[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Rules and Regulations]
[Pages 4194-4585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1321]



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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 400, 403, 411, 417, and 423



Medicare Program; Medicare Prescription Drug Benefit; Final Rule

  Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules 
and Regulations  

[[Page 4194]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 400, 403, 411, 417, and 423

[CMS-4068-F]
RIN 0938-AN08


Medicare Program; Medicare Prescription Drug Benefit

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

ACTION: Final rule.

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SUMMARY: This final rule implements the provisions of the Social 
Security Act (the Act) establishing and regulating the Medicare 
Prescription Drug Benefit. The new voluntary prescription drug benefit 
program was enacted into law on December 8, 2003 in section 101 of 
Title I of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173). Although this final 
rule specifies most of the requirements for implementing the new 
prescription drug program, readers should note that we are also issuing 
a closely related rule that concerns Medicare Advantage organizations, 
which, if they offer coordinated care plans, must offer at least one 
plan that combines medical coverage under Parts A and B with 
prescription drug coverage. Readers should also note that separate CMS 
guidance on many operational details appears or will soon appear on the 
CMS website, such as materials on formulary review criteria, risk plan 
and fallback plan solicitations, bid instructions, solvency standards 
and pricing tools, plan benefit packages.
    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.
    Generally, coverage for the prescription drug 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, MA-PDs or PDPs, but not fallback PDPs 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 final rule also provides for subsidy 
payments to sponsors of qualified retiree prescription drug plans to 
encourage retention of employer-sponsored benefits.
    We are implementing the drug benefit in a way that permits and 
encourages a range of options for Medicare beneficiaries to augment the 
standard Medicare coverage. These options include facilitating 
additional coverage through employer plans, MA-PD plans and high-option 
PDPs, and through charity organizations and State pharmaceutical 
assistance programs. See sections II.C, II.J, and II.P, and II.R of 
this preamble for further details on these issues.
    The proposed rule identified options and alternatives to the 
provisions we proposed and we strongly encouraged 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.

DATES:  These regulations are effective on March 22, 2005.

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).
    Melvin Sanders (410) 786-8355 (for issues related to marketing and 
user fees).
    Vanessa Duran (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 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.)
    Jim Slade (410) 786-1073 (for issues related to pre-emption of 
State law) and (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.)
    Christine Hinds (410) 786-4578 (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).
    Mark Smith (410) 786-8015 (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.)
    Jean LeMasurier (410) 786-1091 (for issues related to employer 
group waivers and options).
    Frank Szeflinski (303) 844-7119 (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.)
    Mark Smith (410) 786-8015 (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

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drug subsidy and other employer-based sponsor options.)
    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.)

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Table of Contents

I. Background
    A. Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003
    B. Codification of Regulations
    C. Organizational Overview of Part 423
II. Discussion of the Provisions of the Final Rule
    A. General Provisions
    1. Overview
    2. Discussion of Important Concepts and Key Definitions
    B. Eligibility and Enrollment
    1. Eligibility and Enrollment
    2. Enrollment Process
    3. Enrollment of Full Benefit Dual Eligible Individuals
    4. Disenrollment process
    5. Enrollment Periods
    6. Effective Dates
    7. Involuntary Disenrollment by the PDP
    8. Late Enrollment Penalty
    9. Information about Part D
    10. Approval of Marketing Materials and Enrollment Forms
    11. Information Provided to PDP sponsors and MA Organizations
    12. Procedures to Determine and Document Creditable Status of 
Prescription Drug Coverage
    C. Voluntary Prescription Benefits and Beneficiary Protections
    1. Overview and Definitions
    2. Plan Formularies
    3. Establishment of Prescription Drug Plan Service Areas
    4. Access to Covered Part D Drugs
    5. Special Rules for Out-of-Network Access to Covered Part D Drugs 
at Pharmacies
    6. Dissemination of Plan Information
    7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs
    8. Privacy, Confidentiality, and Accuracy of Enrollee Records
    D. Cost Control and Quality Improvement Requirements for Part D 
Plans
    1. Overview (Scope)
    2. Drug Utilization Management, Quality Assurance, and Medication 
Therapy Management Programs (MTMPs)
    3. Consumer Satisfaction Surveys
    4. Electronic Prescription Program
    5. Quality Improvement Organizations (QIO) Activities
    6. Treatment of Accreditation
    E. RESERVED
    F. Submission of Bids and Monthly Beneficiary Premiums: Plan 
Approval
    1. Overview
    2. Requirements for Submission of Bids and Related Information
    3. General CMS Guidelines for Actuarial Valuation of Prescription 
Drug Coverage
    4. Determining Actuarial Equivalency for Variants of Standard 
Coverage and for Alternative Coverage.
    5. Test for Assuring the Same Protection against High Out-of-Pocket 
Costs
    6. Review and Negotiation of Bid and Approval of Plans
    7. National Average Monthly Bid Amount
    8. Rules Regarding Premiums
    9. Collection of Monthly Beneficiary Premiums
    G. Payments to Part D Plan Sponsors for Qualified Prescription Drug 
Coverage
    1. Overview
    2. Definitions
    3. General Payment Provisions
    4. Requirement for Disclosure of Information
    5. Determination of Payment
    6. Low-Income Cost-Sharing Subsidy Interim Payments
    7. Risk Sharing Arrangements
    8. Retroactive Adjustments and Reconciliation
    9. Reopening
    10. Payment Appeals
    H. RESERVED
    I. Organization Compliance with State Law and Preemption by Federal 
Law.
    1. Overview
    2. Waiver of Certain Requirements in Order to Expand Choice
    3. Temporary Waiver for Entities Seeking to Offer a Prescription 
Drug Plan in more than One State in a Region
    4. Solvency Standards for Non-Licensed Entities
    5. Preemption of State Laws and Prohibition of Premium Taxes
    J. Coordination Under Part D Plans with Other Prescription Drug 
Coverage
    1. Overview and Terminology
    2. Application of Part D Rules to Certain Part D Plans on and after 
January 1, 2006
    3. Application to PACE Plans
    4. Application to Employer Groups
    5. Medicare Secondary Payer Procedures
    6. Coordination of Benefits with Other Providers of Prescription 
Drug Coverage.
    K. Application Procedures and Contracts with PDP Sponsors
    1. Overview
    2. Definitions
    3. Application Requirements
    4. Evaluation and Determination Procedures for Applications to Be 
Determined Qualified to Act as a Sponsor
    5. General Provisions
    6. Contract Provisions
    7. Effective Date and Term of Contract
    8. Nonrenewal of Contract
    9. Modification or termination of contract by mutual consent
    10. Termination of Contracts by CMS
    11. Termination of Contract by the Part D Plan Sponsor
    12. Minimum Enrollment Requirements
    13. Reporting Requirements
    14. Prohibition of Midyear Implementation of Significant New 
Regulatory Requirements
    15. Fraud, Waste and Abuse
    L. Effect of Change of Ownership or Leasing of Facilities during 
the Term of Contract
    1. General Provisions
    2. Change of Ownership
    3. Novation Agreement Requirements
    M. Grievances, Coverage Determinations, and Appeals
    1. Introduction
    2. General Provisions
    3. Grievance Procedures

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    4. Coverage Determinations
    5. Formulary Exceptions Procedures
    6. Appeals
    7. Effectuation of Reconsideration Determinations
    8. Federal Preemption of Grievances and Appeals
    9. Employer Sponsored Prescription Drug Programs and Appeals
    10. Miscellaneous
    N. Medicare Contract Determinations and Appeals
    1. Overview
    2. Provisions of the Final Rule
    O. Intermediate Sanctions
    1. Kinds of Sanctions
    2. Basis for Imposing Sanctions
    3. Procedures for Imposing Sanctions
    P. Premiums and Cost-Sharing Subsidies for Low-Income Individuals
    1. Definitions
    2. Eligibility for the Low-Income Subsidy
    3. Eligibility Determinations, Redeterminations and Applications
    4. Premium Subsidy and Cost-Sharing Subsidy
    5. Administration of Subsidy Program
    Q. Guaranteeing Access to a Choice of Coverage (Fallback 
Prescription Drug Plans)
    1. Overview
    2. Terminology
    3. Assuring Access to a Choice of Coverage
    4. Submission and Approval of Bids
    5. Rules Regarding Premiums
    6. Contract Terms and Conditions
    7. Payment to Fallback Plans
    R. Payments to Sponsors of Retiree Prescription Drug Plans
    1. Introduction
    2. Options for Sponsors of Retiree Prescription Drug Programs
    3. Definitions
    4. Requirements for qualified retiree prescription drug plans
    5. Retiree drug subsidy amounts
    6. Appeals
    7. Change of Ownership
    8. Construction
    S. Special Rules for States-Eligibility Determinations for Low-
Income Subsidies, and General Payment Provisions
    1. Eligibility Determinations
    2. General Payment Provisions
    3. Treatment of Territories
    4. State Contribution to Drug Benefit Costs Assumed by Medicare
    T. Part D Provisions Affecting Physician Self-Referral, Cost-Based 
HMO, PACE, and Medigap Requirements
    1. Definition of Outpatient Prescription Drugs for Purposes of 
Physician Self-Referral Prohibition
    2. Cost-Based HMOs and CMPS offering Part D coverage
    3. PACE Organizations Offering Part D Coverage
    4. Medicare Supplemental Policies
III. Provisions of the Final Rule
IV. Collection of Information Requirements
V. Regulatory Impact Analysis
    In addition, because of the many organizations and terms to which 
we refer by acronym in this final rule, we are listing these acronyms 
and their corresponding terms in alphabetical order below:

ABN                               Advanced beneficiary notice
ADAP                              AIDS Drug Assistance Program
AEP                               Annual coordinated election period
AHRQ                              Agency for Healthcare Research and
                                   Quality
AI/AN                             American Indians and Alaska Natives
AIC                               Amount in controversy
ALJ                               Administrative Law Judge
AMA                               American Medical Association
AMCP                              Academy of Managed Care Pharmacy
ANCI                              American National Standards Institute
AO                                Accreditation organization
ASAP                              American Society of Automation in
                                   Pharmacy
ASHP                              American Society of Health Systems
                                   Pharmacists
AWP                               Average wholesale price
BBA                               Balanced Budget Act
BLS                               Bureau of Labor Statistics
CAHP                              Consumer Assessment of Health Plan
CBI                               Confidential business information
CBO                               Congressional Budget Office
CCIP                              Chronic care improvement programs
CCP                               Comprehensive Compliance Program
CFR                               Code of Federal Regulations
CHOW                              Change of ownership
CMP                               competitive medical plan
CMS                               Centers for Medicare & Medicaid
                                   Services
COB                               Coordination of benefit
COBRA                             Consolidated Omnibus Budget
                                   Reconciliation Act (of 1985)
CPI-PD                            Consumer Price Index for Prescription
                                   Drugs and Medical Supplies
CPT                               Current Procedural Terminology
CY                                Calendar year
DAB                               Departmental Appeals Board
DHS                               Designated health services
DME                               Durable medical equipment
DoD                               Department of Defense
DOL                               Department of Labor
DUR                               Drug utilization review
EOB                               explanation of benefits
ERISA                             Employee Retirement Income Security
                                   Act of 1974
ESRD                              End stage renal disease
FAR                               Federal Acquisition Regulation
FDA                               Food and Drug Administration
FEHBP                             Federal Employee Health Benefits
                                   Program
FFP                               Federal financial participation
FOIA                              Freedom of Information Act
FQHCs                             Federally qualified health centers
FPL                               Federal poverty level
FR                                Federal Register
FSA                               Flexible savings account
FY                                Fiscal year
HEDIS                             Health plan Employer Data and
                                   Information Set
HHS                               Department of Health and Human
                                   Services
HIC                               Health insurance claim
HIPAA                             Health Insurance Portability and
                                   Accountability Act of 1996
HMO                               Health maintenance organization
HPMS                              Health Plan Management System
HRA                               Health reimbursement account
HRSA                              Health Resources and Services
                                   Administration
HSA                               Health savings account
ICFs/MR                           Intermediate care facilities for the
                                   mentally retarded
IDIQ                              Indefinite duration, indefinite
                                   quantity
IEP                               Initial enrollment period
IHS                               Indian Health Service
IRE                               Independent review entity
I/T/U                             Indian Tribes and Tribal
                                   organizations, and urban Indian
                                   organizations
JCHACO                            Joint Commission on Accreditation of
                                   Health Care Organizations
LIS                               Low-income subsidy
LTC                               Long term care
MA                                Medicare Advantage (formerly
                                   Medicare+Choice)
MA-PD                             Medicare Advantage prescription drug
                                   plans
MAC                               Medicare Appeals Council
MAX                               Medicaid Analytic extract
MCBS                              Medicare Current Beneficiary Survey
MMA                               Medicare Prescription Drug,
                                   Improvement, and Modernization Act of
                                   2003
MSA                               Medicare savings account
MSIS                              Medicaid Statistical Information
                                   System
MSP                               Medicare Secondary Payor
MTMP                              Medication Therapy Management Program
NAIC                              National Association of Insurance
                                   Commissioners
NCQA                              National Committee for Quality
                                   Assurance
NCPDP                             National Council for Prescription Drug
                                   Programs
NCVHS                             National Center for Vital and Health
                                   Statistics
NDC                               National Drug Code
NHE                               National Health Expenditure
NPA                               National PACE Association
NPI                               National Provider Identifier
OACT                              Office of the Actuary (CMS)
OBRA                              Omnibus Budget Reconciliation Act
OCR                               Office for Civil Rights
OEPI                              Open enrollment period for
                                   institutionalized individuals
OIG                               Office of the Inspector General
OPM                               Office of Personnel Management
P&T                               Pharmaceutical and therapeutic
PBA                               Pharmacy benefit administrator
PBMs                              Pharmacy benefit managers
PBP                               Plan Benefit Package
PDP                               Private prescription drug plan

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PDSC                              Phased-down State contribution
PFFS                              Private fee-for-service plan
PHI                               Protected health information
PhRMA                             Pharmaceutical Manufacturers and
                                   Researchers of America
PPO                               Preferred provider organization
PPV                               Pharmaceutical Prime Vendor
PSO                               Provider-sponsored organization
QDWIs                             Qualified disabled and working
                                   individuals
QIl                               Qualified individuals
QIO                               Quality Improvement Organization
QMB                               Qualified Medicare beneficiaries
REACH                             Regional Education About Choices in
                                   Health
RHC                               Rural Health Center
SCHIP                             State Children's Health Insurance
                                   Program
SEP                               Special enrollment period
SHIP                              State health insurance assistance
                                   program
SLMB                              Special Low-Income Beneficiaries
SOW                               Scope of work
SPAP                              State Pharmaceutical Assistance
                                   Program
SPD                               Summary Plan Description
SPOC                              Single point of contact
SSA                               Social Security Administration
SSI                               Supplemental Security Income
SSRI                              Selective serotonin reuptake inhibitor
SSSGs                             Similarly Sized Subscriber Groups
TANF                              Temporary assistance for needy
                                   families
TrOOP                             True out-of-pocket
U&C                               Usual and customary
URAC                              Utilization Review Accreditation
                                   Commission
USP                               U.S. Pharmacopoeia
VA                                Department of Veterans Affairs
VDSA                              Voluntary data sharing agreement
 

I. Background

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 establishing a new Part D: 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 we will refer to the Medicare Advantage Program described 
in Part C of title XVIII of the Act -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 the 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 final rule is designed to broaden 
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 establishes an optional 
prescription drug benefit for individuals who are entitled to or 
enrolled in Medicare benefits under Part A and Part B. Beneficiaries 
who qualify for both Medicare and Medicaid (full-benefit dual 
eligibles) will automatically receive the Medicare drug benefit unless 
Medicare has identified the individual as having other creditable 
coverage through an employer-based prescription drug plan. 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 a benefit with 
broader coverage than the basic benefit, but at no additional cost to 
the beneficiary. If this required level of coverage is offered, MA-PDs 
or PDPs, but not fallback plans, may also offer supplemental benefits, 
called ``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, and the 
ability to have a cost-sharing structure other than the statutorily-
defined structure, subject to certain actuarial tests. Most Part D 
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. Codification of Regulations

    The final provisions set forth here are codified in 42 CFR Part 
423-Voluntary Medicare Prescription Drug Benefit. Note that the 
regulations--
     for Medicare supplemental policies (Medigap) will continue 
to be located in 42 CFR part 403 (subpart B);
     for exclusions from Medicare and limitations on Medicare 
payment (the physician self-referral rules) will continue to be located 
in 42 CFR part 411;
     for managed care organizations that contract with us under 
cost contracts will continue to be located in 42 CFR part 417, Health 
Maintenance Organizations, Competitive Medical Plans, and Health Care 
Prepayment Plans;
     for PACE organizations will continue to be located in 42 
CFR part 460.

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C. Organizational Overview of Part 423

    The regulations set forth in this final rule are codified in the 
new 42 CFR Part 423-Voluntary Medicare Prescription Drug Benefit. There 
are a number of places in which statutory provisions in Part D 
incorporate by reference specific sections in Part C of Medicare (the 
MA 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 believed it was appropriate to adopt 
the same organizational structure as part 422. Wherever possible, we 
modeled the 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 appeals related to 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 
Part D Plans: Utilization controls, quality assurance, and medication 
therapy management, 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 Part D plans for Qualified Prescription Drug 
Coverage: Data submission, payments and reconciliations for direct 
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, waivers of part D provisions for PACE plans and 1876 cost plans 
offering qualified prescription drug coverage, and procedures to 
facilitate calculation of true out-of-pocket (TrOOP) 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 
from the perspective of which prescription drug benefits are covered by 
Part D 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 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, 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, and contract 
requirements for fallback PDPs.
    Subpart R, Payments to Sponsors of Retiree Prescription Drug Plans: 
Provisions for making retiree drug subsidy 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 final rule also makes changes to: 
part 400 relating to definitions of Parts C & D, 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 health 
maintenance organizations (HMOs), and part 460 relating to PACE 
organizations.

II. Provisions of the Proposed Rule

    We received 7,696 items of correspondence containing comments on 
the August 2004 proposed rule. Commenters included managed care 
organizations and other insurance industry representatives, pharmacy 
benefit management firms, pharmacies and pharmacy education and 
practice-related organizations, pharmaceutical manufacturers, 
representatives of physicians and other health care professionals, 
beneficiary advocacy

[[Page 4199]]

groups, representatives of hospitals and other healthcare providers, 
States, employers and benefits consulting firms, members of the 
Congress, Indian Health Service, Tribal and Urban Health Programs, 
American Indians and Alaska Natives, beneficiaries, and others. We also 
received many comments expressing concerns unrelated to the proposed 
rule. Some commenters expressed concerns about Medicare unrelated to 
the Prescription Drug Benefit, while others addressed concerns about 
health care and health insurance coverage unrelated to Medicare. 
Because of the volume of comments we received in response to the 
proposed rule, we will be unable to address comments and concerns that 
are unrelated to the proposed rule.
    Most of the comments addressed multiple issues, often in great 
detail. Listed below are the areas of the regulation that received the 
most comments:
     Transition of Coverage for Dual Eligibles from Medicaid to 
Medicare
     Access to Drugs in Long Term Care Facilities
     Formulary Policies
     Medication Therapy Management Requirements
     Network Access Standards
     Part B/Part D Drug Identification and Coordination
     Dispensing Fees
    In this final rule, we address comments received on the proposed 
rule. For the most part, we will address issues according to the 
numerical order of the related regulation sections.

A. General Provisions

1. Overview
    Section 423.1 of subpart A specified the general statutory 
authority for the ensuing regulations and indicated that the scope of 
part 423 is to establish requirements for the Medicare prescription 
drug benefit program. We proposed key definitions at Sec.  423.4 for 
terms that appear in multiple sections of part 423.
    Consistent with the MMA statute, in many cases we proposed 
procedures that parallel those in effect under the MA program. Our goal 
was to maintain consistency between these two programs wherever 
possible; thus we evaluated the need for parallel changes in the MA 
final rule when we received comments on provisions that affect both 
programs.
    Comment: Many commenters urged us to finalize regulations by early 
January--and detailed business requirements soon thereafter. Some also 
recommended that we make public certain key decisions and data sooner 
than January in order to promote planning.
    Response: We agree that the earliest possible release of program 
requirements and final rules will facilitate planning and 
implementation of new business processes required to offer and 
administer this new program. Consequently we have made numerous draft 
documents, such as the risk plan solicitation, PDP solvency 
requirements, formulary review policies, and the actuarial bidding 
instructions, available for public comment in November and December of 
2004 and have expedited the rulemaking process to meet these goals. In 
response to the lack of specificity regarding the PDP regions in our 
proposed rule, we conducted extensive outreach in order to obtain 
public input prior to the publication of our final rule. On December 6, 
2004, we announced the establishment of 26 MA regions and 34 PDP 
regions.
2. Discussion of Important Concepts and Key Definitions (Sec.  423.4)
a. Introduction
    For the most part, the proposed definitions were 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 have not been 
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
     Discussion of the Meaning of Actuarial Equivalence
    The concept of actuarial equivalence is applied in several 
different contexts in Title I of the MMA. 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 provisions, we proposed 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 in those sections of this preamble, such as section II.F, where 
actuarial equivalence comes into play. We will provide further detailed 
guidance on methods required to demonstrate actuarial equivalence.
    Comment: One commenter requested that the definition of actuarial 
equivalence be refined through examples or more descriptive language.
    Response: We agree that it is critical to disclose our requirements 
for calculation of actuarial values under Part D requirements as fully 
and as expeditiously as possible to reduce uncertainty on the part of 
potential plan sponsors. To that end we made available our draft bid 
preparation rules and processes early in December 2004 for public 
comment, and we will continue to refine our guidance to bidders through 
vehicles such as the annual 45-day notice and the CMS website. We have 
modified our definition to refer to this separate guidance.
 Discussion of the Meaning of Creditable Prescription Drug 
Coverage
    Comments on creditable coverage are addressed in the preamble for 
subparts B and T.
 Prescription Drug Plan Regions
    Prescription drug plan regions are areas in which a contracting PDP 
sponsor must provide access to covered Part D drugs. Although we 
included specifications for regions in Sec.  423.112, the regions 
themselves were not set forth in the proposed rule. To the extent 
feasible, we tried to establish PDP regions that were consistent with 
MA regions. The MMA specifically required 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.
    Comment: Many commenters expressed concerns about the MA and PDP 
region decisions. Many argued that

[[Page 4200]]

regions should closely mirror existing State insurance markets to 
maximize participation. Others representing rural constituencies argued 
for larger regions to encourage offering of coverage in rural areas.
    Response: We conducted a market survey and analysis, including an 
examination of current insurance markets as required in the MMA. Key 
factors in the survey and analysis included payment rates; eligible 
population size per region; preferred provider organization (PPO) 
market penetration; current existence of PPOs, MA plans, or other 
commercial plans; and presence of PPO providers and primary care 
providers. Additional factors were also considered, including solvency 
and licensing requirements, as well as capacity issues. Recognizing the 
lack of specificity regarding the PDP regions in our proposed rule, we 
conducted extensive outreach in order to obtain public input prior to 
the publication of our final decision. On December 6, 2004, we 
announced the establishment of 26 MA regions and 34 PDP regions. For 
maps and fact sheets on the regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/.
 Service Area
    In the proposed rule we proposed that Medicare beneficiaries would 
be 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.'' For PDPs the service area 
is defined as the region or regions for which they must provide access. 
This is the Region established by CMS either pursuant to proposed Sec.  
423.112, or, in the case of fallback plans, the fallback service area 
pursuant to Sec.  423.859, 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.
    We also proposed 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. The same analysis applies with regard to a 
beneficiary who lives abroad, and does not reside within the boundaries 
of any PDP Region or MA-PD Service Area. We have modified our 
definition of service area to clarify our intent as proposed.
    Comment: Several commenters asked that we waive the service area 
requirement for employer group PDP plans.
    Response: We agree that we have the authority to waive the service 
area requirement for employer-sponsored group prescription drug plans, 
and we plan to do so in appropriate cases. We will provide further 
details on waivers in separate CMS guidance.
 Sponsor Cost-Sharing in Beneficiary Education and Enrollment 
Related Costs-User Fees (Sec.  423.6)
    The last section of subpart A proposed regulations implementing the 
user fees provided for in section 1857(e)(2) of the Act, as 
incorporated by section 1860D-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-
MEDICARE 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 will help to offset the costs of educating over 41 
million beneficiaries about the drug benefit through written materials 
such as a publication describing the drug benefit, internet sites, and 
other media. The user fee provisions establish the applicable aggregate 
contribution portions for PDP sponsors and MA organizations through two 
calculations.
    Comment: Several commenters supported the extension of user fees to 
PDP sponsors in addition to MA plans. One commenter emphasized the need 
for Medicare to provide national beneficiary educational materials in 
accessible formats (including Braille and other languages commonly used 
by beneficiaries), as well as telecommunications equipment to support 
beneficiaries with hearing impairments, in order to meet the various 
needs of Medicare beneficiaries with disabilities. Another commenter 
urged us to focus beneficiary education efforts on helping 
beneficiaries make a choice, as opposed to simply describing the array 
of choices. This commenter also urged us not to overlook the M+C 
population in its outreach campaign.
    Response: We have a long-standing tradition of making our 
beneficiary education materials accessible in a variety of formats to 
meet the needs of people with disabilities and special communications 
barriers. Beneficiary publications on a variety of topics are available 
in Braille, large print, and audiotape versions, in addition to 
conventional formats. We expect to continue these practices when 
educating beneficiaries about MMA topics. In addition, we are 
finalizing a partnership with the Social Security Administration (SSA) 
that will allow some of our educational products to be translated into 
14 languages (other than English and Spanish) and reach a broader 
audience.
    We are currently planning the development of a range of tools and 
strategies that will help beneficiaries make a choice that meets their 
needs. We agree that this action is an essential part of our education 
process, in addition to building general awareness and understanding. 
We will address the needs of multiple audiences through our outreach 
and education efforts, including those with M+C (MA) plans.
c. Definitions of Frequently Occurring Terms
    The following definitions were discussed in the preamble to our 
proposed rule:
    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.
    Comment: One commenter asked us to clarify whether individuals 
eligible for Medicaid at the special income level for long term care 
qualify as full benefit dual eligibles for a full subsidy.
    Response: Yes, all individuals who qualify for Medicaid, including 
expansion populations and persons eligible for Medicaid in long term 
care facilities under a State's special income standard which does not 
exceed 300 percent of the supplemental security income (SSI) payment 
standard will qualify as full benefit dual eligible beneficiaries 
eligible for a full subsidy.
    Insurance risk means, for a participating pharmacy, risk of the 
type

[[Page 4201]]

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).
    Comment: Several commenters supported our definition of `insurance 
risk', including the exclusion of performance-based compensation as 
this is not commonly viewed as insurance risk.
    Response: We will adopt the definition as proposed.
    MA means Medicare Advantage, which refers to the program authorized 
under Part C of Title XVIII 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 
Medicare benefits under Part A or enrolled in Medicare Part B. For 
purposes of this part, enrolled under Part B means ``entitled to 
receive benefits'' under 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 or in the case of fallback PDPs also under subpart Q.
    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.
    Comment: Several commenters noted that the terms PDP sponsor and MA 
organization offering an MA-PD plan were not consistently used in the 
proposed rule to represent distinct and mutually exclusive entities. As 
a result the proposed rule was not always clear regarding when 
requirements or options applied only to one or the other entity, or 
both.
    Response: We acknowledge that the terminology regarding sponsors 
and plans was inconsistently applied. We have revised the language in 
the final rule accordingly and have also standardized the terms `Part D 
plan' and `Part D plan sponsor' when referring to all plans and 
sponsors in general. Consequently we have relocated these terms from 
subpart C to this subpart and clarified that references to ``Part D 
plans'' in the final rule refer to any or all of MA-PD plans, PDPs, 
PACE plans and cost plans. Likewise, the term ``Part D plan sponsor'' 
refers to MA organizations offering MA-PD plans, PDP sponsors, and 
sponsors of PACE plans and cost plans.
    Comment: Several commenters asked that we be flexible in its 
definition of a non-governmental entity to allow either the creation of 
State-sponsored entities as PDPs or the selection of a preferred PDP 
entity for Medicaid dual eligible and SPAP populations.
    Response: While we understand and support the goals of minimizing 
client confusion and facilitating continuity of care, we believe the 
requirements imposed by sections 1860D-41(13) and 1860D-23(b)(2) of the 
Act do not allow us to approve State-sponsored PDPs or the selection of 
preferred PDPs for State populations. We would note, however, that we 
believe we can waive the non-governmental requirement in section 1860D-
41(23) of the Act under the employer waiver authority for States that 
seek to sponsor Part D plans on behalf of their employees. This is 
discussed in more detail in subpart J of this rule.
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), or pharmaceutical manufacturers may be subject to the 
anti-kickback statute and, if the relationship involves a physician, 
the physician self-referral statute. Nothing in this regulation should 
be construed as implying that financial relationships described in this 
final rule 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 
applicable laws.
    In addition to the provisions in these regulation, under section 
6(a)(1) of the Inspector General Act of 1978, as amended, OIG has 
access to all records, reports, audits, reviews, documents, papers and 
other materials to which the Department has access that relate to 
programs and operations for which the Inspector General has 
responsibilities under the Inspector General Act. The provisions in 
these regulations do not limit the Office of the Inspector General's 
(OIG) authority to fulfill the Inspector General's responsibilities 
under Federal law.''
e. ERISA application and requirements
    The rules contained in this rulemaking apply for purposes of Title 
I of the MMA and no inference should be drawn from anything in this 
rule regarding the applicability of title I of ERISA. In addition, 
nothing in this rulemaking should be construed as relieving a plan 
administrator or other fiduciary of obligations under title I of ERISA.

B. Eligibility and Enrollment

    We outlined the eligibility and enrollment requirements for Part D 
plans in subpart B of the August 2004 proposed rule. We received over 
100 comments on this subpart. Below we summarize the provisions of the 
proposed rule and our final rule and respond to public comments. 
(Please refer to the proposed rule (69 FR 46637) for a detailed 
discussion of our proposals.)
1. Eligibility for Part D (Sec.  423.30)
    Section 101 of 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 and enroll in a Part D plan. 
Section 1860D-1(a)(3)(A) of the Act defines a ``Part D eligible 
individual'' as an individual who is entitled to Medicare benefits 
under Part A or enrolled in Part B. Further, in order to be eligible to 
enroll in a PDP plan, Sec.  423.30(a) of the proposed rule provided 
that the individual must reside in the plan's service area, and cannot 
be enrolled in an MA plan, other than a Medicare savings account (MSA) 
plan or private fee-for-service (PFFS) plan that does not provide 
qualified prescription drug coverage. In addition, Sec.  423.4 of the 
proposed rule provided the definition of service area, which describes 
that for purposes of eligibility to enroll to receive Part D benefits, 
certain access standards must be met, hence, making certain individuals 
ineligible to enroll.
    Generally, a Part D eligible individual enrolled in an MA plan that 
does not provide qualified prescription drug coverage (that is, an MA 
plan) may not enroll in a PDP. There are, however, exceptions under 
sections 1860D-1(a)(1)(B)(iii) and (iv) of the Act for individuals who 
are enrolled in either an MA private fee-for-service plan (as defined 
in section 1859(b)(2) of the Act) that does not provide qualified 
prescription drug coverage or an MSA plan (as defined in section 
1859(b)(3) of the Act). We provided for these

[[Page 4202]]

exceptions in Sec.  423.30(b) of the proposed rule.
    Except as provided above, in accordance with section 1860D-
1(a)(1)(B)(i) of the Act, and as provided in Sec.  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 Sec.  422.50 through Sec.  422.68 of the proposed rule 
establishing and regulating the MA program (CMS-4069-P) which was also 
published August 2004.
    Except as otherwise provided below, the final rule adopts the 
eligibility criteria set forth in Sec.  423.30 of the proposed rule.
    Comment: Several commenters requested clarification of the 
definition of a Part D eligible individual. One commenter stated than a 
literal reading of the proposed definition appears to say that any 
individual who is eligible for Medicare but not enrolled could get the 
Part D benefit, and asks if an individual must enroll in Part A or Part 
B in order to be eligible for Part D. One commenter indicated that it 
was unclear how CMS would coordinate Part D eligibility with any 
retroactive eligibility determinations made by SSA.
    Response: Section 1860D-1(a)(3)(A) of the Act defines a ``Part D 
eligible individual'' as ``an individual who is entitled to benefits 
under Part A or enrolled under Part B.''
    In other context, we generally have interpreted the concept of 
``entitled'' to benefits to mean that an individual has met all of the 
necessary requirements for a benefit (that is, is eligible for the 
benefit), and has actually applied for and been granted coverage. We 
believe for purposes of applying the definition of ``Part D eligible 
individual'' under section 1860D-1(a)(3) of the Act, we believe this 
interpretation of ``entitlement'' is the appropriate interpretation. 
Accordingly, we will deem an individual ``entitled'' to Part A, and 
thus a Part D eligible individual, if the individual is eligible for 
benefits under Part A, and has actually applied for and been granted 
coverage under Part A. On the other hand, under our Medicare Part B 
regulations at part 407, an individual is considered to be ``enrolled'' 
in Part B when he or she has applied for Part B coverage (or is deemed 
to have applied). Nevertheless, we do not believe this interpretation 
of ``enrolled'' in Part B is the correct interpretation of section 
1860D-1(a)(3)(A) of the Act, and instead interpret ``enrolled under 
Part B'' to mean that the individual is entitled to receive benefits 
under Part B.
    When establishing eligibility and enrollment rules for the MA 
program upon its inception, we adopted a similar interpretation of 
section 1851(a) (3) of the Act. Section 1851(a) (3) of the Act defined 
the term ``Medicare+Choice eligible individual'' to mean an individual 
who is entitled to benefits under part A ``and enrolled under part B.'' 
As we explained in our proposed rule for the Medicare+Choice program 
(see 63 FR 34979), we believe that the Congress intended that we 
provide an individual the opportunity to enroll in the Medicare+Choice 
program only if entitled to actually receive benefits under Part B in 
addition to Part A. As we explained, under some situations, an 
individual may apply for or be deemed to have applied for Part B before 
he or she is actually entitled to receive coverage. For example, if an 
individual applies for Part B coverage after he or she reaches age 65, 
the individual may not actually be entitled to Part B coverage under 
section 1837 of the Act until one or several months after the month of 
application and enrollment. If we had interpreted section 1851(a) (3) 
of the Act to permit individuals to enroll in a Medicare+Choice plan 
when an individual has only been enrolled in Part B, but is not yet 
entitled to Part B, he or she could be entitled to the benefits under a 
Medicare+Choice plan before actually being entitled to Medicare Part B 
coverage. In order to avoid such a result, we interpreted the language 
``enrolled'' in Part B in section 1851(a) (3) of the Act to mean 
``entitled'' to Part B.
    We similarly will interpret section 1860D-1(a)(3)(A) of the Act as 
providing that an individuals is eligible for Part D only if the 
individual is entitled to receive benefits under Part A or Part B. 
Section 1860D-1(b)(1)(B) of the Act requires us to use rules similar to 
and coordinated with certain rules for enrollment that govern 
eligibility for the MA program. Hence, we believe that the Congress 
intended that we provide an individual the opportunity to enroll in 
part D only if entitled to actually receive benefits under Part B (or 
Part A); otherwise an individual would be entitled to receive coverage 
of Part D drugs under PDP before being entitled to receive benefits 
under original fee-for-service Medicare.
    Our regulations at Sec.  422.2 define an MA eligible individual as 
someone who meets the requirements of Sec.  422.50, which outlines the 
various criteria that an individual must meet to be eligible to elect 
an MA plan, including: entitlement to Parts A and B, residency in a 
plan's service area, making an enrollment election and agreeing to 
abide by the rules of the MA plan. We intend to apply a parallel 
approach to the Part D program. We will amend Sec.  423.4 to define a 
Part D eligible individual as an individual who meets the requirements 
at Sec.  423.30, that is, the individual is entitled to Medicare 
benefits under Part A or enrolled in Part B and lives in the service 
area of the Part D plan. We clarify, however, that ``enrolled'' in Part 
B means that the individual not only has applied for and enrolled in 
Part B, but is also receiving coverage for Part B services, in 
accordance with part 407.
    We have included in Sec.  423.30 to be eligible to enroll in a Part 
D plan, the individual must also reside in the Part D plan's service 
area and not be enrolled in another Part D plan.
    We have clarified Part D eligibility for those individuals for whom 
eligibility determinations for Medicare Part A or B have been made 
retroactively, which results in retroactive entitlement to these 
programs. The MA statute at section 1851(f) of the Act provides that 
initial elections shall take effect upon the date the individual 
becomes entitled to Part A or B, except as the Secretary may provide 
``in order to prevent retroactive coverage.'' Under the MA program, an 
individual who has received a retroactive eligibility determination for 
Medicare Part A or B is not permitted to enroll in an MA plan 
retroactively. Again, using section 1860D-1(b)(1)(B) of the Act that 
directs us to establish rules similar to those in MA, we envision 
individuals enrolling in a Part D plan prospectively and have revised 
Sec.  423.30 so that individuals who become entitled to Medicare Part A 
or Part B benefits for a retroactive effective date are deemed Part D 
eligible as of the month in which notice of Medicare Part A or Part B 
entitlement is provided.
    Such revisions at Sec.  423.4 and Sec.  423.30 will clarify that an 
individual is eligible for Part D at the same time an individual is 
eligible to enroll in Part D.
    Comment: Commenters requested clarification on the eligibility of 
incarcerated individuals. One commenter did not believe that we had the 
authority to create such exclusion. Another requested clarification of 
the ability of individuals released from incarceration on probation or 
parole to enroll in Part D.
    Response: In the preamble of the proposed rule, we explained that 
individuals who are incarcerated likely do not have access to Part D 
services, as they cannot obtain their prescription drugs from network 
pharmacies, yet

[[Page 4203]]

technically the jail or prison may be located within the larger 
geographic area encompassing a PDP's service area. As a result, the 
individual would be subject to a late enrollment penalty for not 
enrolling in a Part D plan. As a result, we believe that it is 
appropriate to provide in Sec.  423.4 that a PDP's service area would 
exclude areas in which incarcerated individuals reside (that is, a 
correctional facility) and as a result, incarcerated individuals would 
be ineligible to enroll in a PDP and we have revised the definition to 
clarify this point. Upon release from incarceration, such as for 
probation or parole, individuals will be considered eligible for Part D 
by living in a PDP service area, if they meet other Part D eligibility 
requirements.
    Comment: One commenter suggested that we consider individuals who 
are residents of a State mental institution to be out of the service 
area and therefore ineligible for enrollment in a Part D plan.
    Response: We would not consider individuals who are residing in a 
State mental institution to be out of the service area. Medicare 
beneficiaries residing in such institutions have access to Medicare 
benefits under Parts A and B and therefore would be entitled to enroll 
in a Part D plan. However, we do recognize that individuals in a State 
mental institution may be limited to the pharmacy network contracted 
with the facility. Therefore, we will provide such individuals a 
Special Enrollment Period (SEP) to enable them to join the appropriate 
Part D plan based upon their situation. We will clarify this in 
guidance following publication of this rule.
    Comment: One commenter asked that we clarify Sec.  423.30(c) in the 
final rule to indicate when an individual in an MA-PD plan can change 
plans.
    Response: The provisions explaining the opportunities for 
individuals to make PDP enrollment choices are fully set forth at Sec.  
423.38 of the final rule. The requirements for MA plans are outlined 
under Sec.  422.50 through Sec.  422.80.
    Comment: One commenter suggested that we permit beneficiaries 
enrolled in an MA plan to enroll in a PDP or disenroll from the MA plan 
and enroll in an MA-PD plan.
    Response: Section 1860D-1(a)(1) of the Act specifically prohibits 
an MA plan enrollee from enrolling in a PDP except in the case of 
enrollees of a MA PFFS plan that does not provide qualified 
prescription drug coverage or enrollees of an MSA plan. All 
individuals, including enrollees of MA plans, can enroll in a Part D 
plan during the established enrollment periods, as described at Sec.  
423.38 of the final rule.
2. Enrollment Process (Sec.  423.32)
    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 rules for MA plans under certain provisions of 
section 1851 of the Act. Thus, we proposed, where possible, to adopt 
the MA enrollment requirements provided under Sec.  422.50 through 
Sec.  422.80.
    Generally, a Part D eligible individual who wishes to make, change, 
or discontinue an enrollment during applicable enrollment periods must 
file an enrollment with the PDP directly. However, we will allow PDPs 
to use other enrollment mechanisms, as approved by us. In addition, 
Sec.  423.32 of the final rule provides that beneficiaries will remain 
enrolled in their PDP without having to actively re-enroll in that PDP 
at the beginning of each calendar year. Except as otherwise provided 
below, the final rule adopts the enrollment rules set forth in Sec.  
423.34 of the proposed rule.
    Comment: Several commenters submitted identical comments on various 
aspects of the coordination of the enrollment process reflected at both 
Sec.  423.34(b) and Sec.  423.42(a).
    Response: Commenters provided similar comments about the enrollment 
process at Sec.  423.34(b)(1) of the proposed rule and the coordination 
of enrollment and disenrollment process at Sec.  423.42(a) of the 
proposed rule. After reviewing these comments, we recognized that these 
sections were duplicative and could cause confusion. To address this 
problem, we have reorganized the following subjects in subpart B into a 
more logical order: the enrollment process at Sec.  423.32 (previously 
proposed Sec.  423.34); auto-enrollment process for dual eligible 
individuals at Sec.  423.34 (previously proposed Sec.  423.34(d); the 
disenrollment process at Sec.  423.36; the enrollment periods in Sec.  
423.38; and the effective dates at Sec.  423.40. We believe that this 
will simplify and clarify these provisions.
    Comment: Several commenters supported the inclusion of regulatory 
provisions that would permit enrollment through means other than the 
submission of signed, hard-copy enrollment forms in order to facilitate 
flexibility for future enrollments. These commenters supported allowing 
alternative mechanisms for enrollment, particularly electronic 
enrollments, to enable beneficiaries with access to computers to enroll 
or disenroll through secure websites established by PDP sponsors. 
Another commented that we should make the same enrollment mechanisms 
that are available to Medicare Advantage plans available to PDP 
sponsors. A few commenters requested clarification as to the ``other 
mechanisms'' referenced by us in the proposed rule, specifically what 
types of enrollment are envisioned and the populations to which these 
``other mechanisms'' would be applied. One commenter recommended we 
allow electronic enrollments through a CMS-hosted web site, and that we 
develop a standard registration process to authenticate the 
enrollments. Another stated that processing applications via the 
Internet would require significant systems changes and that the 
regulation appeared to lack requirements necessary to process 
applications in such a manner.
    Response: We were pleased by the general support for flexibility 
and creativity in this important part of the enrollment process, and we 
anticipate working in collaboration with all of our partners to develop 
enrollment processes that will be convenient, reliable and secure for 
all beneficiaries. We will adopt this provision as proposed at Sec.  
423.32(b), rather than specify or limit the types of alternative 
enrollment processes that may be used. We will continue to assess the 
technology available and provide additional operational guidance in the 
future, including specific systems requirements and other information 
necessary to implement these processes.
    Comment: We received several comments requesting clarification of 
what parties are authorized to act on behalf of a beneficiary for 
enrollment purposes. One commenter noted that the regulation does not 
appear to recognize a beneficiary's ``authorized'' or ``personal'' 
representative who could be designated to make decisions for 
individuals and refers to the personal representative definition that 
we created in subpart P of the proposed rule. Another commenter was 
concerned that individuals in long-term care facilities do not have a 
designated surrogate decision maker in place to make such a decision 
and lack the cognitive capacity to select a PDP. While some commenters 
stated that we should allow an individual's personal representative to 
enroll a person into a PDP, others requested that we recognize specific 
representatives who could effectuate

[[Page 4204]]

such an enrollment within the regulatory text (for example, SPAP).
    Response: In the regulation, we refer to a Part D eligible 
``individual'' who wishes to enroll. An individual who has been 
appointed as the legal representative to execute such an enrollment on 
behalf of the beneficiary, in accord with State law, would constitute 
the ``individual'' for purposes of making the enrollment or 
disenrollment. As with the Medicare Advantage provisions, we will 
recognize State laws that authorize persons to effect an enrollment for 
Medicare beneficiaries. We will include more information on this 
clarification in future operational guidance.
    Comment: Several commenters asked that we clarify that nothing 
would prevent a person or entity from assisting a beneficiary in 
completing and submitting his or her application to the PDP, as the MA 
program allows at Sec.  422.60(c).
    Response: We agree and have revised the regulatory language at 
Sec.  423.32(b) to allow for such assistance, consistent with the MA 
regulations.
    Comment: One commenter suggested that we set forth an appeals 
process for beneficiaries who are denied enrollment.
    Response: Although we agree with the commenter that we should 
establish a procedure for beneficiaries to dispute enrollment denials, 
we do not believe that a formal appeals process is necessary. Instead, 
we intend to address beneficiary complaints regarding enrollment in a 
similar manner as we have done under the MA program. Under the MA 
program, individuals are advised through their notice of denial of 
enrollment that if they disagree with the decision to deny enrollment, 
they may contact the MA organization. We monitor MA organizations 
periodically to ensure that they are providing this notification. We 
also respond to specific inquiries from beneficiaries and investigate 
possible situations where MA organizations have failed to notify 
beneficiaries of the process or where an organization may have 
incorrectly denied a beneficiary's enrollment. If we discover a 
beneficiary was incorrectly denied enrollment we can require the MA 
organization to enroll that individual, as provided in our manual 
instructions. We believe our current process provides adequate remedies 
to beneficiaries and will therefore establish a similar process for 
PDPs. We decline to establish a separate appeals process for these 
denials at this time.
    Comment: One commenter requested that we specify in the final rule 
that PDPs must provide written notice of enrollment decisions to each 
consumer.
    Response: In Sec.  423.32(d) we require PDPs to provide all 
individuals prompt notice of acceptance or denial of enrollment in the 
PDP in a format and manner specified by CMS. We will provide specific 
instructions on the format and manner of these required notices in 
operational guidance and intend to provide model language and materials 
for PDPs to use as well. Looking ahead, we believe that beneficiaries 
may want to receive documents (such as notices) in a variety of 
formats, rather than just in writing. To that end, we decline to 
require a specific format in regulation, thereby preserving the 
flexibility to foster innovation and creativity to satisfy beneficiary 
and industry expectations in the future.
    Comment: One commenter suggested that individuals enrolled in PACE 
should remain enrolled in the PACE organization for purposes of Part D 
coverage effective January 1, 2006. Another commenter suggested a 
similar process be established for cost plans.
    Response: Section 1860D-21(f) of the Act provides that a PACE plan 
may elect to provide qualified prescription drug coverage to its Part D 
eligible enrollees. Section 1860D-21(e) of the Act establishes a 
similar directive to cost-based HMO or competitive medical plan (CMP) 
plans. Discussion of the application of the Part D benefit to both PACE 
and cost-based HMO or CMP plans can be found under subpart T of the 
proposed rule. For PACE plans, we stated that PACE plans generally will 
be treated similar to MA local plans. Applying the appropriate MA rules 
from Sec.  422.66, PACE enrollees will receive their Part D benefits 
through the PACE plan if the PACE plan has elected to provide such 
coverage. Beneficiaries who are enrolled in PACE plans that provide 
such coverage as of December 31, 2005 will remain enrolled in that plan 
on January 1, 2006. For cost-based HMO or CMP plans, we state that cost 
contracts may offer Part D coverage only to individuals also enrolled 
for Medicare in the cost contract. As a result of the provisions for 
PACE and cost-based HMO or CMP plans, we revised Sec.  423.32(f) to 
provide that individuals who are in PACE or cost-based HMO or CMP plans 
that provide prescription drug coverage on December 31, 2005 will 
remain enrolled in that plan and be enrolled in the Part D benefit 
offered through that plan as of January 1, 2006.
3. Enroll Full-Benefit Dual Eligible Individuals (Sec.  423.34)
    In the proposed rule, Sec.  423.34(d) required that full benefit 
dual eligible individuals who fail to enroll in a PDP or MA-PD during 
their initial enrollment period would be automatically enrolled into an 
appropriate Part D plan, specifically a PDP with a Part D premium that 
does not exceed the low-income premium subsidy amount. When there is 
more than one available PDP in a region, full benefit dual eligible 
individuals would be auto-enrolled on a random basis.
    All beneficiaries in an MA plan with any prescription drug coverage 
on December 31, 2005 will be deemed enrolled on January 1, 2006 in an 
MA-PD plan offered by the same MA organization in accordance with Sec.  
422.66(e)(2) and (e)(3) of Title II of the final regulation even if the 
monthly beneficiary premium exceeds the low-income premium subsidy 
amount. For full-benefit dual eligible individuals only, the proposed 
rule provided that those already enrolled in an MA plan without any 
prescription drug coverage would be auto-enrolled into an MA-PD plan 
offered by the same organization, and that has a monthly Part D premium 
that does not exceed the low-income premium subsidy amount. The 
proposed rule clarified that those auto-enrolled into a Part D plan may 
affirmatively decline Part D coverage or change Part D plans.
    In a related area, Sec.  423.36(c) of the proposed rule provided a 
SEP for full-benefit dual eligible individuals that permits them to 
change Part D plans at any time. Separately, there already exists a SEP 
for full-benefit dual eligible individuals to enroll in or disenroll 
from a Medicare Advantage plan at any time, and this will be expanded 
to include MA-PD plans. This SEP is provided in operational guidance 
(see section 30.4.4-5 of Chapter 2 of the Medicare Managed Care 
Manual), in accordance with section 1851(e)(4)(D) of the Act, which 
gives us the authority to provide Special Enrollment Periods for 
exceptional circumstances. Taken together, the PDP and MA-PD plan SEPs 
mean a full-benefit dual eligible individual may switch from Original 
Medicare and a PDP into an MA-PD plan and vice versa; from one PDP to 
another; and from one MA-PD plan to another MA-PD plan at any time.
    We requested comment on two areas: whether we or States should 
conduct auto-enrollment, and how to address an inherent conflict in the 
statute, whereby the statute requires auto-enrollment of full-benefit 
dual eligible individuals

[[Page 4205]]

into a Part D plan with a premium that does not exceed the low-income 
premium subsidy amount, but does not speak to those instances in which 
an individual is enrolled in an MA organization whose premium for the 
available MA-PD plan(s) exceeds the low-income premium subsidy amount.
    Except as otherwise provided below, the final rule adopts the 
enrollment rules for full-benefit dual eligible individuals set forth 
in Sec.  423.34(d) of the propose rule.
    Comment: Several commenters supported CMS performing the auto-
enrollment function. They viewed it as the most appropriate entity 
because it is in the best position to randomly assign beneficiaries to 
MA-PD plans or PDPs in the region, and to establish links with each MA-
PD plan or PDP in each region, thereby more efficiently auto-enrolling 
individuals. Some commenters also suggested that we consider adding an 
enrollment broker to the process for populations with special health 
care needs.
    A number of other commenters recommended that States either be 
required or have the option to perform the auto-enrollment function, as 
they view the States as having more readily available data identifying 
dual eligible individuals and a vested interest in ensuring these 
individuals are enrolled in appropriate Part D plans. This option was 
also viewed as advancing care coordination and ensuring continuity of 
care. It was noted that these options also present a disincentive for 
States to maximize enrollment, since the phased-down State contribution 
payments are tied to the number of Part D eligible individuals enrolled 
in Part D plans. Commenters also acknowledged that, if we were to 
afford States the option of conducting the auto-enrollment function, we 
would have to develop its own systems for auto-enrollment in States 
that lack the capacity to develop such systems. Commenters supporting 
this option felt strongly that we should reimburse States for all of 
their costs related to enrollment activities they are required to 
perform.
    Some commenters recommended that an independent third party 
coordinate the enrollment process. Those parties could include State 
and local officials and representatives of nonprofit organizations 
specializing in care for seniors. One also suggested that the 
contracted agent would need to be compliant with the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) privacy rule and 
should have no financial incentives regarding a full-benefit dual 
eligible individual's assignment beyond the contract between it and 
CMS.
    Response: We agree with those who commented that we, or a 
contractor on our behalf, should perform the auto-enrollment function 
because we can better ensure consistent, timely implementation. In 
addition, we would not have to develop and implement a separate 
administrative structure to oversee auto-enrollment being performed by 
some or all of the States. Finally, it would likely be more cost 
effective for us to have a single entity perform auto-enrollment, 
rather than pay 51 separate entities. For these reasons, we will modify 
the final regulation to specify that we will conduct the auto-
enrollment process.
    At this time, we do not envision contracting with an enrollment 
broker to provide more intensive choice counseling for beneficiaries 
subject to auto-enrollment. Because the statute makes us ultimately 
responsible for the auto-enrollment process, we will, at least 
initially, conduct it ourselves. Instead of hiring a new third party, 
we believe it would be more effective to partner with existing 
stakeholders to conduct broad-based outreach and education; provide 
clear and comprehensive information to beneficiaries; and refer 
individuals to either the 1-800-MEDICARE toll-free line or to Part D 
plans for additional information. However, if we decide in the future 
to contract with an independent enrollment broker, we agree with the 
commenter that the entity would need to be free of conflicts of 
interest and comply with HIPAA privacy rules. We note that any 
delegation to a third party would make the third party a business 
associate of ours for HIPAA purposes, since the entity would be 
performing a function on behalf of us.
    Comment: Many commenters recommended that we define ``random'' to 
include auto-enrollment based on beneficiaries' particular drug needs, 
pharmacy affiliation, or on their classification as a special needs 
population. Many commenters expressed concerns about how random 
assignment will impact individuals who are on drug regimens on which 
they have been previously stabilized. They were concerned that these 
individuals would be auto-enrolled in a ``low-cost'' plan that may not 
cover the drugs they need. Without direct access to the coverage they 
need, this population would have no real choice but to switch 
medications, even though changing medications can be difficult and lead 
to adverse health outcomes, reactions, and so on.
    Several other commenters expressed similar concerns about 
individuals who reside in long-term care facilities. In addition, some 
long-term care facilities require residents to use a pharmacy selected 
and contracted by the facility. One commenter requested that we define 
``random,'' specifically detail how we envision the random process 
would work, and seek further public comment.
    Response: We share the commenters' concerns with ensuring access to 
necessary prescription drug coverage for vulnerable populations. For 
ensuring continued access to existing drugs prescribed for an 
individual, please refer to comments on Sec.  423.120(b) of the final 
regulation. For ensuring access to long-term care facilities' 
contracted pharmacies, please refer to comments on Sec.  423.120(a) of 
the final regulation.
    The systems challenges associated with anything other than a random 
process would be significant, and possibly result in inappropriate 
assignment or delayed implementation. For example, we have drug 
utilization data for Medicaid beneficiaries, but there is a time lag in 
receiving those data. Furthermore, we do not currently have access to 
information about the pharmacies that contract with long-term care 
facilities. Finally, we realize that pharmacy affiliation and 
particular drug needs are only two of the variables that impact a 
beneficiary's choice of a Part D plan. For example, a beneficiary may 
also consider cost-sharing, formulary structure, customer service and, 
in the case of MA-PD plans, whether she or he would want to receive all 
of her or his Medicare benefits from one organization.
    Given these data limitations, and the many and varied reasons for 
choosing a Part D plan, we do not believe we are in a position to make 
a judgment about what is best for individual beneficiaries, and decline 
to change the proposed regulations. However, we will make every effort 
to ensure that beneficiaries and community organizations receive enough 
information in time for them to determine the appropriate plan for the 
beneficiary. The SEP provided for full-benefit dual eligible 
individuals in the statute and in our final rule at Sec.  423.38(c)(4) 
also ensures that they can change plans to better accommodate their 
pharmaceutical needs and pharmacy affiliations.
    Comment: One commenter recommended that we establish a bid process 
whereby PDPs with an expected enrollment by full-benefit dual eligible 
individuals that is higher than the proportion in the total Medicare 
eligible population in the relevant PDP region

