary to 
secure access to qualified prescription drug coverage for Part D 
eligible individuals residing in a State other than the 50 States or 
the District of Columbia; or
    (2) An entity seeking to become a prescription drug plan in a State 
other than the 50 States or the District of Columbia requests waiver or 
modification of any Part D requirement in order to provide qualified 
prescription drug coverage in a State other than the 50 States or the 
District of Columbia.


Sec.  423.863  Submission and approval of bids.

    (a) Submission of Bids. (1) Solicitation of bids. Separate from the 
bidding process under Sec.  423.265, CMS solicits bids from eligible 
fallback entities for the offering in all fallback service areas in one 
or more PDP regions of a fallback prescription drug plan during the 
contract period specified in Sec.  423.871(c).
    (2) Timing of bids. CMS will determine when to solicit bids for 
2006 so that potential fallback plans will have enough time to prepare 
a bid. After that, bids will be solicited on three-year cycles, or 
annually thereafter as needed to replace contractors between 
contracting cycles.
    (3) Format of bid. CMS specifies the form and manner in which 
fallback bids are submitted in separate guidance to bidders.
    (b) Negotiation and acceptance of bids.
    (1) General rule. Except as provided in this section, the 
provisions of Sec.  423.272 apply for the approval or disapproval of 
fallback prescription drug plans. CMS enters into contracts under this 
paragraph with eligible fallback entities for the offering of approved 
fallback prescription drug plans in potential fallback service areas.
    (2) Flexibility in risk assumed and application of fallback plan. 
In order to ensure access in an area pursuant to Sec.  423.859(a), CMS 
may approve limited risk plans under Sec.  423.272(c) for that area. If 
the access requirement is still not met after applying Sec.  
423.272(c), CMS provides for the offering of a fallback prescription 
drug plan in that area.
    (3) Limitation of 1 Plan for all fallback service areas in a PDP 
region. All fallback service areas in any PDP region for a contract 
period must be served by the same fallback prescription drug plan.
    (4) Competitive procedures. CMS uses competitive procedures (as 
defined in section 4(5) of the Office of Federal Procurement Policy Act 
(41 U.S.C. 403(5)) to enter into a contract under this paragraph. The 
provisions of section 1874A(d) of the Act apply to a contract under 
this section in the same manner as they apply to a contract under that 
section.
    (5) Timing of contracts. CMS approves a fallback prescription drug 
plan for a PDP region in a manner so that, if there are any fallback 
service areas in the region for a year, the fallback prescription drug 
plan is offered at the same time as prescription drug plans are 
otherwise offered. In the event of mid-year changes and as required by 
Sec.  423.859(b)(2), CMS approves a fallback prescription drug plan for 
a PDP region in a manner so that the fallback plan is offered within 90 
days of notice.
    (6) No national fallback plan. CMS may not enter into a contract 
with a single fallback entity for the offering of fallback plans 
throughout the United States.


Sec.  423.867  Rules regarding premiums.

    (a) Monthly beneficiary premium. Except as provided in Sec.  
423.286(d)(3) (relating to late enrollment penalty) and subject to 
Subpart P (relating to low-income assistance), the monthly beneficiary 
premium under a fallback prescription drug plan must be uniform for all 
fallback service areas in a PDP region. It must equal 25.5 percent of 
CMS's estimate of the average monthly per capita actuarial cost, 
including administrative expenses, of providing coverage in the region 
based on similar expenses of prescription drug plans that are not 
fallback prescription drug plans.
    (b) Special rule for collection of premiums in fallback plans. In 
the case of a fallback prescription drug plan, the provisions of Sec.  
423.293 (b) concerning payments of the late enrollment penalty do not 
apply and the monthly beneficiary premium is collected in the manner 
specified in Sec.  422.262(f)(1) (or other manner as may be provided 
under section 1840 of the Act in the case of monthly premiums under 
section 1839 of the Act).


Sec.  423.871  Contract terms and conditions.

    (a) General. Except as may be appropriate to carry out the 
requirements of this section, the terms and conditions of contracts 
with eligible fallback entities offering fallback prescription drug 
plans are the same as the terms and conditions of contracts at Sec.  
423.504 for prescription drug plans.
    (b) Period of contract. Except as may be renewed after a subsequent 
bidding process, a contract with a fallback entity for fallback service 
areas for a PDP region is in effect for a period of 3 years. However, a 
fallback prescription drug plan may be offered for any year within the 
contract period for a particular area only if the area is a fallback 
service area for that year.
    (c) Entity not permitted to market or brand fallback prescription 
drug plans. An eligible fallback entity with a contract under this part 
may not engage in any marketing or branding of a fallback prescription 
drug plan.
    (d) Performance measures. CMS issues guidance establishing 
performance measures for fallback prescription drug plans based on the 
following:
    (1) Types of Performance Measures. Performance measures include at 
least measures for each of the following:
    (i) Costs. The entity contains costs to the Medicare Prescription 
Drug Account and to Part D eligible individuals enrolled in a fallback 
prescription drug plan offered by the entity through mechanisms such as 
generic substitution and price discounts, including discounts from 
manufacturers.
    (ii) Quality programs. The entity provides the enrollees with 
quality programs that avoid adverse drug reactions and over utilization 
and reduce medical errors.
    (iii) Customer service. The entity provides timely and accurate 
delivery of services and pharmacy and beneficiary support services.
    (iv) Benefit administration and claims adjudication. The entity 
provides efficient and effective benefit administration and claims 
adjudication.
    (2) Development of performance measures. CMS establishes detailed 
performance measures for use in evaluating fallback entity performance 
and determination of certain management fees based on criteria from 
historical performance, application of acceptable statistical measures 
of variation to fallback entity and PDP sponsor experience nationwide 
during a base period, or changing program emphases or requirements.