[[Page 4206]]

automatically qualify for inclusion in the auto-enrollment process. The 
commenter further recommended that, if such a plan has a monthly 
beneficiary premium above the low-income premium subsidy amount, we 
should permit a ``waiver'' based on a subsidy or payment of that excess 
premium by CMS or another entity in order to reduce the premium to an 
amount equal to or below the low-income premium subsidy amount.
    Response: Those plans available for purposes of auto-enrollment are 
ones that have premiums at or below the low-income premium subsidy 
amount. This includes fallback plans in areas where they exist. It is 
our intent to implement the Part D program and adhere to the statute as 
closely as possible, assuming tenable options are available to do so. 
In the case of PDPs that serve a disproportionate share of full-benefit 
dual eligible individuals, and whose premium exceeds the low-income 
premium subsidy amount, we believe there are tenable options, that is, 
other PDPs with premiums at or below the low-income premium subsidy 
amount. However, we note that risk-adjustment should correct for the 
higher costs incurred by plans with larger proportions of full-benefit 
dual eligible individuals.
    Comment: A few commenters recommended that we not limit the Part D 
plans available for auto-enrollment to just those plans with premiums 
below the low-income premium subsidy amount, as this limits full-
benefit dual eligible individuals to the ``lowest cost'' plans, which 
may offer a less generous benefit. The commenters suggested that, 
regardless of whether these individuals enroll on their own or are 
auto-enrolled, they should be permitted to enroll in any plan and not 
be charged any additional premium. At a minimum, a beneficiary's 
medical provider could attest that a higher premium plan will better 
meet his or her medical needs and therefore be allowed to enroll in a 
higher premium plan without the added premium.
    Response: We appreciate the commenters' concern that full-benefit 
dual eligible individuals be able to enroll in the plan best suited for 
them, not just ``low cost'' plans. We note that a full-benefit dual 
eligible individual is free to enroll in any Part D plan during the 
initial enrollment period or annual coordinated election period.
    For auto-enrollment, however, section 1860D-1(b)(1)(C) of the Act 
only permit us to, auto-enroll full-benefit dual eligible individuals 
into those plans with premiums at or below the low-income premium 
subsidy amount. In addition, those full-benefit dual eligible 
individuals randomly auto-enrolled in a particular plan may still 
choose another plan pursuant to a special enrollment period.
    In addition, as we do not have the authority under section 1860D-
14(a)(1)(A) of the Act to increase the low-income premium subsidy 
amount (as defined under section 1860D-14(b)(2)(B) of the Act), full-
benefit dual eligible individuals who elect to enroll in a plan with a 
premium exceeding the low-income premium subsidy amount must pay the 
difference in premium. We are also precluded under sections 1860D-
13(a)(1)(F) and 1854(c) of the Act from requiring or even permitting 
Part D plans from waiving any premium in excess of the premium subsidy 
amount, including allowing MA-PD plans to use rebate dollars to reduce 
the premium only for this portion of their enrolled population.
    Comment: We received numerous comments related to the timing of the 
auto-enrollment process for full-benefit dual eligible individuals. 
Commenters identified the possibility of a gap in coverage for some of 
those individuals if the auto-enrollment did not occur until the close 
of the Initial Enrollment Period on May 15, 2006, since Medicaid 
coverage of Part D drugs ends several months earlier, on January 1, 
2006. They proposed that we require auto-enrollment of these 
individuals to be completed prior to Medicaid coverage ending on 
December 31, 2005. Some commenters recommended that the process be 
completed as early as November 15, 2005, and one commenter suggested 
starting the 2005 Initial Enrollment Period for full-benefit dual 
eligible individuals prior to November 15, 2005. Another commenter 
recommended that auto-enrollment precede Part D eligibility by 6 
months, and that Medicaid coverage of Part D drugs be continued until 
auto-enrollment can be done.
    Response: We did not intend to implement a process that would 
create a gap in drug coverage for full-benefit dual eligible 
individuals. We do not believe that the Congress intended for such a 
gap to occur. Therefore, we will modify the final rule so that the 
auto-enrollment of these individuals will begin as soon as Part D plans 
with premiums at or below the low-income premium subsidy amount are 
known prior to January 1, 2006. We will also modify the final rule to 
provide that those full-benefit Medicaid individuals who become 
eligible for Medicare after January 1, 2006, will be enrolled as soon 
as their Medicare Part D eligibility is determined. For the suggestion 
to start the 2005 Initial Enrollment Period for full-benefit dual 
eligible individuals before November 15, 2005, we are precluded from 
doing so, as this date is explicitly identified in section 1860D-
1(b)(2)(A) of the Act as the date upon which enrollment in Part D may 
commence.
    Comment: Many other commenters suggested that we delay 
implementation of the Part D program for full-benefit dual eligible 
individuals by at least five or six months, and some recommended a 
year's delay, although the commenters recognized that such a delay 
would require a legislative change. The commenters' concern was based 
on the limited time to transition drug coverage for these full-benefit 
dual eligible individuals from Medicaid to Medicare. The commenters 
expressed concern about the feasibility of identifying, educating, and 
enrolling the population of full-benefit dual eligible individuals in 
time for a smooth transition of drug coverage. Some commenters 
highlighted the need to ensure adequate time for physicians and 
patients to navigate administrative barriers and change medications to 
comply with formularies. One commenter suggested Medicare beneficiaries 
who currently participate in Medicaid buy-in programs (that is, 
qualified Medicare beneficiaries (QMB), special low-income 
beneficiaries (SLMB), and qualified individuals (QI1)) be permitted to 
keep Medicaid drug coverage after Part D starts.
    A few commenters recommended that, assuming Part D coverage begins 
for full-benefit dual eligible individuals on January 1, 2006, Medicaid 
coverage of Part D drugs be extended past December 31, 2005, and 
continued until such time as full-benefit dual eligible individuals are 
enrolled in Part D.
    One commenter recommended that full-benefit dual eligible 
individuals who are American Indians or Alaska Natives (AI/AN) be 
exempt from Part D and continue to be eligible for Medicaid drug 
coverage after January 1, 2006. The commenter argued that this would 
prevent loss of revenues to pharmacies operated by Indian Health 
Services (IHS), Tribal Clinics, and Urban Indian Clinics, who may 
receive lower payments from Part D plans than they currently receive 
from Medicaid, and eliminate barriers for this population.
    Response: As the commenters correctly point out, a delay in the 
implementation of the Part D program, including auto-enrollment for 
full-benefit dual eligible individuals would require a change to the 
statute. Similarly, extending Medicaid coverage of prescription drugs 
covered under Part D would also require a legislative

[[Page 4207]]

change. Absent such changes, we cannot delay implementation, extend 
Medicaid coverage of Part D drugs, nor can we exclude full-benefit dual 
eligible individuals who are AI/AN, or participants in Medicaid buy-in 
programs from Part D.
    Comment: A couple of commenters requested clarification about the 
circumstances under which a beneficiary may affirmatively decline 
participation in Part D. They expressed concern that individuals with 
diminished mental faculties may not fully understand the impact of 
their decision, and that States would likely bear additional costs 
associated with full-benefit dual eligible individuals whose health 
deteriorates due to their failure to take necessary medications. One 
commenter urged that States be able to obtain FFP to provide 
prescription drug coverage in these instances. Another commenter 
asserted that permitting a full-benefit dual eligible individual to 
affirmatively decline enrollment in Part D contradicts numerous 
statutory and regulatory provisions that require this population's 
enrollment in Part D. One commenter urged CMS to make disenrollment 
contingent upon selection of another Part D plan to ensure there is no 
lapse in coverage. Finally, one commenter suggested expanding the 
ability to affirmatively decline enrollment in Part D to Medicare 
beneficiaries who are not auto-enrolled.
    Response: The Congress specified that prescription drug coverage 
under this program is voluntary, and section 1860D-1(b)(1)(C) of the 
Act specifically stipulates that auto-enrollment does not prevent a 
full-benefit dual eligible individual from declining or changing such 
enrollment. Absent any legislative change, we cannot intervene with an 
individual's right to decline coverage. Nor can we adopt the suggestion 
to permit Federal financial participation (FFP) for State Medicaid 
agencies that choose to provide drug coverage for full-benefit dual 
eligible individuals who affirmatively decline auto-enrollment. Section 
1935(d)(1) of the Act stipulates that no FFP is available for any Part 
D drugs or cost-sharing for Part D drugs for full-benefit dual eligible 
individuals who are eligible for Part D, even if they are not enrolled 
in a Part D plan. However, we will be making every effort to ensure 
that beneficiaries and community organizations have sufficient 
information to assist individuals in making the most appropriate 
choices about participating in Part D.
    Concerning the comment that we should make disenrollment from a 
Part D plan contingent upon enrolling in another Part D plan to prevent 
a coverage gap for full-benefit dual eligibles, we decline to do so in 
regulation, but will continue to work develop strategies to prevent a 
coverage gap in this instance.
    We decline to expand the ability to affirmatively decline Part D 
enrollment to individuals who are not auto-enrolled or for whom we do 
not facilitate enrollment into a Part D plan. This population is 
comprised of those who are not deemed or determined eligible for the 
low-income subsidy. If these individuals do not want Part D coverage, 
they can simply choose not to enroll in a Part D plan.
    Comment: One commenter suggested that there should be flexibility 
for CMS to change the plan into which a beneficiary has been auto-
enrolled should the plan no longer meet the needs of the enrollee.
    Response: We agree that it would be prudent to retain the 
flexibility to enroll an individual in subsequent years in a different 
plan from the one into which we originally enrolled the individual, and 
have modified the final rule to provide for this. We note that this 
will require an exception to the maintenance of enrollment provision in 
Sec.  423.32(e), so we have modified the final rule to provide for one.
    We envision this may only be necessary in certain limited 
circumstances. For example, we may want to consider doing this if the 
plan's premium in a subsequent year exceeded the low-income premium 
subsidy amount. We will ensure that beneficiaries are fully notified, 
and have the option to remain in their original plan. We will examine 
the need for this as the program evolves and provide operational 
guidance should we implement it.
    Comment: A number of commenters responded to our request in the 
preamble for solutions to an inherent conflict in the statute. In this 
instance, the statute requires auto-enrollment of full-benefit dual 
eligible individuals into a Part D plan with a premium at or below the 
low-income premium subsidy amount. Section 423.34(d) of the proposed 
rule stipulated that those in an MA-only plan would be auto-enrolled 
into an MA-PD plan in the same organization that has a premium that 
does not exceed the low-income premium subsidy amount. However, there 
may be instances in which an individual is enrolled in an MA-only plan 
offered by an MA organization, and all the MA-PD plans in that 
organizations have premiums that exceed the low-income premium subsidy 
amount.
    We note that most MA enrollees will be deemed to be enrolled into 
an MA-PD plan in accordance with Sec.  422.66(e)(2) and (e)(3). 
However, deeming does not address those who elect an MA-only plan that 
does not offer any drug coverage in 2005, nor qualified prescription 
drug coverage thereafter.
    Several commenters supported auto-enrolling these full-benefit dual 
eligible individuals into an MA-PD plan offered by the same 
organization with the lowest Part D premium, even if it was higher than 
the low-income premium subsidy amount. This would provide seamless 
continuation of their Medicare benefits through the same organization. 
Commenters noted that these individuals retain the right to decline 
Part D coverage, and have a SEP that permits them to change PDPs or MA-
PD plans at any time.
    One commenter noted that excluding full-benefit duals from auto-
enrollment in an MA-PD plan with a premium higher than the low-income 
premium subsidy amount would give those MA plans an unfair advantage by 
removing from their risk pool full-benefit dual eligible individuals, 
who tend to have higher drug utilization.
    Response: We agree with commenters' concerns about ensuring 
continuity of care through the same MA organization, if possible. 
However, as we discussed in the preamble to the proposed regulation, 
there is an inherent statutory conflict that would seem to preclude 
using auto-enrollment authority to accomplish this. Section 1860D-
1(b)(1)(C) of the Act directs the Secretary to auto-enroll full-benefit 
dual eligible individuals who do not enroll in a PDP or MA-PD plan on a 
random basis into a PDP with a premium at or below the low-income 
premium subsidy amount; it does not identify an MA-PD plan as an entity 
into which an individual could be auto-enrolled.
    General principles of statutory interpretation requires us to 
reconcile two seemingly conflicting statutory provisions rather than 
allowing one provision to effectively nullify the other provision. We 
had proposed to resolve this by interpreting the reference to 
``prescription drug plans'' in section 1860D-1(b)(1)(C) of the Act as 
including both PDPs and MA-PD plans, thereby allowing auto-enrollment 
of an MA full-benefit dual eligible individual into an MA-PD offered by 
the same organization offering his or her MA plan if the premium for 
such plan did not exceed the low-income premium subsidy amount.

[[Page 4208]]

    Upon further consideration, we believe there continue to be legal 
concerns as to whether we have the authority to auto-enroll full-
benefit dual eligible individuals into an MA-PD plan. Rather than rely 
on auto-enrollment authority under section 1860D-1(b)(1)(C) of the Act 
to ensure continuity of Part D coverage for full-benefit dual eligible 
individuals enrolled in MA-only plans, we instead will rely on our 
general authority to establish enrollment procedures under section 
1860D-1(b)(1)(A) of the Act to establish a facilitated enrollment 
process that substantially fulfills the intent of ensuring no 
prescription drug coverage gap for these individuals.
    We will therefore facilitate enrollment into Part D for full-
benefit dual eligible individuals enrolled in a MA plan that does not 
offer qualified prescription drug coverage by assigning them to an MA-
PD plan with the lowest premium offered by the same MA organization, 
even if the plan's MA monthly prescription drug beneficiary premium 
exceeds the low income premium subsidy amount. We will inform them in 
advance of this assignment. If the beneficiary fails to affirmatively 
elect an alternative plan or declines enrollment in Part D, she or he 
will be enrolled into the plan into which she or he has been assigned. 
In this instance, a beneficiary's silence would be deemed consent to 
the enrollment choice we are making on their behalf. We note that the 
right to affirmatively decline in Sec.  423.34(e), on affirmatively 
declining Part D enrollment, and the Special Enrollment Period in Sec.  
423.38(c)(4), apply equally to all full-benefit dual eligibles, whether 
they are auto-enrolled or have their enrollment facilitated.
    In the case of a full-benefit dual eligible for whom we facilitate 
enrollment into an MA-PD plan with a premium higher than the low-income 
premium subsidy amount, we acknowledge that this creates a new 
financial obligation for the enrollee to pay the balance of the monthly 
MA monthly prescription drug beneficiary premium not covered by the 
low-income premium subsidy amount. However, this option best preserves 
informed enrollee choice, is consistent with statutory intent, respects 
the beneficiary's initial choice to enroll in an MA plan, and ensures 
continuity of prescription drug coverage. These individuals will have 
information about other plan choices available and retain their right 
to a Special Enrollment Period to choose another plan at any time, as 
provided by section 1861D-1(b)(3) of the Act for PDPs, and section 
1851(e)(4)(D) of the Act and section 30.4.4-5 of Chapter 2 of the 
Medicare Managed Care Manual for MA-PD plans.
    Comment: A few commenters generally supported auto-enrolling full-
benefit dual eligible individuals into an MA-PD plan, but urged CMS to 
find a solution that would ensure no additional costs were imposed on 
beneficiaries. Some of the commenters that supported auto-enrollment 
into the MA-PD plan with the lowest Part D premium provided suggestions 
as to how to minimize the financial impact on beneficiaries. A few 
suggested that for those who are institutionalized, the excess premium 
should be considered an incurred medical expense and deducted from 
their monthly share of cost to the facility. For non-institutionalized 
beneficiaries, in States with State Pharmacy Assistance Programs 
(SPAPs), SPAPs should be allowed to pay the balance. For full-benefit 
dual eligible individuals who are medically needy, the balance should 
be considered an incurred medical expense contributing towards their 
spend-down. Otherwise, individuals should be counseled about the 
premium discrepancy and about the right to disenroll from an MA plan 
and enroll in Original Medicare with a PDP.
    Response: We appreciate these suggestions for minimizing the 
financial impact on beneficiaries. We intend to highlight the impact of 
our facilitating enrollment into an MA-PD plan with a premium higher 
than the low-income premium subsidy amount to these beneficiaries and 
advise them of their ability to switch plans. We note that under 
Medicaid, whatever portion of the premium the individual pays would be 
an incurred medical expense, including any portion of the premium that 
is paid by the SPAP. Since incurred medical expenses are deducted from 
income when determining patient liability for an institutionalized 
individual, and are deducted from income for medically needy spend-down 
purposes, the commenter's suggestions correctly characterize how 
Medicaid would treat any premium difference paid by the individual. The 
commenter is also correct in noting that SPAPs will be allowed to pay 
the balance for their enrollees, but we note this is an option for all 
enrollees of an SPAP, not just non-institutionalized enrollees. Since 
these options are already permitted under the regulatory language in 
the proposed rule, we will not modify the regulation further to specify 
them.
    Comment: One commenter suggested that we permit MA-PD plans to 
waive the portion of their premium above the low-income premium subsidy 
amount. The commenter suggested that explicit authorization by CMS 
would be a contract amendment, not an inducement to a beneficiary to 
enroll, which would ensure that the waiver of the excess premium does 
not implicate the Federal anti-kickback rules or be considered 
disparate treatment.
    Response: We appreciate the intent of the commenter's suggestion. 
However, we are precluded from permitting MA-PD plans to waive a 
portion of the Part D premium for a subset of their enrollees by 
section 1854(c) of the Act, which requires uniform premiums for all 
enrollees of an MA plan.
    Comment: A few commenters urged CMS to prohibit auto-enrollment of 
full-benefit dual eligible individuals into MA-PD plans. Instead, these 
MA enrollees should be auto-enrolled into a PDP for their Part D 
benefit. The commenters note that these beneficiaries could always 
switch to an MA-PD plan.
    Response: Section 1861D-1(a)(1)(B)(ii) of the Act specifies that, 
with limited exceptions, individuals in an MA plan may not also enroll 
in a PDP. The only exceptions are those enrolled in a MSA plan, or in a 
MA private fee-for-service plan or cost-based HMO or CMP that does not 
offer qualified prescription drug coverage, may enroll in a PDP. Thus, 
auto-enrolling these individuals into a PDP would require us to also 
disenroll them from their MA plan, which could be inconsistent with our 
current MA requirements Sec.  422.66(e), which provide that an 
individual who elects an MA plan is considered to have continued to 
have made that election until he or she voluntarily changes that 
election, or the plan is discontinued or no longer serves the service 
area.
    Comment: Finally, one commenter suggested that if no MA-PD plan is 
available, or if the Part D premium of the available MA-PD plan exceeds 
the low-income premium subsidy amount, CMS should auto-enroll these 
beneficiaries into another organization's MA-PD plan whose premium does 
not exceed the low-income premium subsidy amount.
    Response: For the concern that no MA-PD plan would be available, we 
note that section 1860D-21(a) of the Act requires all MA organizations 
to offer at least one MA-PD plan.
    Involuntarily disenrolling the individual from his or her MA plan, 
and auto-enrolling him or her into another MA-PD plan offered by 
another MA organization, is inconsistent with MA requirements at Sec.  
422.66(e) described above.
    Comment: A few commenters urged expanding Part D auto-enrollment in 
the

[[Page 4209]]

case of full-benefit dual eligible individuals who are in an 
organization's Medicaid managed care product, but currently receive 
Part A and B benefits through Original Medicare. Specifically, the 
commenters recommended that these beneficiaries be auto-enrolled into 
an MA-PD plan that is offered under common ownership and control of the 
organization offering the Medicaid managed care plan.
    Response: Please refer to responses to comments on Sec.  422.66(d) 
in Title II of the final regulation for a discussion on this issue.
    Comment: A few commenters proposed that, where a full-benefit dual 
eligible individual in Original Medicare will be auto-enrolled into a 
PDP that is affiliated with an MA Special Needs Plan, CMS auto-enroll 
the individual into the MA Special Needs Plan for their Part A and B 
benefits, as a way to promote better overall coordination of care. To 
preserve the beneficiary choice, the commenter suggested the regulation 
provide an opportunity for the individual to ``opt out'' within some 
specified period of time (for example, 90 days).
    Response: The statute prohibits beneficiaries who have Part D 
coverage through a PDP from getting their Medicare A and B coverage 
through an MA-only plan. As a result, we decline to make the suggested 
change.
    Comment: One commenter asked CMS to clarify that, if a full-benefit 
dual eligible individual is auto-enrolled into an MA-PD plan with a 
premium higher than the low-income premium subsidy amount, that the 
State Medicaid program would not be obliged to pay the balance on 
behalf of the beneficiary.
    Response: We confirm that the State Medicaid agency has no 
obligation to pay any Part D premium in excess of the low-income 
premium subsidy amount. Further, section 1905(a) of the Act, which 
provides Federal medical assistance for Medicare cost-sharing (as 
defined in section 1905(p)(3)(A) of the Act), does not include Part D 
premiums.
    Comment: A few commenters recommended that we consider establishing 
a process for automatically enrolling or at least facilitating the 
enrollment into Part D plans all individuals deemed eligible for the 
full low-income subsidy. In effect, this would expand auto-enrollment 
to individuals in Medicare Savings Programs. These are individuals for 
whom State Medicaid agencies pay for Medicare cost sharing, but who are 
not eligible for comprehensive Medicaid benefits and thus are not 
considered full-benefit dual eligible individuals. They include QMB, 
SLMB, and QI1. To the extent that we accept this recommendation, the 
commenters suggested we also broaden the SEP provision to cover any 
full subsidy eligible individual who is auto-enrolled in a Part D Plan.
    A few commenters advocated expanding auto-enrollment even further 
to all those who receive the low-income subsidy. This would include not 
only those deemed eligible for the subsidy, but also those who have to 
apply and be determined eligible. Auto-enrollment would ensure that 
these individuals are not subject to a late enrollment penalty.
    Response: We agree that there are compelling reasons to promote 
Part D enrollment of all individuals deemed or determined eligible for 
the low-income subsidy. These individuals typically are less healthy 
and often face barriers to care. Effective medication management and 
prescription drug coverage can lead to reduced inpatient hospital 
expenditures, making it more cost-effective to provide drug coverage.
    Facilitating enrollment into Part D would promote access to drug 
coverage for these beneficiaries by ensuring that they have drug 
coverage starting in 2006, while also preserving the voluntary nature 
of enrollment in Part D. Doing so would also ensure that beneficiaries 
with limited means would not be liable for a late enrollment penalty 
for failing to enroll in Part D when first eligible.
    We intend to pursue many steps to assist beneficiaries, 
particularly low-income beneficiaries, in taking advantage of the new 
Medicare drug coverage. Such steps could include facilitating 
enrollment into Part D for those beneficiaries. We will provide details 
in operational guidance to be issued shortly after the publication of 
the final regulation, including details on the population for whom we 
will facilitate enrollment. By facilitating enrollment, we mean giving 
beneficiaries an opportunity to choose a Part D plan first; if they do 
not choose, we would notify them that we intend to facilitate their 
enrollment into a specific plan prospectively. If the beneficiary fails 
to affirmatively elect an alternative plan or declines enrollment in 
Part D by a given date, she or he would be enrolled into the plan into 
which she or he has been assigned. In this instance, a beneficiary's 
silence would be deemed consent to the enrollment choice we are making 
on their behalf. If we facilitate enrollment in this manner, we would 
likely follow rules for assigning beneficiaries to Part D plans similar 
to those for the auto-enrollment and facilitated enrollment process for 
full-benefit dual eligibles: MA enrollees would be enrolled into an MA-
PD plan with the lowest Part D premium; Original Medicare beneficiaries 
would be enrolled in a PDP with a Part D premium that does not exceed 
the low-income premium subsidy amount, and, if there is more than one 
such PDP available, the individual would be randomly enrolled into one 
of the plans available. In establishing a process for this facilitated 
enrollment, we would rely upon discretion afforded the Secretary under 
section 1860D-1(b)(1)(A) of the Act to establish enrollment processes 
for Part D eligible individuals. Similarly, we would extend some of the 
same protections afforded the full-benefit dual eligible population who 
are auto-enrolled to those whose enrollment we facilitate. These 
protections would include a Special Enrollment Period, the right to 
affirmatively decline Part D enrollment, and where possible, 
facilitating enrollment into plans whose premiums do not exceed the 
low-income premium subsidy amount.
    Comment: One commenter suggested expanding auto-enrollment to PACE 
enrollees, that is, CMS auto-enroll them into their PACE organization 
for purposes of Part D coverage effective January 1, 2006, unless the 
PACE enrollee makes another enrollment choice. PACE organizations would 
provide their enrollees an opportunity to opt out of enrollment in Part 
D (and, as a result, out of the PACE organization).
    Response: We agree that PACE enrollees should not be required to 
take any additional steps to obtain their Part D benefit through their 
PACE organization. Individuals who enroll in a PACE organization elect 
to get all their Medicaid (if eligible for Medicaid) and Medicare 
benefits through the PACE organization. As noted in response to a 
similar comment on Sec.  423.32 of the final regulation, we will modify 
the final regulation to deem individuals enrolled in a PACE 
organization as of December 31, 2005 to be enrolled with that PACE 
organization for their Part D benefit as of January 1, 2006. This 
precludes the need to expand auto-enrollment to PACE enrollees, so we 
decline to make that change.
    Comment: One commenter noted that no provision was made for auto-
enrollment of full-benefit dual eligible individuals enrolled in 
Medicare cost-based HMO or CMPs. The commenter suggested that for full-
benefit dual eligible individuals enrolled in a cost-based HMO or CMP, 
CMS auto-enroll these individuals into the cost-based HMO or CMP for 
Part D benefits if the cost-based HMO or CMP offers Part D,

[[Page 4210]]

even if the Part D premium is higher than the low-income premium 
subsidy amount. If the cost-based HMO or CMP does not offer Part D 
benefits, the commenter recommends auto-enrolling the beneficiary into 
a PDP.
    Response: We agree that we should ensure that full-benefit dual 
eligible individuals, and potentially others eligible for the low-
income subsidy who are enrollees of a cost-based HMO or CMP obtain Part 
D benefits. As noted in response to a similar comment on Sec.  423.32 
of the final regulation, we will modify the final regulation to specify 
that all individuals enrolled in a cost-based HMO or CMP that offers 
any prescription drug coverage as of December 31, 2005, will be deemed 
to be enrolled in the cost-based HMO or CMP for Part D benefits as of 
January 1, 2006, if the cost-based HMO or CMP opts to provide Part D 
benefits, and regardless of whether the Part D premium exceeds the low-
income subsidy amount.
    We believe the same legal concerns noted above for auto-enrolling 
full-benefit dual eligible individuals into MA-PD plans arise for auto-
enrolling them into a cost plan HMO or CMP. As a result, we decline to 
expand auto-enrollment a suggested by this commenter. Instead, we will 
use a facilitated enrollment process discussed above to accomplish 
substantially the same end. We will facilitate the enrollment of full-
benefit dual eligible individuals enrolled in a cost plan HMO or CMP 
that offers Part D benefits and who fail to enroll in a Part D plan 
into the Part D benefits offered by their cost plan HMO or CMP. If the 
cost plan HMO or CMP does not offer Part D benefits, the individual 
will be enrolled in a PDP. We may similarly facilitate the enrollment 
of other cost plan enrollees eligible for the low-income subsidy who 
fail to elect a Part D plan into the Part D benefit offered by their 
cost plans.
    Comment: One commenter requested clarification as to whether auto-
enrollment into a PDP will only occur for Medicare beneficiaries who 
receive comprehensive health care benefits (full hospital and physician 
services) from both Medicare and Medicaid, or whether auto-enrollment 
also applies to Medicare beneficiaries that receive pharmacy-only 
benefits through Medicaid.
    Response: The final rule will limit auto-enrollment to only those 
dual eligible individuals who receive comprehensive health benefits 
from both Medicare and Medicaid. As noted above, we may facilitate 
enrollment of all others deemed or determined eligible for the low-
income subsidy into Part D plans. To the extent that a Medicare 
beneficiary with pharmacy-only Medicaid benefits is in the population 
whose enrollment we facilitate, we would facilitate that individual's 
enrollment into a Part D plan.
    Comment: One commenter recommended that we explore auto-enrolling 
residents of long term care facilities who are not full-benefit dual 
eligible individuals, and permitting these beneficiaries to disenroll 
or choose another Part D plan. The commenter was especially concerned 
about residents who lack the cognitive capacity to select a PDP and who 
do not have a designated surrogate decision-maker in place.
    Response: Generally, enrollment in Part D is voluntary. Section 
1860D-1(b)(1)(C) of the Act provides for auto-enrollment of full-
benefit dual eligible individuals. As noted above, we may facilitate 
enrollment of others deemed or otherwise determined eligible for the 
low-income subsidy into Part D plans. To the extent that a resident of 
a long term care facility is in the population whose enrollment we 
facilitate, we would facilitate that individual's enrollment into a 
Part D plan.
    Since the Act limits auto-enrollment to full-benefit dual eligible 
individuals, we decline to auto-enroll long-term care residents who do 
not receive the low-income subsidy. While we acknowledge that access to 
prescription drug coverage is critical for this population, we believe 
they generally have the resources and support to make timely enrollment 
decisions. We will, however, continue to explore options regarding 
enrollment for all individuals in long-term care facilities.
    Comment: A number of commenters urged CMS to permit SPAPs to act as 
authorized representatives and enroll some or all of the beneficiaries 
they serve into the SPAP's preferred PDP. These beneficiaries should be 
permitted to decline enrollment in the SPAP's preferred PDP or to 
change to another Part D plan.
    Response: With regard to the issue of authorized representatives, 
we defer to State law, as discussed in response to comments on Sec.  
423.32. However, it is important to note that SPAPs that act as the 
authorized representative for the individual must also comply with the 
nondiscrimination provisions at Sec.  423.464(e). Please see responses 
to related comments in subpart J.
    Comment: One commenter noted that it appears that a full-benefit 
dual eligible individual cannot enroll in an MA-PD plan if the 
individual is not already an MA enrollee. The commenter urged that MA-
PD plans that bid at or below the low-income premium subsidy amount 
should be an enrollment option for all full-benefit dual eligible 
individuals.
    Response: During the Part D initial enrollment period that starts 
November 15, 2005, full-benefit dual eligible individuals who are in 
Original Medicare are free to change to an MA-PD plan. Further, we have 
established in our operational guidance a Special Enrollment Period 
(SEP) that permits full-benefit dual eligible individuals to enroll in 
and disenroll from an MA plan at any time, and will extend this SEP to 
MA-PD plans. This will ensure that MA-PD plans are an option for all 
full-benefit dual eligible individuals.
    As indicated previously, any individual enrolled in a PACE 
organization as of December 31, 2005 will be deemed to be enrolled with 
that organization for their Part D benefit as of January 1, 2006.
    The chart below provides a summary of the enrollment rules for all 
beneficiaries, including those with and without the low-income subsidy, 
in accordance with Sec.  423.32, Sec.  423.34, and Sec.  422.66.

------------------------------------------------------------------------
             Population                        Enrollment Rules
------------------------------------------------------------------------
General Medicare Population          (1) A beneficiary who chooses to
                                      enroll a Part D plan must do so as
                                      follows:
                                     Original Medicare [rtarr2] Original
                                      Medicare with separate PDP
                                     MA Plan without drug coverage
                                      [rtarr2] MA-PD plan
                                     Medical Savings Account (MSA) Plan
                                      [rtarr2] MSA with separate PDP
                                     PFFS with Part D [rtarr2] PFFS with
                                      Part D
                                     Private Fee-For-Service Plan (PFFS)
                                      without Part D [rtarr2] PFFS with
                                      separate PDP
                                     Cost Plan with Part D [rtarr2] Cost
                                      plan Part D or cost plan with
                                      separate PDP

[[Page 4211]]

 
                                     Cost Plan without Part D [rtarr2]
                                      Cost Plan with separate PDP
                                     (2) A beneficiary enrolled in an
                                      entity that offers any drug
                                      coverage in 2005, CMS deems him or
                                      her enrolled as follows* :
                                     MA Plan [rtarr2] MA-PD Plan
                                     Cost Plan [rtarr2] Cost Plan with
                                      Part D
                                     PACE Organization [rtarr2] PACE
                                      Organization
                                     (3) On a case-by-case basis, CMS
                                      may allow an MA organization to
                                      process ``seamless'' enrollments
                                      into the organization's MA-PD plan
                                      if individuals are enrolled in a
                                      health plan offered by that MA
                                      organization that includes
                                      prescription drug coverage upon
                                      their entitlement to Medicare.
------------------------------------------------------------------------
Full-Benefit Dual Eligible           (1) A beneficiary who chooses to
 Beneficiaries                        enroll in a Part D Plan follows
                                      the same rules as above; otherwise
                                      CMS auto-enrolls or facilitates
                                      enrollment for him or her as
                                      follows:
                                     Original Medicare [rtarr2] PDP
                                     MSA Plan [rtarr2] PDP
                                     PFFS Plan without Part D [rtarr2]
                                      PDP
                                     Cost Plan with Part D [rtarr2] Cost
                                      plan with Part D
                                     Cost Plan without Part D [rtarr2]
                                      PDP
                                     MA-Only Plan [rtarr2] MA-PD Plan
                                     (2) For a beneficiary enrolled in
                                      an entity that offers any drug
                                      coverage in 2005, CMS deems him or
                                      her enrolled as follows:
                                     MA Plan [rtarr2] MA-PD Plan
                                     Cost Plan [rtarr2] Cost Plan with
                                      Part D
                                     PACE Organization [rtarr2] PACE
                                      Organization
                                     (3) On a case-by-case basis, CMS
                                      may allow an MA organization to
                                      process ``seamless'' enrollments
                                      into the organization's MA-PD plan
                                      if individuals are enrolled in a
                                      health plan offered by that MA
                                      organization that includes
                                      prescription drug coverage upon
                                      their entitlement to Medicare.
------------------------------------------------------------------------
* Those in an MA Plan without any drug coverage in 2005 will not be
 deemed into an MA-PD plan, but instead must actively choose one if they
 want Part D benefits.
** We may facilitate enrollment for other beneficiaries eligible for the
 low income subsidy; if so, we would likely follow these same rules.
For additional detail, please see discussion on:
 Sec.   423.32--Beneficiary's choice
 Sec.   422.66(d)(5)--``Seamless'' enrollment on case-by-case basis
 Sec.   422.66(e)(2)-(3)--Deemed enrollment in 2005
 Sec.   423.34--Auto-enrollment and facilitated enrollment
------------------------------------------------------------------------

4. Disenrollment process (Sec.  423.36)
    Section 1860D-1(b)(1)(A) of the Act authorizes us to establish a 
process to allow disenrollment from prescription drug plans. In the 
proposed rule, we outlined the rules for a Part D eligible individual 
who wishes to change or discontinue an enrollment during applicable 
enrollment periods, including filing a disenrollment with the PDP 
directly or enrolling in another PDP.
    While we initially envision a paper disenrollment process, we 
retain the flexibility for other secure and convenient mechanisms that 
we may approve in the future. Any such mechanism will be available at 
the option of each PDP sponsor. We believe it is important to clarify 
that, as other mechanisms are approved and implemented, we will require 
all PDPs offer a minimum standard process, which at this time would be 
a paper process, along with any optional election mechanism available 
to prospective enrollees and plan members in conjunction with the paper 
process. In the future, as technology evolves, another process may be a 
more appropriate minimum standard. Except as provided below, the final 
rule adopts the disenrollment rules set forth at Sec.  423.42 of the 
proposed rule.
    Comment: One commenter asked that we clarify whether an enrollment 
in a different PDP would automatically disenroll the beneficiary from 
his or her previous PDP effective the first day of enrollment in a new 
PDP and asked who is responsible for that notification.
    Response: We envision creating a process similar to that created 
for the MA program, under which an individual who is eligible to enroll 
in another PDP will automatically be disenrolled from the previous PDP 
upon enrollment in the new PDP. The PDP to which the individual submits 
an enrollment is required to provide a notice of acceptance or denial, 
as provided in Sec.  423.32(d). We will notify the previous PDP of the 
disenrollment and that PDP will inform the individual that he or she 
has been disenrolled. As for the specifics of the notice requirements, 
we will issue guidance to PDPs following the publication of this rule.
    Comment: One commenter requested that we clarify in the regulations 
that proper beneficiary protections for retroactive disenrollments are 
in place for beneficiary requests that are made but not properly acted 
upon.
    Response: We will treat an individual's request for disenrollment 
that was made but not properly acted upon as if the disenrollment had 
properly occurred. We will provide guidance to PDPs as to how to handle 
the processing of such requests, including proper notification to the 
beneficiary.
    Comment: One commenter asked CMS to address the issue for those 
retirees who enroll in both a PDP and the employer sponsored plan due 
to their confusion over the variety of new coverage options. The 
commenter indicated that this not only results in duplicative coverage 
and unnecessary premium costs. In addition, the commenter was concerned 
because

[[Page 4212]]

many retirees may not be aware that a consequence of enrolling in Part 
D may be the discontinuation of their employer group benefits, often 
permanently prevented from ever being able to rejoin the group once he 
or she enrolls in other coverage, such as Part D. One commenter 
requested that we allow for retroactive disenrollment from Part D and 
refund of the Part D premiums for these retirees who enrolled by 
mistake into a PDP.
    Response: We recognize that during the initial enrollment period 
that some retirees may be confused about how their employer-based 
coverage may coordinate with Part D coverage. While we feel that 
establishing a retroactive disenrollment process specifically for this 
reason would generally be inappropriate, we can establish a process in 
which we would work with employer group sponsors, PDPs and MA-PDs to 
educate beneficiaries prior to open enrollment and at the time of 
enrollment. In addition, we intend to establish a process for the PDPs 
and MA-PDs to verify an enrollment request for those individuals who 
have been identified to CMS as having been claimed by an employer group 
sponsor to receive the employer based subsidy. We will also include 
information in beneficiary education and enrollment materials targeted 
to those individuals who already have other prescription drug coverage 
to provide assistance in determining whether enrollment in Part D would 
be appropriate for that individual. We will issue operational guidance 
on this process shortly following publication of the final rule.
5. Part D Enrollment Periods (Sec.  423.38)
    In the proposed rule, as directed by the MMA, we established three 
coverage enrollment periods: (1) the initial enrollment period (IEP); 
(2) the annual coordinated election period (AEP); and (3) SEPs. 
Generally, in accordance with section 1860D-1(b)(2)(B) of the Act, the 
IEP for Part D is the same as the initial enrollment period established 
for Part B. 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 
have established 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.
    In accordance with section 1860D-1(b)(1)(B)(iii) of the Act, the 
AEP for Part D is concurrent with the annual coordinated election 
period for the MA program under section 1851(e)(3) 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. 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 will be 
November 15 through December 31 for coverage beginning on January 1 of 
the following year.
    The MMA also establishes SEPs. SEPs allow an individual to 
disenroll from one PDP and enroll in another PDP. Similarly, the SEP 
rules that will apply for individuals in an MA-PD plan will be provided 
under Sec.  422.62(b). We will include in regulation those SEPs that 
have been specifically named in the statute. Those SEPs established for 
exceptional circumstances for PDPs and MA-PDs, as authorized by section 
1860D-1(b)(3)(C) of the Act and section 1851(e)(4) for MA-PDs of the 
Act, respectively, will be provided in our manual instructions. The 
final rule adopts the enrollment periods as proposed.
    Comment: We received several comments regarding SEPs. Several 
commenters supported the SEPs for exceptional conditions we proposed to 
provide through manual guidance. Specifically, these include certain 
SEPs already established in the MA program for circumstances where a 
plan terminates its contract or the individual changes his or her 
permanent residence. These commenters also supported an SEP to enroll 
in a PDP for individuals disenrolling from an MA-PD plan during the MA 
Open Enrollment Period, and for institutionalized individuals. Other 
commenters suggested we establish various other SEPs, including the 
following:
     A subsidy-eligible individual who leaves private 
prescription drug coverage for any reason, including his or her 
inability to pay;
     A change in a person's health status that makes a current 
plan choice no longer suitable to his or her needs;
     Individuals eligible for the low-income subsidy, other 
than full benefit dual eligible individuals;
     If there are substantial changes to the plan's formulary;
     Individuals with ``life-threatening situations;''
     Individuals whose situations are pharmacologically 
complex;
     All individuals for the first 18 months of the program as 
it may be a confusing time;
     All beneficiaries leaving MA plans throughout the year so 
that they can enroll in a PDP;
     Medicare-eligible retirees whose plan sponsor changes 
their retiree drug coverage so that it no longer meets the criteria for 
creditable coverage;
     Individuals enrolled in, or desiring to enroll in PACE, as 
the PACE program has continuous enrollment and disenrollment; and
     Full benefit dual eligibles at any time, including every 
time a PDP changes its plan in a way that directly effects these 
individuals, such as removing a drug from its formulary, changing the 
co-payment tier for a drug, or denying their appeal concerning a non-
formulary drug or an effort to change the co-payment tier.
    Response: We appreciate this feedback. As previously mentioned, we 
have historically included in regulation only those SEPs that have been 
specifically named in the statute. The SEPs explicitly provided for in 
statute include an SEP for full-benefit dual eligible individuals, 
individuals who permanently change their residence so that they no 
longer reside in their PDP's service area, and individuals enrolled in 
a PDP whose contract is terminated.
    We will issue guidance regarding the above SEPs and other 
additional SEPs that we choose to establish following publication of 
the regulation. We intend to establish in this guidance an SEP for 
those individuals eligible for the low-income subsidy whose enrollment 
into a Part D plan will be facilitated, individuals in long-term care 
facilities, individuals enrolled in, or desiring to enroll, in PACE and 
individuals enrolled in employer group health plans. However, we 
decline to establish SEPs for other reasons included in the comments 
described above, because we do not view these circumstances as 
exceptional. However, we retain the right to establish additional SEPs 
in the future and will do so in our operational guidance. Furthermore, 
we may establish SEPs on a case-by-case basis, where warranted by an 
immediate exceptional circumstance, such as an individual with a life-
threatening condition or illness. For the commenter's request that we 
provide an SEP for the first 18 months of the program, we do not 
believe that such an SEP is warranted in the circumstances. First, we 
are committed to ensuring all beneficiaries have adequate information 
to make informed choices about participating in the Part D program. 
Second, the statute provides for an

[[Page 4213]]

extended AEP and provides a concurrent IEP at the beginning of this 
program. These extended enrollment periods, in conjunction with the 
planned education and information campaigns, will provide all 
beneficiaries with adequate time and information to make an enrollment 
decision. Therefore, we do not believe that such an SEP is warranted.
    Comment: A few commenters recommended that we should provide a SEP 
to permit those individuals who will receive the low-income subsidy 
under subpart P but who are not full-benefit dual eligible individuals 
to change to a plan of their choosing.
    Response: We strongly agree that we should permit those individuals 
who are enrolled or whose enrollment is facilitated by CMS the 
opportunity to change to a plan of their choosing. Since we are 
generally limiting in regulation those SEPs specified in statute, we 
will provide for this SEP in operational guidance.
    Comment: One commenter recommends that we change the provision of 
an SEP for the involuntary loss of creditable coverage to include 
individuals who lose such coverage due to failure to pay premiums. The 
commenter believes the provision as proposed is too restrictive and 
should be modified.
    Response: Section 1860D-1(b)(3)(A)(iii) of the Act is clear that 
disenrollments for failure to pay premiums will be considered a 
voluntary disenrollment action. We therefore do not believe it 
appropriate to treat this disenrollment as an exceptional circumstance 
justifying an SEP.
    Comment: One commenter asked if MA-PD plans are required to 
participate in the AEP.
    Response: The MA enrollment periods are discussed in the MA 
regulations at Sec.  422.62. The AEP applies to both PDP and MA-PD 
plans.
    Comment: One commenter requested clarification of how many times an 
individual may use an SEP to enroll in a PDP and encouraged CMS to 
limit the number of times an SEP may be used to enroll.
    Response: The duration and applicability of an SEP is specific to 
each SEP and may vary from one specific circumstance to another. For 
example, an SEP in the MA program for individuals affected by a plan 
termination is specific to the circumstances surrounding that specific 
action and limited in duration. Other SEPs apply more generally to 
individuals, for example, full-benefit dual eligible dual individuals. 
We will provide detailed guidance concerning each SEP following the 
publication of this rule.
    Comment: One commenter requested clarification of proposed Sec.  
423.36(c)(3) regarding the SEP for individuals whose enrollment or 
nonenrollment in Part D is caused by an error of a Federal employee or 
any person authorized by the Federal government to act on its behalf. 
The commenter suggests that we include all sponsors of Part D plans as 
``persons authorized by the Federal Government to act on its behalf.''
    Response: We have interpreted this statutorily required SEP to 
apply to Federal government employees, staff, and contractors hired by 
the Federal government to perform government duties. We would not 
consider Part D plans to be performing enrollment functions as a 
subcontractor on the behalf of CMS; rather, Part D plans must perform 
certain enrollment functions as requirement of their direct contract 
with CMS. While it is unlikely that an SEP would be necessary, we will 
correct any errors made by the plan and not hold the individual liable 
for the plan's mistake. Thus, we may allow an SEP in individual 
situations, if appropriate.
    Comment: One commenter asked if SEP enrollment in a PDP could be 
retroactive in order to maintain continuity of care.
    Response: An SEP enrollment in a PDP will generally be prospective. 
We establish the effective date for SEPs and can accommodate unusual 
circumstances on a case-by-case basis.
    Comment: One commenter suggested that we establish an SEP with no 
late enrollment penalty if a Medigap issuer or other entity fails to 
provide adequate or accurate notice of whether such coverage is 
creditable.
    Response: Section 423.38(c)(2) of the final rule establishes an SEP 
for all individuals who are not adequately informed when their 
creditable prescription drug coverage is lost or changes so that it is 
no longer creditable prescription drug coverage or that the individual 
never had such creditable coverage. We believe that these provisions 
adequately protect an individual who does not receive the required 
notice from a Medigap issuer or other entity. Regarding the late 
enrollment penalty, the provision of an SEP is not directly related to, 
nor does it have a direct effect upon, the imposition of applicable 
late enrollment penalties. The late enrollment penalty is discussed in 
more detail at Sec.  423.46 and its relationship to creditable 
prescription drug coverage is discussed at Sec.  423.56. Specifically, 
at Sec.  423.56(g) of the final rule we describe the available remedy 
for an individual who was not adequately informed that their 
prescription drug coverage is not creditable.
    Comment: One commenter believed the enrollment process should 
ensure that residents of a long-term care facility are enrolled in a 
PDP that provides access to the pharmacy located in the long-term care 
facility.
    Response: We understand the issue raised by the commenter. 
Individuals who are in a long-term care facility will be given an SEP 
to ensure they can choose the PDP that is appropriate for their 
situation. This will be clarified in guidance following publication of 
this rule.
6. Effective Dates of Coverage and Change of Coverage (Sec.  423.40)
    Section 1860D-1(b)(1)(B)(iv) of the Act directs us to apply the 
effective date requirements provided under the MA program at section 
1851(f) of the Act. As described above, the three enrollment periods 
provided under Part D are the IEP, the AEP, and SEP. In the proposed 
rule, we established the following effective dates for these enrollment 
periods:
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 Part A or enrollment in Part B is effective 
the first day of the month the individual is entitled to Part A or 
enrolled in Part B. Since the Part D provisions are not effective until 
January 1, 2006, we clarified that in no case may enrollment in Part D 
be effective prior to this date. We also clarified 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 Part A 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.
b. Annual Coordinated Election Period
    In accordance with section 1851(f)(3) 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 1\st\. One exception to this rule occurs during 2006 in the 
special annual coordinated election period in 2006, in

[[Page 4214]]

which elections made between January 1, 2006 though 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 Period
    A SEP is effective in a manner that we determine to ensure 
continuity of health benefits coverage.
    The final rule adopts the effective dates as proposed.
    Comment: Three commenters suggested that we specify a distinct 
effective date for the SEPs in the final rule (as described in Sec.  
423.38(c) of the proposed rule) to ensure adequate consumer protection. 
Two commenters suggested adding: ``but no later than the first day of 
the second calendar month following the month of the request for the 
enrollment change'' to the end of this section. The third commenter 
suggested we add: ``changes made before the 20\th\ of the month are 
effective the first day of the second month following'' the change.
    Response: We have outlined the specific effective date requirements 
for SEPs granted in the MA program in operational guidance and will 
follow the same process for the Part D program. We believe that in so 
doing, we retain our ability to react quickly to changes or unforeseen 
circumstances.