[[Page 46858]]

    (e) Payment terms. A contract approved with a fallback entity 
includes terms for payment for--
    (1) The actual costs (taking into account negotiated price 
concessions described in Sec.  423.108(d) of covered Part D drugs 
provided to Part D eligible individuals enrolled in a fallback 
prescription drug plan offered by the entity); and
    (2) Management fees that are tied to the performance measures 
established by CMS for the management, administration, and delivery of 
the benefits under the contract as provided under paragraph (d) of this 
section.
    (f) Requirement for the submission of information. Each contract 
for a fallback prescription drug plan requires an eligible fallback 
entity offering a fallback prescription drug plan to provide CMS with 
the information CMS determines is necessary to carry out this section, 
or as required by law. Officers, employees and contractors of the 
Department of Health and Human Services may use any information 
disclosed or obtained in accordance with the provisions of this part 
only for the purposes of, and to the extent necessary in, carrying out 
this part. This restriction does not limit OIG authority to conduct 
audits and evaluations necessary for carrying out these regulations.
    (g) Amendment to reflect changes in service area. The contract may 
be amended by CMS at any time as needed to reflect the exact regions or 
counties to be included in the fallback service area(s).


Sec.  423.875  Payments to fallback plans.

    The amount payable for a fallback prescription drug plan is the 
amount determined under the contract for the plan in accordance with 
Sec.  423.871(e).

Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans


Sec.  423.880  Basis and scope.

    (a) Basis. This subpart is based on section 1860D-22 of the Act, as 
amended by section 101 of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA).
    (b) Scope. This section implements the statutory requirement that a 
subsidy payment be made to sponsors of qualified retiree prescription 
drug plans.


Sec.  423.882  Definitions.

    For the purposes of this subpart, the following definitions apply:
    Allowable retiree costs in accordance with section 1860D-
22(a)(3)(C)(i) of the Act, means gross covered retiree plan-related 
prescription drug costs between the cost threshold and cost limit, as 
defined under Sec.  423.886(b), that are actually paid by either the 
qualified retiree prescription drug plan or the qualifying covered 
retiree (or on the retiree's behalf), net of any manufacturer or 
pharmacy discounts, chargebacks, rebates, and similar price 
concessions.
    Covered Part D drug has the same meaning as defined in Sec.  
423.100.
    Retiree drug subsidy amount means the subsidy amount paid to 
sponsors of qualified retiree prescription drug coverage under Sec.  
423.886(a).
    Employment-based retiree health coverage means coverage of health 
care costs under a group health plan based on an individual's status as 
a retired participant in the plan, or as the spouse or dependent of a 
retired participant. The term includes coverage provided by voluntary 
insurance coverage, or coverage as a result of statutory or contractual 
obligation.
    Gross covered retiree plan-related prescription drug costs, or 
gross retiree costs means, for a qualifying covered retiree who is 
enrolled in a qualified retiree prescription drug plan during a plan 
year, non-administrative costs incurred under the plan for covered Part 
D drugs during the year, whether paid for by the plan or the retiree, 
including costs directly related to the dispensing of covered Part D 
drugs.
    Group health plan has the same meaning as defined in section 607(1) 
of ERISA, 29 U.S.C. 1167(1). This definition also includes the 
following plans:
    (1) Federal and State governmental plan means a plan established or 
maintained for its employees by the Government of the United States, by 
the government of any State or political subdivision of a State, or by 
any agency or instrumentality or any of the foregoing, including a 
health benefits plan offered under chapter 89 of title 5, United States 
Code (the Federal Employee Health Benefit Plan (FEHBP)).
    (2) Collectively bargained plan means a plan established or 
maintained under or by one or more collective bargaining agreements.
    (3) Church plan means a plan established and maintained for its 
employees or their beneficiaries by a church or by a convention or 
association of churches that is exempt from tax under section 501 of 
the Internal Revenue Code of 1986 (26 U.S.C. 501).
    Part D eligible individual is defined in Sec.  423.4 of our 
proposed rule.
    Qualified retiree prescription drug plan means employment-based 
retiree health coverage that meets the requirements set forth in Sec.  
423.884(a) through (d) of this chapter for a Part D eligible individual 
who is a participant or beneficiary under the coverage.
    Qualifying covered retiree means a Part D eligible individual who 
is a participant under the qualified retiree prescription drug plan or 
the spouse or dependent of a participant under the qualified 
prescription drug plan, who is not enrolled in a Part D prescription 
drug plan or a Medicare Advantage-Prescription Drug (MA-PD) plan.
    Standard Prescription Drug Coverage has the same meaning as defined 
in Sec.  423.100.
    Sponsor is a plan sponsor as defined in section 3(16)(B) of the 
Employee Retirement Income Security Act of 1974 (ERISA), except that, 
in the case of a plan maintained jointly by one employer and an 
employee organization and for which the employer is the primary source 
of financing, the term means the employer.