7. Involuntary 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. The proposed disenrollment provisions for PDPs were outlined 
in Sec.  423.44 of our proposed rule, including the basis for 
disenrollment--both optional and required--and guidance for notice 
requirements.
    Specifically, we proposed at Sec.  423.44(b)(2) that a PDP is 
required to disenroll an individual who dies, 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 knowingly 
misrepresents to the PDP that he or she has received or expects to 
receive reimbursement for covered Part D drugs through other third-
party coverage. The proposed rule also required a PDP to disenroll an 
individual if the PDP sponsor's contract is terminating.
    In addition to providing requirements for mandatory disenrollments, 
we also provided 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, consistent with section 1860D-1(b)(1)(B)(v) of 
the Act.
    As with the MA program, PDP sponsors will be required in the final 
rule to provide proper notice to the beneficiary, as outlined at 
proposed Sec.  423.44(c), and afford him or her due process in 
accordance with the procedures outlined in our operational instructions 
prior to disenrolling the individual. For example, a PDP that wishes to 
disenroll a beneficiary for disruptive behavior must receive our prior 
approval and demonstrate to our satisfaction that it has made a good 
faith effort to resolve the issue prior to requesting the 
disenrollment. We will review 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.
    Except as otherwise provided below, the final rule adopts the 
involuntary disenrollment rules set forth in Sec.  423.44 of the 
proposed rule.
    Comment: Several commenters urged CMS to establish a process for 
individuals to appeal disenrollment decisions. Several commenters 
believed that individuals should have access to an outside independent 
review process, especially if these individuals are disenrolled without 
an SEP. Another commenter stated that involuntary disenrollments must 
be heavily scrutinized and an appeal right be available on an expedited 
basis.
    Response: As we discussed under a previous comment regarding 
appeals for enrollment denials, we do not believe that a formal appeals 
process is necessary. Instead, we intend to address beneficiary 
complaints regarding disenrollment in a manner addressed under the MA 
program. Under the MA program, MA plans are required to follow a 
specific process, which includes notice of potential disenrollment if 
the individual does not address situation. We currently provide 
assistance to MA organizations to handle beneficiary inquiries and 
complaints regarding disenrollment through staff assigned to each MA 
organization. We envision a similar process being established under the 
PDP program.
    Comment: Several commenters pointed out an error in the numbering 
of the regulatory text for disruptive behavior at proposed Sec.  
423.44(b)(1).
    Response: We concur and have corrected the numbering.
    Comment: A commenter requested that we clearly define how long an 
individual would need to reside out of the PDP service area before we 
would consider the individual as no longer residing in the service 
area. One commenter did not think that it was reasonable to apply a 6-
month time limit to PDPs; PDPs should not be required to disenroll 
individuals if the PDP can provide individuals access to benefits out 
of the service area through a PDP in another region, or the PDP's 
network of pharmacies in other regions, or mail order pharmacies. One 
commenter believed the decision should be left to the individual as to 
when he or she has permanently moved out of the PDP service area. A few 
commenters did not believe that a person's residency should be a factor 
in a plan's basis for disenrollment. Another commenter stated that a 
PDP should not be required to disenroll an individual if the PDP meets 
licensure requirements in the State where the individual has moved and 
the PDP has a national pharmacy network in place. Another commenter 
suggested that PDP maintain members if they are an established sponsor 
and meet certain network adequacy requirements in the region in which 
the beneficiary moves.
    Response: We agree that disenrolling a beneficiary after being 
temporarily out of the service area for a certain period of time may be 
less appropriate for PDPs than in the MA program. The MMA directs us to 
use rules similar to (and coordinated with) the MA residency 
requirements at section 1851(b)(1)(A) of the Act, which provides that 
an individual may elect an MA plan only if the plan serves the 
geographic area in which the individual resides, except as the 
Secretary may otherwise provide. However, the MA regulation at Sec.  
422.74(d)(4) generally provides for disenrollment of an individual if 
that individual is out of the service area, even temporarily, for 6 
months, unless the MA organization offers visitor or traveler benefits 
that provide for benefits while outside of the service area. We believe 
that the nature of the prescription drug benefit and the ability for 
many individuals to access the benefit through mail order or chain drug 
stores provide greater flexibility in accessing the prescription drug 
benefit while temporarily being out of the PDP's service area. However, 
while an individual has greater flexibility to be temporarily outside 
the service area and still access the PDP benefit, we maintain that the 
individual must maintain his or her permanent residence within the

[[Page 4215]]

PDP's service area to be a member of the PDP. If the PDP learns of a 
change in the individual's permanent address, the PDP would initiate 
the disenrollment process. It is, however, an individual's 
responsibility to notify the PDP if the individual permanently moves 
out of the service area. We will provide further guidance to PDPs on 
the process of disenrollment when an individual permanently moves out 
of the service area following publication of this rule.
    Comment: One commenter asked how a PDP will learn of loss of 
entitlement to Part A or Part B.
    Response: We will notify the PDPs of the loss of Part A or B 
benefits. We will issue detailed operational guidance for PDPs prior to 
2006.
    Comment: A few commenters requested that we further clarify the 
provision that an individual who ``knowingly misrepresents to the PDP 
that he or she has received or expects to receive reimbursement for 
covered Part D drugs through other third party coverage'' (that is, 
whether his or her costs are expected to be reimbursed through 
insurance or otherwise, such as a group health plan) must be 
disenrolled. These commenters also asked how ``knowingly'' will be 
determined and what entity would be responsible for investigating such 
a case. One commenter indicated that a beneficiary should not be 
penalized for unintended errors or inadvertent omissions, and that many 
beneficiaries will be confused at the outset about their PDP coverage 
and how it may coordinate with other insurance.
    Response: Section 1860D-2(b)(4)(D)(ii) of the Act provides that 
``material misrepresentation'' by an individual as to whether his or 
her costs are expected to be reimbursed through insurance or otherwise 
(through a group health plan or other third party payment arrangement) 
shall be grounds for termination by the PDP. Since section 1860D-
2(b)(4)(D)(ii) of the Act also provides that a PDP sponsor may 
periodically ask Part D eligible individuals about such reimbursement, 
the statute establishes a penalty for an individual who ``materially'' 
misrepresents such information. This provision is not intended to 
disenroll individuals who simply make an error, but instead apply to 
those individuals who knowingly provide such false information. We 
would be responsible for reviewing and issuing the final decision on 
such a case. We plan to issue further guidance on this for PDPs prior 
to 2006.
    Comment: We received several comments on the disenrollment for 
nonpayment of premium provision, both supporting and opposing inclusion 
of such a process. Several commenters requested that we clarify the 
details of disenrollment for nonpayment of premium, including what we 
view as ``reasonable efforts'' to collect the premium. Several 
commenters recommended providing a minimum grace period for repayment 
before permitting disenrollment. One commenter requested that we waive 
payment of past premiums for full-benefit dual eligible individuals or 
low-income subsidy individuals. Some commenters believe that it is 
inappropriate for us to disenroll any individual from Part D for 
nonpayment of premium. One commenter stated that individuals enrolled 
in a PACE plan should not be subject to the disenrollment requirements 
under Sec.  423.44 of the proposed rule.
    Response: Section 1860D-1(b)(1)(B)(v) of the Act specifically 
directs us to apply rules to PDPs that are similar to (and coordinated 
with) the MA provisions at section 1851(g) of the Act related to 
disenrollment for nonpayment of premium. While some commenters objected 
to disenrollment by the PDP on those grounds, we note that such 
disenrollment is at the PDP sponsor's option and PDP sponsors therefore 
have the ability to apply this rule to their plan enrollees. In 
contrast, under Part B, individuals who fail to pay their Part B 
supplementary medical insurance premiums must be disenrolled from Part 
B. While we do not review and approve such disenrollments, we maintain 
that if a PDP chooses the option to disenroll a beneficiary for 
nonpayment of the premium, we would require that the PDP apply this 
policy consistently, as we direct, amongst all its members and could 
not ``waive'' the premium for a certain group of its members. As 
indicated in the preamble of subpart T of this rule, we will issue 
additional guidelines that will include a comprehensive listing of Part 
D waivers applicable to PACE organizations. However, we agree that PACE 
organizations should not be subject to the disenrollment requirements 
of Sec.  423.44 as they are duplicative of the PACE disenrollment 
requirements associated with Sec.  460.164 of the PACE regulation.
    Comment: Several commenters recommended that we permit plans to 
deny reinstatement following disenrollment for failure to pay premiums 
unless the enrollee pays the outstanding amount that is due. Other 
commenters stated that PDP should not be required, under any 
circumstance, to re-enroll individuals who are disenrolled for 
nonpayment of the premium.
    Response: We have provided in the final regulation at Sec.  
423.44(d)(1)(iii) that a PDP may decline future enrollment to 
individuals who have been disenrolled for failure to pay premiums until 
past due premiums are paid to the PDP. However, we would not allow a 
PDP to prohibit an individual from enrolling in its plan if the 
individual has paid all past due premiums to the PDP.
    Comment: We received a substantial number of comments on proposed 
Sec.  423.44(d)(2) to allow PDP sponsors to disenroll individuals who 
exhibit disruptive behavior.
    One commenter supported the definition established in the proposed 
rule, while several commenters supported the due process safeguards 
afforded by our approval of disenrollment requests. Two commenters 
suggested that we provide guidance to PDP sponsors on the symptoms of 
mental illness and dementia and other personality disorders to 
distinguish between disruptive behavior and behavior resulting from a 
medical condition. There were other commenters who asked us to clearly 
define the terms and requirements for disenrolling a beneficiary for 
disruptive behavior. These commenters recommended that we include in 
the final rule such requirements as documentation of a PDP sponsor's 
effort to provide a reasonable accommodation for individuals with 
disabilities and sufficient notice of the sponsor's actions during the 
course of the disenrollment process.
    Numerous commenters expressed concern that the proposed definition 
of disruptive behavior does not adequately protect individuals whose 
behavior is induced by disability, mental illness, cognitive 
impairment, or certain prescribed drugs and who rely on prescription 
drug therapy to stabilize their behavior. Some commenters recommended 
that we prohibit PDP sponsors from disenrolling certain populations for 
disruptive behavior, explaining that State Medicaid programs will not 
be able to claim Federal matching funds for prescription drugs spending 
on behalf of full-benefit dual eligibles who have been disenrolled by a 
PDP sponsor. Other commenters suggested that we develop more stringent 
criteria for PDP sponsors requesting to disenroll a full-benefit dual 
eligible individual. Several commenters stated that, in cases where an 
individual is unstable, disruptive behavior could be related to 
unsuccessful attempts to find the proper medication. There were also a 
number

[[Page 4216]]

of commenters who asserted that we lacked statutory authority to permit 
PDPs sponsors to disenroll individuals for disruptive behavior. Two 
commenters questioned the appropriateness of applying a policy of 
involuntary disenrollment for disruptive behavior to PDPs. One 
commenter suggested that we allow an individual who is disruptive to 
designate an authorized representative to access services on his or her 
behalf.
    Response: In the final rule, we aim to strike a balance between 
allowing PDP sponsors to disenroll individuals who exhibit disruptive 
behavior and creating adequate protections for individuals who face 
involuntary disenrollment from a PDP. In accordance with the statute 
(at section 1860D-1(b)(1)(B)(v) of the Act), we must establish a 
process that is similar to and coordinated with the process under the 
MA program that permits MA organizations to disenroll an individual for 
disruptive behavior. At the same time, we recognize the impact of such 
a disenrollment on an individual's ability to access prescription drug 
coverage under the Medicare program, and the need for adequate 
safeguards for individuals whose disruptive behavior is due to mental 
illness or a medical condition. Continuity of care for these 
individuals is essential, especially if they are taking prescription 
medications that can minimize the debilitating impact of their illness 
and restore their functioning.
    Therefore, in revising our proposed definition of disruptive 
behavior in Sec.  423.44(d)(2)(i) of the final rule, we focus on 
behavior that substantially impairs a PDP sponsor's ability to arrange 
or provide care for the individual or other plan members. Behavior that 
is related to the use of medical services or compliance (or non-
compliance) with medical advice is not disruptive behavior.
    We also agree with commenters that arranging or providing care for 
individuals with mental illness, cognitive impairments such as 
Alzheimer's disease or other dementias, and medical conditions and 
treatments that may cause disruptive behavior warrant special 
consideration, and therefore revise Sec.  423.44(d)(2)(v) to require 
PDP sponsors to provide a reasonable accommodation to individuals in 
such exceptional circumstances that we deem necessary. Such 
accommodation is intended to ensure that the individual can maintain 
Medicare prescription drug coverage and may include granting an 
individual a SEP to choose another plan, or requiring the plan to 
continue the individual's enrollment until the Annual Coordinated 
Election Period, when the individual has an opportunity to enroll in 
another plan. We will determine the type of accommodation necessary 
after a case-by-case review of the needs of all parties involved. This 
review will be conducted as part of our review and approval of the PDP 
sponsor's request, as required in regulations at Sec.  423.44(d)(2)(v), 
and will include expert opinion from our staff with appropriate 
clinical or medical background.
    In addition, we recognize that circumstances may arise where an 
individual is only able to obtain qualified prescription drug coverage 
from a fallback prescription drug plan operating in his or her service 
area. In such instances, allowing a fallback entity to disenroll an 
individual may create substantial barriers to accessing prescription 
medications under the Medicare program. Section 1860D-11(g)(4)(B) of 
the Act grants us authority to establish additional requirements 
specifically for fallback prescription plans. Under this authority, we 
reserve the right at Sec.  423.44(d)(2)(vi) to deny a fallback 
prescription drug plan's request to disenroll an individual for 
disruptive behavior.
    In the proposed rule, we established procedures that PDP sponsors 
must follow prior to requesting to disenroll a member for disruptive 
behavior. Under proposed Sec.  423.44(c), a PDP sponsor must give an 
individual timely notice of the disenrollment, which includes an 
explanation of the individual's right to a hearing under the PDP's 
grievance procedures. We further required at proposed Sec.  
423.44(d)(2)(ii) a sponsor to make a serious effort to resolve the 
problems presented by the individual, including the use or attempted 
use of the organization's grievance procedures. Finally, we established 
under proposed Sec.  423.44(d)(2)(iii) that a PDP sponsor must document 
the individual's behavior, its own efforts to resolve the problem, and 
the use or attempted use of its internal grievance procedures. We are 
preserving all of these requirements in the final rule at Sec.  
423.44(c) and Sec.  423.44(d)(2)(iii) and (d)(2)(iv).
    We believe that the final rule achieves the twin goals of 
permitting involuntary disenrollment based on an individual's 
disruptive behavior, while also establishing necessary protections for 
individuals who are subject to our disenrollment rules.
    Comment: Several commenters contended that allowing a PDP sponsor 
to disenroll an individual for disruptive behavior provides an 
opportunity for PDP sponsors to discriminate against individuals with 
disabilities, mental illness, Alzheimer's, and other cognitive 
conditions.
    Response: We appreciate the commenters concern about the need to 
ensure that individuals are not discriminated against on the basis of 
their disability. However, the Part D plans are not provided the 
authority to make the decision on such a disenrollment. In addition to 
establishing safeguards in the final rule for individuals with special 
needs by requiring PDP sponsors to make reasonable accommodations where 
we deem necessary, it is CMS who reviews the request for disenrollment 
and makes the decision to approve or deny the request. In our review, 
we will include our staff with the appropriate clinical or medical 
expertise review the case before a final decision is made.
    Comment: Several commenters noted that the proposed rule denies 
protection to individuals who comply with medical advice by trying an 
on-formulary drug instead of the drug originally prescribed and 
subsequently experience an adverse reaction that triggers the 
disruptive behavior. A few commenters asked us to prohibit PDPs from 
disenrolling an individual because of his or her refusal or inability 
to adhere to a treatment plan developed by the PDP or other health care 
professionals associated with the plan.
    Response: We agree with the commenters and clarify in the final 
rule at Sec.  423.44(d)(2)(i) that an individual cannot be considered 
disruptive if such behavior is related to the use of medical services 
or compliance (or non-compliance) with medical advice or treatment.
    Comment: Two commenters supported the flexibility afforded PDP 
sponsors by our allowing PDP sponsors to limit re-enrollment for 
individuals who are disenrolled for disruptive behavior, and one of 
these commenters specifically asked us to establish criteria for re-
enrolling an individual such as a minimum waiting period and a 
commitment by the individual to discontinue such behavior. On the other 
hand, there were many commenters who opposed the ability of a PDP 
sponsor to decline re-enrollment of an individual. These commenters 
contended that prohibiting an individual from re-enrolling in a PDP for 
a specified period could cause undue harm and lapses in coverage, 
especially if the individual is not able to enroll in another PDP. One 
commenter requested that we specify the maximum period of time that a 
PDP sponsor may prohibit re-enrollment of

[[Page 4217]]

an individual who has been disenrolled for disruptive behavior.
    Response: In the proposed rule, we enabled PDP sponsors to request, 
at their option, the ability to decline future enrollment by an 
individual who had been disenrolled for disruptive behavior. While we 
retain this option for PDPs in the final rule, we require these 
sponsors to request future conditions on re-enrollment as part of their 
disenrollment request. At the same time, we reserve the right in 
accordance with Sec.  423.44(d)(2)(v) to review each request on a case-
by-case basis. In the review process, we will give due consideration to 
exceptional circumstances that may warrant reasonable accommodations in 
addition to the appropriateness of conditions on re-enrollment.
    Comment: There were several commenters who objected to the 
expedited disenrollment process. The commenters noted that the 
expedited process lacks even the minimal standards and requirements 
that are in place to protect beneficiaries in these circumstances.
    Response: It is our intent to ensure that all individuals facing 
involuntary disenrollment for disruptive behavior have sufficient 
opportunity, as provided by the notice requirements, to change their 
behavior or grieve the PDP sponsor's decision to request involuntary 
disenrollment from us. We have therefore removed this provision from 
the final regulation.
    Comment: One commenter asked us to clarify whether a full-benefit 
dual eligible individual who is disenrolled for disruptive behavior is 
entitled to a SEP.
    Response: In accordance with the Sec.  423.38(c)(4), a full-benefit 
dual eligible individual as defined under section 1935(c)(6) of the Act 
is entitled to a SEP. A full benefit dual eligible individual who is 
involuntarily disenrolled for disruptive behavior remains entitled to a 
Special Enrollment Period.
    Comment: We received two comments asking us to adopt an 
interpretation of nonpayment of cost sharing as disruptive behavior as 
we had discussed in the preamble of the proposed rule for MA 
organizations.
    Response: We appreciate the feedback provided on the consideration 
to include nonpayment of cost-sharing as disruptive for the purposes of 
applying the provisions under disruptive behavior. We will consider 
these comments in developing guidance for the disruptive behavior 
provisions.
8. 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 Part D plan. We outlined this process 
for imposing the penalty in the proposed rule. We also proposed that an 
uncovered month is any month in which an individual does not have 
creditable coverage at any time during that month. We also reference 
the calculation of the amount of the penalty, which was described at 
Sec.  423.286(d)(3) of the proposed rule.
The final rule adopts the rules for late enrollment penalties as 
proposed.
    Comment: Several commenters requested that we waive the late 
enrollment penalty for certain individuals, such as full-benefit dual 
eligible individuals, subsidy eligible individuals, individuals who are 
eligible for a special enrollment period and individuals who are 
involuntarily disenrolled. One commenter asked that State Medicaid 
programs be allowed to request and obtain such a waiver. Other 
commenters urged CMS to delay the implementation of the late enrollment 
penalty for one to two years, or be flexible with the application of 
the penalty, stating the Part D program was new and complex. Another 
commenter asked if we would provide any exception to the penalties for 
exceptional circumstances, such as natural disaster, family death, or 
clinical justification. A few commenters did not see a late penalty 
appeals process in the regulation and requested that we add an 
opportunity to appeal the late penalty.
    Response: There is nothing in the statute that would provide us 
with the authority to waive or delay the late enrollment penalty at any 
time unless an individual was not adequately informed that his or her 
prescription drug coverage as described at Sec.  423.56 was not 
creditable. Only in this limited situation will we be able to deem the 
individual's prescription drug coverage as creditable, regardless of 
whether it actually is creditable, so as not to impose the late 
penalty. Further, it is clear that the statute intended this provision 
to apply to full-benefit dual eligible individuals since the 
application of the penalty is specifically referenced in the definition 
of the full premium subsidy under section 1860D-14(a)(1)(A) of the Act, 
for which full-benefit dual eligible individuals are eligible. 
Specifically, section 1860D-14(a)(1)(A) of the Act provides that full 
subsidy eligible individuals, including full-benefit dual eligible 
individuals, are responsible for 20 percent of any late enrollment 
penalty for the first 60 months during which such penalty is imposed. 
As discussed in the proposed rule, we will develop a process for 
individuals to apply to CMS for reconsideration of the penalty. We 
appreciated the feedback that organizations provided on setting up such 
a process.
    Comment: Several commenters asked CMS to clarify that those who do 
not receive a notice that their prescription drug coverage was not 
creditable (or received the wrong notice) are not subject to the late 
enrollment penalty.
    Response: As provided in Sec.  423.56(g) of the final rule, an 
individual who is not adequately informed that his or her prescription 
drug coverage was not creditable may apply for our review and make a 
determination if this occurred. If we determine that the individual did 
not receive adequate notice or received incorrect information, we may 
deem the individual to have had creditable coverage so that the late 
enrollment penalty will not be imposed.
    Comment: One commenter asked CMS to clarify how the 63-day period 
would be counted. The commenter recommended from the end of the IEP to 
the date of the application for the low-income subsidy since 
individuals may delay a decision until he or she knows whether there 
will be a subsidy.
    Response: The count of the 63-day period will commence the day 
following the end of the individual's IEP or, once the IEP has passed, 
the day following the last day of creditable coverage or Part D 
enrollment (in a PDP or MA-PD plan). The application of the 63-day 
period will be consistently applied to all individuals, regardless of 
when an individual may or may not apply for the low-income subsidy.
    Comment: One commenter asked how the late enrollment penalty will 
be coordinated with the late enrollment penalty for Part B.
    Response: We are currently developing operational and system 
requirements to implement the late enrollment penalty process. 
Additional guidance will be provided to PDPs and individuals with 
specific information as to how this will occur.
9. Part D Information That CMS Provides to Beneficiaries (Sec.  423.48)
    As provided under section 1860D-1(c)(1) of the Act, we will conduct 
activities designed to broadly disseminate information about Part D 
coverage to individuals who are either eligible or prospectively 
eligible for Part

[[Page 4218]]

D benefits. In the proposed rule, we indicated that this information 
will be made available to beneficiaries at least 30 days prior to their 
initial enrollment period.
    Each organization offering a PDP or MA-PD plan must provide us 
annually with the information to disseminate to individuals who are 
currently or prospectively eligible for Part D benefits. The 
information dissemination activities for Part D will 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 proposed to 
include the following comparative information for 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 also proposed to 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 
will conduct 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 will work 
with SSA and the States to ensure that low-income individuals eligible 
for or currently enrolled in Part D benefits are 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 SHIPs, and will 
coordinate with other Federal programs providing assistance to low-
income individuals. In addition, we will 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, private community 
organizations, plan sponsors and stakeholders serving Medicare 
beneficiaries to explain the options available under this program. 
Materials and information will be made available in languages other 
than English where appropriate.
    This information will enable beneficiaries to make informed 
decisions regarding their Part D coverage options. Organizations 
offering a PDP or MA-PD plan will be required to provide this 
information in a format and to use standard terminology that we will 
specify in further operational guidance.
    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 would 
extend 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 www.medicare.gov.
    Since the introduction of www.medicare.gov in 1998, we have 
substantially increased the amount of personalized information 
available to Medicare beneficiaries, making it one of the government's 
most comprehensive and customer-oriented sites available to the public. 
The web site hosts twelve separate database applications to help 
individuals make their own health care decisions. The most significant 
ones are: the Medicare Personal Plan Finder (which contains costs, 
benefits, quality, satisfaction and disenrollment measures), Nursing 
Home Compare (which contains basic characteristics, staffing 
information and inspection results), the Prescription Drug and Other 
Assistance Programs application (which contains the most extensive, 
nationally complete listing of the Medicare-approved discount drug 
cards, including price comparisons, as well as other government and 
private programs designed to help with prescription drug costs), and 
the Medicare Eligibility Tool (which assists users in determining when 
they are eligible, how to enroll and what they need to consider when 
joining Medicare). Other tools providing customized results include: 
the Participating Physician and Supplier Directories, Home Health and 
Dialysis Facility Compare, Your Medicare Coverage, Helpful Contacts, 
Publications, and Frequently Asked Questions. By updating all 
information on the web site at least once a month, the information 
provided to Medicare beneficiaries via www.medicare.gov is the most 
reliable and consistent information available.
    Much of the information available through 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. 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 drug coverage. The caller can always 
talk to a live person at 1-800-MEDICARE to get the facts they need. 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.
    The final rule adopts the information requirements set forth in the 
proposed rule.
    Comment: Several commenters were concerned that the web site should 
reflect accurate information that is presented in an appropriate 
context and in a way that is useful for beneficiaries to use. Many 
commenters noted that the web site should provide beneficiaries with 
the ability to compare plans on the basis of estimating their out-of-
pocket spending, including premiums and applicable cost sharing. 
Several commenters encouraged CMS to rely not only on price as the 
factor in determining which Part D plan fits beneficiary needs. Another 
commenter urged CMS to include specific information regarding which 
drugs are covered by each plan. Other commenters indicated that other 
information that the beneficiaries would need to consider would be the 
level of coinsurance, the amount a beneficiary would pay during any 
period he or she is liable for 100 percent of the cost sharing, whether 
the drug is on or off the formulary, and other cost management 
techniques that may apply, such as step therapy and prior 
authorization. Another commenter stated that we must post prices on its 
website of retail pharmacies that offer maintenance supplies of 
medications. One commenter stated that beneficiaries need to know 
whether the pharmacy is included in the plan's network.
    Response: We appreciate this feedback and will consider this when

[[Page 4219]]

developing the requirements for the Part D price comparison web tool.
    Comment: Another commenter stated that we need to ensure that any 
website includes price comparisons about generic drugs compared to 
their innovator brands, as well as generics compared to other brand 
name drugs in a similar therapeutic class.
    Response: This comment will be considered when developing the 
requirements for the Part D price comparison web tool. As with the 
current price comparison tool for the Medicare-approved drug discount 
card program, we include pricing information for both brand and generic 
drugs.
    Comment: One commenter noted that correct information may not be 
provided to seniors if we require plans to post the maximum price that 
could be charged, since the maximum price is typically the pharmacy's 
usual and customary cash price.
    Response: It is our understanding that usual and customary pricing 
data is not readily accessible; therefore, we anticipate posting the 
maximum negotiated prices for prescription drugs on the website with 
the understanding that beneficiaries will pay the lower of the 
negotiated or usual and customary price at the point of sale. It is 
anticipated that the prices displayed on the website would reflect what 
enrollees would expect to pay at the point of sale for their 
prescriptions under the respective plans.
    Comment: One commenter asked that we define the process for the 
information sharing exchange between PDPs and CMS.
    Response: The process has not been defined at this time. Once we 
have developed the data requirements and process for submission of 
data, we will share this information with all prospective Part D plans.
    Comment: Several commenters believe that the price comparison tool 
should not be a requirement for PDP sponsors or MA organizations 
offering MA-PD plans.
    Response: It is important for beneficiaries to have access to all 
information in order to make informed choices. We are committed to 
providing Medicare beneficiaries with information about both PDPs and 
MA-PD plans through the price comparison tool. Therefore, we will keep 
this requirement.
    Comment: One commenter expressed a general concern with the 
disclosure of negotiated prices and the negative impact that disclosure 
of such information could have on competition. The commenter further 
noted that negotiated prices may be subject to confidentiality 
agreements. The commenter suggested that we disclose only estimated or 
average prices and that this information only be posted on the specific 
website of the Part D plan.
    Response: As mentioned previously, it is anticipated that the 
prices displayed on the website will reflect what enrollees would 
expect to pay at the point of sale for their prescriptions under the 
respective plans.
    Comment: A commenter stated it was unacceptable for CMS not to 
provide quality and performance information in the first year or second 
year of the Part D program.
    Response: Quality data will not be available for the first year 
since this is a new program and historical data will not be available 
for reporting. For year two, the regulation simply states that if it is 
impractical to obtain data or if it is not available, it will not be 
reported; this is not the same as stating that it will not be available 
for the second plan year. From the perspective of many beneficiaries, 
cost and availability are the most important quality issues. Hence, we 
will be able to report timely in response to these issues.
    Comment: One commenter urged the agency to work closely with 
pharmacies to ensure that any price comparison website is 
understandable and free of errors before it is made public.
    Response: Historically, we have worked closely with beneficiaries, 
stakeholders, partners, and advocacy groups to ensure the information 
disseminated meets the needs of the Medicare population we serve. We 
will continue this practice in the development of the website for Part 
D plan information.
    Comment: One commenter stated that we are silent on the 
notification timeframe for beneficiaries. CMS simply refers to the 30-
day notice period. The commenter thinks that beneficiaries will need 
much more than 30 days to digest all of the information they will 
receive from CMS to enable them to make informed choices about their 
Part D coverage. The commenter urges information to be disseminated as 
soon as possible and urges CMS to plan numerous information campaigns 
now and involve numerous organizations in developing education 
activities and materials. Another commenter suggests dissemination 
activities occur at least 60 days prior to the initial enrollment 
period for Part D, which begins November 15, 2005.
    Response: We are planning outreach and education activities that 
will occur throughout 2005 and 2006. Detailed information about drug 
plans and their individual benefit structures will be released as soon 
as possible after this information is approved. It is impossible to 
send out plan data any sooner due to submission dates for plan 
information and the process steps needed to translate the raw data into 
consumer-friendly information, as well as the print production steps 
for the publication that will house this comparative information.
    Comment: One commenter asked what information we will provide to 
SSA, SHIPs, and other groups to educate beneficiaries about the late 
enrollment penalty.
    Response: We will provide important details about the penalty 
associated with late enrollment in the information provided to SSA and 
SHIPs, as well as in SHIP training materials. In addition, we will 
develop materials that can be used by employers, unions, partners, 
advocacy groups and other stakeholders to educate beneficiaries about 
the late enrollment penalty.
    Comment: One commenter stated that we must give greater attention 
to developing materials and education campaigns focused on informing 
beneficiaries, especially those with special needs, about the new drug 
benefit and to help them to enroll in the best plan available.
    Response: We are planning a multi-tiered education program to 
repeatedly reach all beneficiaries. This program will include plans for 
specific important target audiences, including those with special 
needs. Mailings and outreach activities to dual eligibles are currently 
being planned. Education and outreach materials developed for 
beneficiaries will be thoroughly tested with the target audience.
    Comment: Another commenter stated that we should mail, no later 
than October 15, 2005, standardized, easy-to-understand notices to 
full-benefit dual eligible individuals that, among other things: inform 
them of their eligibility to receive the low-income subsidy if they 
enroll in a PDP; list of choices of health plans, clearly denoting 
those that meet the benefit premium assistance limit, and contact 
information for each plan; explain that full-benefit dual eligible 
individuals will be randomly enrolled in a prescription drug plan at a 
specified date if they fail to opt out or enroll in a plan themselves; 
explain how they may change their drug plans if they wish at any time; 
and inform them of where in their community they can go to get help 
with enrollment. The commenter also recommended that these notices 
should be tested for readability by focus groups and experts.

[[Page 4220]]

    Response: We plan to consumer test beneficiary notices and send out 
the information noted by the commenter above by October 15, 2005. We 
are considering using the mailing to inform the full-benefit dual 
eligible individuals about what plan they will be auto-enrolled in if 
they fail to elect a Part D plan by December 31, 2005 or affirmatively 
opt of Part D, and that they have a right to choose to enroll in a 
different plan.
    Comment: One commenter stated that the website should be provided 
in languages other than English to reflect the language spoken in a PDP 
service area.
    Response: We appreciate this feedback and will consider this when 
developing the requirements for the website.
    Comment: CMS should include in the final rule binding and 
enforceable standards defining information plans must provide to 
beneficiaries with various types of disabilities. For example, this 
information must be available to individuals who are blind or have low-
vision. Further, CMS must require PDP internet websites to be 
accessible for individuals with vision impairments.
    Response: Our websites are accessible to people with various 
disabilities, including those who are blind or have low-vision. Under 
our marketing requirements in Sec.  423.50, we require Part D plans to 
demonstrate that marketing resources are allocated to marketing to the 
vulnerable populations, as well as beneficiaries age 65 and over. It is 
also important to note that Section 508 of the Rehabilitation Act of 
1973 allows individuals with disabilities to access electronic 
information.
    Comment: Commenters stated that the proposed rule focused largely 
on support through Internet sources and the 1-800 Medicare number, and 
argued that both are necessary and helpful but insufficient to meet the 
needs of many duals, as well as those eligible for the low-income 
subsidy.
    Response: Although the basis for information dissemination is 
through publications, www.medicare.gov and 1-800-MEDICARE, we do not 
plan to solely rely on these resources to reach the population as a 
whole. We will work closely with SSA, SHIPs, Area Associations on Aging 
as well as other national stakeholders and partners, to provide 
assistance to those who may qualify for the low-income subsidy. Through 
a broad network of support from community based organizations, we will 
make considerable efforts to reach those beneficiaries who do not have 
access to the Internet or are uncomfortable calling 1-800-MEDICARE.
    Comment: CMS should also make detailed information about PDPs 
available electronically to others in accessible formats that would 
enable them to conduct independent analyses about what plan would be 
best for a particular individual.
    Response: Because the actual plan data underlying the price 
comparison tool is considered proprietary, we do not anticipate making 
the underlying data available electronically to outside organizations. 
Since nothing in the MMA addresses disclosure of plan data, the Freedom 
of Information Act (FOIA) rules apply. FOIA Exemption 4 protects 
certain confidential commercial information that is submitted to a 
Federal agency. Determinations about the applicability of FOIA 
Exemption 4 to plans' pricing data would be made on a case-by-case 
basis depending on whether the submitter of the data could demonstrate 
that disclosure of this information would likely cause substantial 
competitive harm to the submitter's competitive position. If FOIA 
Exemption 4 is found to protect submitted price information, we cannot 
disclose this information because to do so would violate the Trade 
Secrets Act (18 U.S.C. 1905).
    Comment: Several commenters stated that we should develop specific 
outreach and education strategies for vulnerable populations, including 
disabled Medicare beneficiaries and dual eligibles. Another commenter 
stated that PDPs should be required to include specific plans for 
encouraging enrollment of hard-to-reach populations, including 
individuals with mental illness. Another commenter indicated that 
outreach efforts must involve community-based groups on a collaborative 
basis and not just use these groups as conduits for distributing 
written materials produced by CMS regarding the new benefit. Resources 
must be provided to enable these groups to educate beneficiaries about 
their choices and help enroll them. This collaboration with community 
groups must begin as soon as possible to establish the infrastructure 
needed once Part D goes into effect.
    Response: We are developing an extensive outreach campaign for 
these individuals and are working closely with U.S. Department of 
Health and Human Services' Office of Disability to ensure that this 
important audience is reached.
    Comment: One commenter strongly urged CMS to develop a specific 
plan for facilitating enrollment of beneficiaries with disabilities 
that incorporates collaborative partnerships with State and local 
agencies and disability advocacy organizations.
    Response: In addition to working closely with the HHS Office of 
Disability to ensure we reach this group of individuals, we plan to 
broaden local partner networks though the Regional Education About 
Choices in Health (REACH) campaign to provide training, information and 
planning support to provide outreach and assistance to these 
populations. REACH is a national education and publicity campaign 
implemented at the local level by our Regional Offices and their 
partners. The REACH campaign works through partnerships to increase 
awareness of the Medicare program and resources among hard to reach 
populations.
    Comment: A commenter suggested that we should develop and implement 
effective outreach strategies utilizing the Medicare Beneficiary 
Ombudsman authorized under section 923 of the MMA.
    Response: Section 923 of the MMA states that, to the extent 
possible, the Ombudsman shall work with SHIPs to facilitate the 
provision of information to individuals entitled to benefits under Part 
A or enrolled under Part B, or both regarding MA plans and changes to 
those plans. We will ensure that SHIPs receive sufficient training in 
all aforementioned subjects so that SHIPs can provide information and 
assistance to beneficiaries referred to them by the Ombudsman. The 
Ombudsman operational design assumes that 1-800-MEDICARE will refer 
callers to appropriate sources, including SHIPs, for resolution of 
complaints and appeals and, when necessary, refer them directly to the 
Ombudsman as a last resort.
    Comment: We received two comments that strongly recommended that we 
clarify the SHIPs mandate to ensure that they address the needs of 
individuals with disabilities, including non-elderly individuals.
    Response: Section 4360 of the Omnibus Budget Reconciliation Act 
(OBRA) 1990, which created SHIP, requires that SHIPs provide 
information, counseling and assistance to Medicare eligible 
beneficiaries, including beneficiaries with disabilities. All CMS SHIP 
grant announcements expressly reference beneficiaries with disabilities 
as intended recipients of SHIP services. In addition, we provide 
training and information on the special needs and issues related to 
this population. We agree with the commenters and will clarify the SHIP 
mandate through the methods described here to address this need.

[[Page 4221]]

    Comment: One commenter suggested that we partner with and fund 
community-based disability organizations to conduct outreach, 
information, and referral activities on the new Part D benefit.
    Response: While we agree to partner with these organizations in 
these activities, funding these groups are subject to available funds 
in our budget.
    Comment: One commenter was concerned about beneficiaries being 
inundated with marketing and outreach materials. Since many 
beneficiaries will need counseling on plan selection, this commenter 
asked for clarification regarding whether counseling will be available, 
what the States' role will be, and whether there will be Federal 
financial participation available for such costs.
    Response: States that had SPAPs on October 1, 2003 will have 
Federal assistance available to them through the transitional grant 
program authorized under section 1860D-23(d) of the Act. These States 
will use the transitional grant funds to educate SPAP enrollees about 
the plans that are available to them under part D, as well as provide 
technical assistance, phone support, counseling, and other activities 
the SPAP believes will promote the effective coordination of enrollment 
in Part D. States that do not have a SPAP operational as of October 1, 
2003 will not have these transitional funds available to them.
    In addition, we will continue to provide grants to the States 
through the SHIP. SHIP is a national program that offers one-on-one 
counseling and assistance to people with Medicare and their families. 
Through grants directed to States, SHIPs provide free counseling and 
assistance via telephone and face-to-face interactive sessions, public 
education presentations and programs, and media activities. We expect 
SHIP counseling to be an important source of information for 
beneficiaries about Part D.
    Comment: One commenter was concerned that the targeted and hands-on 
outreach, education and decision support and enrollment services, 
particularly outreach to lower income, rural and disabled beneficiaries 
is not adequate.
    Response: Through the REACH campaign, we plan to broaden local 
partner networks in order to provide training, information and planning 
support to provide outreach and assistance to these populations. 
Through a broad network of support from community-based organizations 
as well as national stakeholders and partners, considerable effort will 
be made to reach those beneficiaries who do not have access to the 
Internet or who are uncomfortable calling 1-800-MEDICARE.
    Comment: One commenter stated that we should consider preparing 
educational materials that would help pharmacists understand the 
benefits and other material that they can use to educate beneficiaries.
    Response: We are working with our provider education staff to 
develop materials for all providers, including pharmacists, for 
educational use.
10. Approval of Marketing Materials and Enrollment Forms (Sec.  423.50)
    Section 1860D-1(b)(1)(B)(vi) of the Act directs us to use rules 
similar to those established under section 1851 of the Act to review 
PDPs' marketing materials and application forms.
    In the proposed rule, we generally replicated the marketing 
provisions established under Sec.  422.80 for MA plans as appropriate 
for PDPs. Therefore, we proposed at Sec.  423.50(a) guidance for our 
review of marketing materials, definition of marketing materials, 
deemed approval, and standards for PDP marketing. We do recognize that 
the differences between PDPs and MA plans will require different 
marketing requirements and we requested comments on this issue. We have 
drafted the final rule to apply the marketing requirements to all Part 
D sponsors, although we may waive the Part D provisions in deference to 
similar MA, PACE and cost plan requirements.
    We also proposed to add Sec.  423.50(a)(3) in order to streamline 
the marketing review process for all PDP sponsors for those materials 
which pose the lowest risk of confusing or misleading beneficiaries. 
This aspect of the File and Use program allows the PDP sponsor, prior 
to distribution, to submit and certify that for certain types of 
marketing materials it followed all applicable marketing guidelines, or 
for certain other marketing materials that it used, without 
modification, proposed model language as specified by CMS.
    Except as otherwise provided below, the final rule adopts the 
marketing rules set forth in Sec.  423.50 of the proposed rule. 
Although the following area generally applies to Fallback plans, 
subpart Q specifically addresses issues related Fallback plans.
    In addition to marketing materials and enrollment forms, comments 
provided the opportunity to respond to enrollment issues related to 
SPAPs, pharmacist and physician marketing to beneficiaries, and 
organizations marketing additional products in conjunction with PDP 
services.
    Comment: We received several comments on types and quantity of 
information that should be disseminated to beneficiaries. Many 
commenters suggested that specific formulary information needs to be 
provided including specific drugs (top 25-50), pricing and premium 
information, benefit structure, pharmacy networks, plan availability by 
region, medication management services offered (and who is eligible for 
them), appeals and exception process and information on plan 
performance. Most agreed that this information should be mailed, as 
well as provided on the Internet and that comparison tables with this 
information for all plans in a geographic region should be provided so 
that beneficiaries can compare plans side-by-side. One commenter was 
concerned that beneficiaries would be overwhelmed with materials and 
expressed concern about the potential for adverse selection. It was 
suggested that strict and detailed regulations on marketing be issued 
to protect beneficiaries. One commenter suggested that we need more 
detail in the final rule around patient education.
    Response: We agree with the commenters that beneficiaries will need 
information on the Part D plans available in their areas. Our goals in 
providing information has always been to ensure that beneficiaries have 
access to timely, accurate and reliable information that helps them 
make informed health care decisions. Our education and outreach efforts 
related to Part D are no exception. We will employ multiple tactics, 
including publications, direct mailings, the Internet 
(www.medicare.gov), toll-free telephone numbers, and localized 
grassroots partnerships to help beneficiaries access the level of 
detailed information that they want and need to make their best choice 
among Part D plans. Our tiered communications approach recognizes that 
different beneficiaries have varying information needs and what might 
be an overwhelming level of detail to some individuals may only meet 
the baseline needs of another. By using multiple, integrated education 
and outreach approaches and thoroughly market testing our products and 
messages during development, we are working to strike the best balance 
of providing the right information at the right time. In addition, we 
are committed to making sure plans provide clear, accurate information 
on covered benefits, including formulary, pharmacy networks, and costs. 
We intend to require such information in guidance rather than 
specifying the full range of materials in the regulations so that we

[[Page 4222]]

can modify our requirements in a timely manner to meet beneficiary 
needs.
    Comment: We received several comments regarding the use of various 
marketing vehicles to promote PDPs. Several of the commenters supported 
the distribution of information through websites, 800 numbers, written 
communications and telemarketing. One commenter stated that marketing 
should be limited to mail contacts only due to concerns regarding 
fraud. One commenter stated that the restrictions on marketing need to 
be expanded due to the potential for fraud. Many commenters opposed 
telemarketing and one was explicitly against email as well.
    Response: Section Sec.  1860(D)(1)(b) of the Act allows for similar 
marketing rules for the drug benefit as those for MA. We intend to 
follow this guidance and promote marketing guidelines that are in line 
with those under the MA program. The MA program supports the use of 
websites, 800 numbers, mailings, email and telemarketing for plan 
marketing. By allowing plans multiple routes for marketing, we believe 
that greater numbers of beneficiaries will be reached and thus enrolled 
in drug benefit plans. We believe this is an important goal given the 
penalty for late enrollment in Part D. We understand that this is 
contrary to what we allowed in the drug discount programs. We did not 
allow the drug discount card programs to participate in telemarketing 
practices because many of the drug card sponsors were stand alone 
start-up companies that did not have a previous history of doing 
business. We expect that the PDP sponsors will have previous experience 
administering drug plans, insurance or other lines of similar business, 
with established reputations, much like MA plans.
    Marketing guidelines are in the process of being established, and 
these will set forth in greater detail what will be expected of the 
plans. PDP sponsors may be barred from engaging in certain practices if 
abuses occur. In addition, PDPs will be prohibited from requesting 
beneficiary identification numbers over the telephone or via email as 
related to marketing activities.
    Comment: One commenter stated that the States should be able to 
steer its SPAP enrollees toward the most appropriate plan.
    Response: Section 1860D-23(b)(2) of the Act defines an SPAP as a 
State program which, in determining eligibility and the amount of 
assistance to a Part D eligible individual under the program, provides 
assistance to such individuals in all Part D plans and does not 
discriminate based upon the Part D plan in which the individual is 
enrolled. We further interpreted that provision in the preamble of the 
proposed regulation such that a SPAP may not designate a preferred PDP, 
even if the State allows beneficiaries to choose a non-preferred plan 
and provides for benefits equivalent to that which it also provides for 
the preferred plan (referred to as wrap-around benefits). We believe 
that, regardless of whether the SPAP is authorized under State law to 
make enrollment decisions on behalf of the beneficiary, we interpret 
using that authority to steer beneficiaries to a preferred PDP or MA-PD 
plan would be interpreted to violate the non-discrimination provision 
under section 1860D-23(b)(2) of the Act.
    Section 1860D-23(d) of the Act provides for grants to SPAPs, in 
existence as of October 1, 2003, which were awarded in September of 
2004 for fiscal year 2005, for the purpose of educating their members 
about options to access Medicare drug benefit coverage and about 
comparing options so they can choose the best value to them. We will 
reach out to SPAPs with information to help people with Medicare 
understand their drug plan options. We will also assist SPAPs in 
adapting this information to ensure that their members understand the 
way that the new Part D plans coordinate with their SPAP benefit and 
supporting their members in making informed decisions about drug 
benefit plan options. Outreach to SPAPs would also include instruction 
on the educational/outreach/assistance activities SPAPs could pursue 
while not discriminating against Part D plans.
    SPAPs cannot discriminate amongst plans; however, they may provide 
beneficiaries with comparable education on all of the available Part D 
plans (PDPs, MA-PD plans, and PACE and cost-based HMO or CMPs offering 
qualified prescription drug coverage) in terms of the following: which 
plans have lower premiums after application of any uniform SPAP premium 
subsidy; which plans offer formularies that cover the drugs utilized by 
the beneficiaries so that beneficiaries can continue to use the same 
drugs; which plans offer the drugs used by the beneficiary at the most 
favorable combination of deductibles, coinsurance/co-pays, and 
negotiated prices; which plans use the same network pharmacies as the 
SPAP so that beneficiaries can continue to use the same pharmacy; and 
which plans (if any) have ID cards that include an emblem or symbol 
indicating its coordination with the SPAP to facilitate secondary 
payment at the point of service.
    In addition, SPAPs are prohibited from recommending Part D plans 
based on their financial interest in minimizing their cost of providing 
coverage that supplements (wraps-around) their members Part D benefits. 
They are required to mirror our process auto-enrolling full-benefit 
dual eligible individuals among PDPs on a random basis in the event 
that members do not actively select a Part D plan during their IEP or 
after enroll in the SPAP.
    Part D plans benefit coordination requirements include establishing 
procedures to share information with SPAPs on enrollment files, the 
processing and payment of claims, claims reconciliation reports and 
whether the beneficiary has satisfied the out-of-pocked limit. Part D 
plans are encouraged to work with all SPAPs to co-brand the Part D 
benefits by providing (in its electronic claim response to the 
pharmacy) information on payment of premiums and coverage, and whether 
claims should be sent to an SPAP for processing. Plans should also 
consider including the SPAPs' benefits in marketing and educational 
materials to beneficiaries, which includes SPAP benefit information, 
eligibility criteria, order of party payment, and a phone number for 
SPAP enrollment and claims payment information.
    Comment: Two commenters were concerned that SPAP beneficiaries will 
be confused by materials and decline enrollment if premiums, 
deductibles and coverage gaps are discussed since SPAP participants 
were never required to pay these amounts. It was also stated that 
marketing materials for this population should include coordination of 
benefit (COB) information.
    Response: We expect that SPAPS will provide information to 
beneficiaries on their drug plan choices in their States. We expect 
that plans will work cooperatively with SPAPs to co-brand materials, 
when appropriate, to ensure that beneficiaries are provided with 
comprehensive, appropriate, coordinated information that will 
facilitate education and understanding of their benefits. Requirements 
for coordination of benefits with other providers of prescription drug 
coverage are described under Sec.  423.464 (e). We expect Part D plans 
to work with SPAPs on coordination of benefit activities to ensure that 
beneficiaries are provided seamless care that is easily understandable.
    Comment: We received multiple comments regarding the specific 
requirements for marketing materials. Many commenters agreed that 
marketing materials should be available in Spanish and in other 
languages that

[[Page 4223]]

are in the plan's service area. Two commenters stated that marketing 
materials should be developed at an appropriate health literacy level. 
Two commenters stated that the information will need to be adapted for 
the blind/low vision, those with cognitive disabilities, in Braille, 
large print and on audio or computer disks. It was also stated that 
there should be a requirement that the Internet site be accessible for 
the visually impaired and that interpreters and alternative 
communication methods should be mandated. Another commenter stated that 
a subpart should be devoted to notice requirements.
    Response: We agree that there are special needs of beneficiaries 
that will need to be provided for. The regulation currently dictates 
that marketing materials need to be available in low-literacy formats. 
While we do not require materials to be available in other languages, 
it is highly encouraged. In addition, basic enrollee information should 
be developed to accommodate the visually impaired. Call centers must be 
able to accommodate non-English speaking/reading beneficiaries. Plan 
sponsors should have appropriate individuals or translation services 
available to call center personnel to answer questions that 
beneficiaries may have concerning aspects of the drug benefit. We are 
working on developing guidance shortly following publication of the 
final rule that is similar to the MA requirements to ensure appropriate 
information is available to beneficiaries.
    Comment: Several commenters stated that marketing materials should 
be consistent with other Medicare programs.
    Response: We are currently developing additional marketing 
guidelines and expect them to be similar to other Medicare programs 
(for example, the MA and the Medicare-approved prescription drug 
discount card programs), to the extent possible, in order to reduce the 
administrative burden for plans that participate in these programs.
    Comment: We received many conflicting comments regarding whether 
providers (pharmacists and physicians) should be allowed to market to 
beneficiaries. This includes the display of materials from Part D 
sponsors as well as verbally steering beneficiaries to particular 
plans. Several commenters were in support of pharmacies marketing MA/PD 
and PDPs; some of these commenters stated that equal attention should 
be provided to all plans in the particular area. In addition, some 
commenters specifically mentioned that they were in support of 
physicians marketing Part D plans.
    Other commenters were against marketing of Part D plans in the 
pharmacy setting; three specifically mentioned the prohibition of 
physicians from marketing to beneficiaries. Most stated that the 
reasons for their positions were that physicians or pharmacists could 
steer a beneficiary to inappropriate Part D plans.
    Response: Both the MA and the Medicare-approved prescription drug 
discount card programs allow some provider marketing to occur. Our 
position is that it is appropriate to allow providers and pharmacies to 
market to beneficiaries. This marketing provides beneficiaries with 
access to information about the options available to them under Part D 
that they may not have received through other sources because 
beneficiaries often look to their health care professionals to provide 
them with complete information regarding their health care choices. 
Therefore, we believe that providers and pharmacies should provide 
prospective enrollees with information on the full range of options 
available to them under Part D. This process is similar to the process 
followed for the discount drug card program, where pharmacies may 
provide information on where beneficiaries may get complete information 
regarding all the Medicare-approved discount cards available in the 
region in their service area. We would require Part D sponsors that 
want their network pharmacies to provide marketing materials to 
prospective enrollees to include in their contracts language requiring 
the pharmacies Part D eligible individuals with information on all Part 
D options available in the service area. This requirement would be 
specified in the further guidance issued by CMS. Any remuneration 
offered to providers in exchange for providing to patients information 
about particular Part D plans must comply with applicable Federal and 
State laws on fraud and abuse.
    Comment: Two commenters stated that Part D sponsors should be 
prohibited from using Medicare discount card enrollee and applicant 
information to provide leads for marketing their Part D plans.
    Response: We acknowledge the importance of beneficiary privacy, and 
the marketing limitations that drug cards operate in accordance with 
section 1860D-31(h)(7) of the Act. The drug card provisions under 
section 1860D-31 of the Act contemplate a transition from the drug card 
program to Part D, and we are considering what will be the specific 
drug card responsibilities of drug card sponsors during transition. 
From that understanding we will assess whether PDP sponsors currently 
offering a drug card may use of beneficiary drug card information to 
market their Part D plans and we will provide further guidance to the 
drug card sponsors and Part D sponsors at a later time. We note, 
however, that the HIPAA Privacy Rules may limit the ability of drug 
card sponsors to disclose their enrollees' information to un-affiliated 
Part D sponsors.
    Comment: One commenter suggested that the File & Use program should 
be delayed one year until we have more experience with evaluating the 
practice of the PDPs, and that the term ``performance requirements'' 
needs to be defined.
    Response: We will define the eligibility and performance 
requirements associated with the File & Use program in further 
guidance.
    Comment: There was concern over the amount of time that was stated 
was necessary for a review of PDP and MA-PD marketing materials. Some 
suggestions included decreasing the time of this review from 45 days to 
30 days, and instituting a 10-day review period for resubmitted 
materials. In addition, if unaltered model materials were used, the 
review should be limited to 10 days.
    Response: We agree that that timelines for reviewing marketing 
materials should be shortened. However, we intend on maintaining the 
proposed timelines for Part D marketing materials as defined in the 
statute. We will work to develop a review process that is as efficient 
as possible. We will develop a range of model materials for Part D 
sponsors.
    Comment: We also received a comment that the amount of materials 
that must be individually approved should be limited. There was also 
concern that we may not have enough staff to review the materials and 
that the process needs to be open, fair and constructive.
    Response: We will develop a range of model materials for Part D 
sponsors to choose from to improve efficiency of the marketing review 
process. Materials that utilize ``model language'', without 
modification, are subject to a streamlined review process. We will work 
to develop a review process that is as efficient and effective as 
possible utilizing standardized criteria to review the materials.
    Comment: Two commenters stated that it is unacceptable that 
marketing materials are deemed approved if we fail to approve them 
within the time

[[Page 4224]]

period and materials should be reviewed multiple times for multiple 
regions.
    Response: It is a statutory requirement that we approve marketing 
materials within 45 days or that they are then deemed approved. In 
developing sub regulatory marketing guidance and processes, we will 
work to ensure that our reviews are completed within the statutory 
timeframe.
    Comment: Commenters stated that guidelines for CMS review under 
Sec.  423.5(c)(i),(ii), and (iii) of the proposed rule need to be more 
specific. These sections lay out the information that Part D plans need 
to provide to beneficiaries.
    Response: We will provide greater detail in the sub regulatory 
guidance in order to facilitate any necessary future changes that would 
need to be made.
    Comment: Many commenters gave input as to whether additional 
products, such as financial services, should be marketed to Medicare 
beneficiaries in conjunction with the Part D benefit. Several of the 
organizations expressed their concerns over the fact that beneficiaries 
may be confused with receiving additional information for other 
products and services in conjunction with information about the Part D 
benefit. The major concern is that beneficiaries would choose not to 
participate in Part D because they did not like some of the other 
products or that they may mistakenly believe that we have approved 
these products. One commenter suggested that individuals must actively 
agree to receive marketing materials other than enrollment materials. 
Some commenters suggested that financial institutions should not be 
encouraged to participate as PDPs, since the potential for abuse, as in 
selection of healthier beneficiaries into plans and avoidance of 
financial services to less healthy individuals, is enormous.
    Some health plans commented that they are in favor of allowing PDP 
sponsors to market additional health-related and non-health-related 
products to beneficiaries. These products could be provided for an 
additional fee or at no additional cost to the beneficiary. The belief 
is that the additional tools could help beneficiaries manage their 
expenses and financial securities. One organization also stated that if 
PDP sponsors are permitted to provide these additional products, than 
MA-PD plans should be allowed to similarly provide these additional 
products.
    Response: We do not want to restrict beneficiaries from receiving 
materials about of health-related and non-health-related services that 
may be of benefit to them in managing their health or payments for 
health care. All organizations that are qualified to be a Part D 
sponsor are encouraged to participate in providing services under Part 
D. In situations where plans want to use or disclose protected health 
information (PHI), for purposes of marketing these other products or 
services, for example beneficiary enrollment information, Part D plans 
must comply with the HIPAA Privacy Rule and obtain a written 
authorization from the beneficiary prior to using the beneficiary's PHI 
to market non-health-related products and services. In other cases 
where Part D plans implement general marketing mailings that do not use 
beneficiary PHI, we would not object to plans providing such 
information to beneficiaries as long as the information is not 
contingent upon PHI to do so. For example, a plan may obtain a general 
mailing list from a non-related marketing vendor to mail materials to 
all individuals over age 65 in a geographic area to promote its 
products. The use of beneficiary names and addresses obtained from a 
plan and used for mailings to beneficiaries only, would presumably use 
PHI. Consequently, plans could not market non-health-related products 
through mailings using beneficiary information absent authorization.
    Comment: One commenter recommended that any Part D sponsor offering 
other health coverage to its Part D plan enrollees be required to 
provide anti-duplication notices like those that are required under the 
National Association of Insurance Commissioners (NAIC) model regulation 
for Medigap policies. The purpose of these anti-duplication notices is 
to advise Medicare beneficiaries as to whether other non-Medigap types 
of coverage being offered to them might duplicate coverage they already 
have under Medicare.
    Response: The disclosure statements that are required under the 
NAIC model regulation for Medigap policies were adopted by the NAIC 
pursuant to anti-duplication provisions contained in section 171(d) of 
the Social Security Act Amendments of 1994 (SSAA'94-Pub. L. 103-432) 
that amended section 1882(d)(3)(A) of the Act. These statements apply 
to all issuers of health insurance coverage that is offered to Medicare 
beneficiaries that is neither a Medigap policy nor a type of coverage 
that is listed as exempt from this requirement in a Federal Register 
notice that CMS [then HCFA] published on June 12, 1995. Section 171(d) 
required CMS to either publish the disclosure statements developed by 
the NAIC or publish its own. The FR notice through which CMS accepted 
the 10 separate disclosure statements developed by the NAIC for the 
various types of coverage commonly offered to Medicare beneficiaries 
contained a list of types of policies not requiring disclosure 
statements (See 60 FR 30880).
    Among the types of coverage not requiring the use of a disclosure 
statement were managed care organizations with Medicare contracts under 
section 1876 of the Act. The notice went on to explain that these types 
of policies are exempt because ``these plans do not `duplicate' 
Medicare benefits; rather their purpose is to actually provide all 
covered Medicare benefits directly to enrolled beneficiaries.'' In 
1995, cost and risk managed care organizations with contracts under 
section 1876 of the Act were the primary alternative to fee-for-service 
Medicare. Medicare+Choice plans were authorized by the Balanced Budget 
Act (BBA) in 1997, and the program has now been renamed Medicare 
Advantage by MMA. MMA also provided for private prescription drug plans 
(PDPs) to contract to deliver Medicare prescription drug benefits under 
Medicare Part D. Because Part D plans will actually provide all covered 
Medicare drug benefits directly to enrolled beneficiaries, we wish to 
clarify that these entities will not have to provide anti-duplication 
notices for their provision of coverage pursuant to their Medicare Part 
D contracts. However, if Part D plans choose to market to their 
enrollees other (non-Medigap) health insurance products that are not 
part of their contracts under Part D, these other types of health 
insurance products will have to bear the disclosure statements required 
by section 1882(d)(3)(A) (vi) of the Act and the NAIC model regulation 
unless the other coverage comes within one of the specified exemptions.
11. Information Provided to PDP sponsors and MA Organizations
    Section 1860D-1(b)(4)(A) of the Act authorizes us to provide 
information about Part D eligible individuals to PDP sponsors and MA 
organizations to facilitate the marketing and enrollment of 
beneficiaries in their PDP and MA-PD plans. This information is 
intended to ensure participation in the Part D program, as well as to 
reduce costs to those plans.
    In the final rule, it is not necessary to provide regulatory text 
implementing this provision; however, we intend to provide additional 
guidance shortly following publication of this rule, as explained 
below.

[[Page 4225]]

    Comment: We received several comments on this MMA provision. 
Several of the commenters supported the provision of such information 
to organizations, with a few offering to work with CMS to develop 
guidance and ensure that the appropriate beneficiary protections are in 
place. Many who supported this initiative believed that, at a minimum, 
the name, address, and telephone number of the individual should be 
provided. Another commenter believed that the statute permits 
organizations to contact beneficiaries through written, electronic, or 
phone communication. Another commenter stated that the individual's 
dual eligible or low-income subsidy status should also be provided. The 
commenter also noted that we should provide the information to 
organizations upon request, as opposed to being limited to only 
receiving such information at certain times of the year. The commenter 
also believed that the statute would permit PDP sponsors to obtain 
marketing information on low-income and dual eligible individuals 
directly from States and SPAPs.
    Several commenters also opposed such information being provided to 
organizations. One commenter believed that providing such information 
to Part D competitors would generate more problems and ``incite'' more 
negative beneficiary reaction that would outweigh any value in 
enhancing beneficiary outreach. Other commenters were concerned that 
such information would be used to ``cherry pick'' healthier and less 
expensive beneficiaries. Several commenters noted that if we were to 
provide such information to organizations, such information should be 
limited to the minimum amount necessary. They stated that certain 
information, such as health or financial information or telephone 
numbers should not be provided. Further, beneficiaries should be given 
the option to request that we not share their information with plans. 
Several commenters did not believe that PDPs or MA-PD plans should be 
able to use the information for telemarketing purposes. Another 
commenter indicated that we should only disclose information to the 
plan if the plan's marketing material contains formulary and drug 
pricing information and is accompanied by an application form.
    Response: We decline to provide specifics on the provision of this 
information at this time but reserves the right to provide this 
information to plans in the future. We will develop further guidance on 
this issue shortly after publication of this rule.
12. 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 our proposed rule that must disclose whether the 
prescription drug coverage that they provide to their members who are 
Part D eligible is creditable prescription drug coverage.
    Sections 1860D-13(b)(4) (A) through (G) of the Act lists seven 
forms of potential creditable prescription drug coverage: Coverage 
under a PDP or under an MA-PD plan; 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.
    In addition to the forms of creditable coverage identified in 
sections 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 
prescription drug coverage. We proposed, at Sec.  423.56, to expand the 
list of types of creditable prescription drug coverage.
    As discussed 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 will 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.''
    In the proposed rule, we interpreted ``to the individual'' in this 
case as being to the average individual under the plan, as opposed to 
the sponsor of the plan. For purposes of determining creditable 
coverage, we proposed a ``gross'' test: will the expected plan payout 
on average be at least equal to the expected plan payout under the 
standard benefit? We also proposed at Sec.  423.56(c) that any entity 
seeking to offer coverage of the type described in Sec.  423.56 must 
attest to the actuarial equivalence (or non-equivalence) of its 
prescription drug coverage 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 coordination with the provisions regarding the late enrollment 
penalty, we proposed at Sec.  423.56 to establish a process under which 
these entities will disclose the creditable status of their 
prescription drug coverage to us and to each part D eligible 
beneficiary enrolled in such coverage.
    Section 1860D-13(b)(6)(C) of the Act, implemented at Sec.  
423.56(g) of the proposed rule, provides that an individual who was not 
adequately informed that his or her prescription drug coverage was not 
creditable prescription drug coverage may apply to CMS to have such 
coverage treated as creditable prescription drug coverage for purposes 
of not having the late penalty imposed.
    Comment: One commenter stated that Medicaid should not be 
considered creditable prescription drug coverage, for the purposes of 
Part D, because no Medicaid benefit for Part D covered prescription 
drugs is available to Part D eligible beneficiaries.
    Response: All entities listed under Sec.  423.56(b), except PDPs 
and MA-PDs under (b)(1) and PACE plans and cost-based HMOs and CMPs 
offering qualified prescription drug coverage, must provide notice to 
both CMS and its members whether the prescription drug coverage 
provided is or is not creditable. The purpose of the notice of 
creditable coverage is to ensure that individuals are aware of whether 
such coverage is creditable prescription drug coverage and its 
implication to the late enrollment penalty.
    Medicaid is prohibited from providing Part D drugs to full-benefit 
dual eligible individuals. However, since there may be other 
individuals who are not receiving the full range of benefits from 
Medicaid but who will continue to receive some drug coverage from the 
State, these individuals must also receive this notice providing status 
of the coverage.
    Comment: One commenter requested that we include SPAP in the 
definition

[[Page 4226]]

of types of coverage that may be creditable.
    Response: The proposed rule at Sec.  423.56(b)(4) includes SPAPs as 
potentially creditable. Section 1860D-13(b)(4)(D) of the Act specifies 
these programs, as described in section 1860D-23(b) of the Act, as 
such. To ensure this concept is clear, we will revise Sec.  
423.56(b)(4) to include the acronym ``SPAP.''
    Comment: We received a comment indicating that the value of 
prescription drug coverage under PACE will likely equal or exceed the 
actuarial value of Part D standard prescription drug coverage as a 
result of existing requirements in sections Sec.  460.90 and Sec.  
460.92 of the PACE regulation. The commenter recommended incorporating 
PACE into the CMS definition of creditable prescription drug coverage 
found in Sec.  423.56(a).
    Response: We agree with the commenter and have incorporated PACE 
into the definition of potentially creditable prescription drug 
coverage found in Sec.  423.56(b). Additional discussion of the 
applicability to Part D benefits and requirements to PACE are outlined 
in subpart T of the final rule.
    Comment: A few commenters inquired about the actuarial equivalence 
test that the entities listed will be required to meet, since the 
actuarial equivalence reference in Sec.  423.265 refers to bid 
submissions. Commenters supported both the concept of ``gross'' test 
and an ``aggregate test'' for calculation of the actuarial equivalence 
for plans, including group health plans which offer several benefit 
packages to determine if the prescription drug coverage is creditable.
    Response: The basic actuarial equivalence value test for the 
determination of creditable coverage of alternative coverage is 
determined by calculating whether the expected plan payout on average 
will be at least equal to the expected plan payout under defined 
prescription drug coverage (gross test). We believe Section 1860D-
22(a)(2) of the Act is subject to two reasonable interpretations of 
calculating the creditable coverage test (gross test). Under the first 
interpretation, the actuarial equivalence standard for determining 
creditable coverage would be applied to the alternative coverage as a 
whole, and under the second interpretation the actuarial standard would 
be applied for each benefit option (including separate cost-sharing 
arrangements) within a single group health plan. Whereas our proposed 
rule required plans to apply the actuarial equivalence standard at the 
aggregate level, for the final rule we instead require plans to apply 
the actuarial equivalence standard to each benefit option within its 
plan.
    Our rationale for revising the actuarial equivalence test is to 
ensure that beneficiaries are adequately informed that their coverage 
is or is not creditable prescription drug coverage. A sponsor may offer 
many different benefit options to beneficiaries. One of those benefit 
options may not pass the gross test but be included in an overall (or 
``aggregate'') text. As a result, this would leave beneficiaries in 
certain benefit options with a determination that their coverage is 
creditable, when in actuality it is not. For example, a sponsor has a 
group in which richer benefits are offered, compared to another group 
that has more limited benefits. If the sponsor would aggregate the two 
benefits together, the lower benefit will end up as ``creditable'' when 
the benefit packages are averaged together.
    We will issue guidance on the aspects of actuarial equivalence 
shortly following publication of the final rule.
    Comment: One commenter asked if any coverage that is less than full 
pharmacy benefits could be considered creditable prescription drug 
coverage, such as coverage for maintenance or coverage of specific 
disease-only drugs.
    Response: We believe that the definition of creditable prescription 
drug coverage would prohibit us from concluding that such coverage is 
creditable. To be creditable prescription drug coverage, the coverage 
must equal or exceed the actuarial value of defined standard 
prescription drug coverage, as we will define in guidance referenced in 
the previous response. It is likely that coverage of a very limited 
scope such as the commenter refers will not likely meet our actuarial 
equivalence test.
    Comment: In response to our request for comments on other forms of 
coverage that may potentially be considered creditable, two commenters 
requested that we cost-based HMOs and CMPs authorized under section 
1876 of the Act as potential providers of creditable prescription drug 
coverage. Both commenters also suggest that we include a provision 
allowing CMS to designate other types of coverage as potentially 
creditable prescription drug coverage in the future without requiring 
such an addition be accomplished through the rule making process. 
Another commenter suggested that coverage provided by State high risk 
insurance pools also be included in the types of coverage that may be 
creditable.
    Response: We agree with these suggestions and have revised Sec.  
423.56(b) to include cost-based HMOs and CMPs and coverage offered by 
State high risk pools, as defined under the HIPAA regulations at Sec.  
146.113(a)(1)(vii), as well as a provision permitting CMS to recognize 
other types of coverage as potentially creditable prescription drug 
coverage, which we would do so in separate guidance as determined 
necessary.
    Comment: Several commenters supported permitting the disclosure of 
the creditable prescription drug status of coverage through the 
inclusion of this information in already existing beneficiary 
materials, such as Summary Plan Descriptions (SPDs), or annual notices. 
One commenter suggested that because beneficiaries are already familiar 
with these documents, they provide a more recognizable and familiar 
avenue for this important information. On the other hand, several 
commenters supported requiring all notices of the creditable status of 
coverage to ``stand alone;'' that is; to be provided separately in a 
specific notice to each individual. Some commenters expressed concern 
that if this disclosure were not highlighted in a separate notice, the 
important message could go unnoticed and inadvertently subject an 
individual to the late enrollment penalty. Another commenter suggested 
that all notices be linked to ERISA disclosure documents (that is, 
SPDs), and to HIPAA or COBRA required notices. One commenter suggested 
that notice of creditable status could be incorporated into already 
existing beneficiary information materials, while notice of non-
creditable status should stand alone. Lastly, a commenter requested 
that we specify the elements that would be required to be included in 
these notices.
    Response: We specifically requested comment on the disclosure of 
creditable prescription drug notice requirements and appreciate the 
feedback received. Based on the comments we received we believe that 
linking the notice of creditable status to other required documents is 
an acceptable vehicle provided it is conspicuous and includes standard 
information elements. This approach appropriately recognizes the 
importance and familiarity of materials that beneficiaries currently 
receive regarding coverage they have. Further, we believe that it is 
important to encourage compliance with the provision of these notices 
by eliminating duplication and the undue burden associated with it. To 
that end, we have revised Sec.  423.56(c) to allow notices of 
creditable and non-creditable status to be provided in the same manner, 
and will provide specific guidance following the publication of the 
rule. This guidance will require that

[[Page 4227]]

a notice of creditable and non-creditable status be provided, at 
minimum, prominently with other beneficiary information materials, and 
will include model language for both types of notices.
    We may specify different requirements for those entities identified 
at Sec.  423.56(b) that are required to provide these notices, where 
appropriate, to reduce beneficiary confusion and minimize 
administrative burden. For example, as explained in our discussion of 
Sec.  423.34 above, we intend to notify full benefit dual eligible 
individuals that they are eligible for the low-income subsidy. This 
notice will also inform individuals that Medicaid will no longer cover 
those prescription drugs covered under Part D and that any additional 
prescription drug coverage provided by Medicaid would not be creditable 
coverage under Part D. Including this information in the same notice 
will avoid duplication of effort and possible beneficiary confusion.
    Comment: Several commenters felt that requiring an attestation by 
group health plans of actuarial equivalence for creditable coverage 
when the sponsor of such coverage elects not to enroll in the retiree 
drug subsidy program under subpart R was an unnecessary cost and an 
administrative burden. The commenters believed that for those employer 
groups that offer prescription drug coverage to active employees who 
might be Part D eligible individuals, such coverage should be assumed 
to be ``creditable'' and should only have to provide notices to those 
qualified retirees and dependents who are Part D eligible individuals. 
The commenters also suggested that notices could be published in 
summary plan descriptions, on employer website and via e-mail.
    Response: Section 1860D-13(b)(6)(B) of the Act requires specific 
entities that offer prescription drug coverage to provide notices to 
all Part D eligible individuals enrolled in their plans regarding 
whether such prescription drug coverage is creditable. This would 
include sponsors (as defined under Sec.  423.880) not electing the 
Retiree Drug Subsidy, as described in subpart R. A notice of creditable 
or non-creditable coverage must be provided to active Medicare eligible 
employees and Medicare eligible dependents so that a late enrollment 
penalty will not be imposed when the beneficiary enrolls in Part D 
coverage.
     We will provide further guidance on a simplified method of 
determining creditable coverage for those sponsors not electing the 
retiree drug subsidy.
    We will also provide guidance to sponsors on the form, manner, and 
timing of such notice requirements, following publication of this final 
rule. Notices may be provided, at minimum, prominently with other plan 
participant information materials (for example, summary plan 
descriptions, or HIPAA notices) that the sponsor is required to provide 
as long as it is conspicuous and includes standard information elements 
as determined in our guidance. This approach appropriately recognizes 
the importance and familiarity of materials that beneficiaries 
currently receive regarding coverage they have.
    Comment: Many commenters responded to our request for comments on 
the timing of the delivery of creditable coverage status notices to 
Part D eligible individuals. Several of these commenters suggested that 
the initial notice should be required to be delivered prior to the 
commencement of the AEP which begins on November 15, 2005. One 
commenter suggested that notices also be issued at least 60 days prior 
to the effective date of any change to current coverage. Another 
commenter suggested that entities required to deliver these notices 
should do so within 30 to 45 days of the end of Part D enrollment 
periods.
    Response: We appreciate the feedback we received regarding the 
timing of notices to disclose creditable prescription drug coverage. We 
agree that, in order to ensure beneficiaries are making informed 
choices regarding enrollment in Part D, notice must be provided to all 
Part D eligible individuals each year prior to the commencement of the 
AEP, which begins on November 15\th\. We also believe there are three 
other key times when notice must be provided: (1) prior to the 
commencement of the individual's initial enrollment period in Part D; 
(2) prior to the effective date of enrollment in such coverage or any 
change in creditable status of that coverage; and, (3) upon request by 
the beneficiary. We will revise Sec.  423.56(f) to require that notice 
be provided, at minimum, at these 4 times.
    Comment: One commenter requested that we clarify the meaning of the 
words in Sec.  423.56(b) of the proposed rule ``with the exception of 
PDPs and MA-PD plans.'' for the duty to furnish notices of creditable 
coverage to beneficiaries. The commenter also requested clarification 
of the duty of Cost plans offered under section 1876 of the Act that 
provide qualified prescription drug coverage to furnish such notice. 
Lastly, the commenter asked us to clarify if the provision at Sec.  
423.56(d) of the proposed rule regarding the disclosure of creditable 
status to CMS applies to any entity that is exempted from notice 
requirements according to Sec.  423.56(b).
    Response: It is our view that the practical need for disclosure of 
creditable status notices is directly related to a beneficiary's 
understanding of their options related to enrolling in Part D and any 
consequences should they choose not to, such as the late enrollment 
penalty. It also provides the beneficiary with information about how 
their coverage compares to what is available under a Part D plan. 
Beneficiaries enrolled in a PDP, MA-PD plan, PACE plan or cost plan 
that provides qualified prescription drug coverage are enrolled in Part 
D, and therefore not subject to any consequence of choosing not to 
enroll. Including these types of coverage in the list of coverage that 
may be considered creditable ensures that at no time could a 
beneficiary who has maintained enrollment in a legitimate Part D plan 
be subject to the late enrollment penalty for the same time period. 
However, sending notice of creditable status seems superfluous since, 
as these plans are Part D plans, the creditable status is automatic.
    The statute at 1860D-13(b)(6)(B) of the Act exempts PDP sponsors 
and MA organizations from providing notice of creditable coverage to 
its members. Since sections 1860D-21(e) and (f) of the Act provide that 
we treat cost-based HMO and CMPs and PACE organizations that elect to 
provide qualified prescription drug coverage similar to MA-PD local 
plans, such cost-based HMO and CMP and PACE organizations offering 
qualified prescription drug coverage will also be excepted from this 
notice requirement. We will revise the notice requirements under Sec.  
423.56(c) to reflect that PACE plans and 1876 Cost plans offering 
qualified prescription drug coverage as excepted entities from the 
notice requirements under Sec.  423.56(c). We also note that PACE plans 
and section 1876 of the Act cost plans that do not offer qualified 
prescription drug coverage must provide notices, as required. To ensure 
that Part D plan members understand their options, we will ensure that 
an explanation of the late enrollment penalty and the concept of 
creditable coverage are included in plan documents.
    Similarly, a requirement for organizations that provide Part D 
benefits to submit separate notice would be duplicative by their nature 
as CMS approved Part D plans, they are creditable. We will revise Sec.  
423.56(e) to clarify that all entities providing CMS-approved Part D 
coverage do not have

[[Page 4228]]

to disclose creditable status of Part D coverage to us under this 
paragraph.
    Comment: One commenter suggests that we consider ways that entities 
could provide the required notice of creditable status to beneficiaries 
and CMS via electronic means.
    Response: We recognize that most plan documents have been 
historically provided to beneficiaries in hard-copy (that is, paper) 
but know from the comments received from plan sponsors and business 
advocates that participants are receiving plan information through 
other electronic means, such as websites and e-mail. Most beneficiaries 
are probably accustomed to receiving materials in one of these manners. 
We feel that paper documents have better ensured that the beneficiary 
receives and understands the information. In addition, paper documents 
will provide beneficiaries a hard copy that they can present whenever 
needed to show proof of creditable coverage. Since beneficiaries may 
already be choosing to receive information electronically, we will 
explore this option as we develop operational guidance for creditable 
notice requirements.
    As for entities notifying us of the creditable status of their 
coverage, we will describe the form and manner in which entities 
disclose this information to us in operational guidance and will 
consider various options for entities to do so.

C. Voluntary Prescription Benefits and Beneficiary Protections

1. Overview and Definitions (Sec.  423.100)
    Proposed subpart C of part 423 implemented 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 Act. This subpart set forth 
requirements regarding--
     Definitions for terms that are frequently used in this 
subpart.
     The benefits offered by Part D sponsors.
     The establishment of prescription drug plan service areas.
     Access standards with regard to covered Part D drugs.
     Part D sponsor formularies.
     Information dissemination by Part D sponsors.
     Disclosure to beneficiaries of pricing information for 
generic versions of covered Part D drugs.
     Privacy, confidentiality, and accuracy of PDP sponsors' 
beneficiary records.
    Below we summarize the provisions of subpart C and respond to 
public comments. (Please refer to the proposed rule (69 FR 46646) for a 
detailed discussion of our proposals.)
a. Part D Drug
    The definition of a covered Part D drug in Sec.  423.100 of our 
proposed rule closely followed the statutory definition in section 
1860D-2(e) of the Act. According to this definition, a covered Part D 
drug was 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 included prescription drugs, biological 
products, 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 included ``medical 
supplies associated with the injection of insulin (as defined in 
regulations of the Secretary).'' We proposed 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 specifically excluded drugs or classes of 
drugs, or their medical uses, which may be excluded from coverage or 
otherwise restricted under Medicaid under section 1927(d)(2) of the 
Act, 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.
    The definition of a covered Part D drug also excluded 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).
    Except as otherwise provided below, the final rule adopts the 
definition of ``covered Part D drug'' set forth in Sec.  423.100 of the 
proposed rule.
    Comment: Several commenters were confused about the distinction 
between drugs that may be covered under Part D given the definition of 
the term ``covered Part D drug'' in section 1860D-2(e) of the Act and 
those drugs that are actually included on a Part D plan's formulary.
    Response: In order to clarify when we are referring to a drug that 
may be covered under Part D and one that not only is covered by Part D 
but is also included on a particular Part D plan's formulary, we refer 
to drugs that may be covered under Part D, consistent with the 
definition of the term ``covered Part D drug'' in section 1860d-2(e) of 
the Act, simply as ``Part D drugs.'' We use the term ``covered Part D 
drug'' to refer to a drug that not only is a Part D drug, but that is 
included in a Part D plan's formulary or treated (through a coverage 
determination or appeal described in subpart M of this preamble) as 
being included in a Part D plan's formulary, and is obtained at a 
network pharmacy or at an out-of-network pharmacy in accordance with 
Sec.  423.124 of our final rule. Both terms are defined in Sec.  
423.100 of our final rule.
    Comment: One commenter recommended that we consider expanding the 
definition of ``medically accepted indication'' beyond the FDA-approved 
indications to include uses in official compendia or research. Another 
commenter was concerned that the definition of ``medically accepted 
indication'' may allow Part D sponsors to limit their payments for use 
of Part D drugs solely to FDA-approved indications even though clinical 
standards allow for alternative uses. Another commenter was concerned 
that pharmacists will be penalized for dispensing prescriptions that 
are prescribed for an indication that is not a medically accepted 
indication. This commenter indicated that pharmacists cannot be 
expected to contact each physician for each prescription in question to 
determine if the drug is being prescribed for a medically-accepted 
indication.
    Response: To qualify as a Part D drug, a drug or biological must be 
used for a medically accepted indication, as defined under section 
1927(k)(6) of the Act. This definition states that a medically accepted 
indication means not only any use for a covered outpatient drug which 
is FDA-approved, but also a use which is supported by one or more 
citations included or approved for inclusion in any of the compendia 
listed in section 1927(g)(1)(B)(i) of the Act-the American Hospital 
Formulary Service Drug Information, United States

[[Page 4229]]

Pharmacopoeia-Drug Information, the DRUGDEX Information System, and 
American Medical Association Drug Evaluations. We cannot extend the 
meaning of ``medically accepted indication'' to cover uses in research, 
as one commenter notes, since the definition of ``medically accepted 
indication'' in section 1927(k)(6) of the Act does not include the 
reference in section 1927(g)(1)(B)(ii) of the Act to peer-reviewed 
medical literature. Thus, a ``medically accepted indication'' is 
limited by statute to a use for a covered outpatient drug which is 
approved by the FDA, or the use of which is supported by one or more 
citations in the compendia listed above. It will be Part D plans' 
responsibility to ensure that covered Part D drugs are prescribed for a 
medically accepted indication; plans may, for example, rely on 
utilization management policies and procedures (which we will review as 
part of our comprehensive review of Part D plan benefits) to ensure 
that drugs are prescribed and used for medically accepted indications. 
We clarify that pharmacists will not be required to contact each 
physician to verify whether a prescription is being used for other than 
a medically accepted indication.
    Comment: Some commenters recommended including coverage for all 
EPA-recommended disposal methods and disposal solutions as part of the 
definition of ``medical supplies associated with injection of 
insulin''. The commenters noted that proper disposal of needles and 
lancets are necessary to patient safety and important to public health. 
Some commenters requested that the definition include lancets, blood 
glucose test strips, glucometers, syringes, and needles. One commenter 
suggested that gauze not be included.
    Response: We are interpreting the term ``medical supplies 
associated with the injection of insulin'' in section 1860D-2(e)(1)(B) 
of the Act as comprising syringes, needles, alcohol swabs, gauze, and 
insulin delivery devices not otherwise covered by Part B, such as 
insulin pens, pen supplies, and needle-free syringes. Given that 
section 1860D-2(e)(2)(B) of the Act excludes products covered by Part B 
from the definition of a Part D drug, test strips and lancets, which 
are covered under Part B, cannot be covered under Part D. While we 
recognize the importance of needle disposal systems, we also do not 
consider the systems to be directly associated with injection. Thus, 
these devices fall outside of our interpretation of medical supplies 
associated with the injection of insulin.
    We note that it is our intention to narrowly construe further Part 
D plan determinations of what constitutes ``medical supplies associated 
with the injection of insulin'' in order to ensure that such 
determinations are consistent with the examples we have provided, and 
that they do not lead to an inappropriate expansion of the Part D 
benefit.
    Comment: Some commenters asked for clarification on coverage of 
smoking cessation products, specifically regarding whether over-the-
counter products will be covered under Part D. Another commenter 
suggested that in order to cover smoking cessation products, Part D 
plans should require proof of smoking cessation classes.
    Response: Section 1860D-2(e)(1)(A) of the Act specifies that a Part 
D drug is a drug that may be dispensed only upon a prescription. 
Although section 1860D-2(e)(1)(B) of the Act specifically allows 
smoking cessation agents to be covered under Part D, such agents must 
not otherwise be excluded from coverage under Part D. Over-the-counter 
smoking cessation products (for example, gum and most patches), by 
virtue of being not being drugs that may be dispensed only upon a 
prescription, therefore cannot be considered Part D drugs, even though 
they are smoking cessation products. Smoking cessation products that 
may be dispensed only upon a prescription, however (for example, some 
patches, oral inhalants, nasal sprays, and Zyban), may be considered 
Part D drugs provided they meet all other applicable requirements under 
the definition of a Part D drug in Sec.  423.100 of the final rule. We 
do not have the authority to require Part D plans to condition coverage 
of permissible smoking cessation agents on proof of smoking cessation 
classes.
    Comment: One commenter requested clarification in the final rule 
that Part D plans are not prohibited from providing drugs on the 
exclusion list (under section 1927(d)(2) of the Act, other than smoking 
cessation drugs) if they are provided through an enhanced benefit.
    Response: As provided in Sec.  423.104(f)(1)(ii)(A) of our final 
rule and in accordance with section 1860D-2(a)(2)(A)(ii) of the Act, 
Part D plans may only provide coverage of drugs that are specifically 
excluded as Part D drugs under section 1860D-2(e)(2)(A) of the Act, 
that is, drugs or classes of drugs, or their medical uses, which may be 
excluded from coverage or otherwise restricted under Medicaid under 
section 1927(d)(2) of the Act, with the exception of smoking cessation 
agents--if they do so as supplemental benefits through enhanced 
alternative coverage and if they would otherwise meet the definition of 
a Part D drug under section 1860D-2(e)(1) of the Act, but for the 
application of section 1860D-2(e)(2)(A) of the Act.
    Comment: Many commenters urged us to remove benzodiazepines from 
the exclusion list indicating the multiple therapeutic uses of this 
drug. One commenter was concerned that excluding drugs such as these 
from the Part D benefit would force health care providers to alter how 
they treat patients based on which medications are Part D drugs. Many 
commenters noted that benzodiazepines serve as valuable therapy for 
anxiety disorders, bipolar disorder, Parkinson's disease, seizures, and 
other conditions. Some commenters noted that excluding drugs such as 
benzodiazepines that are inexpensive, first-line therapies would 
require more expensive drugs to be prescribed simply because they are 
covered. Some commenters were concerned about the dangers of 
beneficiary withdrawal from benzodiazepines if these drugs are not 
covered under Part D. Some commenters were concerned about loss of drug 
coverage for benzodiazepines for dual eligibles, especially because 
benzodiazepines are covered in many States. Many commenters also urged 
us to remove barbiturates from the exclusion list, citing similar 
reasons as those listed for benzodiazepines.
    Some commenters urged us to make an exception for vitamins used 
under special circumstances, specifically with ESRD patients. Another 
commenter was concerned about the exclusion of renal vitamins under 
Part D and requested that we allow the coverage of water-soluble 
vitamins lost during dialysis to be covered under Part D. Another 
commenter noted that prescription vitamins are relatively inexpensive.
    Some commenters requested coverage of over-the-counter medications 
for beneficiaries with certain conditions. One commenter asked us to 
reconsider excluding over-the-counter drugs that were formerly 
prescription-only drugs and now have over-the-counter status. Another 
commenter recommended including a provision allowing over-the-counter 
drugs to be covered if prescribed in the same manner as a prescription 
item. Another commenter asked us to consider over-the-counter drugs and 
medications for unintended weight loss as a covered drug under Part D. 
One commenter suggested that we amend the exclusion for ``agents used 
for symptomatic relief of cough or cold'' to ``non-prescription agents 
used for symptomatic relief of cough or cold''.

[[Page 4230]]

    Response: Section 1860D-2(e)(2) of the Act clearly requires us to 
exclude certain drugs from the definition of a Part D drug. According 
to the statute, the definition of a Part D drug specifically excludes 
certain drugs or classes of drugs that may be excluded from Medicaid 
coverage under section 1927(d)(2) of the Act, including agents when 
used for anorexia, weight loss, or gain; agents when used for cosmetic 
purposes or hair growth; agents when used for symptomatic relief of 
cough and colds; prescription vitamins and mineral products, except 
prenatal vitamins and fluoride preparations; 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; nonprescription drugs; barbiturates; and 
benzodiazepines. We have no flexibility to allow Part D coverage of any 
of these drugs, including over-the-counter drugs used to treat certain 
medical conditions, except as provided in Sec.  423.104(f)(1)(ii)(A) of 
the final rule, which permits Part D plans to provide coverage of drugs 
that otherwise meet the definition of a Part D drug under section 
1860D-2(e)(1) of the Act and are not otherwise excluded under section 
1860D-2(e)(2)(B) of the Act, if they do so as supplemental benefits 
through enhanced alternative coverage. We also note that insurance or 
otherwise, group health plans, or third party payment arrangements 
(including States under Medicaid and State Pharmaceutical Assistance 
Programs) may, at their discretion, provide Part D enrollees with 
supplemental coverage for drugs excluded from coverage under Part D.
    Comment: One commenter said that many of the categories of 
excludable drugs in section 1927(d)(2) of the Act refer to drugs when 
used for a specific purpose and that it is inappropriate to simply 
exclude these drugs when they may be covered depending on the specific 
clinical use. This commenter recommended that that we provide coverage 
for potentially excludable drugs when they are prescribed for a 
clinical use not covered by section 1927(d)(2) of the Act. Two examples 
provided were ``weight loss agents'' when used not for cosmetic 
purposes, but for the treatment of morbid obesity, and decongestant 
combination products, which while commonly prescribed to treat coughs 
and colds, could be used for the treatment of allergic conditions.
    Response: Drugs that are excluded from coverage under Part D when 
used as agents for certain conditions may be considered covered when 
used to treat other conditions not specifically excluded by section 
1927(d)(2) of the Act, provided they otherwise meet the requirements of 
section 1860D-2(e)(1) of the Act and are not otherwise excluded under 
section 1860D-2(e)(2)(B) of the Act. To the extent this is the case, 
and a drug is dispensed for a ``medically accepted indication'' as 
described in the statute, weight loss agents may be covered for the 
treatment of morbid obesity, and decongestant products for example, may 
be covered when used to treat allergies. However, we clarify that Part 
D plans may establish utilization management processes in order to 
ensure that such drugs are being prescribed for medically accepted 
indications that are not excluded under section 1927(d)(2) of the Act 
(for example, decongestant products when used for ``symptomatic relief 
of coughs and colds'').
    Comment: One commenter suggested excluding drugs that have non-
prescription drug alternatives available as Part D drugs. Two 
commenters supported excluding drugs that are ``lifestyle'' drugs such 
as Viagra, Levitra, and Cialis.
    Response: We do not have the authority to exclude the drugs if they 
meet all the criteria of a Part D drug as provided under section 1860D-
2(e)(1) of the of the Act and are not otherwise excluded under section 
1860D-2(e)(2) of the Act. However, we clarify that Part D plans may 
subject these drugs to utilization management processes provided we do 
not find such processes to discourage enrollment by certain Part D 
enrollees as part of the benefits package review we will conduct (and 
which is discussed in detail elsewhere in this preamble).
    Comment: One commenter supports the current statutory language 
regarding the manufacturer tying arrangements exclusion, whereas 
another commenter supports expanding this prohibition but does not 
specify how we should expand it. One commenter opposes any CMS effort 
to mandate the interactions between Part D plans and pharmaceutical 
manufacturers, and another asks us to affirm that this exclusion will 
not interfere with Part D plan decisions to cover drugs/diagnostic test 
combinations if manufacturers do not require the purchase of the 
combinations. Yet another commenter points out that the tying 
arrangement exclusion would exclude drugs from Part D coverage that are 
tied to one pharmacy system because of requirements for patient 
monitoring.
    Response: We appreciate the clarification provided by the various 
commenters. We are not expanding the manufacturer tying arrangement 
exclusion of coverage under Part D in our final rule. We believe that 
existing Federal fraud and abuse laws, including the anti-kickback 
statute at section 1128B(b) of the Act, as well as the civil monetary 
penalty provision at Section 1128A(a)(5) of the Act, provide clear 
guidance regarding what are and are not inappropriate manufacturer 
tying arrangements. Manufacturers remain responsible for ensuring that 
they do not engage in any tying arrangements that violate the anti-
kickback statute or, where applicable, the civil monetary penalty 
provision prohibiting inducements to beneficiaries.
    Comment: Some commenters asked for clarification on which vaccines 
are covered under the Part D benefit and suggested that we provide 
additional guidance on how non-Part B vaccines are to be covered under 
Part D, including administrative fees. Another commenter requested that 
we strongly encourage Part D plans to include all vaccines that are not 
covered under Part B on their formularies.
    Response: The definition of a Part D drug in section 1860D-2(e) of 
the Act clarifies that Part D may cover a biological product described 
in sections 1927(k)(2)(B)(i) to (k)(2)(B)(iii) of the Act--to include a 
vaccine licensed under section 351 of the Public Health Service Act. 
Since section 1860D-2(e)(2)(B) of the Act excludes an otherwise covered 
Part D drug from coverage under Part D ``if payment for such drug as so 
prescribed and dispensed or administered with respect to that 
individual is available (or would be available but for the application 
of a deductible) under Part A or B for that individual,'' certain drugs 
and vaccines would be covered under Part D only to the extent they are 
not covered under Part B.
    In addition to excluding Part B vaccines from coverage under Part 
D, section 1860D-2(e)(3) of the Act provides that a Part D plan may 
exclude from coverage covered Part D drugs for which payment may not be 
made under section 1862(a) of the Act if applied to Part D. Section 
1862(a)(1)(A) generally excludes from payment items and services that 
are not reasonable and necessary for the diagnosis or treatment of 
illness or injury or to improve the functioning of a malformed body 
member, except those vaccines identified in section 1862(a)(1)(B) of 
the Act as covered Part B vaccines. Section 1862(a)(1)(A) of the Act, 
however, excepts from this rule vaccines covered under Part B. 
Therefore, if these provisions are read literally, Part D plans would 
be permitted to exclude

[[Page 4231]]

from coverage preventative vaccines that are covered Part D drugs 
because they are not ``reasonable and necessary for the diagnosis or 
treatment of an illness or injury.''
    However, we argue that whereas section 1862(a)(1)(B) of the Act 
requires coverage under Part B of covered Part B vaccines, by analogy, 
section 1862(a)(1)(B) of the Act as applied to Part D should be read as 
requiring coverage under Part D of vaccines that are covered Part D 
drugs. This argument is buttressed by the fact that the Congress 
specifically defined Part D drugs under section 1860D-2(e)(1) of the 
Act to include vaccines. Moreover, section 1860D-2(e)(3) of the Act 
references all of section 1862(a) of the Act, and the only way to give 
meaning to the reference to section 1862(a)(1)(B) of the Act is to 
extend the provision to permit coverage of Part D vaccines. In other 
words, if section 1862(a)(1)(B) of the Act as applied to Part D were 
read literally as only permitting coverage of Part B vaccines, the 
reference in section 1860D-2(e)(3)(A) of the Act to section 
1862(a)(1)(B) of the Act would be rendered meaningless.
    Building on the argument that by analogy section 1862(a)(1)(B) of 
the Act should be extended to Part D so as to require coverage of non-
Part B vaccines under Part D, the standard under Part D should reflect 
a standard similar to section 1862(a)(1)(b) of the Act but adapted to 
apply to preventative vaccines. Therefore, we believe such standard 
should be vaccines that are ``reasonable and necessary for the 
prevention of illness.'' Plans will need to develop explicit criteria 
that can be applied on a case-by-case basis to determine that the 
administration of Part D vaccine is ``reasonable and necessary'' and 
that the Part D vaccine is therefore a covered Part D drug. Presumably 
these will comply with any widely accepted practice guidelines. If 
widely accepted practice guidelines are not available for certain 
vaccines, Part D plans will need to develop criteria that they can 
support with sound clinical reasoning.
    Currently, most vaccines of interest to the Medicare population are 
covered under Part B. Although Part B makes only three exceptions 
(influenza, pneumococcal, and hepatitis B vaccines for high risk 
patients) to its rule requiring injury or direct exposure, these three 
exceptions probably account for the majority of vaccinations needed by 
an elderly population. Since many of the remaining vaccines on the 
market are administered during childhood, we do not expect that Part D 
will cover a large number of vaccines. However, as more vaccines are 
developed and practice guidelines develop, Part D plans might face a 
growing burden with supplying vaccinations to significant numbers of 
their Part D patient populations. Therefore, the ability of Part D 
plans to limit payment to those situations that are ``reasonable and 
necessary for the prevention of illness'' will become more and more 
important.
    Given the definition of dispensing fees we have incorporated in the 
final rule, the costs of Part D-covered vaccine administration could 
not be covered as part of a dispensing fee. Neither could those costs 
be covered as separate administrative fees, since as discussed 
elsewhere in this preamble, other than medication therapy management 
programs (described in subpart D), we do not expect medical or clinical 
services to be included in administrative fees.
    As discussed in subpart J, Part D-covered vaccines administered in 
a physician's office will be covered under the out-of-network access 
rules at Sec.  423.124 of our final rule. The costs of vaccine 
administration may be included in physician fees under Part B since 
Part B pays for the medically necessary administration of non-covered 
drugs and biologicals. However, there is currently no ready mechanism 
for physicians to bill Part D plans for Part D-covered vaccine costs. 
In the short-term, we will require that a Part D enrollee self-pay the 
physician for the Part D-covered vaccine cost and submit a paper claim 
for reimbursement by his or her Part D plan. This approach is 
consistent with how beneficiaries accessing covered Part D drugs at an 
out-of-network pharmacy will be reimbursed by Part D plans for costs 
associated with those drugs. Once Part D is implemented, we will get a 
better sense for the actual volume of Part D-covered vaccines (and 
other covered Part D drugs appropriately dispensed and administered in 
a physician's office) and the need and most appropriate mechanisms for 
any automatic cross-over procedures such that physicians could submit 
claims for reimbursement of Part D-covered vaccine ingredient costs 
directly to the appropriate Part B carrier. Any such automatic cross-
over procedures would mean that beneficiaries would not have to submit 
paper claims and, instead, physicians could submit a single claim for 
reimbursement of both the Part D-covered vaccine ingredient costs and 
the administration fee directly to the appropriate Part B carrier, 
which would forward the Part D charge to the appropriate Part D plan.
    Comment: One commenter asked that we cover individually compounded 
medications or combinations of medications. Another commenter stated 
that we should not consider compounded drugs as meeting the definition 
of a Part D drug, as it is contrary to the definition in the MMA and 
would put patients at risk.
    Response: Historically, extemporaneous compounding has filled an 
important role in pharmacy practice and continues to be an important 
part of contemporary pharmacy practice. While less than one percent of 
prescriptions are compounded, these compounded prescriptions often 
provide medically necessary drug therapies that would otherwise be 
unavailable to patients. Compounding also provides many independent 
pharmacies with the opportunity to offer services that competitively 
differentiate them from the chain industry. In addition, compounded 
prescription drug products are frequently reimbursed under commercial 
prescription drug benefit plans. Therefore, excluding compounded 
prescription drug products from Medicare Part D would be a significant 
change from current pharmacy practice.
    Section 1860D-2(e)(1)(A) of the Act defines a Part D drug as 
including a drug that may be dispensed only upon a prescription and 
that is described in section 1927(k)(2)(A)(i), (A)(ii) or (A)(iii) of 
the Act. As a matter of simplification, we refer to these products as 
``FDA approved prescription drug products,'' and note that, as used in 
this part of the preamble, that term incorporates the non-FDA approved 
drug products specifically described under sections 1927(k)(2)(A)(ii) 
and (A)(iii) of the Act.
    Compounded prescription drug products may contain: (1) all FDA 
approved prescription drug products; (2) some FDA approved prescription 
drug products; or (3) all non-FDA approved drug products. While the 
strictest reading of section 1927(k)(2) of the Act appears to indicate 
that non-FDA approved compounded prescription drug products are not 
Part D drugs, we believe that FDA-approved prescription drug product 
components of a non-FDA approved compounded prescription drug product 
could be considered to be Part D drugs. The definition of a Part D drug 
is not based on the final form of the drug as dispensed to the 
beneficiary; rather, section 1860D-2(e)(1)(A) of the Act speaks to a 
drug ``that may be dispensed'' only upon a prescription and that meets 
the requirements of section 1927(k)(2) of the Act. Therefore,

[[Page 4232]]

the FDA approved component can satisfy section 1860D-2(e)(1)(A) of the 
Act even if the finished product does not. Although reimbursement must 
be limited to the FDA approved prescription drug components (that is, 
no reimbursement is available for compounded products containing only 
products that are not approved by the FDA, or otherwise described under 
sections 1927(k)(2)(A)(ii) and (A)(iii) of the Act, or only over-the-
counter products), these usually account for the most significant drug 
costs and, accordingly, current commercial practice often limits 
reimbursement to the most expensive component only. In addition, the 
labor costs associated with mixing a compounded drug product that 
contains at least one FDA approved prescription drug component can be 
included in dispensing fees (as defined in Sec.  423.100 of our final 
rule).
    Comment: Two commenters suggested covering medical foods under the 
Part D benefit because medical foods contain vitamins and nutrition 
that are beneficial to beneficiaries with certain diseases such as End 
Stage Renal Disease (ESRD). Another commenter asked that we cover 
parenteral nutrition therapy.
    Response: It is not clear what the commenter meant by ``medical 
foods.'' If ``medical foods'' refers to products that are vitamins and 
mineral products, these are excluded from the definition of Part D 
drugs and are not a covered Part D benefit. In addition, enteral 
nutrients are not regulated as drugs by the FDA and are therefore not 
covered under Part D.
    On the other hand, parenteral nutrition frequently contains primary 
components such as amino acids, nitrogen products, and dextrose 
mixtures that are regulated by the FDA as drugs and therefore meets the 
definition of a Part D drug if prescribed for a medically accepted 
indication and not otherwise excluded under section 1860D-2(e)(2) of 
the Act. Vitamins and minerals added to parenteral nutrition are not be 
considered Part D drugs, and costs associated with these vitamins or 
minerals cannot be paid for under Part D.
    Part D plans would only need to include parenteral nutrition 
coverage for reasonable and necessary medically accepted indications 
that are not covered under Parts A or B. These situations would likely 
involve long-term care facility or home infusion patients who do not 
qualify for Part B coverage under the prosthetic benefit provision for 
permanent dysfunction of the alimentary tract. This could include 
temporary situations in which patients are unable to swallow or absorb 
nutrients from the alimentary tract, either for physical or cognitive 
reasons. We are currently unable to estimate the potential impact of 
such coverage on Part D expenditures. However, Part D plans will need 
to establish appropriate policies and procedures in order to limit Part 
D coverage of parenteral nutrition to patients with medically accepted 
indications that are not otherwise covered by Parts A or B. In 
addition, we note that Part D plans are not responsible for the costs 
of supplies and equipment related to parenteral nutrition therapy.
    Comment: One commenter suggested additional supplies to consider 
for Part D coverage: spacers and aerochambers for administration of 
inhalation products, devices for administration of eye drops, and 
flushing supplies (for example, saline and heparin for home infusion 
therapy).
    Response: Section 1860D-2(e)(1) of the Act provides us with 
authority to deem medical supplies to be Part D drugs to the extent 
they are associated with the injection of insulin. Thus, the supplies 
mentioned by this commenter cannot be covered under Part D, as they are 
not associated with the injection of insulin. We clarify that although 
heparin is a Part D drug, a heparin flush is not used to treat a 
patient for a medically accepted indication, but rather to dissolve 
possible blood clots around an infusion line. Therefore, heparin's use 
in this instance is not therapeutic but is, instead, necessary to make 
durable medical equipment work. It would therefore not be a Part D drug 
when used in a heparin flush.
    Comment: One commenter recommended that Part D drugs should include 
liquid, chewable, transdermal and other special dosage forms and 
delivery mechanisms to accommodate swallowing limitations and 
intravenous medications, such as antibiotics.
    Response: The definition of a Part D drug at section 1860D-2(e) of 
the Act places no limitations on drug dosage forms and delivery 
mechanisms provided that a drug or biological product is not otherwise 
excluded by the statute. We expect Part D plans to provide an adequate 
benefit that includes coverage of special dosage forms and delivery 
mechanisms to fit the needs of all their enrollees.
    Comment: Several commenters supported our proposed framework for 
Part D coverage wrapping around Part B coverage at the individual 
level. However, other commenters recommended that drugs currently 
covered under Part B be excluded from coverage under Part D until the 
mandated study on the transitioning of Part B prescription drug 
coverage into Part D is released. Another commenter recommended that 
individual drugs be paid by either Part B or Part D in all 
circumstances.
    Response: The statutory definition of the term ``covered Part D 
drug'' would, under section 1860D-2(e)(2)(B) of the Act, exclude any 
drug for which, as dispensed and 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)(2)(B) of 
the Act makes a distinction between what would be paid for under Part D 
as opposed to Part B. This language indicates that the Congress was 
aware that some drugs could qualify for payment under Part B in some 
circumstances and Part D in others, depending on the way those drugs 
are dispensed or administered. Given the statutory definition of the 
term ``covered Part D drug'', we cannot preclude drugs that may be 
covered under Part B under some circumstances (for example, when they 
are furnished ``incident to'' a physician's service), but that are not 
covered under Part B under other circumstances, from being covered 
under Part D under such other circumstances (for example, because they 
are self-administered by the patient at home). Such a policy would 
require statutory changes by the Congress. The various issues raised by 
the drugs covered under Part B for the administration of the Part D 
drug benefit will be addressed in our report mandated by section 1860D-
42(c) of the Act.
    Comment: We solicited comments concerning any drugs that may 
require special guidance with regard to their coverage under Part D, 
and any gaps that may exist in the combined ``Part D & B'' coverage 
package. A number of commenters requested that we further clarify the 
relationship between drugs covered under Medicare Part B and drugs that 
will be covered under Part D. These commenters would like us to clarify 
how Part D plans can recognize Part B covered drugs since no universal 
list exists, Part B coverage differs by patient and situation, and Part 
B coverage policies differ regionally. They raise concerns about 
appropriately limiting coverage of drugs under Part D while achieving 
our goal of wrapping around Medicare Part B to the greatest extent 
possible.
    Response: We acknowledge that there are numerous complexities 
involved in the distinction between drugs covered

[[Page 4233]]

under Parts B and D, as well as with wrapping around existing drug 
coverage under Part B. Nevertheless, section 1860D-2(e)(2)(B) of the 
Act states that Part D plans must exclude any drug that would otherwise 
be considered a Part D drug for which, as so prescribed and dispensed 
or administered to that individual, payment would be available under 
Parts A or B (even though a deductible may apply). Furthermore, we 
believe that the language ``as so prescribed and dispensed or 
administered'' indicates the Congress's awareness that the 
determination regarding whether a particular drug is covered under Part 
B or Part D could differ on a case-by-case basis.
    Despite the complexities, we believe Part D plans can best wrap 
around existing Part B coverage under Part D by understanding the scope 
of the definition of covered Part D drug, becoming familiar with the 
general categories of Part B covered drugs, and planning for potential 
Part B interactions that are likely to be encountered in specific 
settings with regard to some of these categories.
    Part D drugs are not limited to typical outpatient prescription 
drugs. The definition includes injectable prescription drugs (for 
example, intramuscular, intravenous, and infusible drugs, as well as 
vaccines). Some Part D plans may lack experience with covering the 
drugs under an outpatient prescription drug benefit program because 
they are more commonly covered under commercial medical benefits, as 
opposed to commercial prescription drug benefits.
    The implementation of the Part D benefit does not alter coverage or 
associated rules for drugs currently covered under Part B. Part B 
covers drugs in a variety of settings. In almost all of these settings 
the question of whether coverage should be provided under Part D will 
not arise since the drugs are being provided in the context of a 
service or procedure. For a limited number of categories, however, 
pharmacists and infusion providers will have to determine whether to 
bill Part B or Part D, and Part D sponsors will need to confirm whether 
Part D is being billed correctly. In some cases, this determination can 
be made on the basis of the drug. For example, in the case of oral 
anti-cancer drugs, there is a list of drugs covered under Part B based 
on certain statutory criteria. All other oral anti-cancer drugs will be 
covered under Part D, provided they otherwise meet the definition of a 
Part D drug. In other cases, the pharmacist or infusion provider would 
need information about the member in order to bill appropriately. For 
example, in the case of drugs used in immunosuppressive therapy, Part B 
should be billed in the case of a beneficiary whose transplant has been 
covered by Medicare. Part D should make payment in all other instances. 
We will provide more information and guidance on the relation between 
Part B and Part D coverage in separate guidance to Part D plans.
    Based upon the definition of the term ``Part D drug'' and the 
general categories of coverage under Part B, we believe that Part D 
plans could implement utilization management strategies to identify 
potential Part B drug coverage overlap for individuals and verify 
appropriate coverage accordingly. For example, if a Part D beneficiary 
were filling a retail prescription for an antiemetic, prior 
authorization could be used to ensure that the drug is not covered by 
Part B. Similarly, prior authorization could be used to flag drugs 
dispensed via home infusion that are covered under the Part B durable 
medical equipment policy. Plans will need to ensure that they do not 
cover any drugs which, as prescribed and dispensed or administered, are 
covered under Part B in a specific region under its local medical 
review policy (LMRP).
    We clarify that MA organizations must follow fee-for-service 
coverage rules as provided in section 1852(a)(1) of the Act in 
determining whether to pay for a drug under its Part A/Part B or Part D 
benefits. Payment for injectable drugs that Medicare considers to be 
usually not self-administered should be paid under the Part A or Part B 
benefits if provided in a physician's office, and under Part D if 
dispensed by a network pharmacy. Even if an MA plan offers coverage 
under Part D of an injectable drug that Medicare considers to be 
usually not self-administered (for example, Avonex) the plan cannot 
deny coverage of this drug under its Part A or Part B benefits when 
furnished in a physician's office.
    Comment: Several commenters noted that excluding Part B drugs from 
coverage under Part D regardless of whether the consumer is enrolled in 
Part B is seriously detrimental to consumers who enroll in Part B but 
who cannot effectuate their enrollment for many months due to the Part 
B enrollment timeframes. Consumers without Part B coverage, but who 
intend to enroll, could enroll in Part D in April of 2006 but would not 
be able to gain coverage for Part B drugs until 15 months later 
(enrollment in January effective in July). These commenters argue that 
we should make an exception for beneficiaries in this predicament such 
that their Part D plans could cover Part B drugs. This is especially 
important for full-benefit dual eligible individuals in this situation, 
since they would be unable to fall back on Medicaid to obtain coverage 
for Part B-covered medications. They recommend that Part D plans be 
required to cover Part B medications for a consumer for up to 15 months 
(the maximum amount of time it could take to effectuate an enrollment 
under Part B).
    Response: Section 1860D-2(e)(2)(B) of the Act 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 interpreted this to mean that if payment could be available under 
Part A or Part B to the individual for such drug, then it will not be 
covered under Part D. Thus, for all Part D eligible individuals, drugs 
covered under Parts A and B are available if they choose to pay the 
appropriate premiums.
    This will be the case even if a beneficiary has Part A, but not 
Part B, or vice versa, since, as we explain in subpart F of this 
preamble and at Sec.  423.265(c) of the Act, Part D sponsors must offer 
a uniform benefit package in order to carry out the 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 Part D 
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 or are waiting to be 
enrolled, as these commenters describe. 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.
    Comment: Some commenters recommended that we introduce more 
consistent coverage rules by adopting national standards rather than 
relying on local carriers for coverage and payment decisions.
    Response: Policies with regard to coverage of infusible drugs 
covered as DME supplies are uniform across the