Sec.  423.884  Requirements for qualified retiree prescription drug 
plans.

    A qualified retiree prescription drug plan must meet the 
requirements of this section.
    (a) Actuarial Attestation. The sponsor of the plan (or a plan 
administrator designated by the sponsor) provides to CMS an attestation 
that the actuarial value of the retiree prescription drug coverage 
under the plan is at least equal to the actuarial value of the standard 
prescription drug coverage under Part D. The attestation must--
    (1) Be provided annually, no later than 90 days prior to the start 
of the calendar year, except that for 2006, the attestation must be 
provided by September 30, 2005;
    (2) Be provided no later than 90 days before the implementation of 
a material change to the drug coverage of the plan that impacts the 
actuarial value of the coverage;
    (3) Certify that the values have been calculated according to 
established CMS actuarial guidelines based on generally accepted 
actuarial principles;
    (4) Be certified by a qualified actuary who is a member of the 
American Academy of Actuaries. Applicants may use qualified outside 
actuaries.
    (5) Be signed under the penalty of perjury;
    (6) State that the information contained in the attestation is true 
and accurate to the best of the attester's knowledge;
    (7) Contain an acknowledgement that the information being provided 
in the attestation is being used to obtain Federal funds.
    (b) Sponsor application for the subsidy payment.
    (1) Deadlines. The sponsor must submit an application for the 
subsidy,

[[Page 46859]]

signed by an authorized representative of the sponsor, to CMS by no 
later than for:
    (i) The year 2006, September 30, 2005.
    (ii) All other years, 90 days prior to the start of the year.
    (iii) Plans that begin coverage in the middle of a year, 90 days 
prior to the date the coverage begins.
    (iv) New plans that institute coverage after September 30, 2005, 
150 days prior to the start of the new plan.
    (2) Required information. The following information must be 
submitted with the application:
    (i) Employer Tax ID Number (if applicable).
    (ii) Sponsor name and address.
    (iii) Contact name and email address.
    (iv) Actuarial attestation and supporting documentation for each 
qualified retiree prescription drug plan for which the sponsor seeks 
subsidy payments.
    (v) Full names of each qualifying covered retiree enrolled in each 
prescription drug plan (including spouses and dependents, if Medicare-
eligible), and the following information:
    (A) Health Insurance Claim (HIC) number (when available).
    (B) Date of birth.
    (C) Sex.
    (D) Social Security number.
    (E) Relationship to the retired employee.
    (3) Terms and conditions. The application must specify acceptance 
of the terms and conditions of eligibility to receive a subsidy 
payment. The sponsor must--
    (i) Agree to comply with all Federal laws and regulations, and the 
terms and conditions of eligibility for a subsidy payment, including 
those concerning auditing of claims for subsidy payments and combating 
fraud and abuse;
    (ii) Acknowledge that the information is being provided to obtain 
Federal funds;
    (iii) Require that all subcontractors, including administrators, 
acknowledge that information provided in connection with the 
subcontract is used for purposes of obtaining Federal funds;
    (iv) Sign any further certification that CMS may require.
    (4) Signature by sponsor. An authorized representative of the 
requesting sponsor must sign the completed application. The signed 
application constitutes an agreement between CMS and the sponsor.
    (5) Updates. The sponsor (or the plan administrator designated by 
the sponsor) must provide updates to CMS of the information required in 
paragraph (b)(2) of this section in the manner and frequency specified 
by CMS.
    (6) Data match. Once the full application for the subsidy payment 
is submitted, CMS--
    (i) Matches the names of the qualifying covered retirees and the 
identifying information of each retiree with the Medicare Data Base 
(MBD) to determine which retirees are qualifying covered retirees.
    (ii) Provides to the sponsor (or to a plan administrator designated 
by a sponsor) the names, and other identifying information if 
necessary, of the sponsor's qualifying covered retirees.
    (c) Disclosure of creditable coverage status. The sponsor must 
disclose to all of its retirees and their spouses and dependents 
eligible to participate in its plan who are Part D eligible individuals 
whether the coverage is creditable coverage under Sec.  423.4 in 
accordance with the notification requirements under Sec.  423.56.
    (d) Audits, CMS access to records. The sponsor must meet the 
requirements of Sec.  423.888 (d).


Sec.  423.886  Retiree drug subsidy amounts.

    (a) Amount of subsidy payment. For each qualifying covered retiree 
enrolled with the sponsor of a qualified retiree prescription drug plan 
in a plan year in which the retiree's gross covered retiree plan-
related prescription drug costs (as defined in Sec.  423.882) exceeds 
the cost threshold defined in paragraph (b)(1) of this section, the 
sponsor receives a subsidy payment in the amount of 28 percent of the 
allowable retiree costs (as defined in Sec.  423.882) attributable to 
the gross covered prescription drug costs between the cost threshold 
and the cost limit defined in paragraph (b)(2) of this section.
    (b) Cost threshold and cost limit. The following cost threshold and 
cost limits apply--
    (1) Subject to paragraph (b)(3) of this section, the cost threshold 
under this section is equal to $250 for calendar year 2006.
    (2) Subject to paragraph (b)(3) of this section, the cost limit 
under this section is equal to $5,000 for calendar year 2006.
    (3) The cost threshold and cost limit specified in paragraphs 
(b)(1) and (b)(2) of this section, for years after 2006, is adjusted in 
the same manner as the annual Part D deductible and the annual Part D 
out-of-pocket threshold are adjusted annually under Sec. Sec.  
423.104(e)(1)(ii) and (e)(4)(iii)(B), respectively.


Sec.  423.888  Payment methods, including provision of necessary 
information.

    (a) Basis. The provisions of Sec.  423.301 through Sec.  423.343, 
including requirement to provide information necessary to ensure 
accurate subsidy payments, govern payment under Sec.  423.886.
    (b) Payment. Payment under Sec.  423.886 is conditioned on 
provision of accurate and truthful information in a form and manner 
specified by CMS. When directed by the sponsor of a qualified retiree 
prescription drug plan applying for payment under this section, the 
qualified retiree prescription drug plan (or an administrator or 
insurer of the qualified retiree prescription drug plan, if applicable) 
must submit in the form and manner CMS specifies, the information 
required to CMS.
    (c) Use of information provided. Officers, employees and 
contractors of the Department of Health and Human Services, including 
the Office of Inspector General (OIG), may use information collected 
under paragraphs (a) and (d) of this section only for the purposes of, 
and to the extent necessary in, carrying out this subpart including, 
but not limited to, determination of payments and payment-related 
oversight and program integrity activities, or as otherwise required by 
law. This restriction does not limit OIG authority to conduct audits 
and evaluations necessary for carrying out these regulations.
    (d) Maintenance of records. (1) The sponsor of the qualified 
retiree prescription drug plan and the qualified retiree prescription 
drug plan (or an administrator or insurer of the qualified retiree 
prescription drug plan), as applicable, must maintain, and furnish to 
CMS or the Office of Inspector General (OIG) upon request, the records 
enumerated in paragraph (d)(3) of this section. The records must be 
maintained for 6 years after the expiration of the plan year in which 
the costs were incurred for the purposes of audits and other oversight 
activities conducted by CMS to assure the accuracy of the actuarial 
attestation and the accuracy of payments.
    (2) CMS or the OIG may extend the 6-year retention requirement in 
the event of an ongoing investigation, litigation or negotiation.
    (3) The records that must be retained are:
    (i) Reports and working documents of the actuaries who wrote the 
attestation submitted in accordance with Sec.  423.884(a).
    (ii) All documentation of costs incurred and other relevant 
information utilized for calculating the amount of the subsidy payment 
made in accordance with Sec.  423.886, including the underlying claims 
data.

[[Page 46860]]

Sec.  423.890  Appeals.