[[Page 4234]]

country. Some differences do exist between carriers with regard to 
which injectable drugs will be covered under Part B ``incident to'' a 
physician service. These differences in coverage in a physician's 
office setting, however, should not impact whether a Part D plan will 
cover a prescription for an injectable drug presented at a 
participating pharmacy. The statute does not exclude ``all drugs'' 
covered under Medicare, but rather, drugs when Medicare coverage under 
Part B is available ``as so prescribed and dispensed or administered.''
    Comment: One commenter asked about the interface between the 
hospice benefit and Part D, specifically whether we anticipated that 
Part D would account for or impact the delivery of hospice drugs.
    Response: As provided in section 1861(dd)(1) of the Act, the 
hospice benefit covers all medications related to a beneficiary's 
terminal illness. There is no change in Medicare coverage of these 
drugs. However, all other medications provided to the beneficiary are 
currently paid for either out-of-pocket or by private insurance. These 
drugs could now be covered by Part D plans on either a primary or 
secondary basis depending on the presence or nature of other insurance. 
Given the life expectancy of beneficiaries receiving hospice benefits, 
we do not expect this to be a large expense for Part D plans.
b. Dispensing Fees
    The MMA does not define the term ``dispensing fee,'' although the 
terms ``dispensing fee'' and ``dispense'' appear several times 
throughout the MMA. Because the statute is ambiguous on the meaning of 
``dispensing fee,'' in the proposed rule we did not propose a specific 
definition of ``dispensing fee,'' but instead offered three different 
options we believed would be reasonable, permissible definitions of the 
term and invited comments on which option would be most appropriate 
under Part D.
     Option 1: The dispensing fee will 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 will 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 2: The dispensing fee will include the activities 
included in Option 1, but in addition will 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 will include the activities 
in Option 2, but in addition will 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.
    We also requested comments regarding any implications for our 
proposed options for defining dispensing fees vis-[agrave]-vis the 
administration of other drugs (for example, vaccines and injectable 
long-acting antipsychotic drugs).
    Comment: The majority of commenters favored Option 1 claiming that 
this definition is consistent with current industry practice regarding 
dispensing fees. Several said that professional services involved in 
providing medications should more appropriately be covered under Parts 
A and B, and another commenter opined that Options 2 and 3 were 
burdensome for Part D sponsors. Another commenter expressed concern 
that what is currently covered under Part B should not be shifted to 
Part D through the dispensing fees. Other commenters stated that, 
although they supported Option 1, they believed that the definition 
proposed for Option 1 was too narrow. One commenter suggested that 
pharmacists are required to provide patient counseling for Medicaid 
patients under OBRA 1990 and that they should be reimbursed for those 
efforts. They also felt that the definition of what it means to 
dispense a drug should be clarified. One commenter argued that 
supplies, equipment and professional services needed to deliver a drug 
should be covered under ancillary fees negotiated between pharmacies 
and Part D plans and should not be included in dispensing fees. Another 
commenter pointed out that requiring PBMs to pay for professional 
services, as contemplated under Option 3, would require them to 
renegotiate tens of thousands of contracts with the pharmacies in their 
networks.
    Several commenters supported Option 2. One commenter focused on 
medication packaging and the need to cover packaging specifically 
designed for the cognitively impaired or those with physical 
impairments.
    Other commenters favored adoption of Option 3. Some of these 
commenters argued that the Congress meant for home infusion to be 
covered and that failure to pay for the supplies, equipment and 
services involved in delivering home infusion drugs was tantamount to 
failure to cover the drug itself. Since Part D specifically covers 
those drugs, (antibiotics, pain management, chemotherapy, parenteral 
nutrition, immune globulin and other infused drugs) they argued that we 
must require that dispensing fees cover the resources needed to deliver 
them. Other commenters argued that new treatment modalities were 
allowing patients to remain at home, a cost-effective setting, to 
receive their medications, and that some patients might not be able to 
receive their medications at home should the definition of dispensing 
fee fail to cover the service, equipment, and supplies needed to 
deliver the medications in the home setting. One commenter specifically 
noted the need to cover supplies and services surrounding infusion of 
long-term anti-psychotic medications in community mental health 
centers. Two commenters focused on the need to pay for physician 
services involved in home infusion of certain drugs given that many 
infections and adverse events take place in this setting. Direct 
physician supervision of these services is required to mitigate these 
potential problems.
    Other commenters argued for Part D plan flexibility in establishing 
dispensing fees that would be appropriate for the setting and 
medication at issue, allowing each Part D plan to define dispensing 
fee. One commenter thought that Part D plans should be allowed to use 
tiered dispensing fees to encourage the use of generic drugs. One 
commenter indicated that point of sale systems in place today already 
support multiple variations of dispensing fees based on drug or amount 
of effort required to prepare or administer medication and such systems 
could handle the multiple variations for the drug benefit. Another 
commenter specified that the transmission standard should be the 
National Council of Prescription Drug Program's Telecommunication 
Standard Version 5.1.
    Response: We agree with the majority of commenters that Option 1--
including 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 
is the most appropriate definition of the term ``dispensing fees'' for 
Part D, and we have included a definition of dispensing fees in Sec.  
423.100 of our final rule consistent with Option 1.
    Although we recognize that Options 2 or 3 would eliminate current 
gaps in coverage relative to home infused drugs, such approaches would 
also extend the definition of dispensing fee beyond the

[[Page 4235]]

mere transfer of possession of the drug, and certainly beyond what we 
believe to have been Congressional intent regarding the scope of an 
outpatient drug benefit. The inclusion of professional services in the 
definition of dispensing fees is also problematic given the potential 
for 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.
    We believe Option 1 represents the best reading of the statute, 
since it will limit dispensing fees to a transfer of possession of the 
drug and will not include any fees associated with administering the 
drug. We also note that where the Congress wished for us to include the 
cost of supplies under Part D, it specifically directed us to do so 
(for example, by requiring that the supplies associated with the 
injection of insulin be included in the definition of the term Part D 
drug).
    Even though some commenters suggest that the supplies, equipment, 
and services associated with Options 2 and 3 could be paid for through 
a separate fee or additional compensation to home infusion and other 
providers, we caution that such separate administrative fees would not 
be allowed under Part D. Other than medication therapy management 
programs, as described in section 1860D-4(c)(2) of the Act, we do not 
expect medical or clinical services to be included in administrative 
fees. Please refer to the subpart G preamble discussion of the types of 
costs that Part D plans may include as administrative costs in their 
bids. Thus, the costs for professional services associated with home 
infusion could not be included in the premium bid. In addition, 
professional services, including those associated with home infusion, 
may not be included in Part D plan supplemental coverage, given that 
section 1860D-2(a)(2) of the Act defines supplemental coverage as 
consisting of: (1) a reduction in the deductible, coinsurance 
percentage, initial coverage limit, or any combination thereof; or (2) 
coverage of drugs that are excluded from the definition of a ``Part D 
drug'' because of the application of section 1927(d)(2) or (3) of the 
Act.
    Provided that Part D plans include only those activities allowed 
under our definition of dispensing fees in the dispensing fees 
negotiated with network pharmacies and offer standard contracting terms 
and conditions to all pharmacies, we note that Part D plans have the 
flexibility to vary the actual dispensing fee paid to pharmacies. For 
example, Part D plans may need to increase the dispensing fees paid to 
rural or long-term care pharmacies in order to obtain their 
participation in networks and meet the pharmacy access standards.
    As detailed elsewhere in this preamble, Part D plans will be 
required to ensure adequate access to home infusion services as part of 
their pharmacy network access standards. Thus, enrollees will have 
access to home infusion services, though they may have to pay for 
supplies, equipment, and professional services out-of-pocket 
particularly if they are enrolled in a Part D plan and have no source 
of supplemental coverage.
    As we noted in the proposed rule, our definition of dispensing fees 
under Part D will 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.
    Comment: Some commenters did not support a particular option for 
defining the term ``dispensing fees,'' but were more concerned about 
including certain activities in the definition of dispensing fees (for 
example, staff, equipment, automation, facilities overhead, time 
inputting information into a computer, resolving problems with PBMs and 
prescribing practitioners, counseling the patient, waste disposal, 
turning the medication over to the patient, particularly when it 
involved home delivery, and actually packaging the medications). Many 
of these commenters noted that pharmacists merit a small profit and 
that dispensing fees should not be specifically designed simply to meet 
costs. Others felt that terms used in the proposed options were too 
vague. Specifically, they wanted the meaning of dispensing to be 
defined to include the costs they outlined. They also wanted to account 
for the level of complexity and include clear definitions of 
reconstituting, mixing and compounding drugs, which they believe 
involve very different equipment, skill and time resources.
    Response: We have defined the term ``dispensing fees'' in Sec.  
423.100 of our final rule to include reasonable pharmacy costs 
associated with ensuring that possession of the appropriate covered 
Part D drug is transferred to a Part D enrollee. We specify that 
reasonable pharmacy costs may include costs associated with a 
pharmacist's time in checking the computer for information about an 
individual's coverage, performing quality assurance activities 
consistent with Sec.  423.153(c)(2) of our final rule, measurement or 
mixing of the covered Part D drug, filling the container, physically 
providing the completed prescription to the Part D enrollee, delivery 
costs, special packaging costs, and overhead costs associated with 
maintaining the facility and equipment necessary to operate the 
pharmacy. We clarify that in using the term ``reasonable'' pharmacy 
costs, our intent is to convey that such costs be appropriate for the 
typical beneficiary in that pharmacy setting. We believe that our 
definition clarifies commenters' concerns about the inclusion of some 
overhead costs, time spent inputting information into a computer and 
resolving problems with PBMs and prescribing practitioners, 
transferring the medication to the patient, and special packaging 
costs.
    We clarify that reasonable delivery costs include only those costs 
appropriate for the typical beneficiary in a particular pharmacy 
setting. Thus, while it would be appropriate for Part D plans to 
reimburse long-term care, mail-order, and home infusion pharmacies for 
home delivery costs via the dispensing fee, this would not be the case 
for retail pharmacies (where the term ``delivery'' would be limited to 
the transfer of a covered Part D drug from the pharmacist to the 
patient at the point of sale) because the typical retail customer does 
not require home delivery. While retail pharmacies may offer home 
delivery services, Part D plans may not reimburse those pharmacies for 
these costs, and the delivery cost must be borne by the beneficiary.
    As concerns patient counseling, dispensing fees for covered Part D 
drugs may include pharmacy costs associated with quality assurance 
activities consistent with Sec.  423.153(c)(2) of our final rule. 
Section 423.153(c)(1) of our final rule requires Part D plans to 
represent that pharmacists in their network pharmacies comply with 
minimum standards for pharmacy practice established by the States. 
Since almost all States have established requirements for pharmacy 
practice

[[Page 4236]]

related to counseling, we believe that the offer of counseling that 
pharmacists currently provide their customers will continue consistent 
with current pharmacy practice in compliance with State requirements. 
.Any pharmacist counseling activities in addition to those established 
by the States will have to be negotiated and paid for separately under 
Part D plans' medication therapy management programs (discussed in 
greater detail elsewhere in this preamble).
    As provided in section 1860D-11(i) of the Act, we cannot intervene 
in negotiations between pharmacies and Part D plans. Thus, the extent 
to which Part D plans reimburse pharmacies for their entire dispensing 
costs (or even in excess of their dispensing costs) will depend on the 
outcome of those negotiations. In addition, we clarify that we expect 
Part D plans and pharmacies to account for pharmacy profit as part of 
negotiated prices--either as part of overhead costs accounted for in 
dispensing fees or in the reimbursement rates for ingredient costs 
negotiated with pharmacies.
    We clarify that we interpret the term ``mixing'' as used in our 
definition of the term ``dispensing fees'' to encompass reconstituting 
and compounding of covered Part D drugs. Further, we note that Part D 
plans have the flexibility to pay differential dispensing fees to 
pharmacies based on higher labor costs--for example, for a compounded 
product relative to a non-compounded covered Part D drug. Plans could 
also used differential dispensing fees to encourage the use of generics 
over brand-name drugs as appropriate.
    Comment: Another commenter wanted dispensing fees for non-profit 
entities to reflect their preferred acquisition costs, arguing that 
without this, Part D would be assisting tax-exempt non-profit 
competitors of small business pharmacies.
    Response: As mentioned previously, we have defined the term 
``dispensing fees'' in Sec.  423.100 of our final rule to include 
pharmacy costs associated with ensuring that possession of the 
appropriate covered Part D drug is transferred to a Part D enrollee. 
Plans may wish to consider non-profit entities' preferred acquisition 
costs in the ingredient cost reimbursement negotiated with those 
entities as part of negotiated prices on covered Part D drugs. However, 
it is unclear to us why dispensing fees should vary among non-profit 
and for-profit pharmacies based on differences in acquisition costs.
    Comment: Several commenters emphasized the need to provide 
dispensing fees tailored to long term care pharmacies. They focused on 
the need to reimburse long-term care pharmacists for 24-hour care, the 
specialized packaging that is required, emergency preparation and 
delivery of medications, and the distinct type of medications typically 
prepared and delivered.
    Response: The definition of dispensing fee in Sec.  423.100 of our 
final rule encompasses some of the services--for example, specialized 
packaging, delivery, and preparation of medications (not including the 
actual administration of those medications)--typically provided by 
long-term care pharmacies. Additional long-term care pharmacy services 
could be reimbursed via medication therapy management programs 
established by Part D plans for institutionalized Part D enrollees.
    Comment: Some commenters emphasized the need for the dispensing fee 
to cover all of the costs involved in providing a medication.
    Response: As provided in section 1860D-11(i) of the Act, we cannot 
intervene in negotiations between pharmacies and Part D plans. Thus, 
the extent to which Part D plans reimburse pharmacies for their entire 
dispensing costs will depend on the outcome of those negotiations. 
Given Part D plans' need to secure a network of providers that meets 
our access standards, we believe that Part D plans will have every 
incentive to adequately reimburse pharmacies via dispensing fees for 
the costs involved with providing covered Part D drugs to Part D 
enrollees.
c. Long-Term Care Facility
    We requested comments regarding the definition of the term long-
term care facility in Sec.  423.100 of our proposed rule, which we 
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 were particularly interested to explore whether 
we should include in the definition facilities other than skilled 
nursing and nursing facilities--particularly intermediate care 
facilities for the mentally retarded (ICFs/MR), described in Sec.  
440.150, and other types of facilities in which full-benefit dual 
eligible individuals may reside and which may exclusively contract with 
long-term care pharmacies in a manner similar to current practice in 
skilled nursing and nursing facilities.
    Comment: We received a number of comments urging us to expand the 
definition of the term ``long-term care facility'' in the proposed 
rule. Some of the suggested additions include ICFs/MR; assisted living 
facilities; other facilities recognized by State law as eligible for 
payment under Sections 1915(c) (Home and Community Based waivers), 
1616(e), and 1115 of the Act; group homes for the developmentally 
disabled; and other forms of congregate living arrangements regulated 
by the States. Some commenters suggested that many of these facilities 
operate under exclusive contracts with long-term care pharmacies. Other 
commenters urged us not to make the presence of exclusive contracts 
with long-term care pharmacies the only criterion for defining 
congregate living arrangements as long-term care facilities, as these 
beneficiaries could benefit significantly from subsidies for low-income 
institutionalized Part D enrollees.
    Response: We have expanded the definition of the term ``long-term 
care facility'' in Sec.  423.100 of our final rule to encompass not 
only skilled nursing facilities, as defined in section 1819(a) of the 
Act, but also any medical institution or nursing facility for which 
payment is made for institutionalized individuals under Medicaid, as 
defined in section 1902(q)(1)(B) of the Act. We note that we have 
eliminated the reference to nursing facilities as defined in section 
1919(a) of the Act, as such facilities are captured as nursing 
facilities for which payment is made for institutionalized individuals 
under Medicaid. Such an expansion would include ICFs/MR and inpatient 
psychiatric hospitals along with skilled nursing and nursing facilities 
in the definition of a long-term care facility, provided those 
facilities meet the requirements of a medical institution that receives 
Medicaid payments for institutionalized individuals under section 
1902(q)(1)(B) of the Act. We do not believe that the definition of term 
long-term care facility should be expanded to include other facilities 
recognized by State law but not by Medicare or Medicaid, regardless of 
whether some of these facilities contract on an exclusive basis with 
long-term care pharmacies. Furthermore, we do not believe that our 
definitions of terms associated with institutionalized Part D enrollees 
should conflict. Our revised definition of the term ``long-term care 
facility'' is consistent with the definition of ``institutionalized'' 
in subpart P of this rule and will allow for residents of a number of 
institutional settings to benefit from the special rules for access to 
covered Part D drugs established for residents of long-term care 
facilities. 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 Part 
D sponsors only those entities proposing to offer qualified 
prescription drug

[[Page 4237]]

coverage in accordance with our requirements. As provided in section 
1860D-2(a)(1) of the Act, qualified prescription drug coverage may 
consist of either standard prescription drug coverage or alternative 
prescription drug coverage.
a. Standard Prescription Drug Coverage
    As provided under section 1860D-2(b) of the Act, ``standard 
prescription drug coverage'' consists 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 will be $250, 
the initial coverage limit will be $2,250, and the out-of-pocket 
threshold will be $3,600.
    Once a Part D enrollee reached the annual out-of-pocket threshold, 
in 2006, his or her nominal cost-sharing will 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.)
    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, these amounts will be increased over the previous year's 
amounts by the annual percentage increase in average per capita 
aggregate expenditures for Part D drugs for the 12-month period ending 
in July of the previous year. We requested comments regarding the 
methods and data sources we might use to determine the annual 
percentage increase in the first several years of the Part D program.

                                                    Table C-1
                              Standard Prescription Drug Coverage Benefits for 2006
----------------------------------------------------------------------------------------------------------------
                                         Cost-Sharing     Beneficiary Out-     Plan Payment
                                          Percentage      of-Pocket Costs       Percentage        Plan Payment
----------------------------------------------------------------------------------------------------------------
Annual Deductible ($0-$250 in               100 percent               $250          0 percent                 $0
 spending on covered Part D drugs)
----------------------------------------------------------------------------------------------------------------
Initial Benefit ($250.01-$2,250 in        25 percent\1\            $500\2\      75 percent\1\             $1,500
 spending on covered Part D drugs)
----------------------------------------------------------------------------------------------------------------
No coverage of costs ($2,250.01-            100 percent          $2,850\3\          0 percent                 $0
 $5,100\3\ in spending on covered
 Part D drugs)
----------------------------------------------------------------------------------------------------------------
Catastrophic Coverage (after the        The greater of:                 --         95 percent                 --
 enrollee has incurred out-of-pocket  (1) 5 percent; or
 costs on covered Part D drugs             (2) $2 for a
 greater than $3,600; this is                generic or
 generally equivalent to $5100\3\ in          preferred
 covered Part D drug spending)          multiple source
                                      drug/$5 for other
                                              drugs.\1\
----------------------------------------------------------------------------------------------------------------
\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 or her plan by a group health plan, insurance or otherwise,
  or other third party arrangement.

    In our proposed rule, we 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.'' Section 1860D-
2(b)(2)(A)(ii) of the Act provides that Part D sponsors offering 
actuarially equivalent standard prescription drug coverage will be 
permitted to substitute cost-sharing requirements (including tiered 
structures tied to Part D plan formularies and particular pharmacies in 
a Part D plan's network) for costs above the annual deductible and up 
to the initial coverage limit, provided that those alternative cost-
sharing requirements are 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.
    Based on our interpretation of section 1860D-2(b)(5) of the Act, we 
also proposed allowing Part D plans offering actuarially equivalent 
standard coverage to establish cost-sharing of an amount that is 
actuarially equivalent to the expected cost-sharing above the out-of-
pocket threshold. We proposed 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 the greater of 5 percent coinsurance or $2/$5 
copayments. We noted that any such alternative cost-sharing 
arrangements would be reviewed, along with the rest of a Part D plan's 
benefit design, to ensure that they do not discourage enrollment by 
certain Part D eligible individuals.
    Except as otherwise provided below, the final rule adopts the 
criteria for standard prescription drug coverage set

[[Page 4238]]

forth in Sec.  423.104(e) of the proposed rule.
    Comment: Several commenters felt that the benefit structure 
established in our proposed regulations was too complex and should be 
simplified to minimize beneficiary confusion.
    Response: We do not have the statutory authority to simplify the 
benefit further, as suggested by this commenter. The MMA provides 
private plans with a great deal of flexibility to vary their benefit 
structures consistent with Congressional intent to ensure that Medicare 
beneficiaries have choices regarding outpatient prescription drug 
coverage under Part D that fit their particular needs and minimize 
beneficiary and Medicare costs.
    Comment: One commenter asked how cross-licensed drugs will be 
classified as generics or as brands for the purpose of cost-sharing. 
The commenter also asks what the co-payments would be for multiple 
source drugs that are ordered ``dispensed as written.''
    Response: The amount of cost-sharing, and any variations in cost-
sharing based on brands, generics, or other classifications will be 
determined by Part D plans.
    Comment: Two commenters suggested alternative data sources to use 
in determining the annual percentage increase in the first several 
years of the Part D program. The first commenter recommended two data 
sources to use for years 2007 and 2008--the annual estimates of 
prescription drug expenditures in the CMS National Health Accounts data 
(based on census data and sample surveys of private retail pharmacy 
sales) and employer retiree health plan data (released by Pharmacy 
Benefit Managers and benefit consulting firms). Either of these sources 
of data could be used as a starting point, but should be adjusted to 
account for any difference in trend for Medicare-eligible individuals 
compared to the overall prescription trend. In addition, the trend in 
Part D will likely differ from the overall prescription drug trend due 
to the large volume negotiating power which could control the trend or 
allow manufacturers leeway to raise drug prices. FEHBP experience may 
be useful in accounting for such large volume influences in Part D. 
This commenter also suggested using our Office of the Actuary (OACT) 
procedure in place for Medicare Advantage to make coverage limit 
adjustments the following year for over- or under-stated trends. The 
commenter also noted that the Medicare Current Beneficiary Survey 
(MCBS) and the Medicare 5 percent sample are not available in a timely 
enough fashion to be useful data sources.
    Another commenter recommended that we use the OACT spending growth 
projections that will underlie the Fiscal Year (FY) 2007 President's 
Budget Medicare baseline that will be published in February 2006. We 
could use the March 2006 OACT Medicare baseline estimates as a 
reference check on the OACT projections. OACT and the Congressional 
Budget Office (CBO) are preferred because they use the latest available 
empirical data based on MCBS, these data are the basis for the Medicare 
Trustees' Reports, and the data are widely accepted. In addition, this 
commenter recommended that OACT use the Consumer Price Index for 
Prescription Drugs and Medical Supplies (CPI-PD), issued in a timely 
fashion by the Bureau of Labor Statistics (BLS), as the basis for 
projecting the price inflation component of per capita Part D spending 
growth. This commenter thought that utilization growth should be based 
primarily on the analysis of the latest available MCBS data.
    Response: We appreciate the ideas suggested by the commenters and 
will take these recommendations into consideration as we develop our 
strategy for determining the annual percentage increase in the first 
several years of the Part D drug benefit program. We will provide 
further detail regarding the sources of data to be used and how the 
annual percentage increase will be determined via operational guidance 
to Part D sponsors prior to the deadline for bid submissions.
b. Incurred Costs/TrOOP Limit
    According to section 1860D-2(b)(4)(C) of the Act, beneficiary costs 
for Part D drugs are only considered incurred (for purposes of 
applicability toward beneficiary spending against the annual out-of-
pocket limit) if they are incurred--
    (1) 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) 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 SPAP defined in Sec.  423.454 of 
the proposed rule; and
    (3) On covered Part D drugs (in other words, Part D drugs that are 
either included in a Part D plan's formulary or treated as being 
included in a Part D plan's formulary as a result of a coverage 
determination, redetermination, or appeal under Sec.  423.566, Sec.  
423.580, Sec.  423.600, Sec.  423.610, Sec.  423.620, and Sec.  423.630 
of our final rule).
    We also proposed that beneficiary costs incurred under the 
following circumstances count as incurred costs (with Part D plans 
explicitly accounting for such price differentials in the actuarial 
valuation of their coinsurance in their bids): (1) 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; 
and (2) any differential between an out-of-network pharmacy's usual and 
customary price for a covered Part D drug purchased in accordance with 
the out-of-network access rules and the plan allowance for that covered 
Part D drug. As further explained below, because we have clarified that 
the differential for a 90-day supply dispensed at a retail network 
pharmacy will generally be a differential in cost-sharing and not 
negotiated price (in other words, the difference in cost sharing for 
the 90-day supply between the retail and mail-order network 
pharmacies), we have modified the definition of incurred costs in Sec.  
423.100.
    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, will count as 
incurred, or TrOOP costs. This provision thus creates a distinction 
between all enrollee out-of-pocket expenditures and those that are 
counted as TrOOP expenditures.
    Except as otherwise provided below, the final rule adopts the rules 
applicable to incurred costs set forth in Sec.  423.100 of our proposed 
rule.
    Comment: Several commenters urged us to count all beneficiary 
spending on Part D drugs whether on a Part D plan's formulary or not 
toward TrOOP.
    Response: Section 1860D-2(b)(4)(C)(i) of the Act specifically 
excludes from the definition of the term ``incurred costs'' those costs 
incurred for Part D drugs that are not included (or treated as being 
included on a formulary as a result of a coverage determination, 
redetermination, appeal, or exception) on a Part D plan's formulary. 
Therefore, we do not have the statutory authority to permit the 
payments to count toward a Part D enrollees' TrOOP limit.

[[Page 4239]]

    Comment: Many commenters supported our proposal that beneficiary 
costs incurred as a result of 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 count as an incurred 
costs for the purposes of TrOOP. Only one commenter opposed allowing 
such differentials to count toward TrOOP.
    Many commenters supported our proposal that beneficiary costs 
incurred as a result of any differential between an out-of-network 
pharmacy's usual and customary price for a covered Part D drug 
purchased in accordance with the out-of-network access rules and the 
plan allowance for that covered Part D drug count as an incurred costs 
for the purposes of TrOOP. Only one commenter specifically opposed our 
proposal, stating that if the differential were allowed to count toward 
TrOOP, the use of retail pharmacies would not be cost-neutral to Part D 
plans because individuals who use retail pharmacies would reach the 
out-of-pocket limit sooner.
    Response: We agree with the majority of commenters that it is 
appropriate to allow beneficiary payment differentials to count toward 
TrOOP in cases in which a beneficiary accesses a covered Part D drug 
consistent with the out-of-network policy in Sec.  423.124(a) of our 
final rule.
    Section 423.120(a)(6) of our proposed rule provided that a Part D 
enrollee who obtained a 90-day supply of a covered Part D drug at a 
network pharmacy that is a retail pharmacy rather than a network mail-
order pharmacy would be required to pay for any differential in the 
negotiated price for the covered Part D drug. However, consistent with 
section 1860D-4(b)(1)(D) of the Act, which requires that the Part D 
enrollee pay for ``any differential in charge'' when accessing a 90-day 
supply of a covered Part D drug at a network retail pharmacy instead of 
a network mail-order pharmacy, we have clarified in Sec.  
423.120(b)(10) of our final rule that the beneficiary is not 
responsible for the difference in negotiated price but, rather, for any 
higher cost-sharing associated with purchasing the drug at a retail 
pharmacy rather that a mail-order pharmacy. Any such difference in 
cost-sharing would therefore automatically count toward a beneficiary's 
TrOOP expenditures, since the covered Part D drug in question is being 
purchased at a network pharmacy.
    Comment: Several commenters asked us to define the term ``person'' 
such that a family member can pay for enrollees' cost-sharing on their 
behalf.
    Response: Section 1860D-2(B)(4)(C)(ii) of the Act specifically 
mentions a family member as an example of a person who may pay cost-
sharing on behalf of a beneficiary. We clarify that our proposed rule 
defined the term ``person'' to include a ``natural person.'' Such a 
definition of the term ``person'' thus permits other individuals, such 
as family members, to pay for covered Part D drug cost-sharing on 
behalf of Part D enrollees. We have therefore retained this definition 
of the term ``person'' in Sec.  423.100 of our final rule.
    Comments: Several commenters supported our proposed definition of 
the term ``person,'' which would allow financial assistance for 
beneficiary cost-sharing rendered by ``bona fide'' charities to count 
toward enrollee's out-of-pocket threshold. Some commenters requested 
that we clarify what constitutes a ``bona fide'' charity. Another 
commenter objected to Part D plan member financial assistance programs 
being treated differently from third-party charities for purposes of 
TrOOP.
    Response: Our broad definition of the term ``person'' captures not 
only ``bona fide'' charities, but other charitable organizations as 
well. We note that any arrangement in accordance to which a charitable 
organization pays a Medicare beneficiary's cost-sharing obligations 
must comply with all applicable fraud and abuse laws, including, where 
applicable, the anti-kickback statute at section 1128B(b) of the Act, 
as well as the civil monetary penalty provision prohibiting inducements 
to beneficiaries at section 1128A(a)(5) of the Act. Thus, even if a 
charity is not a bona fide charity for purposes of Federal fraud and 
abuse law, any drug payments it makes on behalf of Part D enrollees 
would count toward TrOOP unless otherwise excluded as payments by a 
group health plan, insurance or otherwise, or similar third party 
arrangement. Charities that are established, maintained, or otherwise 
controlled by an employer or union will likely fall under our 
definition of ``group health plan,'' and any benefits supplementing 
Part D benefits that they provide will therefore be excluded from TrOOP 
on this basis.
    Comment: We noted in the proposed rule that we were considering 
whether assistance in paying enrollees' out-of-pocket cost-sharing 
obligations provided through prescription drug patient assistance 
programs sponsored by pharmaceutical manufacturers would be allowed 
under 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 received a number of comments requesting clarification regarding 
whether assistance in paying enrollees' out-of-pocket cost-sharing 
obligations provided through pharmaceutical manufacturer-sponsored 
patient assistance programs (PAPs) would be permissible under Federal 
fraud and abuse laws and request that we work with the OIG to develop 
guidelines. Some commenters believe that financial assistance and 
product donations provided by PAPs should be allowed to count toward 
beneficiaries' TrOOP expenditures. Some of these commenters recommended 
that product donations be counted as incurred costs and valued at the 
price beneficiaries would have paid at a network pharmacy (the 
negotiated price). One commenter recommended that we allow 
manufacturers to provide funds to Part D plans so that Part D plans can 
apply appropriate criteria and make payments on behalf of 
manufacturers. Another commenter cautions us that without a change in 
the current interpretation of Federal fraud and abuse laws preventing 
PAPs from providing cost-sharing assistance, many low-income 
beneficiaries may avoid filling scripts, resort to splitting pills, and 
interrupt critical drug therapy.
    Response: Regardless of whether a manufacturer patient assistance 
program is a bona fide charity for the purpose of Federal fraud and 
abuse laws, any drug payments it makes on behalf of Part D enrollees 
would count toward TrOOP unless these organizations qualify as group 
health plans, insurance or otherwise, or similar third-party payment 
arrangements. However, any arrangements pursuant to which a charitable 
organization pays a Medicare beneficiary's cost-sharing obligations 
must comply with Federal fraud and abuse laws, where applicable, 
including the anti-kickback statute at section 1128(b) of the Act, as 
well as the civil monetary penalty provision prohibiting inducements to 
beneficiaries at section 1128A(a)(5) of the Act.
    A related issue although it is not mentioned in the proposed rule 
is whether pharmacies can waive or reduce Part D cost-sharing 
obligations given Federal fraud and abuse laws and, if they can, 
whether such waived or reduced cost-sharing should count toward a 
beneficiary's TrOOP limit. Although we did not receive comments on this 
matter, we would like to clarify our policy. Under the new exception to

[[Page 4240]]

the anti-kickback statute added by section 101(e) of the MMA, 
pharmacies are permitted to waive or reduce cost-sharing amounts 
provided they do so in an unadvertised, non-routine manner after 
determining that the beneficiary is financially needy or after failing 
to collect the cost-sharing amount despite reasonable efforts, as set 
forth in section 1128A(i)(6)(a) of the Act. In addition, a pharmacy may 
waive or reduce a beneficiary's Part D cost-sharing without regard to 
these standards for beneficiaries enrolled in a Part D plan eligible 
for the low-income subsidy under section 1860D-14 of the Act, provided 
the pharmacy has not advertised that the waivers or reductions of cost-
sharing are available. Depending on the circumstances, pharmacies that 
waive or reduce cost-sharing amounts for covered Part D drugs without 
following the requirements of the pharmacy waiver safe harbor could be 
subject to civil monetary penalties and exclusion from participating in 
Federal health care programs, as well as criminal fines and 
imprisonment under the anti-kickback statute.
    We will allow waivers or reductions of Part D cost-sharing by 
pharmacies to count toward TrOOP. Not allowing such waived or reduced 
cost-sharing to count toward TrOOP would make it more burdensome for 
Part D plans given the need to track down whether cost-sharing was 
actually incurred by a beneficiary rather than a pharmacy. Moreover, we 
believe this option is consistent both with the definition of 
``person'' in the proposed rule (making waiver or reduction of cost-
sharing applicable toward an enrollee's incurred costs), and with 
Congressional intent in amending the anti-kickback statute to provide 
for a pharmacy waiver safe harbor.
    Comment: Several commenters asked that coverage supplementing the 
benefits available under Part D coverage provided by various government 
programs be allowed to count as incurred costs for purposes of TrOOP. 
These government insurers and programs included Medicaid (using State-
only funds), Medicaid Section 1115 ``Pharmacy Plus'' waiver programs, 
Federally qualified health centers (FQHCs), the Department of Veterans 
Affairs health care program, and local or State indigent drug programs.
    In addition, a substantial number of commenters urged us to allow 
coverage that supplements the benefits available under Part D coverage 
that is provided by AIDS Drug Assistance Programs (ADAPs) funded under 
the Ryan White CARE Act to count as incurred costs. These commenters 
argued that ADAPs are an integral component of the safety net for HIV/
AIDS patients because they fill coverage gaps in public and private 
insurance for critical HIV/AIDS drug treatments. They argue that if 
ADAP supplemental coverage payments do not count as incurred costs, 
ADAPs will have little incentive to coordinate coverage with Part D 
plans, particularly if Part D plans impose user fees on ADAPs. Many of 
these commenters also urged us to define ADAPs as SPAPs so that their 
supplemental coverage will be considered incurred costs for the 
purposes of TrOOP.
    Several commenters also objected to the inclusion of IHS and Indian 
Tribes and Tribal organizations, and urban Indian organizations 
(collectively I/T/U) facilities in the definition of ``insurance or 
otherwise'' in Sec.  423.100 of our proposed rule. Since IHS 
beneficiaries--by custom and regulation--may not be charged any cost-
sharing, I/T/U facilities must provide supplemental coverage for all 
cost-sharing that would have been assessed by a Part D plan. For this 
reason, the commenters argue, our proposed regulations essentially 
ensure that most IHS beneficiaries will never incur costs above the 
out-of-pocket threshold and thus subject AI/AN enrollees and the I/T/U 
pharmacies that serve them to severe financial penalties in comparison 
to non-AI/ANs and non-I/T/U pharmacies. I/T/U facilities will have to 
continue to use their limited appropriated funds to pay the 
prescription drug costs of AI/AN beneficiaries. Commenters further 
argue that the proposed exclusion of financial assistance for cost-
sharing provided by I/T/U facilities is not required by the statute and 
is simply an interpretation of the term ``insurance or otherwise.'' 
Given the Federal government's obligation to provide health services to 
AI-ANs based on the government-to-government relationship between the 
United States and Tribes, these commenters argue that IHS and tribal 
health programs are not ``insurance or otherwise,'' but instead 
``persons'' given that I/T/U facilities are the functional equivalent 
of ``family members.'' We were also asked to clarify why supplemental 
coverage of deductible costs counts toward a beneficiary's deductible 
limit, but supplemental coverage of cost sharing above the deductible 
and initial coverage limit, does not count toward TrOOP.
    Response: Section 1860D-24(a)(1) of the Act extends the 
coordination of benefits provisions required for SPAPs to entities 
providing other prescription drug coverage--including Medicaid 
programs, Section 1115 waiver demonstrations, group health plans, 
Federal Employee Health Benefits Program (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.'' Section 1860D-24(b) of the 
Act defines includes among these entities providing other prescription 
drug coverage some government payers, which when coupled with section 
1860D-24(a)(2) of the Act, which specifically applies the TrOOP 
provisions at 1860D-2(b)(4)(D) of the Act to Rx plans suggests that the 
Congress intended for the term ``insurance or otherwise'' to include 
government benefit plans or programs that provide health care or pay 
the cost of covered Part D drugs. Although section 1860D-24(b) of the 
Act does not list all the government health care programs we consider 
to be ``insurance or otherwise,'' in the absence of a meaningful 
distinction between those entities specifically listed in section 
1860D-24(b)--Medicaid, SPAPs, TRICARE, and FEHBP--and other government 
health care programs, allowing payments from such other programs to 
count toward TrOOP would be arbitrary. Further, in giving the Secretary 
the authority to identify other entities providing other prescription 
drug coverage under section 1860D-24(b)(5) of the Act, the Congress 
contemplated that its list of entities providing other prescription 
drug coverage was not exhaustive.
    For additional clarification of this issue, we have split the 
definition of ``insurance or otherwise,'' in our proposed rule into two 
separate definitions--``insurance'' and ``or otherwise''--in our final 
rule. The term insurance (at Sec.  423.100 of our final rule) refers to 
a health plan that provides, or pays the cost of covered Part D drugs, 
including, but not limited to health insurance coverage, a MA plan, and 
a PACE organization. We note that our definition of ``insurance'' 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.
    We believe that the phrase ``or otherwise'' refers to government-
funded health programs. We have defined the term ``government-funded 
health programs'' at Sec.  423.100 of our final rule to mean any 
program established, maintained, or funded--in whole or in part--by the 
Federal government, the

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governments of States or political subdivisions of States, or any 
agency or instrumentality of these governments which uses public funds 
in whole or in part to provide to, or pay on behalf of, an individual 
the cost of Part D drugs. Thus, insurance or otherwise encompasses not 
just traditional health insurance coverage that is not considered a 
group health plan, but also government programs and entities (including 
the Department of Veterans Affairs (VA), IHS, Federally Qualified 
Health Centers (FQHCs), Department of Labor (DOL) Federal Workers' 
Compensation Program), government insurers (including Medicaid, 
Medicaid 1115 demonstrations, and the State Children's Health Insurance 
Program (SCHIP)), and government-sponsored funds (including 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).
    We believe we have defined these terms consistent with the 
Congress's intent of reducing incentives for current employers, other 
insurers, and government programs to reduce their current levels of 
coverage. 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 coverage that supplements the 
benefits available under Part D coverage that are provided to 
beneficiaries by Medicaid, Medicaid Section 1115 ``Pharmacy Plus'' 
waiver programs, the VA health care program, the IHS, ADAP programs, 
and local or State indigent drug programs would not count as an 
incurred cost for purposes of TrOOP. We note, however, that to the 
extent that a State provides assistance with covered Part D costs to 
Part D enrollees with State-only funds and meets the requirements of a 
State Pharmaceutical Assistance Program as specified in Sec.  
423.464(e)(1), such assistance does count as an incurred cost as 
provided by section 1860D-2(b)(4)(C)(ii) of the Act. However, if an 
entity providing for or paying the cost of drugs receives a government 
grant none of which is used to pay for drugs (for example, a low-income 
housing grant)--such an entity is not considered a government-funded 
program. On the other hand, if an entity pays for drugs using a mix of 
private and public funds, the entity is considered a government-funded 
health program, and all of its drug spending is excluded from TrOOP.
    As mentioned above, Pharmacy Plus program costs, including State 
spending, cannot be counted towards TrOOP because Pharmacy Plus 
programs are funded under Medicaid and therefore do not qualify as 
SPAPs. For this reason, we believe that, generally, States will be 
better off and will realize savings if they restructure their 
prescription drug programs as SPAPs, rather than continuing their 
Pharmacy Plus programs. Their savings could be used in a variety of 
ways, such as directly paying for their enrollees' Part D premiums, 
wrapping around the Part D benefit by paying for the required cost-
sharing, or paying Part D plans for supplemental benefits.
    According to IHS estimates, we anticipate that a large proportion 
of AI/ANs will be eligible for low-income subsidies under Part D, which 
should significantly limit the financial impact on I/T/U facilities. 
For those AI/ANs not eligible for the low-income subsidies and enrolled 
in a Part D plan, the IHS will still obtain some benefit from Part D 
coverage because I/T/U facilities participating in Part D plan networks 
will be reimbursed for 75 percent of spending (on average) between the 
deductible and the initial coverage limit. Moreover, AI/AN enrollees 
will experience no difference in the way they obtain their prescription 
drugs to the extent that they use I/T/U pharmacies or IHS-contracted 
pharmacies.
    ADAPs cannot be considered SPAPs because these programs receive 
Federal funding. As discussed in subpart J, we have interpreted section 
1860D-23(b) of the Act, which requires SPAPs to be State programs that 
provide financial assistance for the purchase of provision of 
prescription drugs, to mean that an SPAP must provide such assistance 
with State funds. Therefore, the definition of the term SPAP excludes 
any program in which program funding is from Federal grants, awards, 
contracts, entitlement programs, or other Federal sources of funding 
(though we clarify that this does not exclude some Federal 
administrative funding or incidental Federal monies). Since ADAPs 
receive Federal funding, they cannot be defined as SPAPs under Sec.  
423.454 of our final rule. However, according to HRSA estimates, we 
anticipate that a substantial majority of ADAP enrollees will qualify 
for low-income subsidies. For those ADAP enrollees who do not receive a 
full or partial subsidy, we estimate that the Part D benefit would pay 
75 percent, on average, of an enrollee's covered Part D drug 
expenditures between the deductible and initial coverage limit. To 
ensure coordination of benefits for the HIV/AIDS and population, as 
well as to eliminate any barriers to enrolling in Part D benefits, the 
ADAP program may wish to pay for their beneficiaries' premiums to 
eliminate any barriers to Part D benefits.
    Per several commenters' request, we also wish to clarify that 
section 1860D-2(b)(4)(C) of the Act defines the term ``incurred costs'' 
only for the out-of-pocket threshold. Thus, the fact that coverage that 
supplements the benefits available under Part D coverage that is 
provided by certain entities is excluded from the definition of 
incurred costs for purposes of TrOOP has no bearing on counting that 
supplemental coverage against the deductible. In other words, ADAPs, 
IHS, and other programs providing coverage that supplements the 
benefits provided under Part D may subsidize costs incurred against a 
Part D enrollee's deductible for those patients unable to afford these 
costs. The provision of the supplemental coverage will not affect an 
enrollee's ability to satisfy the deductible and therefore qualify for 
reduced cost-sharing between the deductible and the initial coverage 
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.
    Comment: We requested comments regarding the treatment of health 
savings account (HSAs), flexible savings arrangements (FSAs), health 
reimbursement arrangements (HRAs), and medical savings accounts (MSAs) 
vis-[agrave]-vis our definitions of ``group health plan,'' ``insurance 
or otherwise,'' and ``third party payment arrangements.'' Many 
commenters suggested that HSAs, FSAs, MSAs, and HRAs be excluded from 
our proposed definition of ``group health plan'' such that any 
distributions used by Part D enrollees to pay out-of-pocket costs 
associated with cost-sharing for covered Part D drugs are allowed to 
count as incurred costs. These commenters agreed that these funds are 
analogous to beneficiaries' bank accounts. Some of these commenters 
asked that we specify that payment of out-of-pocket expenses via these 
accounts count toward TrOOP only when such accounts are bona fide 
arrangements set up in accordance with IRS rules and guidance, such 
funds are not limited to paying prescription drug expenses, and 
individuals have control over how the funds from these accounts are 
utilized. One commenter notes that any exemption of HSAs, FSAs, MSAs, 
and HRAs from our definition of ``group health plan'' should be written 
carefully to avoid circumvention of Medicare Secondary Payer (MSP) 
laws. Another

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commenter noted that from Part D plans' perspective, it makes the most 
sense administratively and operationally to allow funds from these 
accounts to count toward incurred costs because it will be difficult 
for them to identify and differentiate between different sources of 
enrollee funds and carve out the payments from TrOOP calculations. One 
commenter noted that HRAs present a more difficult case, since they are 
by definition employer-funded only. However, this commenter noted that, 
from an administrative perspective, it may be difficult to distinguish 
between HRAs and other types of personal health savings vehicles.
    In contrast, several commenters disagreed that HSAs and similar 
accounts should be exempted from our definition of ``group health 
plan.'' Some of these commenters believed that contributions from one 
type of employer-sponsored benefit should not receive differential 
treatment than other types, particularly when contributions from 
employer-sponsored group health coverage are not being counted as 
incurred costs. One commenter thought that we had no statutory 
authority to create a special rule to exempt HSAs from our definition 
of ``group health plan.'' This commenter was concerned about non-
employer sponsored HSAs, that these funds are not like bank accounts 
given the tax breaks associated with them, that allowing these funds to 
count toward TrOOP discriminates against retirees with employer-
sponsored drug coverage, and that we would create a substantial 
windfall and unjustified double taxpayer subsidy.
    Response: We agree with the majority of the commenters that HSAs, 
FSAs, and MSAs are essentially analogous to a beneficiary's bank 
account, and that distributions from these personal health savings 
vehicles should count as incurred costs for the purposes of the out-of-
pocket threshold. However, as one commenter noted, we believe that HRAs 
are fundamentally different from these personal health saving vehicles 
because they are required to be solely employer-funded. Although 
employers are permitted to contribute funds to HSAs, FSA, and MSAs and 
may administer the benefits associated with these accounts, employees 
are not foreclosed from contributing to these vehicles as they are 
under HRAs. Excluding FSAs, MSAs, and HSAs from the definitions of 
``insurance'' and ``group health plan'' for purposes of calculation of 
TrOOP expenditures will further our objective of encouraging 
beneficiaries to set aside their own money for drug expenses by 
allowing those funds to count toward enrollees' TrOOP expenditures. In 
order to clarify that distributions from HSAs, FSAs, and MSAs can be 
counted toward a Part D enrollee's incurred costs, we have revised the 
definitions in Sec.  423.100 of our final rule accordingly and added a 
definition of ``personal health savings vehicles'' that is limited to 
HSAs, FSAs, and Archer MSAs.
    We note that the term ``group health plan'' is used in reference to 
TrOOP, creditable coverage, and the retiree subsidy in our final rule, 
but that we do not define the term uniformly in our final rule. Section 
1860D-22(c) of the Act explicitly defines ``group health plan'' to 
include ERISA plans, which may include an FSA, MSA, and, in limited 
circumstances, an HSA. The reference to ``group health plan'' under the 
creditable coverage provisions in section 1860D-13(b)(4)(C) of the Act 
states that a group health plan includes a qualified retiree 
prescription drug plan as defined under section 1860D-22 of the Act, 
which is in turn based on the definition of ``group health plan'' under 
section 1860D-22(C) of the Act and thus may include an MSA or, in 
limited circumstances, an FSA or HSA. In contrast, the TrOOP provisions 
simply refer to a ``group health plan,'' without specifying what this 
term may include. Given that the statutory references to ``group health 
plan'' under the TrOOP and creditable coverage provisions use different 
language, and that the policies underlying these issues are different, 
we have adopted two different definitions of the term ``group health 
plan'': one with regard to the TrOOP provisions, and another with 
regard to the remaining provisions of Part D, including the creditable 
coverage and the retiree subsidy provisions. While the Congress 
specifically enumerated two types of coverage to be considered group 
health plans with regard to creditable coverage, the TrOOP provisions 
do not.
    We also note that the definition of a ``group health plan'' used to 
implement the Part D drug benefit will differ from the definition of 
``group health plan'' used by the Medicare Secondary Payer (MSP) 
program for recovery of Medicare payments. While both of our Part D 
definitions of ``group health plan'' are based on the ``ERISA'' 
definition set forth at 29 U.S.C. 1167(1), the MSP definition is taken 
from the Internal Revenue Service (IRS) definition of ``group health 
plan'' at 26 U.S.C. 5000(b)(1). Therefore, the definitions of ``group 
health plan'' in Sec.  423.100 and Sec.  423.4 of our final rule do not 
permit circumvention of the MSP laws since they will not apply in the 
MSP context.
b. Alternative Prescription Drug Coverage
    Section 1860D-2(c) of the Act provides that a Part D sponsor may 
offer an alternative prescription drug benefit design, provided that 
the Part D sponsor applies for and receives our approval for the 
proposed alternative. In order to receive approval to offer an 
alternative prescription drug benefit design, a Part D sponsor will 
have to meet the requirements related to actuarial equivalence 
described in section 1860D-2(c)(1) of the Act, and must use defined 
standard coverage (and not actuarially equivalent standard coverage) as 
a fixed point of comparison.
 Basic Alternative Coverage
    Beyond the required parameters for alternative coverage discussed 
above, we interpreted 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 refers to 
alternative coverage that is actuarially equivalent to defined standard 
prescription drug coverage. Enhanced alternative coverage refers to 
alternative coverage that exceeds defined standard coverage by offering 
supplemental benefits.
    Within the parameters for alternative prescription drug coverage 
described above, a Part D sponsor with a basic alternative prescription 
drug benefit design can theoretically--by combining features such as a 
reduction in the deductible, changes in cost-sharing, and a 
modification of the initial coverage limit--still maintain an actuarial 
value of coverage equal to defined standard prescription drug coverage.
 Enhanced Alternative Coverage
    Section 423.104(f) of our proposed rule permitted Part D sponsors 
to provide qualified prescription drug coverage that includes 
supplemental benefits. We referred to any Part D benefit package that 
includes supplemental benefits as ``enhanced alternative coverage.''
    Enhanced alternative coverage includes 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. These 
supplemental benefits will supplement basic prescription drug coverage, 
providing for a package of benefits that exceeds the actuarial value of 
defined standard coverage. Supplemental benefits can consist of:

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    + Reductions in cost-sharing that increase the actuarial value of 
the coverage beyond that of defined standard coverage; or
    + Coverage of drugs that are specifically excluded from the 
definition of Part D drugs under section 1860D-2(e)(2)(A) of the Act 
and Sec.  423.100 of our proposed rule.
    Under section 1860D-2(a)(2)(B) of the Act, 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 offers 
a prescription drug plan that provides only basic prescription drug 
coverage (which we defined as either standard prescription drug 
coverage or basic alternative coverage, with access to negotiated 
prices) in that same area.
    Similarly, as provided under section 1860D-21(a)(1)(A) of the Act, 
beginning on January 1, 2006, an MA organization cannot offer an MA 
coordinated care plan 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 of our proposed rule, required prescription drug coverage, for 
the purposes of an MA organization offering an MA-PD plan, included 
either: (1) basic prescription drug coverage; or (2) enhanced 
alternative coverage, provided there is no MA monthly supplemental 
beneficiary premium applied under the MA-PD plan. The enhanced 
alternative coverage could be provided without a monthly supplemental 
beneficiary premium only if a MA-PD 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 chooses to provide enhanced 
alternative coverage for no additional premium through the application 
of rebate dollars, the enhanced alternative coverage would constitute 
required coverage for the purposes of meeting the requirement in 
section 1860D-21(a)(1)(A) of the Act.
    As provided under section 1860D-21(a)(1)(B)(i) of the Act, an MA 
organization could not offer prescription drug coverage (other than 
that required under Parts A and B of Medicare) to enrollees of a 
medical savings account (MSA) plan. Under section 1860D-21(a)(1)(B)(ii) 
of the Act, 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.
    Given changes in Sec.  417.440(b) of our final rule (described in 
subpart T), we clarify in our final rule the requirements associated 
with the offering of enhanced alternative coverage by cost plans. As 
provided in Sec.  423.104(f)(4)(i) of our final rule, a cost plan that 
elects to offer qualified prescription drug coverage under Part D may 
offer enhanced alternative coverage only as an optional supplemental 
benefit (under Sec.  417.440(b)(2)(ii)), and only if the cost plan also 
offers basic prescription drug coverage.
    As provided in Sec.  423.104(f)(4)(ii) of our final rule, a cost 
plan that elects to offer Part D coverage as an optional supplemental 
benefit (under Sec.  417.440(b)(2)(ii)) may only do so if the coverage 
it offers consists of qualified prescription drug coverage. However, a 
cost plan that does not offer qualified prescription drug coverage may 
provide prescription drug coverage that is not qualified prescription 
drug coverage, and the requirements of Part D do not apply to the 
coverage.
    Except as otherwise provided below, the final rule adopts the rules 
of alternative coverage set forth in Sec.  423.104(f) and Sec.  
423.104(g) of our proposed rule.
    Comment: One commenter recommended that we issue regulations 
encouraging basic alternative coverage including optional drugs because 
it will offer beneficiaries a more comprehensive benefit package.
    Response: We do not have the statutory authority to allow basic 
alternative coverage to include drugs that are statutorily excluded 
from the definition of Part D drugs. Coverage of drugs otherwise 
excluded from the definition of Part D drug under section 1860D-
2(e)(2)(A) of the Act is considered a supplemental benefit as provided 
under section 1860D-2(a)(2) of the Act. As specified in Sec.  423.100 
of our proposed and final rules, basic alternative coverage must be 
actuarially equivalent to defined standard coverage and cannot include 
any supplemental benefits. The only way that Part D plans may provide 
supplemental benefits, to include coverage of drugs excluded from the 
definition of Part D drugs under section 1860-D(2)(e)(2)(A) of the Act, 
is by providing enhanced alternative coverage.
    Comment: One commenter sought clarification as to whether 
alternative coverage would be subject to the same kind of out-of-pocket 
cost limits and coverage thresholds instituted under standard 
prescription drug coverage.
    Response: In accordance with section 1860D-2(b)(A)(i)(I) of the 
Act, Part D plans offering enhanced alternative coverage may only 
reduce certain cost-sharing specifically, 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. Section 1860D-2(A)(i) does not permit Part D 
plans to offer enhanced alternative drug coverage consisting of a 
reduction of the out-of-pocket threshold under Sec.  423.104(d)(5)(iii) 
of our final rule. Section 1860D-2(c)(3) of the Act also requires that 
Part D plans offering alternative prescription drug coverage provide 
the same protection against high out-of-pocket expenditures as defined 
standard coverage. Thus, enhanced alternative coverage may fill in some 
of the coverage gaps in defined standard coverage, but it cannot affect 
the true out-of-pocket threshold described in Sec.  
423.104(d)(5)(B)(iii) of our final rule, which will be $3,600 in 2006. 
In other words, beneficiaries must still incur $3,600 (in 2006) in true 
out-of-pocket expenses before they can benefit from the Medicare 
catastrophic coverage cost-sharing amounts (the greater of 5 percent 
coinsurance or $2/$5 copayments), and before Part D plans are eligible 
to receive reinsurance subsidies from Medicare. As with actuarially 
equivalent standard coverage, Part D plans can provide an actuarially 
equivalent version of the coverage provided after the true out-of-
pocket threshold is met. In addition, enhanced alternative coverage can 
improve this coverage.
    Comment: Several commenters opposed the provisions of Sec.  
423.104(f) of our proposed rule and recommended that the final rule 
exclude provisions for enhanced alternative coverage. These commenters 
argue that this section exceeds the statutory authority supplied to the 
Secretary under the MMA and that allowing such Part D plans to be 
offered would make it impossible to make a valid comparison between 
Part D plans, thus making it more difficult for beneficiaries to choose 
a Part D plan.
    Response: We disagree with these commenters. Section 1860D-2(a)(2) 
of the Act provides that qualified prescription drug coverage may 
include supplemental prescription drug