    (a) Informal written reconsideration. (1) Initial determinations. A 
sponsor is entitled to an informal written reconsideration of an 
adverse initial determination. An initial determination is a 
determination regarding the following:
    (i) The amount of the subsidy payment.
    (ii) The actuarial equivalence of the sponsor's retiree 
prescription drug plan.
    (iii) If an enrollee in a retiree prescription drug plan is a 
qualifying covered retiree; or
    (iv) Any other similar determination (as determined by CMS) that 
affects eligibility for, or the amount of, a subsidy payment.
    (2) Effect of an initial determination regarding the retiree drug 
subsidy. An initial determination is final and binding unless 
reconsidered in accordance with this paragraph (a).
    (3) Manner and timing for request. A request for reconsideration 
must be made in writing and filed with CMS within 15 days of the date 
on the notice of adverse determination.
    (4) Content of request. The request for reconsideration must 
specify the findings or issues with which the sponsor disagrees and the 
reasons for the disagreements. The request for reconsideration may 
include additional documentary evidence the sponsor wishes CMS to 
consider.
    (5) Conduct of informal written reconsideration. In conducting the 
reconsideration, CMS reviews the subsidy determination, the evidence 
and findings upon which it was based, and any other written evidence 
submitted by the sponsor or by CMS before notice of the reconsidered 
determination is made.
    (6) Decision of the informal written reconsideration. CMS informs 
the sponsor of the decision orally or through electronic mail. CMS 
sends a written decision to the sponsor on the sponsor's request.
    (7) Effect of CMS informal written reconsideration. A 
reconsideration decision, whether delivered orally or in writing, is 
final and binding unless a request for hearing is filed in accordance 
with paragraph (b) of this section, or it is revised in accordance 
paragraph (d) of this section.
    (b) Right to informal hearing. A sponsor dissatisfied with the CMS 
reconsideration decision is entitled to an informal hearing as provided 
in this section.
    (1) Manner and timing for request. A request for a hearing must be 
made in writing and filed with CMS within 15 days of the date the 
sponsor receives the CMS reconsideration decision.
    (2) Content of request. The request for informal hearing must 
include a copy of the CMS reconsideration decision (if any) and must 
specify the findings or issues in the decision with which the sponsor 
disagrees and the reasons for the disagreements.
    (3) Informal hearing procedures. (i) CMS provides written notice of 
the time and place of the informal hearing at least 10 days before the 
scheduled date.
    (ii) The hearing are conducted by a CMS hearing officer who neither 
receives testimony nor accepts any new evidence that was not presented 
with the reconsideration request. The CMS hearing officer is limited to 
the review of the record that was before CMS when CMS made both its 
initial and reconsideration determinations.
    (iii) If CMS did not issue a written reconsideration decision, the 
hearing officer may request, but not require, a written statement from 
CMS or its contractors explaining CMS' determination, or CMS or its 
contractors may, on their own, submit the written statement to the 
hearing officer. Failure of CMS to submit a written statement does not 
result in any adverse findings against CMS and may not in any way be 
taken into account by the hearing officer in reaching a decision.
    (4) Decision of the CMS Hearing Officer. The CMS hearing officer 
decides the case and sends a written decision to the sponsor, 
explaining the basis for the decision.
    (5) Effecting of hearing officer decision. The hearing officer 
decision is final and binding, unless the decision is reversed or 
modified by the Administrator in accordance with paragraph (c) of this 
section.
    (c) Review by the Administrator. (1) A sponsor that has received a 
hearing officer decision upholding a CMS initial or reconsidered 
determination may request review by the Administrator within 15 days of 
receipt of the hearing officer's decision.
    (2) The Administrator may review the hearing officer's decision, 
any written documents submitted to CMS or to the hearing officer, as 
well as any other information included in the record of the hearing 
officer's decision and determine whether to uphold, reverse or modify 
the hearing officer's decision.
    (3) The Administrator's determination is final and binding.
    (d) Reopening. (1) Ability to reopen. CMS may reopen and revise an 
initial or reconsidered determination upon its own motion or upon the 
request of a sponsor:
    (i) Within 1 year of the date of the notice of determination for 
any reason.
    (ii) Within 4 years for good cause.
    (iii) At any time when the underlying decision was obtained through 
fraud or similar fault.
    (2) Notice of reopening. (i) Notice of reopening and any revisions 
following the reopening are mailed to the sponsor.
    (ii) Notice of reopening specifies the reasons for revision.
    (3) Effect of reopening. The revision of an initial or reconsidered 
determination is final and binding unless--
    (i) The sponsor requests reconsideration in accordance with 
paragraph (a) of this section;
    (ii) A timely request for a hearing is filed under paragraph (b) of 
this section;
    (iii) The determination is reviewed by the Administrator in 
accordance with paragraph (c) of this section; or
    (iv) The determination is reopened and revised in accordance with 
paragraph (d) of this section.
    (4) Good cause. For purposes of this section, CMS finds good cause 
if--
    (i) New and material evidence that was not readily available at the 
time the initial determination was made is furnished;
    (ii) A clerical error in the computation of payments was made; or
    (iii) The evidence that was considered in making the determination 
clearly shows on its face that an error was made.
    (5) For purposes of this section, CMS does not find good cause if 
the only reason for reopening is a change of legal interpretation or 
administrative ruling upon which the initial determination was made.


Sec.  423.892  Change in ownership.

    (a) Change of ownership. Any of the following constitutes a change 
of ownership:
    (1) Partnership. The removal, addition, or substitution of a 
partner, unless the partners expressly agree otherwise as permitted by 
applicable State law, constitutes a change of ownership.
    (2) Asset sale. Transfer of substantially all of the assets of the 
sponsor to another party constitutes a change of ownership.
    (3) Corporation. The merger of the sponsor's corporation into 
another corporation or the consolidation of the sponsor's organization 
with one or more other corporations, resulting in a new corporate body.
    (b) Change of ownership, exception. Transfer of corporate stock or 
the merger of another corporation into the sponsor's corporation, with 
the sponsor surviving, does not ordinarily constitute change of 
ownership.

[[Page 46861]]

    (c) Advance notice requirement. A sponsor that has a retiree drug 
subsidy agreement in effect under this part and is considering or 
negotiating a change in ownership must notify CMS at least 60 days 
before the anticipated effective date of the change.
    (d) Assignment of agreement. When there is a change of ownership as 
specified in paragraph (a) of this section, and this results in a 
transfer of the liability for prescription drug costs the existing 
sponsor agreement is automatically assigned to the new owner.
    (e) Conditions that apply to assignment agreements. The new owner 
to whom a sponsor agreement is assigned is subject to all applicable 
statutes and regulations and to the terms and conditions of the sponsor 
agreement.


Sec.  423.894  Construction.

    Nothing in this part must be interpreted as prohibiting or 
restricting--
    (a) A Part D eligible individual who is covered under employment-
based retiree health coverage, including a qualified retiree 
prescription drug plan, from enrolling in a prescription drug plan or 
in a MA-PD plan;
    (b) A sponsor or other person from paying all or any part of the 
monthly beneficiary premium (as defined in Sec.  423.286) for a 
prescription drug plan or MA-PD plan on behalf of a retiree (or his or 
her spouse or dependents);
    (c) A sponsor from providing coverage to Part D eligible 
individuals under employment-based retiree health coverage that is--
    (1) Supplemental to the benefits provided under a prescription drug 
plan or a MA-PD plan.
    (2) Of higher actuarial value than the actuarial value of standard 
prescription drug coverage (as defined in Sec.  423.104(e)); or
    (d) Sponsors from providing for flexibility in the benefit design 
and pharmacy network for their qualified retiree prescription drug 
coverage, without regard to the requirements applicable to PDPs and MA-
PD plans under Sec.  423.104, as long as the requirements under Sec.  
423.884 are met.