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coverage consisting of: (1) 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), provided these reductions in cost-sharing 
increase the actuarial value of the benefits provided above the 
actuarial value of basic prescription drug coverage; or (2) coverage of 
drugs that are specifically excluded as Part D drugs under section 
1860D-2(e)(2)(A) of the Act. ``Enhanced alternative coverage'' is 
simply our term for qualified prescription drug coverage that includes 
these supplemental benefits specifically permitted by the statute. We 
understand commenters' concerns about beneficiaries' ability to compare 
Part D plan features given the benefit flexibility design accorded to 
Part D plans under the MMA and will work to ensure that our comparative 
information is as standardized and user friendly as possible.
c. Negotiated Prices
    Section 1860D-2(d)(1) of the Act requires that a Part D sponsor 
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 will 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 will 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.
    As required under section 1860D-2(d)(1)(C) of the Act, prices 
negotiated with manufacturers for covered Part D drugs by either (1) a 
Part D plan, or (2) a qualified retiree prescription drug plan for 
covered Part D drugs provided on behalf of Part D eligible individuals 
will not be taken into account in making best price determinations 
under the Medicaid program.
    Section Sec.  423.104(h)(3) of our proposed rule required that Part 
D sponsors 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; or (2) lower covered Part D drug prices 
at the point of sale.
    As provided under section 1860D-2(d)(2) of the Act, information on 
negotiated prices reported to us for the purposes of ascertaining the 
level of pass-through will be protected under the confidentiality 
provisions applicable to Medicaid pricing data under section 
1927(b)(3)(D) of the Act. However, that these confidentiality 
protections did not preclude audit and evaluation of negotiated price 
concession information by the HHS OIG.
    As provided under section 1860D-2(d)(3) of the Act and codified in 
Sec.  423.104(h)(4) of our proposed rule, we are authorized to conduct 
periodic audits either directly or through contracts with other 
organizations of the financial statements and records of Part D 
sponsors pertaining to the Part D plans they offer. As required in 
section 1860D-2(d)(3) of the Act, this auditing will 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.
    Except as otherwise provided below, the final rule adopts the rules 
for negotiated prices set forth in Sec.  423.104(h) of our proposed 
rule.
    Comment: Some commenters believed that the phrase ``take into 
account'' in our definition of negotiated prices is not strong enough, 
and that we should establish minimum requirements for the proportion of 
total negotiated price concessions passed through to beneficiaries. 
Suggestions ranged from a majority (75 to 80 percent) to 100 percent of 
negotiated price concessions.
    Response: Section 1860D-2(d)(1)(B) of the Act specifically requires 
that negotiated prices ``shall take into account negotiated price 
concessions, such as discounts, direct or indirect subsidies, rebates, 
and direct or indirect remunerations.'' Had the Congress intended that 
all negotiated price concessions be passed through to beneficiaries, 
they would have used a phrase other than ``take into account'' in the 
definition of the term ``negotiated prices.''
    In addition, section 1860D-2(d)(2) of the Act specifically requires 
that Part D plans disclose to us aggregate negotiated price concessions 
that are passed through to enrollees and to us through lower subsidies, 
lower monthly premiums, and lower prices through pharmacies and other 
dispensers. In requiring Part D plans to disclose to us the extent to 
which they pass through negotiated price concessions to enrollees and 
to us, section 1860D-2(d)(2) of the Act anticipates that Part D plans 
might not pass through all negotiated price concessions. Therefore, we 
interpret the definition of the term negotiated prices in section 
1860D-2(d)(1)(B) of the Act as requiring Part D plans to pass on to 
enrollees some, but not necessarily all, of these price concessions and 
have clarified this interpretation in our definition of the term 
``negotiated prices'' in Sec.  423.100 of our final rule. We believe 
that market competition will encourage Part D plans to pass through to 
enrollees a high percentage of the negotiated price concessions they 
obtain in the form of negotiated prices at the point of sale. 
Establishing minimum threshold levels for the pass-through of 
negotiated price concessions would have the effect of undercutting 
market competition, as Part D plans might cluster their negotiated 
prices around that threshold.
    Comment: Some commenters recommended that we clarify how price 
concessions will be passed through to the pharmacy and to the 
beneficiaries. Some of these commenters specifically asked us to ensure 
that Part D plans, not pharmacists, bear the costs of discounts.
    Response: The Part D benefit was established by the MMA as a 
market-based model under which marketplace competition ensures that 
enrollees receive low prices for prescription drugs. Given this market-
based approach envisioned by the Congress, we are wary of regulating 
negotiations between private parties particularly regarding the 
specifics of price negotiations so as to ensure that enrollees receive 
competitive prices on their covered Part D drugs. We note, as well, 
that pharmacies are not required to contract with Part D plans. To the 
extent that pharmacies believe that the discounts they are being asked 
to offer are too high, they can refuse to participate in Part D plan 
pharmacy networks. Given our pharmacy access standards at Sec.  
423.120(a)(1), we expect that pharmacies will have some leverage vis-
[agrave]-vis the payment provisions in Part D plan contracts.
    Comment: Two commenters stated that they considered our requirement 
that pharmacies pass through negotiated prices during coverage gaps and 
for non-covered formulary drugs to be price controls.
    Response: Section 1860D-2(d)(1) of the Act requires, as implemented 
under Sec.  423.104(g)(1) of our final rule, that a Part D sponsor 
provide enrollees with access to negotiated prices for covered Part D 
drugs 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 interpret the

[[Page 4245]]

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 threshold 
for catastrophic coverage. In that expenditure range, a beneficiary 
enrolled in standard prescription drug coverage would be responsible 
for 100 percent cost-sharing. These are still covered Part D drugs, and 
enrollees should be able to benefit from negotiated prices during the 
coverage gap.
    We clarify that negotiated prices do not have to be made available 
for non-covered Part D drugs. However, as we stated in the preamble to 
our proposed rule, we are interpreting the phrase ``or other cost-
sharing'' as a reference to Part D plan designs that include, as part 
of their formulary design, access to negotiated prices on certain drugs 
but at a tier within their formulary in which the Part D plan would pay 
no benefits and the enrollee would be responsible for 100 percent cost-
sharing (in other words, a negotiated price would be available and the 
drug would be on the Part D plan's formulary, but the beneficiary would 
always be responsible for 100 percent of the drug's negotiated price). 
These drugs would therefore be formulary drugs and would have to be 
offered at negotiated prices. As stated elsewhere in this preamble, 
however, we note that we will review formulary design as part of our 
benefit package review to ensure that Part D plans do not establish 
formulary structures (including tiered cost-sharing) that substantially 
discourage enrollment by certain beneficiaries. To the extent that Part 
D plans propose using certain cost-sharing tiers (including, but not 
limited to, 100 percent cost-sharing tiers) in a discriminatory 
fashion, they would not be allowed.
    In addition, we clarify that we interpret the requirement that 
negotiated prices always be provided to mean that uniform negotiated 
prices must be available to beneficiaries for a particular drug when 
purchased from the same pharmacy. In other words, the negotiated price 
for a particular drug will be the same, at a particular pharmacy, 
regardless of whether a beneficiary's drug spending is between $0 and 
the deductible, between the deductible and initial coverage limit, 
between the initial coverage limit and the out-of-pocket threshold, or 
in excess of the out-of-pocket threshold. We believe that non-uniform 
negotiated prices would discourage enrollment by certain Part D 
eligible individuals in violation of section 1860D-11(e)(2)(D)(i) of 
the Act and, therefore, plans will not be able to apply differential 
negotiated prices to any drug purchased from a given pharmacy.
    Comment: Other commenters recommended that the definition of the 
term ``negotiated price'' reflect the price to the Part D plan net of 
any rebates, discounts, or other price concessions paid to the Part D 
plan for a covered Part D drug prescription obtained from either a 
retail or mail-order pharmacy. Some commenters asked that price 
concessions not be allowed to artificially lower the cost of mail order 
prescriptions.
    Response: Part D sponsors will negotiate prices with pharmacies and 
manufacturers, and we assume based on current market practices that 
negotiated prices will vary within a retail pharmacy network, as well 
as between retail and mail-order pharmacies. How a Part D sponsor nets 
out negotiated price concessions in its negotiated prices is at the 
discretion of the Part D sponsor, but we expect that competition will 
create incentives for Part D sponsors to offer reasonable negotiated 
prices. Ultimately, however, these pricing issues are between a Part D 
sponsor and the network pharmacies and manufacturers with whom the Part 
D plan negotiates price concessions.
    Comment: Some commenters recommended that Part D plans be required 
to reimburse pharmacies to recover costs of purchasing, handling, and 
dispensing products to beneficiaries.
    Response: As provided elsewhere in this preamble, negotiated prices 
will include any dispensing fees for covered Part D drugs 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. As provided in section 1860D-11(i) of the Act, 
we cannot intervene in negotiations between pharmacies and Part D 
plans. Thus, the extent to which Part D plans reimburse pharmacies for 
their entire dispensing costs will depend on the outcome of those 
negotiations.
    Comment: Two commenters noted that our definition of the term 
``negotiated prices'' appears to envision network model Part D plans, 
but that MA organizations and cost plans that own and operate their own 
pharmacies do not negotiate reimbursement rates with contract 
pharmacies. One commenter recommended that negotiated prices for such 
MA organizations and cost plans be defined as the prescription charge 
established by the organization, and that such charge include the 
acquisition cost of the drug, dispensing, operational, capital, 
overhead, and margin costs. The commenter suggested that, in 
determining whether Part D plans' negotiated prices meet the standard 
of section 1860D-2(d)(1)(B) of the Act, we could either compare an MA 
organization's negotiated prices to negotiated prices of network model 
Part D plans in the same market or, alternatively, require the MA 
organization to demonstrate how it takes price discounts it receives 
from manufacturers into account in its pricing methodology or formula. 
Another commenter suggested that we permit such MA organizations to 
establish a pricing methodology that reflects a good faith effort to 
reflect prices analogous to those that would be negotiated by an MA 
organization with third party pharmacy providers, and that we consult 
with affected MA organizations in establishing this policy.
    Response: We clarify that our definition of the term ``negotiated 
prices'' in Sec.  423.100 of the final rule requires that ``discounts, 
direct or indirect subsidies, rebates, other price concessions, and 
direct or indirect remunerations'' be taken into account in 
establishing covered Part D drug negotiated prices. Plans do not have 
to take into account pharmacy discounts to the extent that no such 
discounts exist. Moreover, we note that our definition of the term 
``dispensing fees'' in Sec.  423.100 of the final rule indicates that, 
in the case of pharmacies owned and operated by a health plan, 
dispensing fees are understood to be the equivalent of all reasonable 
pharmacy costs included in the definition (those related to the 
transfer of possession of a covered Part D drug to a Part D plan 
enrollee), including the salaries of pharmacists and other pharmacy 
workers as well of the costs associated with maintaining the pharmacy 
facility and equipment necessary to operate the pharmacy. For purposes 
of evaluating the validity of a Part D plan's bid, including its 
negotiated prices for covered Part D drugs, we will request and 
evaluate disaggregated negotiated price concession data only to the 
extent that such detail is necessary in order to justify actuarial 
assumptions or as part of an audit.
    Comment: One commenter asked that we define the meaning of the 
terms ``direct or indirect subsidies'' and ``direct or indirect 
remunerations.'' Another commenter suggested that negotiated price 
concessions reported to us should include formulary placement 
incentives, market share movement incentives, administrative fees paid 
to

[[Page 4246]]

Part D plans, and direct and indirect forms of remuneration. One 
commenter asked that we provide clarification on how rebates will be 
calculated, reflected in negotiated prices, and reported to us.
    Response: We note that Part D plans may fulfill the requirements of 
section 1860D-2(d)(2) of the Act through the data submission 
requirements discussed in further detail in subpart G. In other words, 
we should be able to determine the proportion of total aggregate price 
concessions passed through to either the Medicare program or to 
enrollees based on the cost data Part D plans will be required to 
submit to us. Although all negotiated price concessions be they direct 
or indirect subsidies, direct or indirect remunerations, rebates, or 
discounts must be reported to us, as provided in Sec.  423.104(g)(3) of 
our final rule, we will require that Part D plans break out any fair 
market value administrative fees pharmaceutical manufacturers may pay 
Part D sponsors. The use of the term indirect with direct is meant to 
be all-inclusive. In other words, we clarify that this means any and 
all subsidies or remunerations. We will specify in operational guidance 
the format and frequency of these reports, as well as what constitutes 
direct or direct subsidies, direct or indirect remunerations, rebates, 
and discounts.
    Comment: We received a number of comments regarding our aggregate 
negotiated price concession disclosure requirements. Several commenters 
asked us to clarify that only aggregate price concessions passed 
through to us and to enrollees will be reported to us, rather than the 
amount or proportion of total price concessions obtained by a Part D 
plan. Other commenters thought that Part D plans should be required to 
disclose all price concessions, not just the proportion passed through 
to Part D enrollees. A number of other commenters asked that we require 
the disclosure of negotiated price concession by drug.
    Response: We clarify that, as provided under section 1860D-2(d)(2) 
of the Act, and specified in Sec.  423.104(g)(3) of our final rule, we 
will require that all aggregate negotiated price concession data and 
not just the proportion passed through to beneficiaries be reported to 
us for purposes of Part D plan bids. However, as explained in subpart 
G, it may be necessary for us to receive disaggregated negotiated price 
concession data from Part D plans in order to ensure accurate payment 
to Part D plans. We will provide further information regarding 
negotiated price concession reporting in separate guidance.
    Comment: Several commenters recommended that Part D plans share all 
negotiated price concession data reporting with SPAPs.
    Response: Since nothing in the MMA addresses disclosure of 
negotiated price information to SPAPs, FOIA rules apply. FOIA applies 
to requests for data from States. FOIA Exemption 4 protects certain 
confidential commercial information that is submitted to a Federal 
agency. Determinations about the applicability of FOIA Exemption 4 to a 
Part D plan's pricing data would be made on a case-by-case basis 
depending on whether the submitter of the data could demonstrate that 
disclosure of this information would likely cause substantial 
competitive harm to the submitter's competitive position. If FOIA 
Exemption 4 is found to protect submitted price information, we cannot 
disclose this information to States because to do so would violate the 
Trade Secrets Act (18 U.S.C. 1905).
    Comment: One commenter stated the ``best price'' provision 
undermined the original intent of section 1927 (c)(1)(C) of the Act and 
would have a negative financial impact on the Medicaid prescription 
drug program.
    Response: We believe the Congress intended that there be no Federal 
barriers to Part D sponsors negotiating the lowest prices possible for 
their plan members. If negotiated prices counted towards ``best 
price,'' this could create a disincentive for manufacturers to offer 
discounts. Further, the purpose of ``best price'' exemptions in section 
1927(c)(1)(C) of the Act is to ensure that manufacturers offer Medicaid 
programs strong rebates that are market-driven, without penalizing the 
manufacturers indirectly for the discounts they offer by law under 
other Federal drug programs. Exempting negotiated prices under the new 
Medicare prescription drug benefit is consistent with that purpose. The 
issue of effects on Medicaid best price is discussed in the impact 
analysis.
    Comment: One commenter asked for further guidance regarding the 
``best price'' exemption, stating that Part D providers should be able 
to negotiate simultaneously for commercial prices, which would count 
toward ``best price,'' and for Medicare/qualified retiree prices, which 
would not count toward ``Best Price.''
    Response: Under section 1860D-11(i) of the Act, we have no 
authority to regulate price concessions between manufacturers and Part 
D plans. Consequently, we cannot prohibit or require Part D plans from 
negotiating simultaneously for commercial prices, which would be 
included in the calculation of the Medicaid drug rebate best price, and 
Medicare prices, which would not be included in the calculation of the 
Medicaid drug rebate best price. If Part D plans wish to simultaneously 
negotiate their commercial and Medicare prices, they are free to do so.
    Comment: One commenter suggested that we recommend to the Congress 
alternatives to the existing ``best price'' rebate formula. The 
commenter recommended a flat rebate formula to generate savings for 
State Medicaid programs, while eliminating the negative impact of the 
``best price'' formula on the prescription drug market generally.
    Response: This regulation does not address the best price 
provisions of the Medicaid drug rebate statute as we do not have the 
statutory authority under Title I of the MMA to modify the Medicaid 
rebate program.
3. Establishment of Prescription Drug Plan Service Areas (Sec.  
423.112)
    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. Section 
1860D-11(a)(2)(B) of the Act stipulates that PDP regions must be, to 
the extent practicable, consistent with MA regions as established under 
section 1858(a)(2) the Act. However, we may establish PDP regions that 
vary from MA regions if we determine that access to Part D benefits 
would be improved by establishing different regions. Section 1860D-
11(a)(2)(C) of the Act stipulates that we designate a separate PDP 
region (or regions) for the U.S. territories.
    Except as otherwise provided below, the final rule adopts the 
requirements related to the establishment of prescription drug plan 
service areas set forth in Sec.  423.112 of the proposed rule.
    Comment: We received a number of comments on the establishment of 
PDP regions both in response to the provisions of our proposed rule and 
as follow-up to a public meeting held in Chicago on July 21, 2004. The 
majority of commenters favored establishing 50 State-based regions or, 
more generally, a larger number of smaller regions--close to that of 
State-level regions. Issues identified in support of 50 State-based 
regions included the large assumption of risk associated with the 
establishment of larger regions; insufficient time for Part D plans to 
negotiate and develop networks, or to renegotiate providers' contracts 
and form partnerships; potential difficulties in meeting State 
licensure and solvency requirements; and greater ease in terms of

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coordination between Part D plans and SPAPs in providing coverage that 
supplements the benefits available under Part D coverage. Several 
commenters recommended an intermediate number of regions between the 10 
and 50 regions authorized by the MMA. One commenter cautioned us to 
develop an appropriate number of regions in order to ensure that 
beneficiaries particularly those in rural areas have meaningful access 
to Part D choices. Yet another commenter recommended that we align PDP 
and MA regions in order to preclude beneficiary confusion by MA 
enrollees as they try to understand their options during the initial 
enrollment period for Part D coverage.
    Several other commenters specifically recommended that a standalone 
region be created for Puerto Rico separate from the 50 States and any 
of the other U.S. territories. These commenters believe it is necessary 
for Puerto Rico to be placed in its own PDP region because a multi-
state PDP region for Puerto Rico would compromise the viability of Part 
D on the island. They argue that Puerto Rico-based plans have years of 
experience working with the local Medicare population and its distinct 
linguistic and cultural traditions and will be disadvantaged when 
competing with U.S. companies to build provider networks outside Puerto 
Rico. Some commenters also thought that combining Puerto Rico and 
another State or States (for example, Florida or New York) will drive 
up premiums for Puerto Rican enrollees. On the other hand, one 
commenter argued that a standalone region for Puerto Rico would isolate 
it, and preferred to stay in the New York region under the MA and PDP 
programs.
    Response: We conducted a market survey and analysis, including an 
examination of current insurance markets as required in the MMA. Key 
factors in the survey and analysis included payment rates; eligible 
population size per region; PPO market penetration; current existence 
of PPOs, MA plans, or other commercial plans; and presence of PPO 
providers and primary care providers. Additional factors were also 
considered, including solvency and licensing requirements, as well as 
capacity issues. In response to the lack of specificity regarding the 
PDP regions in our proposed rule, we conducted extensive outreach in 
order to obtain public input prior to the publication of our final 
rule. On December 6, 2004, we announced the establishment of 26 MA 
regions and 34 PDP regions. For maps and fact sheets on the on the 
regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/.
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, Part D plans 
must 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 Part D 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, our proposed 
rule required that Part D plans establish pharmacy networks in which:
     In urban areas, at least 90 percent of Medicare 
beneficiaries in the Part D plan's service area, on average, live 
within 2 miles of a retail pharmacy participating in the plan's 
network;
     In suburban areas, at least 90 percent of Medicare 
beneficiaries in the Part D 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 Part D plan's service area, on average, live 
within 15 miles of a retail pharmacy participating in the 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 or cost 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 or the cost 
plan. However, in order for the pharmacy access standards to be waived, 
the MA-PD plan or cost plan in question is required to have a pharmacy 
network that, per our determination, provides comparable pharmacy 
access to its enrollees as provided under Sec.  422.112.
    Similarly, section 1860D 21(d)(2) of the Act 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 will be charged under standard prescription drug coverage--the 
pharmacy access requirements will also be waived.
    As provided under section 1860D-4(b)(1)(A) of the Act, Part D 
sponsors will be required to permit the participation in their Part D 
plan networks of any pharmacy that was willing to accept the plan's 
terms and conditions. Based on section 1860D-4(b)(1)(B) of the Act, our 
proposed rule clarified that a Part D sponsor will 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 interpreted this provision as permitting Part D 
sponsors from varying cost-sharing not only based on type of drug or 
formulary tier, but also on a particular pharmacy's status within the 
Part D plan's pharmacy network-in essence authorizing distinctions 
between ``preferred'' and ``non-preferred'' pharmacies.
    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 
Part D sponsor's pharmacy network. We defined ``insurance risk'' in 
relation to a network pharmacy as referring to risk of the type 
commonly assumed only by insurers licensed by a State, but not 
including payment variations designed to reflect performance-based 
measures of activities within the control of a pharmacy, such as 
formulary compliance and generic drug substitutions, or elements 
potentially in the control of the pharmacy (for example, labor costs, 
and productivity).
    Section 1860D-4(b)(1)(D) of the Act requires Part D sponsors to 
allow their enrollees to receive benefits at a network retail pharmacy 
instead of a network mail-order pharmacy, if they so choose. Consistent 
with the statute, our proposed rule allowed Part D plan enrollees who 
choose to obtain an extended supply of a covered Part D drug through a 
network retail pharmacy to 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. We sought comments on 
our proposal that this price differential be counted as an incurred 
cost against the annual out-of-pocket threshold and note that, as 
discussed elsewhere in this preamble, we have modified the level

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playing field provision at Sec.  423.120(b)(10) of our final rule to 
clarify that an enrollee will be responsible for any higher cost-
sharing (and not a differential in negotiated price) associated with 
purchasing a 90-day supply of a covered Part D drug at a network retail 
pharmacy, as well as our definition of incurred costs at Sec.  423.100 
of the final rule.
    Except as otherwise provided below, the final rule adopts the 
access standards set forth in Sec.  423.120(a) of the proposed rule.
    Comment: In our proposed rule, we interpreted the TRICARE access 
standards such that a prescription drug plan or regional MA-PD plan 
would have been required 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.
    Some commenters supported this application of the TRICARE access 
standards in our proposed rules (regional for prescription drug plans 
and MA-PD plans). A number of commenters expressed concerns about the 
adequacy of our proposed application of the access standards and urged 
us to apply the standards at the local (zip-code) level. A number of 
other commenters urged us to apply the TRICARE standards at the State 
level. Several other commenters recommended that Part D plans meet the 
access standards at the broadest geographic area served by the plan 
(for example, regional, multi-regional, or national).
    Response: Although section 1860D-4(b)(1)(C)(ii) of the Act directs 
us to adopt access standards no less favorable to enrollees than those 
set forth in the March 13, 2003, statement of work solicitation 
(MDA906-03-R-0002) of the Department of Defense under the 
TRICARE Retail Pharmacy Program, we note that the statement of work 
does not specify the geographic level at which to apply the TRICARE 
standard. We therefore believe that we have discretion to apply the 
TRICARE standards at the geographic level we believe to be most 
appropriate.
    Although we considered applying the TRICARE standard at the local 
(zip code or county) level for Part D plans, we believe such 
application would make it impossible for Part D plans to meet the 
standards particularly the rural standard--in some parts of the 
country. On the other hand, we believe that application of the access 
standards at the broader, regional level would not adequately ensure 
convenient access for beneficiaries given the potential for Part D 
plans to ``average out'' the access standards across many urban, 
suburban, and rural areas in a region--thus meeting the access 
standards in the aggregate but potentially leaving certain parts of a 
region without convenient access to retail pharmacies.
    We agree with commenters who proposed a State-level application of 
the TRICARE pharmacy access standards for regional MA-PD plans and 
prescription drug plans, and have made changes to Sec.  423.120(a)(1) 
accordingly such that a prescription drug plan or regional MA-PD plan 
will have to meet or exceed the access standards across urban, 
suburban, and rural areas, respectively, in each State in which it 
operates, a local-MA-PD plan would have to meet or exceed the access 
standards across urban, suburban, and rural areas, respectively, in 
each service area (including multi-county service areas) in which it 
operates, and a cost plan would have to meet or exceed the access 
standards across urban, suburban, and rural areas, respectively, in 
each geographic area in which it operates. 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 State of its multi-region or national service 
area. We believe that such an interpretation is a reasonable compromise 
between application at the local level and application at the regional 
or national level, and maximizes Part D plan flexibility while ensuring 
convenient access to network pharmacies for Part D enrollees.
    Comment: Some commenters expressed concern that TRICARE's rural 
access standard was insufficient to provide convenient access to 
network pharmacies in rural areas and urged us to adopt a more adequate 
definition of rural. Others argued for an exceptions process for 
remote, isolated areas in which it is simply not feasible to establish 
pharmacy networks that comply with our requirements.
    Response: We are aware of the difficulties faced by rural 
beneficiaries in accessing medical care. We believe that TRICARE's 
definition of ``rural'' is adequate and have not modified it in our 
final rule (though we will monitor the access standards over time to 
ensure they continue to provide convenient access to all 
beneficiaries). Furthermore, we believe access in rural areas will be 
improved given our revised interpretation of the access standards, 
whereby we will evaluate access at the State (and not the regional) 
level. However, we are aware--based on our experience implementing the 
Medicare Prescription Drug Discount Card and Transitional Assistance 
Program--that there are likely to be several States in which meeting 
the rural access standard will be impossible or impracticable given the 
lack of infrastructure. We expect to establish an exceptions process, 
which we will outline in operational guidance to Part D plans that will 
account for any problem areas and mitigate any disincentives plans may 
have to avoid doing business in parts of the country in which meeting 
the pharmacy access standards would be a challenge.
    In addition, and as explained elsewhere in this preamble, and 
codified in Sec.  423.120(a)(2) of our final rule, we will allow Part D 
plans to count certain non-retail pharmacies--specifically, I/T/U, 
Federally Qualified Health Center (FQHC), and Rural Health Center (RHC) 
pharmacies--toward the pharmacy access requirements in Sec.  
423.120(a)(1) of our final rule. We believe this policy will help 
ensure convenient access in rural areas.
    Comment: Several commenters asked that we ensure that national Part 
D plans are created. These commenters thought that national Part D 
plans would be of benefit to beneficiaries who travel regularly or who 
reside in more than one State in a given year (for example, 
``snowbirds''), and urged that the ramifications of choosing a local 
MA-PD plan or a regional Part D plan be made clear to beneficiaries who 
may not realize the implications of such limited geographic access when 
they select Part D plan coverage.
    Response: Although a Part D sponsor may offer a Part D plan in more 
than one PDP or MA region, it is not required to do so. Therefore, we 
cannot require national Part D plans, though we certainly recognize the 
benefits of such plans for some beneficiaries given the limited 
applicability of our out-of-network access policy. We note that our 
pharmacy access standards would not in any way preclude Part D sponsors 
from contracting with pharmacies outside their Part D plans' service 
areas, provided that the plans meet the pharmacy access requirements 
within their service areas. Such a feature would be of particular use 
to beneficiaries who spend significant amounts of time outside their 
Part D plan's service area (for example, snowbirds) and could make a 
particular Part D plan that offered such benefits more attractive to 
beneficiaries who travel regularly. National Part D plans are also of 
interest to employers who have retirees living throughout the country, 
and the

[[Page 4249]]

employer group waiver authority discussed in subpart J could facilitate 
these employer-only national Part D plans. We also note that, as part 
of our information dissemination requirements in Sec.  423.128(b) of 
the final rule, Part D plans will be required to inform beneficiaries 
about the plan's service area, as well as the locations of network 
pharmacies.
    Comment: Several commenters asked us to make allowances for 
``snowbirds,'' stating that our regulations should allow Part D 
sponsors to offer ``visitor/traveler'' benefits available under the MA 
program. One commenter specifically suggested the application of the MA 
requirements, which allow an organization to provide such benefits to 
an individual who is temporarily out of the area for up to 12 months. A 
few commenters stated that we should require prescription drug Part D 
plans to offer visitor/traveler benefits. One commenter suggested, 
however, that we allow exceptions for regional Part D plans and those 
with out-of-network services. One commenter suggested that we consider 
allowing Part D plans to offer ``travel'' networks without requiring 
them to contract in those regions, suggesting that this could be an 
interim approach pending evaluation of the cost/payment experience for 
both Part D plans and us.
    Response: We appreciate the feedback provided by the commenters on 
applying a visitor/traveler benefit to prescription drug plans as has 
been provided to the MA program. We do not have the authority to 
establish a visitor/traveler benefit. However, as noted above, our 
pharmacy access standards would not in any way preclude Part D sponsors 
from contracting with pharmacies outside their plans' service areas, 
provided that plans meet the pharmacy access requirements within their 
service areas, and such access is not provided outside the United 
States.
    Comment: We interpreted the access requirements in section 1860D-
4(b)(1)(C) of the Act as requiring Part D plans to count only retail 
pharmacies as part of their networks for the purpose of meeting the 
access standards, and we proposed defining a retail pharmacy as any 
licensed pharmacy from which covered Part D enrollees could purchase a 
covered Part D drug without being required to receive medical services 
from a provider or institution affiliated with that pharmacy. We also 
requested comment regarding whether we should allow Part D plans to 
count pharmacies that are operated by the Indian Health Service, Indian 
tribes and tribal organizations, and urban Indian organizations (I/T/U 
pharmacies) toward their network access requirements when the 
pharmacies are under contract with the Part D plan, and 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 some or all of 
these pharmacies. In addition, we solicited comments on permissible 
ways to ensure enrollee access to FQHC and rural pharmacies, since 
these pharmacies could potentially provide access to covered Part D 
drugs in remote, rural areas.
    Several commenters support counting only retail pharmacies towards 
Part D plans' access requirements. Other commenters supported allowing 
I/T/U pharmacies to count toward Part D plans' pharmacy access 
requirements to the extent that we do not require Part D plans to offer 
I/T/U pharmacies a standard contract, at a minimum.
    Response: We agree that, in most cases, only retail pharmacies, 
which we define in Sec.  423.100 of our final rule as any licensed 
pharmacy from which covered Part D enrollees could purchase a covered 
Part D drug without being required to receive medical services from a 
provider or institution affiliated with that pharmacy, should count 
toward our pharmacy access standards. Examples of non-retail pharmacies 
include I/T/U, FQHC, Rural Health Center (RHC), and hospital and other 
provider-based pharmacies, as well as Part D-owned and operated 
pharmacies that serve only plan members.
    However, as explained elsewhere in this preamble, we are concerned 
about access to pharmacies in rural and underserved areas. As one way 
of addressing this concern, Sec.  423.120(a)(2) of our final rule 
allows Part D plans to count certain non-retail pharmacies--
specifically, I/T/U, FQHC, and RHC pharmacies toward the pharmacy 
access requirements in Sec.  423.120(a)(1) of our final rule.
    FQHCs and RHCs face many of the same barriers to inclusion in 
commercial plan networks as do I/T/U pharmacies, which we discuss in 
greater detail elsewhere in this preamble. Beneficiaries served by 
FQHCs and RHCs are often served in those settings because of their 
financial and geographic circumstances. We believe that allowing Part D 
plans to count these pharmacies toward their access requirements will 
incentivize plans to make an extra effort to solicit and include these 
pharmacies in their networks. As the number of these pharmacies is 
limited and, with the exception of I/T/U pharmacies, can generally 
offer services to a broad-based population, we do not believe that this 
exception will have a significant impact on convenient access to 
pharmacies in rural areas for the general population. However, we 
intend to review Part D plans' proposed pharmacy networks to ensure 
that their inclusion of I/T/U, FQHC, and RHC pharmacies does not 
substitute for the inclusion in Part D plan networks of retail 
pharmacies. We also note that this policy should not be interpreted as 
requiring broader access to I/T/U, FQHC, and RHC pharmacies than is 
currently permissible.
    Comment: Several commenters expressed concern about the inclusion 
of rural and FQHC pharmacies in Part D plan networks, with some 
advocating for requiring plans to contract in some cases, under 
preferential contracting terms and conditions with these pharmacies. 
Other commenters opposed requiring Part D plans to contract with 
specific kinds of pharmacies, asserting that the any willing pharmacy 
and pharmacy network access requirements are sufficient to ensure an 
adequate pharmacy network for all beneficiaries. One commenter asked 
that, to the extent we require Part D plans to contract with certain 
pharmacies, plans would only be required to offer standard terms and 
conditions.
    Response: With the exception of I/T/U pharmacies, we will not 
require Part D plans to contract with non-retail pharmacies including 
FQHC or rural pharmacies. We believe our access standards for rural 
areas and the Statewide application of access rules generally will 
ensure adequate access in rural areas. However, as discussed elsewhere 
in this preamble, we will allow Part D plans to count I/T/U, FQHC, and 
RHC pharmacies toward their access requirements as an incentive for 
Part D plans to contract with these pharmacies, which are critical 
providers in underserved areas.
    Comment: One commenter believes we should mandate that Part D plans 
solicit inner city and rural pharmacies that meet the Small Business 
Administration's small business standard for participation in their 
pharmacy networks and should give them access to any terms that the 
Part D plan offers to a subset of pharmacies.
    Response: We believe the pharmacy access standards, as well as 
their application at the State level, in Sec.  423.120(a)(1) of our 
final rule, will ensure adequate access to covered Part D drugs for all 
Part D enrollees in urban, suburban, and rural areas. Given the 
standards, pharmacies' bargaining power will be strengthened in 
underserved areas. Ultimately, however, it is at Part D plans' 
discretion how they will establish pharmacy networks--

[[Page 4250]]

including the offering of contracting terms and conditions that are 
different than standard contracting terms and conditions and the 
establishment of preferred pharmacies provided they meet our pharmacy 
access standards, non-discrimination provisions, and other applicable 
requirements under Part D. We believe that the type of market 
intervention requested by the commenter is contrary to the Congress's 
intent that we not interfere in the private negotiations between Part D 
plans and pharmacies. We will therefore not mandate that Part D plans 
solicit inner city and rural retail pharmacies or that they 
automatically deem them preferred pharmacies within their networks.
    Comment: We sought public comments regarding whether we should 
consider using the authority in section 1860D-4(b)(1)(C) of the Act to 
require that Part D plans contract with a sufficient number of home 
infusion pharmacies in their service area to provide reasonable access 
for Part D enrollees.
    Several commenters supported requiring Part D plans to contract 
with a sufficient number of home infusion pharmacies in their service 
areas to ensure adequate access for beneficiaries. One commenter noted 
that this requirement would result in savings for the Medicare program 
by reducing expenditures under Parts A and B. In addition, these 
pharmacies allow beneficiaries to safely receive their medications at 
home by providing training and skilled support so beneficiaries can 
avoid the inconvenience of hospitals, clinics, and doctor visits. One 
commenter urged us to expand our proposed requirement to include all 
specialty pharmacies, not just home infusion pharmacies.
    Other commenters recommended not mandating Part D plans to contract 
with these non-retail pharmacies but rather encourage participation 
because it would reduce negotiating leverage of plans with these 
pharmacies.
    One commenter urged that home infusion pharmacies should not be 
counted toward network TRICARE standards.
    Response: We agree with commenters who believe that we should use 
our authority under section 1860D-4(b)(1)(C) of the Act to require Part 
D plans to provide adequate access to home infusion pharmacies. Given 
coverage of home infusion drugs under Part D, we do not believe it is 
an option for Part D plans not to include at least some home infusion 
pharmacies in their networks in order to provide enrollees with 
meaningful access to those drugs. This is particularly a concern with 
regard to prescription drug plans which, unlike other Part D plans, do 
not benefit from reduced medical costs associated with home infusion 
and may therefore have little incentive to contract with home infusion 
pharmacies. Therefore, we have added a new provision to our final 
regulations at Sec.  423.120(a)(4) which requires Part D plans to 
demonstrate to us that they provide adequate access to home infusion 
pharmacies consistent with CMS operational guidance to Part D plans. We 
expect that Part D plans will demonstrate adequate access based in part 
on the number of enrollees in their service areas and the geographic 
distribution and capacity of home infusion pharmacies in those service 
areas. We have not included specialty pharmacies that do not provide 
home infusion services in this requirement however, as it is unclear 
whether beneficiaries will need routine access to such pharmacies or 
would not be adequately served through our out-of-network access rules. 
We clarify, that we have made a distinction between specialty 
pharmacies and long-term care pharmacies. We note that home infusion 
pharmacies will not count toward Part D plans' pharmacy access 
requirements because they are not retail pharmacies.
    Comment: We requested comments regarding the advantages and 
disadvantages of using the authority provided under section 1860D-
4(b)(1)(C)(iv) of the Act to require Part D plans to approach some or 
all long-term care pharmacies in their service areas with at least the 
same terms available under their standard pharmacy contracts, or, 
alternatively, to not require (but strongly encourage) Part D sponsors 
to negotiate with and include long-term care pharmacies in their Part D 
plans' pharmacy networks. In addition, we requested 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.
    Some commenters were adamant that the current one-to-one 
relationship between the long-term care pharmacies and nursing homes be 
preserved, as it is critical to ensuring safety and convenient access 
to drugs for Medicare beneficiaries residing in nursing homes. One 
commenter suggested that Part D plans should also provide standardized 
long-term care pharmacy contracts that recognize long-term care 
pharmacies' essential role.
    Some commenters recommended that the final regulation require Part 
D plans to contract with any willing long-term care pharmacy. A number 
of commenters would prefer that we do not require Part D plans to 
contract with any particular non-retail pharmacies (including long-term 
care pharmacies) because both our access standards and the any willing 
pharmacy requirement adequately address our objective of ensuring 
access to Part D drugs for all enrollees. One commenter notes that Part 
D plans will need to include long-term care pharmacies in their 
networks to meet access standards, and that this will encourage Part D 
plans to contract with long-term care pharmacies. Another believes that 
we struck a balance with the option for long-term care pharmacies to 
provide benefits in- or out-of-network because it gives long-term care 
pharmacies and Part D plans the appropriate negotiating flexibility to 
reach mutually satisfactory arrangements for providing services to 
long-term care residents. Also, one commenter points out that some 
long-term care pharmacies would not be able to meet all the operational 
standards necessary to participate in Part D, and Part D plans would 
have to negotiate special reimbursement rates with these pharmacies. 
Some commenters believe that we should promote appropriate payment 
methodologies (for example, via dispensing fees or separate fee 
schedules to pay for specialized services) that would enable all long-
term care pharmacies to join networks and provide a meaningful benefit. 
Another variation suggested was that a Part D plan should be required 
to include at least one long-term care pharmacy in its network and to 
contract with any long-term care pharmacy that agrees to the Part D 
plan's standard contract.
    One commenter reasoned that there should be a balance in the 
contracting requirement; for example, long-term care pharmacies that 
service X percent of beneficiaries should also be required to contract 
with at least one Part D plan. But, without this balance, the commenter 
felt the Part D plans and long-term care pharmacies should be strongly 
encouraged to contract with each other. A few commenters believed that 
we should encourage, but not require, Part D plans to contract with 
long-term care pharmacies and that we should explicitly state in 
regulation that long-term care residents can access long-term care 
pharmacies as out-of-network providers when those pharmacies do not 
contract with particular Part D plans. Other commenters believe that it 
is sufficient to require that long-term care pharmacies be offered 
standard

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contracting terms and conditions by Part D plans.
    Response: 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 long-term care facilities. For a 
variety of reasons, including the quality aspects of Federal nursing 
home regulations, it is generally the case that long-term care 
facilities have chosen to contract with a single long-term care 
pharmacy. Given this state of affairs, our proposed rule assumed that 
Part D enrollees residing in a long-term care facility could not 
reasonably be expected to access their Part D drugs at another pharmacy 
if their facility's long-term care pharmacy is not part of their Part D 
plan's network. In the proposed rule, we proposed that enrollees 
residing in long-term care facilities whose contracted long-term care 
pharmacies did not participate in their Part D plans' networks could 
continue to use those long-term care pharmacies consistent with our 
proposed out-of-network access policy. However, given the narrow 
statutory authority to establish out-of-network access rules provided 
by section 1860D-4(b)(1)(C)(iii) of the Act, we do not believe as 
discussed in greater detail elsewhere in this preamble that access to 
out-of-network pharmacies on a routine basis can be justified. Thus, 
beneficiaries residing in long-term care facilities that do not 
contract with a pharmacy included in their Part D plan network will not 
be able to access covered Part D drugs at the out-of-network long-term 
care pharmacy through the out-of-network access rules in Sec.  423.124 
of our final rule.
    However, it is important to note that we will provide a SEP for 
prescription drug plan enrollment and disenrollment for beneficiaries 
entering in, living in, or leaving an institution. In addition, 
individuals enrolled in an MA-PD plan have an unlimited open enrollment 
period for institutionalized individuals (OEPI). While MA organizations 
may choose individually, at the plan level, whether or not to be open 
for enrollments during this period, they must always accept 
disenrollments.
    Given the risk associated with institutionalized beneficiaries, 
relying on the market alone to ensure that Part D plans include a 
sufficient number of long-term care pharmacies in their networks may 
not be sufficient. We note that relying on the pharmacy access 
standards in Sec.  423.120(a)(1) of our final rule will also not ensure 
sufficient access to long-term care pharmacies, since many of these 
pharmacies are not retail pharmacies and therefore would not count 
toward those requirements. Absent a contracting mandate, Part D plans 
may view contracting with long-term care pharmacies given the risk 
associated with institutionalized beneficiaries as too risky. To the 
extent that we require Part D 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) for long-term care pharmacy-specific 
specialized packaging and services with a number of long-term care 
pharmacies in order to meet our requirement. In addition, although the 
statute includes an ``any willing pharmacy'' requirement, even if we 
require Part D plans to contract with any long-term care pharmacy in a 
service area, we cannot compel long-term care pharmacies to accept the 
plans' terms and conditions.
    We believe it is essential to inject competition into the long-term 
care pharmacy market while preserving the relationships and levels of 
service that long-term care facilities now enjoy vis-[agrave]-vis their 
contracted long-term care pharmacies. To that end, we have used our 
authority under section 1860D-4(b)(1)(C)(iv) of the Act to require, in 
Sec.  423.120(a)(5) of our final rule, that Part D plans offer standard 
contracting terms and conditions, including performance and service 
criteria for long-term care pharmacies that we will specify in 
operational guidance to all long-term care pharmacies in their service 
areas. In other words, we are establishing an ``any willing pharmacy'' 
requirement specifically for long-term care pharmacies, coupled with a 
requirement that Part D plans develop standard contracting terms and 
conditions for long-term care pharmacies, such that any pharmacy in a 
service area could become an eligible long-term care pharmacy by 
certifying that it meets certain performance and service criteria for 
providing pharmacy services to long-term care facilities. These 
criteria would be incorporated into a Part D plan's standard 
contracting terms and conditions for long-term care pharmacies. We will 
provide further detail regarding these criteria in operational 
guidance, but we expect that they will address access to urgent and 
emergency medications on a 24/7 basis, standardized prescribing 
systems, and the availability of one of several standard delivery 
packaging and delivery systems for routine medications. We expect to 
review the reasonableness of Part D plans' standard contracting terms 
and conditions for long-term care pharmacies. We note that entities 
other than current long-term care pharmacies (for example, retail 
pharmacies) could become an eligible long-term care pharmacy by meeting 
these standards of practice, so long as they also meet specific State 
law requirements, if any, for such entities. Plans in a region would be 
required to contract with any willing long-term care pharmacy in that 
region, provided those pharmacies were able to reach agreement with 
Part D plans on all standard contract terms and conditions including 
payment rates.
    As provided in Sec.  423.120(a)(5) of our final rule, we will 
require Part D plans to demonstrate that they have contracts with a 
sufficient number of long-term care pharmacies to ensure convenient 
access to prescription drugs for institutionalized beneficiaries within 
the service area. We will provide more detailed information in CMS 
guidance regarding what constitutes convenient access, but we expect 
that Part D plans will demonstrate convenient access based in part on 
the number of enrollees in their service areas and the geographic 
distribution, capacity, and contracting relationships with long-term 
care facilities of long-term care pharmacies in those service areas.
    We expect that each long-term care facility will select one or more 
eligible network pharmacies to provide a Part D plan's long-term care 
drug benefits to all of its residents enrolled in a Part D plan. In 
order to minimize the number of pharmacy suppliers and maintain patient 
safety, long-term care facilities will likely select long-term care 
pharmacies that meet Part D standards and participate in the largest 
number of Part D plan long-term care networks. To maintain convenient 
access and minimize out-of-pocket expenses, Part D plan enrollees would 
obtain Part D benefits from the eligible long-term care pharmacy 
selected by the facility. The SEP and OEPI available to 
institutionalized beneficiaries, which will provide beneficiaries with 
the ability to change Part D plans to the extent that their current 
Part D plan does not include their facility's long-term care pharmacy 
in its network, will further incentivize long-term care pharmacies to 
participate in as many Part D plan long-term care networks as possible.
    All long-term care pharmacies in a region will have to negotiate 
terms and conditions with as many Part D plans as possible or risk 
losing this business to

[[Page 4252]]

another more competitive long-term care pharmacy. This competition will 
preserve the one-to-one long-term care pharmacy long-term care facility 
relationship favored by so many commenters, but will require a 
negotiation between the long-term care pharmacy and the Part D plan to 
maintain that relationship. Given our rules for access to Part D drugs 
for institutionalized Part D enrollees, all Part D products and 
services would be removed from existing long-term care pharmacy 
contracts because payments for drugs for dual eligible individuals 
under Medicaid will become obsolete. This will likely necessitate the 
renegotiation of existing long-term care facility/long-term care 
pharmacy contracts. Separating the cost of the drug and dispensing fee 
from other long-term care pharmacy specialized services (for example, 
drug administration) may provide for more appropriate negotiation of 
these services and costs between long-term care facilities and 
pharmacies. We note that Part D plan payments under medication therapy 
management programs, described in further detail elsewhere in this 
preamble, may represent an additional revenue stream to long-term care 
pharmacy services for some of the special services provided by these 
pharmacies but not reimbursed through dispensing fees.
    We believe that our long-term care pharmacy access rules will align 
incentives to accomplish several goals, including ensuring that long-
term care pharmacies come to the table in good faith; negotiation of 
more competitive pricing than currently exists in the long-term care 
pharmacy market; and allowing for the one long-term care facility-one 
long-term care pharmacy relationship to remain intact, to the extent 
that long-term care facilities would like to keep it that way.
    Comment: Two commenters favored the carve-out of beneficiaries in 
long-term care facilities through the establishment of a separate PDP 
region in which plans could bid, at risk, to serve this population.
    Response: We understand that, given the institutionalized 
population's special needs, a carve-out of this population may seem 
logical. However, given the risk associated with institutionalized 
beneficiaries, we believe that carving out such a high-risk population 
would result in significant adverse selection and could result in 
unsustainable beneficiary premiums for the institutionalized 
population. In addition, our research related to risk adjustment is 
still in progress, and until that research is completed, we cannot be 
certain as to whether our risk adjustment model could adequately 
mitigate the risk inherent in this population under the highly unique 
circumstances of a plan serving only a carved-out institutionalized 
population. Consequently, particularly in the first few years after the 
implementation of the Part D program, we wonder whether potential Part 
D sponsors would be willing to serve a carved-out institutionalized 
population and therefore ensure access to Part D drugs for Part D 
enrollees residing in long-term care facilities. We are also concerned 
that beneficiaries entering and leaving long-term care facilities will 
be forced to change Part D plans to the extent that institutionalized 
beneficiaries are carved out into a separate PDP region. For these 
reasons, we will not create a separate PDP region for institutionalized 
beneficiaries and, as discussed above, will ensure convenient access to 
covered Part D drug in long-term care facilities as provided in Sec.  
423.120(a)(5) of our final rule.
    Comment: We requested comments regarding whether we should use our 
authority under section 1860D-4(b)(1)(C)(iv) of the Act to require-or, 
instead, strongly encourage-that Part D sponsors approach any I/T/U 
pharmacies in their Part D plan service areas with at least the same 
terms available under the plan's standard pharmacy contracting terms 
and conditions.
    Some commenters believe that we must use our authority under 
section 1860D-4(b)(1)(iv) of the Act to require Part D plans to 
contract with I/T/U pharmacies because, without this requirement, 
private plans will have little or no financial incentive to contract 
given the uniqueness of both the AI/AN population and I/T/U pharmacies. 
Simply encouraging contracts will not work because of the uniqueness 
and remoteness of I/T/U facilities and the perceived cost and time to 
contract with these pharmacies. These commenters urge us to require, in 
regulation, that Part D plans contract with I/T/U pharmacies using 
specific contract provisions. They urge us to consider one of several 
approaches to ensuring that I/T/U pharmacies experience no reduction in 
revenue as a result of the transition from Medicaid to Medicare Part D: 
supplemental payments from Part D plans or the Federal government to 
supplement the difference between the amount paid by the Part D plan 
and the amount the I/T/U pharmacy would have received under Medicaid, a 
carve-out of AI/AN enrollees for Part D plans willing to serve only 
those beneficiaries through I/T/U pharmacies, and an exemption of dual 
eligibles from Part D (with continued prescription drug coverage under 
Medicaid).
    Response: There are currently 235 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. It is our understanding that I/T/U 
pharmacies are not currently well integrated in commercial pharmacy 
networks. We agree with the commenters who believe that--in the absence 
of a contracting requirement--Part D 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. 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. For this reason, we have added a 
provision to our final regulations, at Sec.  423.120(a)(6), requiring 
that Part D plans offer contracts to all I/T/U pharmacies in their 
service areas.
    However, we recognize 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 (for example, I/T/U pharmacies purchase drugs off the 
Federal Supply Schedule (FSS) or through the 340B program; 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). Thus, standard contracting terms and 
conditions will not be sufficient for Part D plans to obtain the 
participation of I/T/U pharmacies in their networks. We are therefore 
requiring Part D plans to include a special addendum to their standard 
contracting terms and conditions in order to account for these 
differences. We will work with major stakeholders to develop a model 
special addendum that will take the special

[[Page 4253]]

circumstances of I/T/U pharmacies into account. As provided in Sec.  
423.120(a)(6) of our final rule, we will require Part D plans to 
demonstrate that they have contracts with a sufficient number of I/T/U 
pharmacies to ensure convenient access to prescription drugs for AI/AN 
enrollees within the service area. We expect to review the 
reasonableness of Part D plans' standard contracting terms and 
conditions for I/T/U pharmacies.
    While we understand the Indian Health Service's concerns regarding 
reductions in revenue resulting from the transition of drug coverage 
from Medicaid to Medicare, we clarify that we do not have the statutory 
authority to require supplemental payments from Part D plans or the 
Federal government to supplement the difference between the amount paid 
by the Part D plan and the amount the I/T/U pharmacy would have 
received under Medicaid; a carve-out of AI/AN enrollees for Part D 
plans willing to serve only those beneficiaries through I/T/U 
pharmacies; or an exemption of dual eligibles from Part D (with 
continued prescription drug coverage under Medicaid). As we develop the 
model special addendum for I/T/U contracts, we will consider how, 
within our statutory authority, we might ensure that I/T/U pharmacies 
do not experience significant revenue losses as a result of the 
transitioning of drug coverage from Medicaid to Part D for dual 
eligible AI/ANs.
    Comment: Several commenters noted that many small I/T/U pharmacies 
and dispensaries carry a limited stock of drugs, and that an exemption 
from formulary requirements (and the ability to use permissible 
substitutes) is necessary in order to accommodate the fact. In 
addition, these commenters note that another factor in whether I/T/U 
pharmacies will stock a particular drug is whether it is available from 
the Federal Supply Schedule or 340B program, which are the principal 
sources of drugs purchased by I/T/U pharmacies. Thus, a Part D plan may 
choose one particular cholesterol-lowering agent on its formulary 
because it is able to negotiate a greater discount for that particular 
Part D drug. However, I/T/U pharmacies may be able to access a 
different medication for a similar, or perhaps lower, price and 
therefore include that drug on its formulary.
    Response: We are aware that most Tribes and Tribal Organizations 
(operating under health programs pursuant to contracts under the Indian 
Self-Determination Education and Assistance Act, Public Law 93-638) and 
all IHS facilities use the Department of Veterans Affairs 
Pharmaceutical Prime Vendor (PPV) for purchasing their pharmaceuticals. 
By ordering through the PPV, IHS and Tribes (but not Urban programs) 
are able to access FSS Contract, National Standardization Contract, and 
Blanket Purchasing Agreement pricing for pharmaceuticals. In addition 
to FSS pricing, Tribes and Urban programs that have been designated as 
Federally Qualified Health Centers (FQHCs) and have been approved by 
the Health Resources and Services Administration (HRSA) are eligible 
for HRSA 340B drug pricing. Since I/T/U facilities have access to 
different pricing than commercial health plans, their formulary 
selections reflect the drugs for which this pricing is available. As 
previously mentioned, we are requiring Part D plans to include a 
special addendum to their standard contracting terms and conditions in 
order to account for the differences between retail and I/T/U 
pharmacies and therefore facilitate contracting with these pharmacies. 
We will work with major stakeholders to develop a model special 
addendum that will take the special circumstances of I/T/U pharmacies 
into account, including the limited stocking of drugs at these 
facilities.
    Comment: Several commenters said that the any willing pharmacy rule 
should apply to mail order as well as retail pharmacies, and that Part 
D plans should not be able to exclusively use a plan-owned mail order 
facility.
    Response: We agree that the any willing pharmacy requirement at 
section 1860D-4(b)(1)(A) of the Act applies to all pharmacies--
including non-retail pharmacies such as mail-order pharmacies--
notwithstanding a Part D plan's ability to designate certain of its 
network pharmacies as preferred pharmacies with lower cost-sharing, or 
to negotiate terms better than those in its standard terms and 
conditions with certain pharmacies. We clarify that a Part D plan could 
have standard terms and conditions for retail pharmacies and a second, 
separate set of standard terms and conditions for mail order pharmacies 
in light of those pharmacies' different characteristics. For example, a 
plan's contracting terms and conditions for mail-order pharmacies could 
reflect the full cost of adding another mail-order vendor, as well as 
the differential costs of strong data controls involved with having 
multiple network mail-order pharmacies.
    Comment: One commenter said it was not clear how the any willing 
pharmacy rule applies to facilities that are owned and operated by a 
Part D plan. The commenter said such plans should be permitted to 
maintain a limited network of contract pharmacies for purposes of 
meeting the access standard in order to maximize cost savings.
    Response: We agree with this commenter that the any willing 
pharmacy requirement makes little sense in the context of Part D plans 
that own and operate their own pharmacies particularly since the 
pharmacy access rules in Sec.  423.120(a)(1) of our final rule will be 
waived for MA-PD plans and cost plans that can demonstrate comparable 
pharmacy access under Sec.  422.112. As provided in Sec.  423.458(b) of 
our final rule, we may waive any Part D provision as applied to an MA-
PD plan if it duplicates, or is in conflict with, provisions otherwise 
applicable to the MA organization or MA-PD plan under Part C of 
Medicare, or if waiver of a Part D provision is necessary in order to 
improve coordination of benefits under Part D with those offered under 
Part C. Similarly, Sec.  423.458(d) provides that we may waive any Part 
D provision as applied to a cost plan if it duplicates, or is in 
conflict with, provisions otherwise applicable to the cost plan under 
section 1876 of the Act, or if waiver of a Part D provision is 
necessary in order to improve coordination of benefits under Part D 
with those offered by the cost plans. We will consider waiving this 
requirement for Part D plans that own and operate their own pharmacies 
to the extent that they request such waiver as provided in Sec.  
423.458(b)(2) and Sec.  423.458(d) of our final rule.
    Comment: We sought comment on whether, in order to guarantee that 
any pharmacy willing to meet a Part D sponsor's contracting terms and 
conditions could participate in a Part D plan's pharmacy network, we 
should require that a Part D sponsor make available to all pharmacies a 
standard contract for participation in their Part D plans' networks.
    A number of commenters thought that Part D plans should be required 
to have a standard or model contract for use with all pharmacies. Other 
comments said that we should not require a standard contract. 
Alternatively, several commenters said that even with a standard 
contract, Part D plans should have maximum flexibility to vary their 
contracting terms and conditions in order to reflect local conditions. 
Some questioned whether we should try to evaluate whether pharmacy 
contract terms are ``reasonable and relevant,'' as proposed in subpart 
K of our proposed rule.
    Response: We concur with the majority of commenters on this issue 
and will require, under Sec.  423.505(b)(18) of our final rule that 
Part D plans offer pharmacies reasonable and relevant