Subpart S--Special Rules for States--Eligibility Determinations for 
Subsidies and General Payment Provisions


Sec.  423.900  Basis and scope.

    (a) Basis. This subpart is based on sections 1935(a) through (d) of 
the Act as amended by section 103 of the MMA.
    (b) Scope. This subpart specifies State agency obligations for the 
Part D prescription drug benefit.


Sec.  423.902  Definitions.

    The following definitions apply to this subpart:
    Actuarial value of capitated prescription drug benefits is the 
estimated actuarial value of prescription drug benefits provided under 
a capitated Medicaid managed care plan per full-benefit dual eligible 
individual for 2003, as determined using data as the Secretary 
determines appropriate.
    Applicable growth factor for each of 2004, 2005, and 2006, is the 
average annual percent change (to that year from the previous year) of 
the per capita amount of prescription drug expenditures (as determined 
based on the most recent National Health Expenditure projections for 
the years involved). The growth factor for 2007 and succeeding years 
will equal the annual percentage increase in average per capita 
aggregate expenditures for covered Part D drugs in the United States 
for Part D eligible individuals for the 12-month period ending in July 
of the previous year.
    Base year Medicaid per capita expenditures is equal to the weighted 
average of:
    (1) The gross base year (calendar year 2003) per capita Medicaid 
expenditures for prescription drugs, reduced by the rebate adjustment 
factor; and
    (2) The estimated actuarial value of prescription drug benefits 
provided under a capitated Medicaid managed care plan per full-benefit 
dual eligible for 2003. The per capita payments for full benefit dual 
eligibles with managed care and non-managed care are weighted by the 
respective average monthly full dual eligible enrollment populations.
    Full-benefit dual eligible individual means an individual who, for 
any month--
    (1) Has coverage for the month under a prescription drug plan under 
Part D of title XVIII, or under an MA-PD plan under Part C of title 
XVIII; and
    (2) Is determined eligible by the State for medical assistance for 
full benefits under title XIX for the month under any eligibility 
category covered under the State plan or comprehensive benefits under a 
demonstration under section 1115 of the Act. (This does not include 
individuals under Pharmacy Plus demonstrations.) It also includes any 
individual who is determined by the State to be eligible for medical 
assistance under section 1902(a)(10)(C) of the Act (medically needy) or 
section 1902(f) of the Act (States that use more restrictive 
eligibility criteria than are used by the SSI program) of the Act for 
any month if the individual was eligible for medical assistance in any 
part of the month. For the 2003 baseline calculations, the full-benefit 
dual eligibles are those individuals having Medicaid drug benefit 
coverage and Medicare Part A or Part B coverage.
    Gross base year Medicaid per capita expenditures are equal to the 
expenditures, including dispensing fees, made by the State during 
calendar year 2003 for covered outpatient drugs, excluding drugs or 
classes of drugs, or their medical uses, which may be excluded from 
coverage or otherwise restricted under section 1860D-2 of the Act, 
other than smoking cessation agents determined per full-benefit-dual-
eligible-individual for the individuals not receiving medical 
assistance for the drugs through a Medicaid managed care plan. This 
amount is determined based on MSIS drug claims paid during the four 
quarters of calendar year 2003 and the associated dual eligibility 
enrollment status of the beneficiary.
    Phased-down State contribution factor for a month in 2006 is 90 
percent; in 2007 is 88 \1/3\ percent; in 2008 is 86 \2/3\ percent; in 
2009 is 85 percent; in 2010 is 83 \1/3\ percent; in 2011 is 81 \2/3\ 
percent; in 2012 is 80 percent; in 2013 is 78 \1/3\ percent; in 2014 is 
76 \2/3\ percent; or after December 2014, is 75 percent.
    Phased-down State contribution payment refers to the States' 
monthly payment made to the Federal government beginning in 2006 to 
defray a portion of the Medicare drug expenditures for full benefit 
dual eligible individuals whose Medicaid drug coverage is assumed by 
Medicare Part D. The contribution is calculated by 1/12th of the 
product of the base year (2003) Medicaid per capita expenditures for 
prescription drugs (that is, covered Part D drugs) for full-benefit 
dual eligible individuals, and multiplied by the--
    (1) State medical assistance percentage;
    (2) Applicable growth factor;
    (3) Number of the State's full-benefit dual eligibles for the given 
month; and
    (4) Phased-down State contribution factor.
    Rebate adjustment factor takes into account drug rebates and, for a 
State, is equal to the ratio for the State for the four quarters of 
calendar year 2003 of aggregate rebate payments received by the State 
under section 1927 of the Act to the gross expenditures for covered 
outpatient drugs.
    State Medical Assistance Percentage means the proportion equal to 
100 percent minus the State's Federal medical assistance percentage, 
applicable to the State for the fiscal year in which the month occurs.