[[Page 4254]]

standard terms and conditions for network participation. We do not 
intend to define ``reasonable and relevant'' in order to provide Part D 
plans with maximum flexibility to structure their standard terms and 
conditions.
    However, it is unreasonable to assume--the any willing pharmacist 
requirement notwithstanding--that a Part D plan could establish a 
network using a uniform set of terms and conditions throughout a 
service area because it will likely need to modify contracting terms 
and conditions to ensure access to certain pharmacies (for example, 
rural and long-term care pharmacies). We clarify that standard terms 
and conditions particularly for payment terms may vary to accommodate 
geographic areas or types of pharmacies) and that this is acceptable, 
provided that all similarly situated pharmacies are offered the same 
standard terms and conditions. Thus, for example, provided Part D plans 
offer all mail-order pharmacies in a particular area with the same 
standard terms and conditions, they may offer separate standard terms 
and conditions to mail-order pharmacies. With standard terms and 
conditions as a ``floor'' of minimum requirements that all similarly 
situated pharmacies must abide by, Part D plans may modify some of 
their standard terms and conditions to encourage participation by 
particular pharmacies.
    Comment: Many commenters disagreed with our interpretation of the 
``any willing pharmacy'' provision, specifically with allowing Part D 
plans to construct networks of preferred and non-preferred pharmacies 
that have different requirements for beneficiary cost sharing. These 
commenters argued that allowing preferred networks undermines the any 
willing pharmacy rule and runs counter to Congressional intent. Many 
said that allowing Part D plans to steer beneficiaries to preferred 
pharmacies would impede pharmacy access and disrupt existing 
relationships between pharmacists and patients. Some argued that our 
interpretation would disadvantage small, independent, and rural 
pharmacies. Others said that a designation of ``non-preferred'' would 
carry a negative connotation about the pharmacy's quality of service.
    Several other commenters concurred with the any willing pharmacy 
policy in our proposed rule. One commenter said that State any willing 
pharmacy laws should be expressly preempted, while another commenter 
said we should clarify that State any willing provider laws continue to 
apply to Part D plans' non-Medicare business. One commenter asked us to 
clarify the extent to which we will allow Part D plans to vary their 
cost sharing for preferred networks.
    Response: We believe that we have correctly interpreted the two 
related provisions in sections 1860D-4(b)(1)(A) and (B) of the Act, 
which require Part D plans to allow any willing pharmacy to participate 
in their pharmacy networks, while also allowing Part D plans to reduce 
cost-sharing differentially for network pharmacies. 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 
gives full effect to competing provisions of the statute. We believe 
that our policy of permitting cost-sharing discounts for preferred 
pharmacies, as codified in Sec.  423.120(a)(9), strikes an appropriate 
balance between the need for broad pharmacy access and the need for 
Part D plans to have appropriate contracting tools to lower costs.
    We note, however, that while these within network distinctions are 
allowed, the statute also requires that such tiered cost-sharing 
arrangements in no way increase our payments to Part D sponsors. 
Therefore, tiered cost-sharing arrangements based on within-network 
distinctions could be included in Part D plans' benefits subject to the 
same actuarial tests that apply to formulary-based tiered cost-sharing 
structures. Thus, a reduction in cost sharing for preferred pharmacies 
in a Part D plan network could be offered through higher cost sharing 
for non-preferred pharmacies (or as alternative prescription drug 
coverage). We also note that differential cost-sharing in the context 
of preferred and non-preferred pharmacies does not raise the cost-
sharing obligation of low-income subsidy eligible enrollees above the 
levels specified in sections 1860D-14(a)(1) and (2) of the Act.
    We recognize the possibility that Part D plans could effectively 
limit access in portions of their service areas by using the 
flexibility provided in Sec.  423.120(a)(9) of our final rule to create 
a within-network subset of preferred pharmacies. In other words, in 
designing its network, a Part D 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 Part D plan. We emphasize that such a network design has the 
potential to substantially discourage enrollment by certain Part D 
enrollees, and that we have the authority under section 1860D-
11(e)(2)(D) of the Act to disallow benefit designs that are 
discriminatory. We clarify that State any willing pharmacist laws would 
be preempted as applicable to plans' Part D business. This is 
consistent with section 1860D-12(g) of the Act, which extends the State 
preemption provisions under section 1856(b)(3) of the Act to Part D 
plans.
    Comment: Several commenters thought that Part D plans should only 
be allowed to have differential cost sharing for preferred pharmacies 
if they exceed the TRICARE access standard.
    Response: We see no statutory basis for such a rule. Moreover, it 
would be difficult to construct and operationalize such a policy.
    Comment: Several commenters wrote that special needs enrollees 
should be exempted from higher cost sharing at non-preferred 
pharmacies.
    Response: We see no statutory basis for such a rule, and we believe 
that Part D plans will provide sufficient access for all Part D 
enrollees under our access standards in Sec.  423.120(a)(1). As noted 
in our proposed rule, we will use the authority provided under section 
1860D-11(e)(2)(D) of the Act to review, as part of the bid negotiation 
process, how Part D plan networks make preferred and non-preferred 
distinctions among their network pharmacies and disallow them if such 
proposed network designs would substantially discourage enrollment by 
certain beneficiaries in any part of a Part D plan's service area. We 
believe that special needs enrollees will be sufficiently protected by 
this review. To the extent that special needs enrollees are also 
eligible for low-income subsidies, as indicated above, differential 
cost-sharing based on preferred pharmacy status does not raise the 
cost-sharing obligation of low-income subsidy eligible enrollees above 
the levels specified in the Act.
    Comment: Several commenters suggested that the TRICARE access 
standards be applied to Part D plans' ``preferred'' networks rather 
than its general network. Several other commenters concurred with the 
regulation as drafted in the proposed rule.
    Response: Section 1860D-4(b)(1)(B) of the Act clarifies that a Part 
D sponsor has the option of reducing cost-sharing for covered Part D 
drugs dispensed through network pharmacies below the level that would 
have otherwise applied. Because the statute provides

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that such distinctions can be made within a network, we do not believe 
that only preferred pharmacies constitute a Part D plan's network for 
the purposes of meeting the access standards in Sec.  423.120(a)(1) of 
our final rule. Rather, both preferred and non-preferred pharmacies 
form part of a Part D plan network, and plans may count both of these 
types of network pharmacies toward their access standards.
    Comment: Several commenters recommended that beneficiaries be able 
to get an extended supply of drugs, greater than a 30-day supply, from 
network retail pharmacies and mail-order pharmacies.
    Response: We clarify that section 1860D-4(b)(1)(D) of the Act, and 
Sec.  423.120(a)(10) of our final rule, require Part D plans to permit 
enrollees to receive extended supplies (for example, 90-day supplies) 
of covered Part D drugs through a network retail pharmacy.
    Comment: Some commenters noted that our proposed regulations would 
unfairly allow Part D plans to charge beneficiaries more when they 
obtain their prescriptions at a community pharmacy than when they use 
mail order. One commenter notes that seniors benefit from face-to-face 
interaction with a pharmacist more than other age groups, which would 
be precluded under mail order and would limit enrollees' ability to use 
the pharmacy and pharmacist of their choice.
    Many commenters recommended that we specifically prohibit Part D 
plans from using economic incentives for beneficiaries to use mail 
order that could create significant differences in cost sharing for 
mail order versus retail pharmacy prescription, or that plans make such 
difference minimal. One commenter recommended that Part D plans use the 
same average wholesale price (AWP) basis to determine the reimbursement 
rate for mail order and retail pharmacies. Another commenter noted that 
there is substantial evidence that seniors, particularly low-income 
seniors, are victims of theft from their mailboxes, undermining the 
financial incentive of mail order. This commenter recommended that we 
allow beneficiaries to pay the mail order price at a retail pharmacy 
when they can demonstrate their mailbox is not secure.
    Response: As provided in section 1860D-11(i) of the Act, we have no 
authority to interfere with the negotiations between Part D plans and 
pharmacies and therefore cannot mandate that Part D plans negotiate the 
same, or similar, reimbursement rates with all pharmacies. Provided 
Part D plans offer all pharmacies standard terms and conditions, they 
may modify their contracting terms--including payment provisions as 
necessary, as long as all similarly situated pharmacies are subject to 
the same minimum terms and conditions. Moreover, section 1860D-
4(b)(1)(B) of the Act provides Part D plans with the authority to 
designate some network pharmacies, including mail-order pharmacies, as 
preferred pharmacies offering plan enrollees lower cost sharing.
    Comment: One commenter noted that MA organizations that own and 
operate their own pharmacies usually have internal systems for 
providing prescription services by mail that are fully integrated with 
the overall pharmacy operation. As a result, it is difficult to provide 
an incentive to beneficiaries to use less costly mail services. The 
commenter said we should permit these organizations to establish 
differential benefit levels for mail delivery as opposed to in-facility 
pickup.
    Response: As noted above, Part D plans have the flexibility to 
establish different cost-sharing requirements for the pharmacies in 
their networks consistent with section 1860D-4(b)(1)(B) of the Act. 
Accordingly, Part D plans have the flexibility to establish 
differential cost-sharing requirements for mail delivery and in-
facility pickup.
    Comment: One commenter recommended that we require Part D plans to 
contract with pharmacies that offer home delivery service, noting that 
same-day or next day need for medications makes mail-order an 
impracticable option.
    Response: We do not believe there is a compelling rationale to 
require Part D plans to contract with pharmacies that offer home 
delivery service. As discussed elsewhere in this preamble, we have 
defined the term ``dispensing fees'' in Sec.  423.100 of our final rule 
to include reasonable pharmacy costs, including delivery costs, 
associated with ensuring that possession of the appropriate covered 
Part D drug is transferred to a Part D enrollee. We clarify that 
reasonable delivery costs include only those costs appropriate for the 
typical beneficiary in a particular pharmacy setting. Thus, while it 
would be appropriate for Part D plans to reimburse long-term care, 
mail-order, and home infusion pharmacies for home delivery costs via 
the dispensing fee, this would not be the case for retail pharmacies 
(where the term ``delivery'' would be limited to the transfer of a 
covered Part D drug from the pharmacist to the patient at the point of 
sale) because the typical retail customer does not require home 
delivery. While retail pharmacies may offer home delivery services, 
Part D plans may not reimburse those pharmacies for these costs, and 
the delivery cost must be borne by the beneficiary.
    Comment: Two commenters expressed their support for our 
interpretation of the term ``insurance risk'' and asked that we include 
in our regulations a statement that the prohibition against the 
assumption of risk by Part D plans' network pharmacies not preclude 
performance-based measures of activities within the control of a 
pharmacy (for example, formulary compliance and generic drug 
substitution).
    Response: We clarify that our definition of the term ``insurance 
risk'' in Sec.  423.4 of the final rule specifically excludes ``payment 
variations designed to reflect performance-based measures of activities 
within the control of a pharmacy, such as formulary compliance and 
generic drug substitutions.''
b. Formulary Requirements
1. P&T Committee Requirements
    To the extent that a Part D sponsor uses a formulary to provide 
qualified prescription drug coverage to Part D enrollees, it will be 
required to meet the requirements of section 1860D-4(b)(3)(A) of the 
Act to use a pharmaceutical and therapeutic (P&T) committee to develop 
and review that formulary.
    The majority of members comprising the P&T committee will be 
required to be practicing physicians or practicing pharmacists. In 
addition, at least one practicing pharmacist and one practicing 
physician member will have to be experts in the care of elderly and 
disabled individuals. Section Sec.  423.120(b)(1)(ii) of the proposed 
rule also provided that at least one practicing pharmacist and one 
practicing physician members on a Part D plan's P&T committee be 
independent experts.
    When developing and reviewing the formulary, the P&T committee will 
be required, 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. Section Sec.  423.120(b)(1)(viii) of our proposed rule 
required that any decisions made by the P&T committee regarding 
development or revision of a Part D plan's formulary be documented in 
writing.
    Except as otherwise provided below, the final rule adopts the 
requirements related to P&T committees set forth in Sec.  423.120(b)(1) 
of our proposed rule.
    Comment: Many commenters thought that P&T committee decisions 
regarding

[[Page 4256]]

a Part D plan's formulary should be binding on a plan. Other commenters 
thought that P&T committee recommendations should be advisory, and not 
binding. Several others believed that only clinical decisions should be 
binding on the Part D plan and that the ultimate responsibility for 
overall formulary design should reside with the plan and ultimately 
involved business leaders and technical experts. One commenter stated 
that it was not likely that a P&T committee comprised of non-employee 
clinicians would be able to make coverage determination in the Part D 
plan's and enrollees' best interests, particularly since many benefit 
design decisions have a financial, as well as a clinical, component.
    Response: We agree with commenters who sought to draw a distinction 
between clinical and overall formulary design issues. We believe that 
the function of a P&T committee is to provide expertise on clinical 
issues, and not financial or benefit design issues. We interpret the 
requirement in section 1860D-4(b)(3)(A) of the Act and Sec.  
423.120(b)(1) of our final rule that Part D plan formularies be 
developed and reviewed by a P&T committee to mean that committee 
recommendations regarding which drugs are placed on a plan's formulary 
be binding on the Part D plan. Although Sec.  423.120(b)(vi) and 
(b)(vii) of our final rule envision a role for the P&T committee in 
reviewing policies that guide exceptions and other utilization 
management processes including drug utilization review, generic 
substitution, quantity limits, and therapeutic interchange and in 
evaluating and analyzing treatment protocols and procedures related to 
the Part D plan's formulary at least annually, P&T committee 
recommendations in these areas should be considered advisory and not 
binding. We clarify, for example, that while the P&T committee may be 
involved in providing clinical recommendations regarding the placement 
of a particular Part D drug on a formulary cost-sharing tier, the 
ultimate decision on such formulary design issues is the Part D plan's, 
and that decision weighs both clinical and non-clinical factors. Thus, 
a P&T committee's role in formulary cost-sharing tiers, while 
important, would be advisory and not binding.
    Comment: Many commenters recommended that we strengthen the 
statutory requirement in section 1860D-4(b)(3)(A)(ii) of the Act and 
require that more than just one practicing physician and one practicing 
pharmacist are independent and free of conflict. Suggestions for new 
requirements included that all, a majority, two-thirds, one-half, 40 
percent, and at least four (at least two practicing physicians and two 
practicing pharmacists) members of a Part D plan's P&T committee be 
independent and free of conflict in order to ensure that formulary 
development is in line with beneficiary and not plan or pharmaceutical 
manufacturer interests. One commenter supported our current requirement 
requiring that at least one practicing physician and one practicing 
pharmacist on the committee be independent and free of conflict
    Response: We appreciate commenters' suggestions and agree that 
maintaining the impartiality and objectivity of P&T committee members 
is an important goal. We have retained the proposed rule requirement 
that at least one practicing pharmacist and one practicing physician on 
the P&T committee be independent and free of conflict--in Sec.  
423.120(b)(1)(ii) of our final rule, though Part D plans should view 
this requirement as a floor which we encourage them to exceed. To 
balance concerns about conflicts of interest with regard to P&T 
committee members, and as proposed in the draft benefit design review 
criteria we recently issued for public comment, we would require all 
P&T committee members to sign a conflict of interest statement 
revealing economic or other relationships with entities that could 
influence pharmaceutical decisions, and to disclose such conflicts to 
other committee members. If P&T committee discussions center around a 
drug that presents a conflict of interest issue for a particular 
committee member, he or she would recuse himself or herself from any 
discussions or votes associated with that drug. We believe this 
requirement is necessary to ensure that the P&T committee's clinical 
decisions regarding development and review of the formulary are based 
on the strength of scientific evidence and standards of practice, 
safety and efficacy considerations, and other such appropriate 
information and considerations in accordance with section 1860D-
4(b)(3)(B) of the Act. In addition, this requirement is consistent with 
best practices in pharmacy benefit management, and we expect that Part 
D plans will implement disclosure of conflicts and recusal procedures 
consistent with standard industry practice.
    Comment: Many commenters requested clarification regarding our 
definition of the term ``independent and free of conflict'' with 
respect to a Part D sponsor and a Part D plan. Several commenters asked 
to clarify that our regulations regarding independence and freedom from 
conflict not preclude individuals from serving on a P&T committee 
simply because they are members of a Part D plan's provider network.
    Response: In our proposed rule, we interpreted the 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'' to mean 
that such P&T committee members could have no stake, financial or 
otherwise, in formulary determinations. We believe this interpretation 
is still appropriate, but clarify that we believe a P&T committee 
member not to be free of conflict of interest if he or she has any 
direct or indirect financial interest in any entity--including Part D 
plans and pharmaceutical manufacturers--that would benefit from 
decisions regarding plan formularies.
    Thus, Part D plan network providers may be considered to be 
independent and free of conflict, provided they are not plan employees 
or contract workers and do not otherwise have any conflicts of 
interests that would compromise their independence. In cases of staff 
model HMOs, panel providers may be determined to be independent and 
free of conflict to the extent that any remuneration received from a 
Part D plan is limited to his or her clinical responsibilities for the 
care of plan enrollees.
    Comment: In our proposed rule, we interpreted the 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'' to mean 
that such P&T committee members would be required to be independent and 
free of conflict not only with respect to a Part D sponsor and its Part 
D plan, but also for pharmaceutical manufacturers. Some commenters 
supported such a requirement. A few commenters opposed such a 
requirement, however, claiming that our interpretation imposes a more 
stringent requirement than is permitted under the MMA. A number of 
other commenters cautioned us that our interpretation could exclude a 
significant number of individuals who are engaged in pharmaceutical and 
clinical research funded by pharmaceutical manufacturers.
    Response: Section 1860D-4(b)(3)(A)(ii)(I) of the Act requires that 
at least one practicing physician and at least one practicing 
pharmacist on a Part D plan's P&T committee be independent and free of 
conflict only with respect to a Part D sponsor and its Part D plan. 
However, given the requirement in section 1860D-4(b)(3)(B) of the Act 
that

[[Page 4257]]

the P&T committee base clinical decisions on the strength of scientific 
evidence and standards of practice, and taking into account therapeutic 
advantages in terms of safety and efficacy, we believe it is necessary 
for those committee members who are ``independent and free of 
conflict'' to be so with respect to pharmaceutical manufacturers as 
well. We agree that P&T committee members could have certain non-
employee relationships with pharmaceutical manufacturers (for example, 
consulting, advisory, or research relationships) and still be 
considered independent and free of conflict, provided those 
relationships do not constitute significant sources of their income and 
they do not otherwise have any conflicts of interests that would 
compromise their independence. As already mentioned, our draft benefit 
review criteria (recently issued for public comment) would require all 
P&T committee members to sign a conflict of interest statement 
revealing economic or other relationships with entities that could 
influence pharmaceutical decisions. This requirement is consistent with 
best practices in pharmacy benefit management, and we expect that it 
will be met consistent with industry standards for conflict of interest 
disclosures.
    Comment: Several commenters supported requiring that a plurality of 
P&T committee members be experts in the care of elderly and disabled 
patients. Some commenters recommended that use of the certified 
geriatric pharmacist credential would be an appropriate way to ensure 
that at least one pharmacist on the P&T committee has expertise in care 
of the elderly. One commenter opposed requiring that at least one 
practicing physician and one practicing pharmacist be experts in the 
care of elderly and disabled patients. Another commenter thought that 
at least one member of Part D plans' P&T committees should be a State 
Medicaid representative.
    Response: As provided in Sec.  423.120(b)(1)(iii) of our final 
rule, we are retaining the requirement that at least one practicing 
physician and one practicing pharmacist on a P&T committee have 
expertise in the care of elderly or disabled persons, though plans 
should view this requirement as a floor which they can certainly 
exceed. As proposed in the draft benefit design review criteria we 
recently issued for public comment, we would require P&T committee 
members to represent various clinical specialties. This requirement is 
consistent with best practices in pharmacy benefit management and will 
ensure that appropriate expertise--including in the areas of care of 
disabled and elderly populations--is included on Part D plans' P&T 
committees and that their clinical decisions are based on the strength 
of scientific evidence and standards of practice, and safety and 
efficacy considerations. We expect that P&T committee members will 
represent a mix of clinical specialties in order to ensure that P&T 
committees have the breadth of expertise necessary to adequately 
evaluate scientific evidence, standards of practice, and other 
information.
    Comment: A number of commenters suggested that we should require 
that P&T committees include experts in certain clinical specialties 
(for example, nephrology, oncology, rheumatology, dermatology, mental 
health, long-term care, and many others) or, at the very least, that 
such experts serve as consultants to P&T committees.
    Response: We agree that P&T committee members should represent 
various clinical specialties in order to provide the depth of expertise 
needed to develop an adequate formulary and utilization management 
processes for the Medicare population. As proposed in the draft benefit 
design review criteria we recently issued for public comment, we would 
require P&T committee members to represent various clinical 
specialties. This requirement is consistent with best practices in 
pharmacy benefit management. In addition, we note that, since committee 
members must base clinical decisions on the strength of scientific 
evidence and standards of practice, it is not essential that every 
specialty be represented--either as a P&T committee member or as a 
consultant. For some issues, the use of peer-reviewed medical 
literature--including randomized clinical trials, pharmacoeconomic 
studies, outcomes research data, and other such information--may be 
sufficient.
    Comment: We received a number of comments regarding our 
requirements for the basis of clinical decisions by Part D plan P&T 
committees. One commenter supported our characterization of the 
appropriate role of quality and cost considerations in Part D plan 
formulary development. Some commenters emphasized that cost 
considerations should be secondary to clinical issues in formulary 
development and review. One commenter suggested segregating cost and 
clinical reviews to preserve objectivity. Several commenters 
specifically suggested that we require Part D plan P&T committees to 
use classes of data that are included in the Academy of Managed Care 
Pharmacy (AMCP) format for Formulary Submissions--including clinical 
trials, health outcomes studies, and economic and budget impact 
models--as well as clinical guidelines issued by medical specialty 
societies. Several other commenters encouraged us to require Part D 
plans to consider data addressing total health care costs, if 
available, rather than pharmacy costs, in any cost considerations used 
for clinical decision-making.
    Response: As required in section 1860D-4(b)(3)(B) of the Act, P&T 
committees will be required 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 other 
such information as the committee determines appropriate). In addition, 
a P&T committee must take into account whether including a particular 
Part D drug on the Part D plan's formulary (or on a particular 
formulary tier) has any therapeutic advantages in terms of safety and 
efficacy. Where applicable, therapeutic advantage should be considered 
in relation to the interaction of a drug therapy regimen and the use of 
other health care services.
    We agree with commenters who urged that Part D plans consider data 
addressing total health care costs, if available, rather than pharmacy 
costs, in any cost considerations used for clinical decision-making. 
Since Part D sponsors have discretion with regard to the actual 
information their P&T committees use, we cannot mandate that all Part D 
plans use pharmacoeconomic studies, for example. However, in our 
subsequent guidance we intend to make clear that to the extent that the 
Part D plan considers costs in making its decision, it will take into 
account total health care costs rather than just drug costs. For 
example, to the extent that a particular drug has been shown to be more 
effective in preventing the need for hospital care or better at 
controlling acute flare-ups requiring the use of other services, we 
expect P&T committees to take these things into account in their 
determinations of drug efficacy. Given these requirements for evidence-
based decision-making, it is our expectation that committee members 
will balance any relevant cost considerations with clinical 
considerations.
    Comment: Some commenters supported a role for P&T committees in 
designing formulary tiers and any other clinical program implemented to 
encourage the use of preferred drugs. One commenter supported such a 
role,

[[Page 4258]]

provided that P&T committees are not required to be engaged in other 
benefit design issues.
    However, several commenters believed that P&T committees should 
have no involvement in the development of utilization management 
programs including development of cost-containment tools, medication 
therapy management programs, and quality assurance programs, as well as 
more specific benefit design issues such as the development of cost-
sharing tiers and should instead be limited to providing Part D plans 
with clinical recommendations on formularies. Other commenters thought 
that we should provide Part D plans with flexibility to determine how 
utilization management programs are designed and administered.
    Response: We believe that the requirement in section 1860D-3(c)(1) 
of the Act that Part D sponsors establish an appropriate cost-effective 
drug utilization management program supports a role for P&T committees 
in the development of formulary management practices and policies--
including prior authorization, step therapy, generic substitution, 
quantity limits, and other drug utilization management activities that 
affect access to covered Part D drugs. Furthermore, section 1860D-
4(b)(3)(F) of the Act and Sec.  423.120(b)(1)(vii) of our final rule 
require Part D plans to periodically evaluate and analyze treatment 
protocols and procedures. Clinical input is critical in the development 
of these policies in order to ensure that formulary management 
decisions balance economic and clinical factors to achieve appropriate, 
safe, and cost-effective policies. The review by P&T committees of Part 
D plan policies that guide exceptions and other utilization management 
processes is not only an important component in ensuring that plans 
adopt appropriate utilization management activities consistent with the 
statutory requirements, but also is consistent with best practices in 
pharmacy management policy. However, as previously stated, we believe 
that the primary function of a P&T committee is to provide clinical and 
not financial or benefit design--expertise.
    Comment: Some commenters suggested that P&T committees review 
formularies regularly, with some suggesting a quarterly review and 
others an annual review
    Response: As proposed in the draft benefit design review criteria 
we recently issued for public comment, we expect that P&T committees 
will meet on a regular basis, but not less frequently than on a 
quarterly basis. This standard is consistent with best practices in 
pharmacy management policy.
    Comment: One commenter urged us to specify minimum timeframes for 
periodic evaluation of Part D plan treatment protocols and formulary-
related procedures under Sec.  423.120(b)(4) of our proposed rule. A 
number of commenters recommended that protocol reviews be conducted on 
an ongoing basis at least quarterly, whereas some specified that such 
reviews be conducted at least annually.
    Response: As specified in Sec.  423.120(b)(1)(vii) of our final 
rule, Part D plan P&T committees will be required to evaluate and 
analyze treatment protocols and procedures related to the plan's 
formulary at least annually.
    Comment: A number of commenters also asked us to require that P&T 
committees have processes for making formulary revisions between 
regularly scheduled meetings when new clinical information becomes 
available or the FDA approves new medications.
    Response: As proposed in the draft benefit design review criteria 
we recently issued for public comment, we expect that P&T committees 
will review new Part D drugs, or drugs for which new clinical 
information is made available by the Food and Drug Administration, 
within 90 days of the availability of new information. This will allow 
for appropriate formulary changes to be made with all due speed and 
ensure that a Part D plan's formulary is based on the most recently 
available scientific evidence, standards of practice, and drugs' 
relative therapeutic advantages in terms of safety and efficacy. 
However, we expect that drugs pulled from the market by the FDA or 
manufacturers will be removed from Part D plan formularies immediately.
    Comment: Many commenters suggested additional requirements for 
ensuring P&T committee accountability, including requiring Part D plans 
to have a P&T committee regardless of whether they have a formulary or 
not; including a patient advocate on the committee to represent 
interests of patients; developing an oversight mechanism similar to 
local Medicare carrier advisory committees; requiring P&T committee 
meetings to be held publicly in order for consumers and stakeholders to 
have an opportunity to hear committee deliberations; requiring Part D 
plans to include a charge ensuring that the interests of beneficiaries 
are protected by their benefit design decisions; requiring thorough 
documentation of the rationale for P&T committee decisions; and 
requiring P&T committee decisions to be issued to the public upon 
request within a reasonable period of time.
    Response: These requirements are not consistent with standard 
practice in pharmacy benefit management. We believe that our 
requirements in Sec.  423.120(b)(1) of the final rule, as well as our 
formulary review which will consider the structure and utilization of 
an organizations P&T committee will sufficiently ensure that P&T 
committees function as a forum for evidence-based formulary review. As 
an added safeguard, and as provided in Sec.  423.120(b)(1)(viii) of our 
final rule, we will require Part D plan P&T committees to document in 
writing the basis of their decisions regarding formulary development 
and revision and utilization management activities.
2. Plan Formularies
    As provided under section 1860D-4(b)(3)(C)(ii) of the Act, we 
requested that the U.S. Pharmacopoeia (USP) develop a model set of 
guidelines that consists of a list of drug categories and classes that 
may be used by Part D sponsors to develop formularies for their 
qualified prescription drug coverage, including their therapeutic 
categories and classes. For more information about the USP model 
guidelines and the model guidelines themselves, please consult http://www.usp.org/drugInformation/mmg/.
    Section 1860D-4(b)(3)(C) of the Act provides, and Sec.  
423.120(b)(2) of our proposed rule required, the inclusion of drugs in 
each therapeutic category and class of Part D drugs in a Part D plan's 
formulary, although not necessarily all drugs within such categories 
and classes. As discussed in the proposed rule, we interpreted this 
provision to require coverage of at least two Part D drugs within each 
therapeutic category and class of Part D drugs, unless only one Part D 
drug existed in a particular therapeutic category and class of Part D 
drugs.
    We sought comments on ways to balance Part D plans' flexibility to 
use utilization management mechanisms to maximize covered Part D drug 
discounts and lower enrollee premiums with the needs of certain special 
populations of Part D enrollees, including Part D enrollees residing in 
long-term care facilities.
    In accordance with section 1860D-4(b)(3)(C)(iii) of the Act, Part D 
sponsors cannot change therapeutic categories and classes in a 
formulary other than at the beginning of a Part D plan year, except as 
we would permit to take into account new therapeutic uses and

[[Page 4259]]

newly approved Part D drugs. Section 423.120(b)(4) of our proposed rule 
specified that, in accordance with section 1860D-4(b)(3)(F) of the Act, 
Part D sponsors will periodically be required to evaluate and analyze 
treatment protocols and procedures related to their formularies to 
ensure that their Part D plan members were receiving the best possible 
care for conditions related to their use of covered Part D drugs.
    In addition, section 1860D-4(b)(3)(E) of the Act requires that Part 
D sponsors 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) of our proposed rule implemented this requirement 
by defining appropriate notice as at least 30 days prior to such change 
taking effect during a given contract year.
    As provided under Sec.  423.120(b)(6) of our proposed rule, we 
proposed that Part D sponsors 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.  423.38(b) and 30 days 
subsequent to the beginning of the contract year associated with that 
annual coordinated election period.
    Each Part D sponsor will 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 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 be met by a Part D 
sponsor directly, or through contracts or other arrangements between a 
Part D sponsor and another entity or entities.
    Except as otherwise provided below, the final rule adopts the rules 
for Part D plan formularies set forth in Sec.  423.120(b) of the 
proposed rule.
    Comment: We received a significant number of comments that directly 
and indirectly relate to the USP draft model guidelines issued for 
public comment in August 2004. In general, the USP related comments can 
be grouped into two categories. On one side, many comments claim that 
the current draft model guidelines lack the necessary detail to ensure 
that beneficiaries will have access to a comprehensive drug benefit, 
often citing specific examples of medications that are necessary for 
the treatment of the most frail and vulnerable populations and could be 
excluded from Part D plan formularies that comply with the model 
guidelines.
    On the other hand, many comments recommended that the USP model 
guidelines allow Part D plans the flexibility they need to develop 
clinically sound formularies that offer a prescription drug benefit at 
the lowest possible cost. Most of these commenters believe that the 
draft model guidelines, while in need of some specific modifications, 
are closer to reasonable than unreasonable. However, these commenters 
claim that the minimum ``drugs'' requirements for each category and 
class could significantly increase benefit costs if the categories and 
classes increase to a level of detail that interferes with Part D 
plans' ability to negotiate with manufacturers.
    Response: We believe that the USP model guidelines identify a 
reasonable number of categories and classes that balance the need for a 
comprehensive Part D benefit with the need to allow Part D plans 
flexibility to develop their own formularies and manage costs. These 
model guidelines will provide us with a useful, standard format as a 
starting point for our review of Part D plan benefit packages, since we 
expect many plans will adopt the model guidelines as the basis for 
their formulary classifications and submissions.
    The model guidelines, while important in creating a template for a 
formulary classification system, are not the only determinant of an 
adequate formulary. Plans will be required to include the types of 
drugs most commonly needed by Part D enrollees, as recognized in 
national treatment guidelines, in their formularies. Regardless of 
whether a Part D plan chooses to use the model guidelines or not, we 
will review the drugs chosen to populate plan formularies under our 
authority in section 1860D-11(e)(2)(D) of the Act to ensure that plan 
benefit design does not discourage enrollment by certain classes of 
Part D eligible individuals. However, formulary structure--including 
tiered cost-sharing structures -utilization management processes, P&T 
committee utilization and structure, and exceptions and appeals 
processes are just as important in ensuring a comprehensive benefit, 
and we intend to review these benefit design features as part of our 
comprehensive benefit package review. We discuss our benefit design 
review criteria in greater detail elsewhere in this preamble.
    Comment: Several commenters disagreed with our interpretation of 
the statutory term ``drugs'' as requiring coverage of at least two Part 
D drugs within each therapeutic category and class of Part D drugs 
(unless only one Part D drug existed in a particular therapeutic 
category and class of Part D drugs), arguing that such an 
interpretation was too expansive, and requiring coverage of too many 
drugs in too many categories would diminish Part D plans' negotiating 
leverage. These commenters provided examples of drug categories for 
which a blanket requirement of two drugs is not appropriate, and an 
exception should be granted. One commenter recommended that we should 
allow an exception from this rule for categories and classes that only 
include two drugs, and allow enrollees to obtain the non-formulary drug 
in such categories via the exceptions process only.
    In contrast, several commenters believed that requiring Part D 
plans to include two drugs in each therapeutic category and class of 
Part D drugs was not sufficient to ensure enrollee access to necessary 
medications. They were concerned that for some categories--including 
cancer treatments, rare diseases, mental illness, chronic pain, and 
other conditions--requiring only two drugs per drug category and class 
would be inadequate for Part D plans in terms of the statutory 
requirement that plan design not discourage enrollment.
    Several commenters urged us to clarify that this minimum two-drug 
requirement must be met through drugs or biologicals offered on an 
unrestricted basis (for example, not subject to utilization management 
processes, such as prior authorization or step therapy, non-preferred 
cost-sharing tiers, or other such restrictions on access to necessary 
therapies), with some specifically urging us to impose restrictions on 
step therapy by Part D plans. Some asked us to specify that the two 
drugs must be distinct chemical entities. One commenter recommended 
that we do not allow any Part B-covered drugs to count toward the two-
drug-per-category requirement.
    Response: Section 1860D-4(b)(3)(C) of the Act requires that Part D 
plans' formularies include ``drugs within each therapeutic category and 
class of Part D drugs, although not necessarily all drugs within such 
categories and classes.'' We believe that our interpretation of 
``drugs'' as ``at least two drugs'' is consistent with Congressional 
intent, and that it strikes an appropriate balance between providing 
Part D plans with the necessary leverage to negotiate with 
manufacturers for significant

[[Page 4260]]

discounts on covered Part D drugs and ensuring sufficient drug choice 
for beneficiaries. We have therefore retained the two-drug minimum 
requirement in Sec.  423.120(b)(2)(i) of our final rule.
    However, we recognize that Part D categories and classes may exist 
for which there are only two Part D drugs, and that including both of 
those drugs on a formulary may be problematic if the two drugs are 
vastly different in their clinical effectiveness. Given that section 
1860D-4(b)(3)(C) of the Act requires that Part D plan formularies 
include ``drugs within each therapeutic category and class of Part D 
drugs, although not necessarily all drugs within such categories and 
classes,'' we will allow plans to request exceptions to the requirement 
in Sec.  423.120(b)(2)(i) of our final rule to the extent they can 
demonstrate that there are only two Part D drugs available for a 
particular Part D drug category or class and that one of those drugs is 
clinically superior to the other. We have incorporated this provision 
at Sec.  423.120(b)(2)(ii) of our final rule.
    In response to comments that our proposed requirement is 
insufficient to provide adequate access to medically necessary 
treatments for Part D enrollees, we clarify that we will require Part D 
plans to adopt policies that ensure that beneficiaries have reasonable 
access to medically necessary drugs. Although Part D plans will not be 
required to include every Part D drug on their formularies, we will--as 
codified in Sec.  423.120(b)(2)(iii) of our final rule--require that 
plans include adequate access to the types of drugs most commonly 
needed by Part D enrollees, as recognized in national treatment 
guidelines, on plan formularies. We are establishing this requirement 
consistent with section 1860D-11(d)(2)(B) of the Act, which provides us 
with authority similar to that provided to the Director of the Office 
of Personnel Management for setting ``reasonable minimum standards'' 
for health benefits plans. We are looking to existing national 
standards to inform our review at the drug level, and Part D plans will 
be expected to accommodate national guidelines and offer complete 
treatment options for a variety of medical conditions, including (but 
not limited to) asthma, diabetes, depression, lipid disorders, 
hypertension, and HIV. This is necessary in order to ensure that Part D 
plans do not substantially discourage enrollment by certain Part D 
eligible individuals based on exclusions of certain classes of drugs 
from their formularies. In addition to examining specific drugs on Part 
D plan formularies, and as discussed in greater detail elsewhere in 
this preamble, we will review other aspects of plan benefit designs--
including tiered cost-sharing formulary structures, P&T committee 
structure and utilization, utilization management policies and 
processes, and exceptions and appeals processes--to ensure that Part D 
plans generally meet the requirements under Part D, including the 
provision of an adequate benefit.
    We do not agree with comments asking that the two-drug requirement 
be met through drugs offered on an unrestricted basis. We recognize 
that Part D plans may establish utilization management processes in 
such a way as to substantially discourage enrollment by certain 
beneficiaries. On the other hand, utilization management restrictions 
may be entirely appropriate for specific drugs or categories of drugs. 
Furthermore, the statute specifically allows plans to utilize tiered 
cost-sharing structures provided they meet certain actuarial 
equivalence tests. As previously mentioned, part of our benefit design 
review will focus not only on the specific drugs included on a Part D 
plan's formulary, but also on a plan's utilization management policies 
and procedures, to ensure that plans do not discriminate against 
certain enrollees.
    In addition, while drugs covered under Part B cannot be covered 
under Part D, as provided in section 1860D-2(e)(2)(B) of the Act, this 
exception to Part D coverage is limited to the drugs ``as so prescribed 
and administered'' under Part B. Thus, the fact that a beneficiary can 
have a particular drug covered under Part B ``incident to'' a physician 
service or as part of a hospital outpatient procedure does not mean 
that a prescription for the same drug should be denied by a Part D 
plan. We will provide more guidance on this issue, but we clarify that 
the number of drugs that may be denied coverage under Part D on the 
basis of the drug itself is limited. One category of drugs that can 
clearly never be covered under Part D is the list of oral cancer drugs 
covered under Part B. Such drugs and limited number of others may not 
be counted toward the two-drug minimum.
    Finally, we clarify that our two-drug minimum requirement must be 
met through the provision of two chemically distinct drugs. In other 
words, Part D plans may not include two dosage forms or strengths of 
the same drug, or a brand-name drug and a generic equivalent, in a 
particular category or class and meet the requirement in Sec.  
423.120(b)(2)(i) of our final rule.
    Comment: One commenter recommended that Part D plans' formularies 
include a wide variety of available dosage forms to the extent that was 
feasible. Another commenter asked us to clarify that we would not allow 
Part D plans to count different dosages of the same active ingredient 
as two separate drugs for the purposes of our two drug requirement. A 
third commenter asked us to clarify that it is acceptable for Part D 
plans to favor some dosages over others on their formularies.
    Response: We stated in our proposed rule that it was our 
expectation that the drugs included in each therapeutic category or 
class would include a variety of strengths and dosage forms, and we 
stand by that expectation in our final rule. However, we clarify that 
Part D plans will not have to provide equal access to all strengths and 
dosage forms of a particular Part D drug, although beneficiaries will 
have the right to pursue coverage of additional strengths and dosage 
forms through the appeals process. We have clarified in Sec.  
423.120(b)(2)(i) of our final rule that Part D plans must include two 
chemically distinct Part D drugs in each therapeutic category and class 
of drugs, with different strengths and doses available for each of 
those drugs. Thus, Part D plans may not meet this requirement by only 
including two or more different dosages of the same Part D drug in a 
particular drug category or class.
    Comment: Many commenters were concerned that our regulations will 
create barriers to physicians prescribing the best medication for their 
patients, including off-label uses of medications, which are common for 
many conditions and are the norm for some conditions. In actuality, 
off-label use is critically important and may be the mainstay of 
medical practice for successfully managing certain conditions, such as 
mental illnesses, chronic pain, chronic heart failure, arthritis, 
Parkinson's, HIV/AIDS and dementia. The FDA recognizes that ``off-label 
use of drugs by prescribers is often appropriate and may represent the 
standard of practice.'' A number of commenters opposed our position 
that the USP model guidelines should not be required to include classes 
of drugs if there is no FDA approved drug with an on-label indication 
for each class, even though there are FDA-approved drugs with commonly 
accepted off-label uses that would fall within a class. One commenter 
noted that any action taken by us regarding off-label use of 
medications would have a ripple effect on other public and private 
programs.

[[Page 4261]]

    Some commenters requested that we clarify the formulary 
requirements in our final rule to require Part D plans to cover 
medically accepted off-label use of prescription drugs. They believe 
this is consistent with Congressional intent and past practice under 
the Medicare and Medicaid programs. In addition, one commenter is 
concerned that by assigning a drug to a specific class for formulary 
purposes, a Part D plan may not cover it for other medically accepted 
indications. One commenter suggested formularies should be required to 
include off-label uses for drugs for the prevention and treatment 
recommended in clinical guidelines issued by government agencies and 
medical societies, whether on-label or off-label. Another commenter 
said that off-label use must be accessible through a Part D plan's 
exceptions process for non-formulary drugs.
    Response: We recognize the value of off label prescribing, 
particularly with regard to certain medical conditions. As mentioned in 
the proposed rule, 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 will 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. We expect Part D plans 
using alternative drug classification systems to include at least one 
drug that is approved by the FDA for the indication(s) in each drug 
category or class. However, this would not preclude physicians and 
other prescribers from prescribing drugs for off label indications, 
provided the drug is prescribed for a ``medically accepted 
indication,'' as defined in section 1927(k)(6) of the Act. Further, we 
clarify that the USP model guidelines would not preclude Part D 
sponsors 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.
    We do not have the authority to require that Part D plans cover the 
off-label use of certain Part D drugs. However, as discussed in greater 
detail elsewhere in this preamble, we will thoroughly evaluate plan 
benefit design to ensure that Part D plans provide an adequate benefit 
and do not discriminate against certain classes of Part D enrollees--
including a review of plan utilization management policies and 
processes, formulary structure, and plan exceptions and appeals 
processes. We believe that these safeguards will ensure Part D enrollee 
access to Part D drugs dispensed for medically appropriate off label 
indications.
    Comment: Multiple commenters were concerned that it is 
inappropriate for physicians to be given the new burden to ``document 
and justify'' off-label use in their Part D enrollees' clinical records 
due to the administrative burden and the interference with the practice 
of medicine by physicians. Many commenters mentioned that the FDA has 
recognized the right of physicians to use approved drugs and devices as 
they believe appropriate and never suggested there is a need to 
document such use. One commenter noted this documentation requirement 
is unprecedented and steps beyond well-established boundaries by 
inserting us into an individual physician's professional decision-
making. If documentation is required, one commenter asked us to clarify 
what constitutes sufficient documentation.
    One commenter, however, noted the need for documentation on 
prescriptions for off label use to enable pharmacists to conduct drug 
utilization review. Another commenter recommended regular reviews by us 
and by P&T committees through drug utilization and provider interviews 
as is customary in commercial plans.
    Many commenters urged us to mandate that Part D plans give 
deference and flexibility to physicians when making coverage 
determinations since a patient's physician has clinical expertise and 
intimate knowledge of patients' medical needs. One commenter suggested 
that we specify that Part D plans may not prohibit providers from 
prescribing drugs for discretionary use if such use is supported by one 
or more standard reference compendia or by one or more scientific 
studies published in peer-reviewed medical journals or by generally 
accepted standards of clinical care. One commenter suggested that MMA 
regulations should restrict the ability of Part D plans to limit 
physician prescribing for off-label purposes unless there is objective 
medical evidence that such prescribing is inefficacious or harmful to 
the individual patient.
    Commenters noted that onerous administrative hurdles associated 
with medically necessary off-label use could result in barriers to 
patient access to essential therapies. Without specific guidance, Part 
D plans could simply minimize financial risk through delay tactics 
disguised as Federal documentation requirements. One commenter 
recommended that at a minimum, we should clarify that there is nothing 
to prevent a Part D plan from covering an off-label use that does not 
meet the statutory definition of ``medically accepted indication'' if, 
based on expert advice, the plan determines that such use is 
appropriate. Multiple commenters suggested that the final rule guidance 
for Part D drugs should be at least as flexible as the current coverage 
policies for drugs covered under Medicare Part B. Under Part B, the 
definition of a ``medically accepted indication'' includes indications 
published in peer-reviewed literature; current Part B coverage policy 
regarding off-label drug use is also consistent with these norms.
    Response: By stating in the proposed rule preamble that we strongly 
encouraged physicians and other prescribers to clearly document and 
justify off-label use in their Part D enrollees' clinical records, we 
did not intend to establish a new documentation requirement for 
prescribers. We agree with commenters that physicians must have 
sufficient latitude to prescribe drugs as necessary based on their 
patients' particular medical needs and consistent with medical 
standards of practice, and our statement should not be interpreted as 
imposing new and onerous reporting requirements on prescribers. As 
previously mentioned, we will thoroughly review plan benefit designs to 
ensure that Part D plans meet all applicable requirements under Part D 
including the provision of an adequate benefit. We expect that onerous 
documentation requirements for off-label prescribing could potentially 
be cause for finding that a Part D plan's proposed benefit structure 
does not meet Part D requirements.
    We note that a drug is considered to be a Part D drug only if 
prescribed for a ``medically accepted indication'' as defined under 
section 1927(k)(6) of the Act. Drugs may not be covered under Part D 
even if they are not prescribed for a medically accepted indication. 
Coverage for other than a medically accepted indication is not 
permitted under the statute, since such drugs would not be considered 
Part D drugs. Plans have the flexibility to decide how to monitor 
whether a drug is prescribed for a medically accepted indication, as 
well as to determine whether the statutory definition of ``medically 
accepted indication'' is met with regard to the particular use of a 
drug.
    Comment: We received numerous comments regarding our authority 
under section 1860D-11(e)(2)(D)(i) of the Act to review Part D plan 
benefit designs including any formulary or tiered formulary structure 
to ensure that plans do not discriminate against certain Part

[[Page 4262]]

D eligible individuals. Many commenters urged us to use this authority 
to thoroughly, comprehensively, and judiciously review Part D plan 
design and benefits including formulary structure to prevent 
discriminatory practices. Some of these commenters were adamant that 
such a review not be limited only to the particular drugs included on a 
formulary list, but also to tiered cost-sharing (including the use of 
100 percent cost-sharing tiers), and utilization management 
requirements (for example, appeals, prior authorization, and step 
therapy requirements).
    Several other comments cautioned us not to be overly prescriptive 
in our formulary review criteria and avoid unintentionally limiting the 
ability of Part D plans to manage the costs of the Part D benefit. One 
commenter suggested that our formulary review standards should provide 
substantial deference to P&T committees including on cost-sharing, 
step-therapy, and prior authorization processes, and that we should not 
establish our own requirements in these areas.
    Other commenters asked that greater specificity regarding our 
criteria for formulary review, as well as practices that would be 
considered discriminatory, be provided either in regulation or in 
separate guidance, or both. Several commenters urged us to use defined 
performance metrics to make formulary discrimination assessments. 
Several commenters encouraged us to establish a flexible and readily 
accessible process for dialogue with a variety of stakeholders to 
create appropriate formulary review criteria, and one commenter urged 
us to actually involve States in the review process.
    Several commenters thought our formulary review process should be 
performed annually and that contract renewal should be contingent upon 
passing our review. Others thought that Part D plan formularies should 
be reviewed more often given plans' ability to make formulary changes 
mid-year.
    Response: We will comprehensively review Part D plans' proposed 
benefit structure to ensure that they generally comply with all 
applicable standards under Part D. We intend to conduct a reasonable 
review, providing guidelines that Part D plans can use in building 
formularies and structuring their bids. We recently shared with the 
public a first draft of our benefit package review criteria and, based 
on public comments received on that document, will finalize and make 
available publicly our final review criteria in early 2005.
    Consistent with the authority provided under section 1860D-
11(e)(2)(D)(i) of the Act, we will review Part D plan formularies to 
ensure that plans do not discriminate against certain classes of Part D 
eligible individuals by adopting a benefit design (including any 
formulary or tiered formulary structure) that would substantially 
discourage enrollment by certain beneficiaries. Nothing in the statute 
would foreclose us from concluding that a Part D plan's formulary 
substantially discourages enrollment even if the plan's classes and 
categories are considered non-discriminatory (for example, because the 
plan uses the USP model guidelines to structure its formulary). 
Although Part D plans will not be required to include every Part D drug 
on their formularies, we will require Part D plans to offer an adequate 
benefit. For example, we have the discretion to find that failure to 
include a specific drug would substantially discourage enrollment by 
beneficiaries with a condition that may only be treated by that drug. 
We are looking to existing national standards to inform our review at 
the drug level, and Part D plans will be expected to accommodate these 
national guidelines.
    We believe that other aspects of Part D plan benefit design 
including formulary structure (including tiered cost-sharing 
structures), the structure and utilization of a plan's P&T committee, a 
plan's utilization management policies and procedures (for example, 
prior authorization, step therapy, and generic substitution), and a 
plan's exceptions and appeals processes are as important as a plan's 
formulary list of drugs in ensuring that beneficiaries are offered an 
adequate benefit that generally complies with all applicable standards 
under Part D. Therefore, we intend to review these plan features as 
part of our comprehensive review of Part D plan benefit designs.
    We will review tiered cost-sharing arrangements to ascertain that 
the cost sharing associated with certain drugs or classes of drugs does 
not discourage enrollment by certain beneficiaries for example, those 
with certain diseases or medical conditions. We will also review a Part 
D plan's P&T committee structure and processes to ensure that plans 
comply with the requirements of section 1860D-4(b)(3)(B) of the Act, 
which creates standards designed to ensure impartial, clinically-based 
decision-making by P&T committees.
    A Part D plan's utilization management policies and processes must 
ensure that beneficiaries have continuous, timely, and appropriate 
access to Part D drugs, and that such policies are structured on 
evidence-based criteria that are reviewed by a Part D plan's P&T 
committee. Section 1860D-4(c)(1)(A) of the Act requires Part D plans to 
establish cost-effective drug utilization management programs 
(including incentives to reduce costs when medically appropriate). Our 
review of plan utilization management policies and processes will 
ensure that those policies and processes are medically appropriate and 
do not discriminate against certain beneficiaries.
    We clarify that a non-formulary drug is not necessarily a non-
covered Part D drug. The MMA provides for an exceptions process whereby 
enrollees and prescribers can request Part D coverage at more favorable 
cost sharing than for non-preferred drugs, as well as access to non-
formulary drugs at formulary cost-sharing levels. As discussed 
elsewhere in this preamble, we interpret section 1860D-4(h)(2) of the 
Act as requiring Part D plans to cover a non-formulary drug on appeal 
when, upon review, a physician determination of medical necessity is 
upheld. Thus, while Part D plans are not required to approve a non-
formulary Part D drug in the first instance at the point of sale, plans 
are required to provide access to Part D drugs, both formulary and non-
formulary, on appeal, where there is a legitimate medical need. We will 
review Part D plans' exceptions and appeals processes to ensure that 
evidence-based criteria are used to ensure medically appropriate access 
to all Part D drugs, including those drugs that are not favorably 
placed on a plan's formulary or not on the formulary at all.
    Section 1860D-11(d)(2)(B) of the Act provides us with authority 
similar to that provided to the Director of the Office of Personnel 
Management with respect to health benefits plans; this includes setting 
``reasonable minimum standards'' for plans. As we finalize our 
guidelines, we will look to existing national standards and guidelines, 
such as those established by the Utilization Review Accreditation 
Commission (URAC), the National Committee for Quality Assurance (NCQA), 
the American Society of Health Systems Pharmacists (ASHP), and the 
Academy of Managed Care Pharmacy (AMCP) to develop a framework for 
formulary management. The principles embodied in these standards and 
guidelines represent commercial best practice, and we believe Part D 
enrollees should be granted the same rights and protections under their 
Part D plan as generally