[[Page 46862]]

Sec.  423.904  Eligibility determinations for low-income subsidies.

    (a) General rule. The State agency must make eligibility 
determinations and redeterminations for low-income premium and cost-
sharing subsidies in accordance with Sec.  423.774.
    (b) Notification to CMS. The State agency must inform CMS of cases 
where eligibility is established or redetermined, in a manner 
determined by CMS.
    (c) Screening for eligibility for Medicare cost-sharing and 
enrollment under the State plan. States must--
    (1) Screen individuals who apply for subsidies under this part for 
eligibility for Medicaid programs that provide assistance with Medicare 
cost-sharing specified in section 1905(p)(3) of the Act.
    (2) Offer enrollment for the programs under the State plan (or 
under a waiver of the plan) for those meeting the eligibility 
requirements.
    (3) Notify deemed subsidy eligibles of their subsidy eligibility in 
accordance with the requirements of Sec.  423.34(d).
    (d) Application form and process.
    (1) Assistance with application. No later than July 1, 2005, States 
must make available--
    (i) Low-income subsidy application forms;
    (ii) Information on the nature of, and eligibility requirements 
for, the subsidies under this section; and
    (iii) Assistance with completion of low-income subsidy application 
forms.
    (2) Completion of application. The State must require an individual 
or personal representative applying for the low-income subsidy to--
    (i) Complete all required elements of the application and provide 
documents, as necessary, consistent with paragraph (3) of this section; 
and
    (ii) Certify, under penalty of perjury or similar sanction for 
false statements, as to the accuracy of the information provided on the 
application form.
    (3) The application process and States.
    (i) States may require submission of statements from financial 
institutions for an application for low-income subsidies to be 
considered complete; and
    (ii) May require that information submitted on the application be 
subject to verification in a manner the State determines to be most 
cost-effective and efficient.
    (4) Other information. States must provide CMS with other 
information as specified by CMS that may be needed to carry out the 
requirements of the Part D prescription drug benefit.


Sec.  423.906.  General payment provisions.

    (a) Regular Federal matching. Regular Federal matching applies to 
the eligibility determination and notification activities specified in 
Sec.  423.904(a) and (b).
    (b) Medicare as primary payer. Medicare is the primary payer for 
covered drugs for Part D eligible individuals. Medicaid assistance is 
not available to full benefit dual eligible individuals, including 
those not enrolled in a PDP or MA-PD, for--
    (1) Covered Part D drugs; or
    (2) Any cost-sharing obligations under Part D relating to covered 
Part D drugs.
    (3) The effective date of paragraphs (b)(1) and (b)(2) of this 
section is January 1, 2006.
    (c) Non-covered drugs. States may elect to provide coverage for 
outpatient drugs other than covered Part D drugs in the same manner as 
provided for non-full benefit dual eligible individuals or through an 
arrangement with a prescription drug plan or a MA-PD plan.


Sec.  423.907  Treatment of territories.

    (a) General rules. (1) Low-income Part D eligible individuals who 
reside in the territories are not eligible to receive premium and cost-
sharing subsidies under subpart P of this part.
    (2) A territory may submit a plan to the Secretary under which 
medical assistance is to be provided to low-income individuals for the 
provision of covered Part D drugs.
    (3) Territories with plans approved by the Secretary will receive 
increased grants under sections 1108 (h) and (g) of the Act as 
described in (c) of this section.
    (b) Plan requirements. Plans submitted to the Secretary must 
include the following:
    (1) A description of the medical assistance to be provided.
    (2) The low-income population (income less than 150 percent of the 
Federal poverty level) to receive medical assistance.
    (3) An assurance that no more than 10 percent of the amount of the 
increased grant will be used for administrative expenses.
    (c) Increased grant amounts. The amount of the grant provided under 
sections 1108 (h) and (k) of the Act for each territory with an 
approved plan for a year shall be the amount in paragraph (d) of this 
section multiplied by the ratio of--
    (1) The number of individuals who are entitled to benefits under 
Part A or enrolled under Part B and who reside in the territory (as 
determined by the Secretary based on the most recent available data for 
the beginning of the year); and
    (2) The sum of the number of individuals in all territories in 
paragraph (c)(1) of this section with approved plans.
    (d) Total grant amount. The total grant amount is--
    (1) For the last three quarters of fiscal year 2006, $28,125,000;
    (2) For fiscal year 2007, $37,500,000; and
    (3) For each subsequent year, the amount for the prior fiscal year 
increased by the annual percentage increase described in Sec.  423.104.


Sec.  423.908  Phased-down State contribution to drug benefit costs 
assumed by Medicare.

    This subpart sets forth the requirements for State contributions 
for Part D drug benefits based on dual eligible drug expenditures.


Sec.  423.910  Requirements.

    (a) General rule. Each of the 50 States and the District of 
Columbia is required to provide for payment to the Secretary a phased-
down contribution to defray a portion of the Medicare drug expenditures 
for individuals whose projected Medicaid drug coverage is assumed by 
Medicare Part D.
    (b) State contribution payment. (1) Calculation of payment. The 
State contribution payment is calculated by the Secretary on a monthly 
basis, as indicated in the chart below. For States that do not meet the 
quarterly reporting requirement for the monthly enrollment reporting, 
the state contribution payment is calculated using a methodology 
determined by the Secretary.

                   Illustrative Calculation of State Phased-Down Monthly Contribution for 2006
----------------------------------------------------------------------------------------------------------------
                                        Illustrative
                Item                       value                                 Source
----------------------------------------------------------------------------------------------------------------
(i) Gross per capita Medicaid                  $2,000  CY MSIS data.
 expenditures for prescription drugs
 for 2003 for full-benefit dual
 eligibles not receiving drug
 coverage through a Medicaid managed
 care plan, excluding drugs not
 covered by Part D.

[[Page 46863]]

 
(ii) Aggregate State rebate receipts     $100,000,000  CMS-64.
 in calendar year 2003.
(iii) Gross State Medicaid               $500,000,000  CMS-64.
 expenditures for prescription drugs
 in calendar year 2003.
(iv) Rebate adjustment factor.......           0.2000  (2) / (3).
(v) Adjusted 2003 gross per capita             $1,600  (1) x [1-(4)].
 Medicaid expenditures for
 prescription drugs for full-benefit
 dual eligibles not in managed care
 plans.
(vi) Estimated actuarial value of              $1,500  To Be Determined.
 prescription drug benefits under
 capitated managed care plans for
 full-benefit dual eligibles for
 2003.
(vii) Average number of full-benefit           90,000  CY MSIS data.
 dual eligibles in 2003 who did not
 receive covered outpatient drugs
 through Medicaid managed care plans.
(viii) Average number of full-                 10,000  CY MSIS data.
 benefit dual eligibles in 2003 who
 received covered outpatient drugs
 through Medicaid managed care plans.
(ix) Base year State Medicaid per              $1,590  [(7) x (5) + (8) x (6)] / [(7) + (8)].
 capita expenditures for covered
 Part D drugs for full-benefit dual
 eligible individuals (weighted
 average of (5) and (6)).
(x) 100 minus Federal Medical                  0.4000  Federal Register.
 Assistance Percentage (FMAP)
 applicable to month of state
 contribution (as a proportion).
(xi) Applicable growth factor                   50.0%  NHE projections.
 (cumulative increase from 2003
 through 2006).
(xii) Number of full-benefit dual             120,000  State submitted data.
 eligibles for the month.
(xiii) Phased-down State reduction             0.9000  Specified in statute.
 factor for the month.
(xiv) Phased-down State contribution       $8,586,000  1/12 x (9) x (10) x [1 + (11)] x (12) x (13).
 for the month.
----------------------------------------------------------------------------------------------------------------

    (2) Method of payment. State payment must be made in a manner 
specified by the Secretary that is similar to the manner in which State 
payments are made under an agreement entered into under section 1843 of 
the Act, except that all payments must be deposited into the Medicare 
Prescription Drug Account in the Federal Supplementary Medical 
Insurance Trust Fund.
    (3) Failure to pay. If a State fails to pay to the Secretary the 
required amount, interest accrues on the amount at the rate provided 
under section 1903(d)(5) of the Act. The amount so owed and applicable 
interest must be immediately offset against amounts otherwise payable 
to the State under section 1903(a) of the Act, in accordance with the 
Federal Claims Collection Act of 1996 and applicable regulations.
    (c) State Medicaid Statistical Information System (MSIS) Reporting. 
Effective with calendar year (CY) 2003 and all subsequent MSIS data 
submittals, States are required to provide accurate and complete coding 
to identify the numbers and types of Medicaid and Medicare dual 
eligibles. Calendar year 2003 submittals must be complete and must be 
accepted, based on CMS' data quality review, by December 31, 2004.
    (d) State monthly enrollment reporting. Effective January 2006, and 
each subsequent month, States must submit an electronic file, in a 
manner specified by the Secretary, identifying each full benefit dual 
eligible enrolled in the State for each month with Part D drug coverage 
who is also determined to be full benefit eligible by the State for 
full Medicaid benefits. The State will submit this file to CMS no later 
than 30 days after the end of each month.
    (e) Data match. The Secretary performs those periodic data matches 
as may be necessary to identify and compute the number of full-benefit 
dual eligible individuals needed to establish the State contribution 
payment.
    (f) Rebate adjustment factor. The Secretary establishes the rebate 
adjustment factor using total drug expenditures made and drug rebates 
received during calendar year 2003 as reported on CMS 64 Medicaid 
expenditure reports for the four quarters of calendar year 2003 that 
were received by CMS on or before March 31, 2004. Rebates include 
rebates received under the national rebate agreement and under a State 
supplemental rebate program, as reported on CMS-64 expenditure reports 
for the four quarters of calendar year 2003.
    (g) Annual per capita drug expenditures. The Secretary notifies 
each State no later than October 15 before each calendar year, 
beginning October 15, 2005, of their annual per capita drug payment 
expenditure amount for the next year.

Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: July 23, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-17234 Filed 7-26-04; 12:01 pm]
BILLING CODE 4120-01-P