[[Page 4263]]

available to those enrolled in commercial plans.
    Comment: Many commenters supported establishing rules for special 
treatment, to include alternative or open formularies and other special 
provisions and exemptions, for certain classes of enrollees. Commenters 
suggested a number of classes of beneficiaries that we may want to 
consider ``special populations'' for the purpose of offering such 
special rules, including dual eligibles, institutionalized 
beneficiaries, individuals with certain diseases or medical conditions, 
and minority populations. Other commenters opposed any requirement that 
special populations be subject to special rules. Instead, they argued 
that we should provide Part D plans the flexibility to manage and 
design benefits consistent with their enrollees' needs. They felt that 
prescriptive guidance was not necessary and that our review for 
discrimination should be sufficient to ensure adequate access to all 
medically necessary drugs.
    Response: We share commenters' concerns about access to all 
medically necessary Part D drugs by vulnerable Part D enrollees. 
However, after much consideration, we disagree with commenters who 
advocated for specific requirements in regulation that would create 
special rules applicable only to certain classes of Part D enrollees. 
We believe commenters' concerns regarding access to Part D drugs for 
vulnerable populations will be addressed via our review of Part D plan 
benefit packages.
    As discussed in great detail elsewhere in this preamble, we will 
comprehensively review Part D plans' proposed benefit structure to 
ensure that they generally comply with all applicable standards under 
Part D--including the provision of a benefit that provides for adequate 
coverage of the types of drugs most commonly needed by Part D 
enrollees, as recognized in national treatment guidelines. We intend to 
conduct a reasonable review, providing guidelines that Part D plans can 
use in building formularies and structuring their bids. We recently 
shared with the public a first draft of our benefit package review 
criteria and, based on public comments received on that document, will 
finalize and make available publicly our final review criteria in early 
2005.
    Comment: A number of commenters urged us to place strict limits on 
Part D plans' ability to remove drugs or increase the cost sharing 
associated with certain formulary drugs mid-year. One commenter 
suggested we allow for changes only at the beginning of a contract year 
so that changes are announced to current and prospective enrollees 
prior to the open enrollment period and Part D plans are able to market 
their new formulary for the upcoming plan year. Another commenter 
recommended that we allow formulary changes only from October 1\st\ to 
November 14\th\ of a given year.
    Several commenters suggested that Part D plans be required to 
provide justification for any decision to remove a drug from the 
formulary. Another commenter stated that Part D plans should be 
required to document any decision to remove a drug from the formulary 
based on detailed scientific and clinical evidence. This commenter 
noted that reasons for discontinuing coverage could include new 
clinical evidence that a drug is unsafe, contraindicated for particular 
indications, or a manufacturer's withdrawal from the market. Other 
commenters noted that Part D plans should only be allowed to remove 
drugs from their formulary when new information about a drug's safety 
becomes available.
    Response: The goal of the MMA was to encourage private sector 
organizations who meet the law's requirements to offer a range of Part 
D plan options for Medicare beneficiaries by providing flexibility in 
plan design and management. This flexibility is modeled after the way 
consumers in the private sector receive drug benefits. Although the 
statute requires us to limit changes in the therapeutic categories and 
classes of a Part D plan's formulary to the beginning of each plan year 
(except as we permit to take into account new therapeutic uses and 
newly approved Part D drugs), it does not give us similar authority to 
preclude mid-year changes to a Part D plan's formulary list. However, 
as provided in section 1860D-4(b)(3)(E) of the Act, codified in Sec.  
423.120(b)(5) of our final rule, and discussed in greater detail 
elsewhere in this preamble, Part D plans must provide appropriate 
notice to affected enrollees, among others, prior to removing a drug 
from their formulary or changing the preferred or tier status of a 
formulary drug. Such notice will provide beneficiaries with ample time 
to transition to a covered Part D drug that meets the enrollee's needs, 
or to request a coverage exception.
    Comment: We received a number of comments urging us to consider 
requirements related to the ``grandfathering,'' on the same terms as 
previously available, of covered Part D drugs that are either removed 
from Part D plan formularies, or whose cost-sharing tier or preferred 
status changes, mid-year. One commenter stated that patients with 
chronic diseases who are stabilized by a plan-covered drug at the 
beginning of the year should not experience a higher copayment or be 
denied coverage of a drug based on a formulary change.
    Other commenters thought the grandfathering should apply more 
broadly. Some commenters said that Part D plans should be required to 
grandfather a drug for anyone taking the medication prior to its 
removal from their formulary (unless removed due to FDA safety 
concerns). One commenter recommended that we require Part D plans to 
grandfather coverage of chronic medications until the next open 
enrollment period. Other commenters noted that, if we do not include 
rules placing strict limits on formulary changes during the year, Part 
D plans should be required to continue coverage of the discontinued 
drug for the remainder of year, at the same price, for all individuals 
taking the drug as part of an ongoing treatment regimen. One commenter 
suggested that Part D plans be required to provide patients with a 72-
hour supply of a drug if it has been removed from the formulary. 
However, some commenters also clarified that such a requirement should 
not be meant to prohibit a Part D plan from asking physicians to 
voluntarily switch patients to less costly drugs through a therapeutic 
substitution initiative.
    Response: Although the MMA does not preclude mid-year formulary 
changes by Part D plans, it does require that plans provide appropriate 
advance notice to affected enrollees of any removal of a covered Part D 
drug from a formulary, or any change in the preferred or tiered cost-
sharing status of a covered Part D drug. As detailed elsewhere in this 
preamble, we have interpreted ``appropriate notice'' to mean at least 
60 days prior to such change taking effect. We believe that 60 days, 
which is consistent with National Association of Insurance 
Commissioners (NAIC) model guidelines, provides affected enrollees with 
ample time to either switch to a therapeutically appropriate 
alternative medication, or obtain a redetermination by the Part D plan, 
reconsideration by the independent review entity, and request an 
administrative law judge hearing before the change becomes effective. 
To the extent that Part D plans do not provide such 60-day advance 
notice, they will be required to provide such notice and a 60-day 
supply of the drug at the same terms covered previously when affected 
enrollees request refills of their prescriptions. Once notice is 
provided, enrollees will have a 60-day window to either switch to a

[[Page 4264]]

therapeutically appropriate alternative medication, or obtain a 
redetermination by the Part D plan, reconsideration by the independent 
review entity, and request an administrative law judge hearing before 
the 60-day supply is exhausted.
    Comment: A number of commenters voiced support for some kind of 
transition period for beneficiaries, particularly full-benefit dual 
eligibles, transitioning to Medicare Part D from other drug coverage. 
These commenters argue that, under Medicaid, many beneficiaries--
especially those with certain conditions (HIV/AIDS and mental illness, 
for example, as well as those residing in long-term care facilities)--
may experience relatively unfettered access to medically necessary 
drugs. This may not be the case when these enrollees transition their 
drug coverage from Medicaid to Part D, since different Part D plans 
will have different formularies, cost-sharing tiers, and utilization 
management requirements. Commenters are concerned that vulnerable 
beneficiaries may elect, or may be auto-enrolled in, a Part D plan that 
does not cover the drugs these beneficiaries need. More generally, 
several commenters noted that many beneficiaries--and not just those 
who are considered vulnerable or special populations--could face a 
significant loss of continuity of care if Part D plans' formularies are 
substantively different from each other or from commercial plans. They 
advocate for an additional coverage clause for patients transitioning 
into or changing Part D plans in order to avoid disruptions in care.
    Response: We agree with commenters that Part D plans should have 
processes in place to transition current enrollees from their old 
coverage to their new Part D plan coverage, particularly in cases where 
new enrollees are currently taking Part D drugs that are not included 
on the Part D plan's formulary at the time of enrollment. However, we 
envision that the need for such a transition period will be limited for 
several reasons.
    In reviewing a Part D plan's benefit package, we have the 
discretion to find that failure to include a specific drug on the 
formulary would substantially discourage enrollment by beneficiaries 
with a condition that may only be treated with that drug. For example, 
we expect that ensuring that beneficiaries with certain conditions, 
such as HIV/AIDS, are not as a group substantially discouraged from 
enrolling in a Part D plan will require that all or substantially all 
drugs in a particular therapeutic class be covered. In addition, in our 
review of plan benefit packages and our general oversight to ensure 
that Part D plans comply with all applicable requirements, we will 
examine not only the inclusion of particular drugs on a formulary, but 
also the structure and utilization of a plan's P&T committee, formulary 
structure (including tiered cost-sharing structures), a plan's 
utilization management policies and procedures (for example, prior 
authorization, step therapy, and generic substitution), and exceptions 
and appeals processes and how such processes guide access to both 
formulary and non-formulary drugs. Given such a review of the overall 
benefit package, we would expect that the majority of transition 
concerns vis-[agrave]-vis special populations will be obviated prior to 
beneficiary enrollment, as Part D plans will know our benefit package 
review criteria in advance of the bidding process. In addition, and as 
described in detail elsewhere in the section of this preamble 
discussing exceptions and appeals, we are adopting a substantive rule 
requiring coverage of non-formulary drugs on appeal provided that a 
medical necessity determination is upheld upon review.
    To address the needs of new Part D plan enrollees who are 
transitioning to Part D from other prescription drug coverage, and 
whose current drug therapies may not be included in their Part D plan's 
formulary despite the safeguards noted above, we are requiring--in 
Sec.  423.120(b)(3) of our final rule--that Part D plans establish an 
appropriate transition process for new enrollees which we would review 
as part of our benefit package review process. Section 1860D-
11(d)(2)(B) of the Act provides us with authority similar to that 
provided to the Director of the Office of Personnel Management (OPM) 
with respect to health benefits plans; as provided in 5 U.S.C. 8902(e), 
this includes the authority to ``prescribe reasonable minimum standards 
for health benefits plans.'' It is our understanding that OPM, in its 
contract negotiations with FEHBP plans, requires a transition policy. 
Furthermore, many commercial plans include transition processes for new 
enrollees. Failure to appropriately transition certain beneficiaries 
could result in aggravation of certain medical conditions including, in 
some cases, hospitalization which could ultimately increase costs to 
Medicare under Parts A and B. Thus, requiring Part D plans to establish 
appropriate transition policies for new enrollees appears to be 
consistent with our authority to prescribe reasonable minimum standards 
for Part D plans.
    We believe that a requirement for an appropriate transition process 
for new enrollees prescribed Part D drugs that are not on the Part D 
plan's formulary appropriately balances the protection of certain 
vulnerable populations with flexibility for Part D plans to develop a 
transition process that dovetails with plans' specific benefit designs. 
We will provide additional guidance regarding transition process 
requirements as part of our benefit package review criteria. However, 
we expect that a Part D plan's transition process would address 
procedures for medical review of non-formulary drug requests and, when 
appropriate, a process for switching new Part D plan enrollees to 
therapeutically appropriate formulary alternatives failing an 
affirmative medical necessity determination. Such a policy should also 
focus on particularly vulnerable populations, including dual eligibles 
and individuals with certain medical conditions (for example, enrollees 
with HIV/AIDS, mental illness, and those with other cognitive 
disorders).
    Comment: Some commenters requested that we establish a standard 
process for making formulary changes that Part D plans are required to 
follow, including standard policies and procedures for communicating 
changes to beneficiaries, pharmacists, and physicians. Another 
commenter suggested that we develop a standard formulary change form.
    Response: As provided in section 1860D-4(b)(3)(E) of the Act, and 
codified in Sec.  423.120(b)(5)(i) of our final rule, we will require 
that Part D plans provide appropriate notice regarding any removal of a 
covered Part D drug from their formulary or any change in the preferred 
or tiered cost-sharing status of a drug to affected enrollees and other 
parties. We believe that Part D plans should have the flexibility to 
develop formulary change notices that meet their particular needs, 
provided they include the information elements we specify at Sec.  
423.120(b)(5)(ii) of our final rule and discussed in greater detail 
elsewhere in this preamble.
    Comment: One commenter suggested that notice not be required when 
the enrollees' cost sharing is being reduced. This commenter also 
suggested that notice not be required when generic competitors have 
dropped out of the market, leaving only one supplier, and the generic 
drug as a result becomes effectively treated as a single-source ``brand 
name'' drug. Another commenter noted that the requirement for written 
notice should extend beyond changes in covered medication and should 
also be sent when the Part D plan changes procedures for accessing a

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particular medicine. Some commenters suggested we define ``appropriate 
notice'' differently for the expansion of a formulary versus the 
removal of a drug from the formulary to be consistent with the private 
market.
    Response: Section 1860D-4(b)(3)(E) of the Act requires Part D plans 
to provide notice before making ``any change in the preferred or tiered 
cost-sharing status of a drug.'' Plans must therefore provide notice 
regarding any cost-sharing changes be they increases or reductions, 
consistent with the requirements of Sec.  423.120(b)(5) of our final 
rule. The previously cited statutory language limits the provision of 
notice of formulary changes to the removal of a drug from a formulary 
or any change in the preferred or tier status of a drug, meaning that 
Part D plans will not be required to provide notice regarding a change 
in utilization management processes associated with a particular drug. 
However, we encourage Part D plans to do so to the extent practicable. 
We agree with the commenter who asks that we make a distinction between 
drugs added to and removed from a formulary. As provided in Sec.  
423.120(b)(5)(i) of our final rule, Part D plans will only be required 
to provide advance notice of formulary changes to affected 
beneficiaries when drugs are removed from a formulary; at their option, 
Part D plans may also wish to notify enrollees of new additions to 
their formularies.
    Comment: Some commenters support the 30-day notice provision in our 
proposed regulation. Other comments specifically noted that there 
should be exceptions to the 30-day requirement in cases where there has 
been an FDA directive to remove a drug from the market.
    However, many commenters were concerned that the 30-day notice 
provision in the proposed regulation would not provide the adequate 
time frame for enrollees to make the necessary changes in their drug 
treatment and ensure continuity of care particularly for enrollees with 
chronic conditions. Many commenters suggested a 90-day notice 
requirement. Several commenters suggested that beneficiaries be 
notified directly in writing at least 60 days before any change, and 
one commenter noted that NAIC model regulations for drug benefit 
changes require a 60-day notice.
    Response: We appreciate the feedback on our interpretation of 
``appropriate notice'' in the proposed rule as consisting of advance 
notice of at least 30 days. To ensure that Part D enrollees are 
provided with sufficient time either to switch to a therapeutically 
appropriate alternative medication, or obtain a redetermination by the 
Part D plan, reconsideration by the independent review entity, and 
request an administrative law judge hearing, we have defined 
appropriate notice as at least 60 days in Sec.  423.120(b)(5)(i)(A) of 
our final rule. In addition to affording enrollees more time to manage 
the consequences of mid-year formulary changes, a 60-day requirement is 
consistent with the NAIC model guidelines for drug benefit changes. As 
provided in Sec.  423.120(b)(5)(i)(B) of our final rule, Part D plans 
also have the option to the extent that they are not able to provide a 
60-day advance notice to provide the notice and provide 60 days' 
coverage of the Part D drug, under the same terms as previously 
available under the Part D plan, at the time the enrollee fills his or 
her prescription. Once notice is provided, enrollees will have a 60-day 
window to either switch to a therapeutically appropriate alternative 
medication, or obtain a redetermination by the Part D plan, 
reconsideration by the independent review entity, and request an 
administrative law judge hearing before the 60-day supply is exhausted.
    We note that, in order for the requirement regarding plan changes 
during the beginning of a contract year in Sec.  423.120(b)(6) of our 
final rule to be consistent with the 60-day advance notice requirement 
in Sec.  423.120(b)(5)(i)(A) of the final rule, we have changed the 
requirement in the proposed rule such that a Part D sponsor may not 
remove a covered Part D drug from its Part D plan's formulary, or make 
any change in the preferred or tiered cost-sharing status of a covered 
Part D drug on its plan's formulary, between the beginning of the 
annual coordinated election period and 60 days after the beginning of 
the contract year associated with that AEP. As previously mentioned, we 
had proposed a period of 30 days in Sec.  423.120(b)(6) of our proposed 
rule.
    We note that, in cases in which the FDA requires the removal of a 
covered Part D drugs from the market or a manufacturer pulls the drug 
from the market for safety reasons, 60-day advance notice will not be 
required, as provided in Sec.  423.120(b)(5)(iii) of our final rule. 
However, Part D plans will be required to provide notice to affected 
enrollees (as well as to SPAPs, entities providing other prescription 
drug coverage, authorized prescribers, network pharmacies, pharmacists, 
and us) about the removal of a such a covered Part D drug from their 
formularies as quickly as possible after the drug is actually removed 
from the formulary. This notification must comply with our notification 
requirements in Sec.  423.120(b)(5)(ii)(A) through (b)(5)(ii)(D).
    Comment: Some commenters asked for clarification on what is 
considered as ``appropriate notice''. Many commenters urged us to 
require Part D plans provide notice in writing and mail directly to 
each enrollee who is affected by the change. The commenters noted that 
without specifying that the notice must be provided in writing, Part D 
plans may believe they satisfy requirement by posting this information 
on their plan websites. Several commenters noted that website 
notification is inadequate. One commenter asked that Part D plans be 
allowed to give notice electronically if the enrollee opts for that 
communication method.
    Another commenter asked that Part D plans, primarily MA plans, 
receive more flexibility in giving notice to enrollees. One commenter 
noted that Part D plans should be allowed to convey certain types of 
formulary changes through pre- and post-enrollment materials such as 
sales brochures, enrollment forms, evidence of coverage, or summaries 
of benefits.
    Response: We agree that Part D plans must provide any formulary 
change notice in writing, and deliver it directly to affected 
enrollees. This requirement is reflected in Sec.  423.120(b)(5)(i)(A) 
of our final rule. As provided in Sec.  423.128(d)(2)(iii) of the final 
rule, Part D sponsors must also provide this notice to all current and 
prospective Part D enrollees via their plan websites. However, we agree 
with commenters who assert that website notification, on its own, is an 
inadequate means of providing specific information to the enrollees who 
most need it. Website notification will simply be an additional way in 
which Part D plans may provide notice of formulary changes to affected 
enrollees. We therefore require Part D plans to provide this notice 
directly to affected beneficiaries. As an alternative to providing this 
notice to affected beneficiaries via U.S. mail, to the extent that plan 
enrollees affirmatively elect to receive such notice electronically 
rather than in writing, via U.S. mail, Part D plans may provide notice 
electronically only.
    We do not believe that the formulary change notice requirements 
should apply any differently to MA-PD plans (or to cost plans offering 
qualified prescription drug coverage) than they do to prescription drug 
plans. In order to ensure that enrollees receive and process 
information about formulary changes in a timely way, we believe that

[[Page 4266]]

a notice of formulary changes is the most efficient way to do so, and 
that other materials (including pre- and post-enrollment materials such 
as sales brochures, enrollment forms, evidence of coverage, or 
summaries of benefits) are not the most appropriate mechanisms to 
convey such information.
    Comment: Many commenters recommended requiring Part D plans to 
include information about enrollees' rights to request an appeal or 
exception with their formulary change notification. One commenter urged 
that if the notice of the change in formulary involves the addition of 
a medication, the notice should also explain how the medication will be 
classed, if the Part D plan uses a tiered co-pay system or step therapy 
system. The notice should also indicate expected cost to the 
beneficiary. If a medication is being removed from the formulary, the 
notice should indicate what medication is available for individuals who 
were prescribed the medication being removed.
    Response: In response to the helpful public comments received on 
what ``appropriate notice'' of formulary changes should comprise, Sec.  
423.120(b)(5)(ii) of our final rule requires that Part D plans include 
the following information on their formulary changes notices: (1) the 
name of the affected covered Part D drug; (2) whether the plan is 
removing such covered Part D drug from the formulary, or changing its 
preferred or tiered cost-sharing status; (3) the reason why the plan is 
removing such covered Part D drug from the formulary, or changing its 
preferred or tiered cost-sharing status; (4) alternative drugs in the 
same therapeutic category or class or cost-sharing tier and expected 
cost-sharing for those drugs; and (5) the means by which enrollees may 
obtain a coverage determination under Sec.  423.566 or exception under 
Sec.  423.578 of our final rule. These required information elements 
will provide enrollees with the information they need to request an 
independent review or to switch to an alternative formulary drug.
    Comment: Several commenters noted that advance notice of formulary 
changes should only be required for enrollees currently using a 
particular drug, per our proposal in our notice of proposed rulemaking. 
One commenter asked that our interpretation of the term ``affected 
enrollee'' be further expanded to include an enrollee who has been 
dispensed a drug that has been removed, or whose status has changed, 
within the last 90 days. Other commenters urged us to require Part D 
plans to provide all enrollees (not just those taking the affected 
drug) with advance notice of formulary changes.
    Response: We interpret the statutory term ``affected enrollee'' as 
referring to a Part D enrollee who is currently taking a covered Part D 
drug that is either being removed from a Part D plan's formulary, or 
whose preferred or tiered cost-sharing status is changing. In other 
words, Part D plans will 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. 
This will minimize Part D plan administrative costs while getting 
information to those individuals who need it. We have incorporated this 
definition of the term ``affected enrollee'' in Sec.  423.100 of our 
final rule.
    Comment: Several commenters recommended that Part D plans notify 
prescribers, pharmacists and pharmacies through information posted on 
plans' websites or through routine communication to prescribers and 
pharmacists rather than contacting all prescribers and pharmacies 
directly. More than one commenter stated that sending a mailed 
notification to all beneficiaries, affected physicians, and pharmacists 
would be an enormous undertaking and expense. This commenter believes 
that it is appropriate to mail notifications to those taking the 
medication and provide it electronically to physicians, pharmacists, 
and other beneficiaries via the Part D plan website and upon request.
    Response: We agree with commenters that we should provide greater 
flexibility in terms of the mechanism by which they provide notice to 
parties other than affected enrollees to whom they are required to 
provide advance notice of formulary changes (including authorized 
prescribers, pharmacists, pharmacies, and us). As provided in Sec.  
423.120(b)(5)(i) of our final rule, we do not specify that written 
notice is required to be provided to these parties. Thus, Part D plans 
can determine the most effective means by which to communicate 
formulary change information to these parties, including electronic 
means.
    Comment: Several commenters suggested Part D plans also notify 
SPAPs, State retiree plans, and State Medicaid programs of formulary 
changes, and another commenter suggested State Medicaid offices as 
well.
    Response: Section 1860D-4(b)(3)(E) of the Act requires that 
``appropriate notice'' of formulary changes be made specifically to the 
Secretary, affected enrollees, physicians, pharmacies, and pharmacists. 
However, we expect Part D plans to coordinate with SPAPs and other 
plans providing benefits that supplement the benefits available under 
Part D coverage to Part D enrollees. Provision of formulary change 
information to these health plans and programs will be important in 
ensuring effective coordination. Given that section 1860D-24(a)(2)(F) 
of the Act provides us with flexibility to establish coordination of 
benefits requirements regarding other administrative processes not 
specified in section 1860D-24(a)(2) of the Act, we believe it is 
reasonable to require Part D plans to notify SPAPs and other health 
plans and programs (as defined in Sec.  423.454(f)(1) of our final 
rule) regarding formulary deletions or changes to the tiered cost-
sharing status of a drug. We have incorporated this requirement into 
Sec.  423.120(b)(5) of our final rule.
    Comment: One commenter recommended that Part D sponsors should 
include in their formulary notice to us a certification that they are 
still meeting the statutory formulary requirements.
    Response: We note that, notwithstanding any formulary changes Part 
D plans make mid-year, plans will still be required to meet all the 
formulary requirements in Sec.  423.120(b) of our final rule, and we 
will review all formulary changes to ensure that this is the case.
c. Use of Standardized Technology
    In accordance with the requirements of section 1860D 4(b)(2)(A) of 
the Act, Part D sponsors must 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. Section 1860D 4(b)(2)(B)(ii) 
of the Act requires us to consult with the National Council for 
Prescription Drug Programs (NCPDP) and other standard setting 
organizations, as appropriate, to develop these standards.
    Except as otherwise provided below, the final rule adopts the rules 
regarding use of standardized technology set forth in Sec.  423.120(c) 
of the proposed rule.
    Comment: A number of commenters support our using a standardized 
identification card using NCPDP standards. These commenters note that a 
standardized card using the NCPDP format will create increased 
efficiencies such as reduced waiting times for dispensing medications 
that will benefit pharmacy providers and beneficiaries. A

[[Page 4267]]

few commenters suggested that we provide MA organizations with the 
flexibility to integrate their drug card with their medical benefits 
card rather than issuing a separate card if the MA organization chooses 
to do so and others requested clarification that MA organizations could 
issue a single card for both their medical and drug benefits. One 
commenter expressed concern about using an identification number other 
than the beneficiaries' Medicare Identification Number because this 
number is familiar and known by the beneficiaries. In certain 
situations, if the card were lost or stolen, beneficiaries could easily 
remember their drug card number.
    Response: 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 expect to base 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 Part D sponsors in time 
for these entities to use the standards (and have their cards approved 
for use by us) beginning January 1, 2006. We understand that Part D 
sponsors would like flexibility to integrate their medical and drug 
benefit cards and will provide Part D sponsors with that flexibility 
consistent with our approach under the Medicare Prescription Drug 
Discount Card and Transitional Assistance Program. It is our intent, 
however, that these standards require that Part D plans use something 
other than an enrollee's social security number (SSN) as an identifier 
on their cards given rising concern over the increasing number of cases 
regarding identity fraud using an individual SSNs and privacy concerns. 
We understand that this number is the most familiar and known to the 
beneficiaries but we will work to make the drug card identification 
number and process easy and convenient for beneficiaries.
5. Special Rules for Out-of-Network Access to Covered Part D Drugs at 
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. Given the inherent 
difficulties in establishing emergency access standards for covered 
Part D drugs, we proposed to meet the requirements of section 1860D 
4(b)(1)(C)(iii) of the Act by establishing a broader out-of-network 
access requirement. We proposed requiring that Part D sponsors ensure 
that their enrollees had adequate access to drugs dispensed at out-of-
network pharmacies when they could not reasonably be expected to obtain 
covered Part D drugs at a network pharmacy. In the proposed rule, we 
stated that we expected out-of-network access to 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 Part D 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 Part D 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. Both the enrollee and his or her Part D plan would 
have been financially responsible for covered Part D drugs obtained at 
an out-of-network pharmacy as described. In the proposed rule, we 
specified that such cost-sharing would have been applied relative to 
the plan allowance for that covered Part D drug. We requested comments 
on how to further define the term ``plan allowance.''
    In addition to this cost-sharing, and as provided under proposed 
Sec.  423.124(b)(2), the enrollee would have been 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. We requested public comments regarding our definition of usual 
and customary price. We also sought comments regarding our proposal 
that the price differential between out-of-network pharmacies' U&C 
costs and the plan allowance 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. Finally, we requested 
general 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.
    Except as otherwise provided below, the final rule adopts the out-
of-network access rules set forth in Sec.  423.124 of the proposed 
rule.
    Comment: Many commenters generally supported our proposed out-of-
network pharmacy proposal and said beneficiaries--particularly those in 
rural areas--should not be penalized for going out-of-network when 
necessary. However, some commenters felt the proposal's list of 
situations in which access to out-of-network pharmacies would be 
allowed was overly broad and recommended limiting such access to 
emergency situations only. Some commenters expressed support for plans 
having the discretion to establish out-of-network access requirements, 
but not being given a specific list of requirements. Some expressed 
concern that the message to beneficiaries might be that they can go to 
out-of-network pharmacies at will, resulting in increased costs.
    A number of commenters stated that as proposed, allowing access to 
out-of-network pharmacies is impractical because these pharmacies 
cannot determine if beneficiaries have met their deductibles, are in 
the coverage gap, or the amount their Part D plan would pay had they 
gone to a participating pharmacy. Out-of-network pharmacies do not have 
access to data needed to calculate payment rates other than their own 
usual and customary price. These commenters asked that we clarify that 
out-of-network pharmacies may charge beneficiaries their usual and 
customary price that beneficiaries must be responsible for submitting 
claims for out-of-network medications they purchase to their Part D 
plans, and that plans must accept claims submitted to them by 
beneficiaries once such a purchase is made. One commenter recommended 
Part D plans be given

[[Page 4268]]

time to retroactively modify claims databases to accommodate paper 
claims tracking, suggesting that we minimize these requirements and be 
specific in the timeline under which these modifications are required 
(for example, 60 days).
    Some commenters stated that the proposal is inadequate for 
emergency situations and should require Part D plans to cover a 
temporary supply of drugs. One commenter recommended that we require 
Part D plans to establish a mechanism to guarantee payment for at least 
a 72-hour supply of any medically necessary, covered Part D drug 
obtained out-of-network. One commenter disagreed with the proposal 
entirely, stating that if the TRICARE access standards were met by a 
Part D plan, this should be a sufficient guarantee of adequate network 
access.
    Response: We expect that, given our pharmacy access standards, Part 
D enrollees will have adequate access to network pharmacies. However, 
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. Given the inherent 
difficulties in establishing what constitutes an ``emergency,'' we 
believe it is most appropriate to establish a broader out-of-network 
access requirement. Section 423.124(a)(1) of our final rule clarifies 
that Part D plans are required to ensure 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. Provided that such access to out-of-network 
pharmacies is not routine, we expect that Part D plans would guarantee 
out-of-network access in cases in which an enrollee: (1) is traveling 
outside his or her plan's service area, runs out of or loses his or her 
covered Part D drugs or becomes ill and needs a covered Part D drug, 
and cannot access a network pharmacy; (2) 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 24/7 service; (3) must fill a prescription for a 
covered Part D drug, and that particular drug (for example, an orphan 
drug or other specialty pharmaceutical) is not regularly stocked at 
accessible network retail or mail-order pharmacies;; and (4) is 
provided covered Part D drugs dispensed by an out-of-network 
institution-based pharmacy while a patient is in an emergency 
department, provider-based clinic, outpatient surgery, or other 
outpatient setting. We are not incorporating these scenarios into our 
final regulations but will closely monitor out-of-network access to 
ensure that Part D plans are adequately meeting beneficiaries' out-of-
network access needs. In addition, plans must provide coverage of drugs 
in physician's offices in cases in which a beneficiary is administered 
a vaccine covered by Part D (or another covered Part D drug that is 
appropriately dispensed and administered in a physician's office).
    We understand commenters' concerns that routine access to out-of-
network pharmacies could undermine a Part D plan's ability to achieve 
cost-savings for both beneficiaries and the Medicare program. For this 
reason, we would like to clarify that Sec.  423.124(c) of our final 
rules requires Part D plans to establish reasonable rules to ensure 
that enrollees use out-of-network pharmacies in an appropriate manner--
provided they ensure adequate access to out-of-network pharmacies on a 
non-routine basis when enrollees cannot reasonably access network 
pharmacies. For example, Part D plans may wish to limit the amount of 
covered Part D drugs dispensed at an out-of-network pharmacy, require 
that a beneficiary purchase maintenance medications via mail-order for 
extended out-of-area travel, or require a plan notification or 
authorization process for individuals who fill their prescriptions at 
out-of-network pharmacies. Plans will be required to disseminate 
information to enrollees about their out-of-network access policies as 
provided in Sec.  423.128(b)(6) of our final rule.
    We wish to clarify that enrollees obtaining covered Part D drugs at 
out-of-network pharmacies, which by virtue of not being under contract 
with an enrollee's Part D plan will not have access to the data needed 
to calculate Part D plan payment rates, will have to pay the pharmacy's 
U&C price at the point-of-sale, submit a paper claim to their Part D 
plan, and wait for reimbursement from the plan. Out-of-network 
pharmacies will therefore be made whole, relative to their U&C price 
for a covered Part D drug, at the point of sale.
    Comment: One commenter stated that patients in emergency 
departments, provider-based clinics, outpatient surgery, or under 
observation are often administered drugs (self-administered drugs or 
insulin, for example) under physician order for medically necessary 
conditions. These drugs are not covered under Part A or Part B and are 
billed to patients as a patient liability. For safety and quality of 
care reasons, patients often cannot bring their own medications into 
hospitals or outpatient settings when they are being treated for other 
conditions. This commenter asked for clarification regarding whether 
Part D plans will cover self-administered prescription drugs dispensed 
by hospital pharmacies; if so, how beneficiaries will avail themselves 
of their Part D benefits; and, if not, whether hospitals will have to 
provide drug coding and other detail on billing statements for 
beneficiaries so they can submit those statements to their Part D plans 
for reimbursement.
    Response: As provided elsewhere in this preamble, Part D plans may 
include institutional pharmacies, including hospital-based pharmacies, 
in their networks, although these pharmacies will not count toward the 
access requirements Part D plans must meet under Sec.  423.120(a)(1) of 
our final rule. To the extent hospital pharmacies are included in Part 
D plan networks, Part D enrollees who are furnished covered Part D 
drugs by those pharmacies, the situations noted by the commenter will 
not be an issue. However, we recognize that enrollees who are provided 
covered Part D drugs by hospital and other institution--based 
pharmacies under the circumstances described by this commenter cannot 
reasonably be expected to obtain needed covered Part D drugs at a 
network pharmacy. We therefore clarify that we expect that Part D plans 
guarantee out-of-network access to covered Part D drugs in cases in 
which an enrollee is provided covered Part D drugs dispensed by an out-
of-network institution-based pharmacy while a patient in an emergency 
department, provider-based clinic, outpatient surgery, or other 
outpatient setting.
    Comment: Two commenters recommended that Part D plan enrollees who 
live in different States during the year should be allowed access to 
out-of-network pharmacies, as with the other four instances we 
proposed. One commenter further argued that restricting pharmacy access 
to mail order during long absences from or trips out of a Part D plan's 
service area violates the prohibition on exclusive use of mail order 
pharmacies.
    Response: The statutory authority for our proposed out-of-network 
access policy derives from the requirement, in section 1860D-
4(b)(1)(C)(iii) of the Act, that our network access rules include 
provisions for adequate emergency access for Part D enrollees. Given 
that narrow statutory authority, we do not believe that access to out-
of-network pharmacies on a routine basis can be justified under our 
out-of-network

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access rules. Through our educational efforts, we will encourage 
enrollees who live in different States during a year (snowbirds, for 
example) to enroll in national or regional Part D plans that will 
provide coverage in multiple areas, or in Part D plans that include 
out-of-area pharmacies in their networks. However, to the extent that a 
beneficiary is enrolled in a Part D plan that does not provide such 
access, plans may not allow routine out-of-network access consistent 
with Sec.  423.124(a)(2) of our final rule.
    Comment: Two commenters emphasized the need to allow out-of-network 
access for specialty medications, such as orphan drugs, that are not 
typically stocked in a retail pharmacy. Their argument was echoed by 
commenters who emphasized the need to allow for out-of-network access 
to home infusion therapy.
    Response: We expect that Part D plans will provide out-of-network 
access to specialty pharmacies in cases in which specialty medications, 
such as orphan drugs, are not available at a network pharmacy, as this 
is a case in which enrollees could not reasonably be expected to access 
their medications at a network pharmacy. However, given that out-of-
network access to covered Part D drugs may not be provided routinely, 
consistent with Sec.  423.124(a)(2) of our final rule, Part D cannot 
not provide access to out-of-network access to a specialty pharmacy on 
an ongoing basis. As discussed elsewhere in this preamble, our final 
rule requires that Part D plans provide adequate access to home 
infusion pharmacies. We established this access requirement to mitigate 
the need for routine out-of-network access to home infusion drugs. 
However, in cases in which an enrollee cannot reasonably access a home 
infusion pharmacy in his or her Part D plan's network, we expect that 
plans will provide access to an out-of-network home infusion pharmacy 
consistent with Sec.  423.124(a) of our final rule.
    Comment: Some commenters stated that the final rule should clarify 
that beneficiaries residing in a long-term care facility should be 
allowed access to long term care pharmacies as out-of-network 
pharmacies, should the pharmacy contracting with the long-term care 
facility in which they reside not participate with their chosen Part D 
plan. Another commenter thought that our proposed policy vis-[agrave]-
vis beneficiaries residing in long-term care facilities is 
inappropriate given that our authority for establishing such 
requirements is based on emergency access only.
    Response: As noted previously, we agree with the commenter who 
questioned our authority for allowing access to out-of-network long-
term care pharmacies on a routine basis. The statutory authority for 
our proposed out-of-network access policy derives from the requirement, 
in section 1860D-4(b)(1)(C)(iii) of the Act, that our network access 
rules include provisions for adequate emergency access for Part D 
enrollees. Given that narrow statutory authority, we do not believe 
that access to out-of-network pharmacies on a routine basis including 
in cases where a beneficiary resides in a long-term care facility whose 
contracted long-term care pharmacy is not in his or her Part D plan's 
network can be justified under our out-of-network access rules.
    Comment: One commenter said that physician offices should be 
considered out-of-network pharmacies insofar as they supply covered 
Part D drugs.
    Response: We note that vaccines (and other covered Part D drugs 
that are appropriately dispensed and administered in a physician's 
office) administered in a physician's office will be covered under our 
out-of-network access rules at Sec.  423.124(a)(2) of our final rule, 
since Part D plan networks are defined as pharmacy networks only. A 
scenario under which a Part D enrollee must obtain a Part D-covered 
vaccine in a physician's office constitutes a situation in which out-
of-network access would be permitted because a beneficiary could not 
reasonably be expected to obtain that vaccine at a network pharmacy. We 
expect that the application of this requirement will be limited to 
vaccines and a handful of drugs (for example, some injectable long-
acting anti-psychotics) that are appropriately dispensed and 
administered in a physician's office and are not covered under Part B, 
and that plans may establish utilization management policies and 
procedures to ensure that out-of-network coverage is limited to such 
covered Part D drugs. Enrollees will be required to self-pay the 
physician for the cost of the vaccine (or other covered Part D drug 
appropriately dispensed and administered in a physician's office) and 
submit a paper claim for reimbursement by their Part D plan.
    Comment: Commenters generally recommended the beneficiary pay the 
difference between the network price applicable to that beneficiary and 
the maximum price charged to any Part D plan with which the pharmacy 
participates. However, they argue, determining that amount would be 
difficult because out-of-network pharmacies do not have access to the 
data necessary to calculate that amount. Some commenters specified that 
beneficiaries purchasing drugs from an out-of-network pharmacy in an 
emergency situation should not be charged anything more than the 
network amount. Several commenters urged us to exempt low-income 
beneficiaries from any differential costs incurred for visiting an out-
of-network pharmacy. One noted that we should monitor usage of out-of-
network pharmacies by low-income beneficiaries.
    Response: As provided in Sec.  423.124(b) of our final rule, if a 
Part D plan offers coverage other than defined standard coverage, it 
may require enrollees to not only be responsible for any cost-sharing, 
including a deductible, that would have otherwise applied had the 
covered Part D drug been purchased at a network pharmacy, but also any 
differential between the out-of-network pharmacy's (or provider's) 
usual and customary (U&C) price and the enrollee's cost-sharing. 
However, given the cost-sharing requirements for defined standard 
coverage in Sec.  423.104(d)(2)(A) of our final rule, under which the 
cost-sharing between the deductible and initial coverage limit must be 
25 percent of the actual cost of a drug at the point of sale, Part D 
plans offering defined standard coverage may not offer such an out-of-
network differential. Instead, a Part D plan offering defined standard 
coverage must simply require its enrollees to pay any deductible or 
cost-sharing, relative to the out-of-network pharmacy's (or provider's) 
usual and customary price. The Part D plan will pay the difference 
between the out-of-network pharmacy's (or provider's) U&C price and the 
enrollee's cost-sharing.
    In either case, enrollees will likely be required to pay more for a 
covered Part D drug purchased out-of-network than one purchased at a 
network pharmacy, though, as explained below, any such differential 
will count toward an enrollee's TrOOP limit. In order to curb 
unnecessary out-of-network use and preserve Part D plans' ability to 
achieve cost-savings based on network pharmacy use, we believe it is 
appropriate that beneficiaries pay more for out-of-network access to 
covered Part D drugs.
    As explained below, we will pay any out-of-network differential for 
appropriate non-routine use of out-of-network pharmacies (or providers) 
for full and other subsidy-eligible individuals as part of our low-
income subsidy under subpart P of the final rule.
    Comment: Some commenters asked us to clarify whether subsidy 
eligible

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individuals who reside in long-term care facilities will have to pay 
any out-of-network differentials when obtaining drugs from an out-of-
network long-term care pharmacy. Many recommended that we pay the out-
of-network differential for institutionalized enrollees who are subsidy 
eligible.
    Response: We agree that for full and other subsidy-eligible 
individuals--whether they are institutionalized or not--we should pay 
any out-of-network differential for appropriate non-routine use of out-
of-network pharmacies. As provided in Sec.  423.104(d)(2) of our final 
rule, we define enrollee cost sharing in relation to the total cost of 
the drug to the Part D plan and the beneficiary (actual costs). 
Therefore, in cases where the total payment is not limited by the plan 
allowable because a drug is obtained out-of-network, the cost sharing 
can be defined as the total paid by beneficiary, or in the case of a 
subsidy eligible individual, as the total cost sharing paid by both the 
beneficiary and by us. This approach reconciles the need to charge the 
OON differential and to hold the subsidy eligible individual liable for 
only the statutorily allowed copayment amounts ($1/$3, $2/$5, or $0 in 
the case of institutionalized full subsidy individuals who are full-
benefit dual eligible individuals).
    Comment: A few commenters argued that enrollees accessing covered 
Part D drugs at out-of-network FQHC, rural and I/T/U pharmacies should 
also be exempt from any out-of-network differentials.
    Response: We do not believe there exists a compelling rationale to 
exempt beneficiaries who access their drugs at FQHC, rural, or I/T/U 
pharmacies. However, to the extent such individuals qualify as full or 
partial subsidy eligible individuals, they will be responsible only for 
the cost-sharing amounts required in subpart P.
    Comment: Comments on the definition of ``U&C price'' fell into 
three groups. Some commenters felt that the U&C price should be defined 
as that amount charged to cash paying customers, excluding sales tax. 
Others argued that the U&C price should be the amount typically charged 
to senior groups or other cash customers who are directly given some 
sort of discount as an inducement to make a purchase from a given 
supplier. A third group of commenters felt that the U&C price should be 
the maximum the pharmacy charges any customer covered by a Part D plan. 
Several commenters noted that we should not allow pharmacies to 
manipulate their U&C prices and should check them periodically to be 
sure they were less than or equal to the average wholesale price.
    Response: We appreciate commenters' suggestions. We believe our 
proposed definition of the term ``usual and customary price'' the price 
that a pharmacy (or provider) charges a customer who does not have any 
form of prescription drug coverage is adequate and are retaining it in 
Sec.  423.100 of our final rule. We note, in response to several 
commenters' suggestions, that we do not have the authority to require 
out-of-network pharmacies to accept a particular price (for example, 
the maximum price a pharmacy charges any of its customers enrolled in 
Part D plans) as their U&C price. We believe that Part D plans, not 
CMS, should be responsible for monitoring of U&C prices for covered 
Part D drugs at out-of-network pharmacies, since, given that any price 
differential paid by a beneficiary would count toward the TrOOP 
threshold, they ultimately have a vested interest in limiting the costs 
associated with out-of-network use.
    Comment: With regard to the definition of ``plan allowance,'' 
several commenters recommended that it be defined as ``the lowest of 
contractual discounts offered in a standard contract or U&C price.'' 
One commenter recommended defining the term in CMS guidance to permit 
consultation with affected parties. One commenter pressed for Part D 
plan flexibility so that they could ensure the lowest prices for their 
members.
    Response: We have retained our proposed definition of ``plan 
allowance'' in Sec.  423.100 of our final rule in order to provide Part 
D plans with maximum flexibility to establish the most appropriate plan 
allowance for drugs obtained out-of-network.
    Comment: One commenter asked for clarification of the appeals 
process relating to adverse coverage decisions for out-of-network 
drugs.
    Response: As provided under Sec.  423.566(b)(1) of our final rule, 
a Part D plan's failure to pay for a covered Part D drug furnished by 
an out-of-network pharmacy is an action that is a coverage 
determination.
    Comment: Another commenter wanted to be sure that out-of-network 
pharmacies did not advertise their services as Medicare covered so that 
beneficiaries would not be confused.
    Response: We believe that beneficiaries should always receive 
accurate and clear information about their pharmacy benefits, and we 
believe pharmacies must ensure that out-of-network beneficiaries are 
not misled. However, we have no authority under the MMA to regulate 
pharmacies' marketing activities. Marketing activities of pharmacies 
may implicate other Federal or State laws, however, including, but not 
limited to, consumer protection laws. Pharmacies may also be subject to 
sanction under section 1140 of the Social Security Act if they 
misrepresent an affiliation with, or endorsement by the Medicare 
program.
6. Dissemination of Plan Information (Sec.  423.128)
    Our proposed rule established beneficiary protection requirements 
concerning the dissemination of Part D information by Part D sponsors 
to enrollees in, and individuals eligible to enroll in, a Part D plan. 
Part D information disseminated by Part D sponsors to current or 
prospective Part D enrollees will constitute marketing materials and 
must be approved by us.
    With the exception of the drug-specific information dissemination 
requirements, many of the proposed requirements duplicated information 
dissemination requirements contained in Sec.  422.111 of our proposed 
MA rule that are applicable to all MA plans, including MA-PD plans. We 
proposed applying the requirements of section 1860D-4(a) of the Act to 
other Part D plans to ensure that all Part D eligible enrollees have 
access to comparable drug-specific information about Part D plans.
a. Content of Plan Description
    Proposed Sec.  423.128(a) and (b) complied 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).
    In order to ensure that individuals who are either eligible for, or 
enrolled in, a Part D plan receive the information they need to make 
informed choices about their Part D coverage options, Part D sponsors 
would be required to disclose, to each enrollee in a Part D plan 
offering qualified prescription drug coverage, a detailed description 
of that plan. This description must be provided in a clear, accurate, 
and standardized form at the time of enrollment and annually, at a 
minimum, after enrollment. The information provided will be similar to 
the information MA plans must disclose to their enrollees.
    Except as otherwise provided below, the final rule adopts the 
requirements pertaining to plan content description set forth in Sec.  
423.128(b) of the proposed rule.
    Comment: One commenter sought clarification regarding what we mean 
by ``standardized'' in our requirement that

[[Page 4271]]

Part D plans provide information to enrollees in a ``clear, accurate, 
and standardized form.''
    Response: We expect Part D plans to provide information about their 
benefit packages in a manner that is consistent with marketing 
guidelines that we will make available to plans.
    Comment: Several commenters requested that we allow Part D plans 
the flexibility to make plan information available through the 
Internet. For the convenience of beneficiaries as well as to control 
costs, these commenters recommend that we encourage the use of more 
efficient information distribution channels (for example, Internet and 
email) to disseminate detailed Part D plan information and thus limit 
the distribution of paper materials to situations in which that makes 
sense. Another commenter recommended that we clarify that, with the 
express consent of the enrollee, Part D plans may waive enrollees' 
right to request and receive any required information in writing and 
allow for the enrollee to obtain that information via a plan website or 
email.
    Response: We agree that some beneficiaries may prefer to receive 
Part D plan information electronically and that the provision of plan 
information through electronic means has the potential to significantly 
reduce Part D plans' costs. However, a number of Medicare beneficiaries 
still do not have access to the Internet or prefer to receive their 
information in written formats. We have modified Sec.  423.128(a) of 
our final rule to note that we may specify the manner in which plan 
information must be disseminated to beneficiaries. We clarify that 
information disseminated by Part D plans as part of a plan description 
under Sec.  423.128(b), as well as information disclosed upon enrollee 
request under Sec.  423.128(c), must be provided in a written format 
and delivered to beneficiaries via U.S. mail unless a beneficiary 
explicitly consents--by actively opting in--to receive information 
electronically or via telephone rather than by mail. The electronic 
provision of Part D plan information should simply be one additional 
mechanism for Part D plans to communicate with enrollees and potential 
enrollees.
    Comment: One commenter recommended that Part D plans provide 
information regarding any prior authorization processes required for 
certain drugs as part of their information dissemination efforts 
regarding formularies.
    Response: We agree with this commenter and have modified that 
language at Sec.  423.128(b)(4) to clarify that Part D plans must 
disclose information about any utilization management procedures they 
may use as part of the formulary information they must disseminate to 
beneficiaries.
    Comment: One commenter recommended that Part D plans be required to 
provide a list of pharmacies in their networks since the proposed rule 
requires information only about the types of pharmacies in plans' 
networks.
    Response: We believe the commenter misinterpreted the provision at 
Sec.  423.128(b)(5) of our proposed rule. This provision, which we have 
retained in our final rule, requires Part D sponsors to disseminate 
information about ``the number, mix, and distribution (addresses) of 
network pharmacies.'' We believe that requiring Part D plans to 
disseminate information about the addresses of network pharmacy at 
which an enrollee may reasonably be expected to obtain covered Part D 
drugs is, in fact, tantamount to requiring plans to provide a list of 
network pharmacies serving enrollees' service areas. We therefore 
clarify that Part D plans will be expected to provide enrollees with a 
list of network pharmacies, including addresses, as well as information 
about the number and mix of network pharmacies available.
    Comment: One commenter requested greater detail regarding the 
contents of the description of quality assurance policies and 
procedures that Part D plans must provide under Sec.  423.128(b)(8) of 
our proposed rule. Another commenter states that, as written, the 
provision requiring Part D plans to describe their quality assurance 
policies and procedures did not indicate a clear CMS-directed oversight 
and enforcement structure. This commenter argues that compliance 
monitoring and enforcement would at best be indirect, leaving us 
reliant on the results of deemed status arrangements as set forth in 
our proposed Sec.  423.165.
    Response: We expect plans to provide descriptions of their policies 
and procedures for concurrent drug utilization review, retrospective 
drug utilization review, and internal medication error identification 
and reduction systems. We also expect plans to provide descriptions of 
their medication therapy management programs, including information 
describing which enrollees are eligible for such services. With respect 
to CMS-directed oversight and enforcement, we have added reporting 
requirements to Sec.  423.153(c) and Sec.  423.153(d) of our final 
rule, and we will specify the details of these reporting requirements 
in separate guidance.
    Comment: One commenter was concerned that the transition of full-
benefit dual eligible individuals from Medicaid to Medicare Part D on 
January 1, 2006 will likely lead full-benefit dual eligible individuals 
to contact Medicaid agencies for more information regarding their new 
pharmacy benefits. This commenter recommended that we require Part D 
plans to include information in their enrollee materials that clarifies 
that State Medicaid agencies are no longer the primary providers of 
pharmacy benefits and cannot answer questions about the Medicare 
benefit, except as pertains to limited supplemental coverage that 
Medicaid may provide.
    Response: Our education and outreach efforts will ensure that 
beneficiaries receive detailed information regarding their transition 
from Medicaid to Medicare for prescription drug coverage. Therefore, we 
do not believe it is necessary to require Part D plans to include this 
information in their materials.
b. Disclosure of Information upon Request
    In addition, in accordance with section 1860D-4(a)(2) of the Act, 
the proposed rule at Sec.  423.128(c) provided that a beneficiary who 
is eligible to enroll in a Part D sponsor's Part D plan will have the 
right to obtain, upon request, more detailed plan information. Except 
as otherwise provided below, the final rule adopts the standards set 
forth in Sec.  423.128(c) of the proposed rule.
    Comment: A number of commenters are supportive of the provision in 
the proposed rule that required Part D plans to make available 
information about how to obtain information about the formulary, but 
thought that this requirement was insufficient given that beneficiaries 
will need precise and detailed formulary information to make informed 
choices about enrollment. These commenters recommend requiring Part D 
plan descriptions to include a detailed formulary listing not only the 
drugs on the formulary, but also any formulary tiers and corresponding 
copayment amounts.
    Response: We agree that it will be critically important for Part D 
enrollees and prospective enrollees to have access to complete 
formulary information in order to make the best possible Part D plan 
selection for their particular medical and prescription drug needs. For 
this reason, we have modified the formulary information requirements 
under Sec.  423.128(b)(4) such that Part D plans will be required to 
include not only information about the manner in which the formulary 
functions (including tiering structures and any

[[Page 4272]]

utilization management procedures used), a process for obtaining an 
exception to a Part D plan's tiered cost-sharing structure or 
formulary, and a description of how an enrollee may obtain additional 
information on the formulary, but also an actual list of drugs included 
on the Part D plan's formulary. For each drug, this list must indicate 
any cost-sharing tier information applicable to that drug and whether 
utilization management programs apply.
    Comment: Several commenters urged us to expand the requirement that 
Part D plans disclose, upon request, information about the number of 
disputes and their disposition in the aggregate to include exceptions. 
Another commenter noted that we appeared to have made a mistake in 
terms of our references to the provisions on grievances and 
reconsiderations in Sec.  423.128(c)(3) of our proposed rule.
    Response: We agree with these commenters. We have corrected the 
reference errors in Sec.  423.128(c)(3) of our final rule and have 
expanded this requirement such that Part D plans must disclose, upon 
request, information about the number of exceptions and their 
disposition in the aggregate. We did not originally include a reference 
to exceptions in our proposed because section 1852(C)(2) of the Act, on 
which the requirements in our proposed Sec.  423.128 were based, did 
not envision an exceptions process for the MA program.
    Comment: Several commenters noted that Sec.  423.128(c)(1)(iii) of 
our proposed rule required Part D plans to inform enrollees about the 
potential for contract termination, but only upon request. However, 
these commenters felt strongly that this information needed to be 
included in all plan descriptions and marketing materials, and not just 
if requested by an enrollee or prospective enrollee, particularly in 
light of previous experience with volatility in the Medicare+Choice 
market.
    Response: We agree with these commenters and have moved the 
requirement that Part D plans disclose information about the potential 
for contract termination upon request only, to Sec.  423.128(b)(10), 
under which plans will be required to disclose this information as part 
of the plan description provided at the time of enrollment and at least 
annually thereafter.
c. Provision of Specific Information
    As required under section 1860D-4(a)(3) of the Act and proposed at 
Sec.  423.128(d) of our proposed rule, Part D sponsors will 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 will include:
     A toll-free customer call center;
     An Internet website; and
     Responses in writing upon beneficiary request.
    As proposed at Sec.  423.128(d)(1)(i) and (d)(1)(ii), Part D plans' 
customer call centers will 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 
recommended, however, that Part D 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. In 
addition, we proposed requiring that Part D plans maintain websites as 
one means of disseminating information to current and prospective Part 
D enrollees that would include the detailed plan description 
information described in Sec.  423.128(b) of our proposed rule. 
Finally, Part D plans would be required to respond to beneficiary 
requests for specific information in writing, upon request. This 
requirement was codified in Sec.  423.128(d)(3) of our proposed rule.
    Except as otherwise provided below, the final rule adopts the 
specific information disclosure standards set forth in Sec.  423.128(d) 
of the proposed rule.
    Comment: Several commenters recommended against requiring a 24-
hour/7-day-a-week call center because of the high costs associated with 
operating a call center during off-hours. These commenters support 
operating a call center during normal business hours as required in the 
proposed regulations. One commenter suggested Part D plans consider 
developing a website and IVR system that allows beneficiaries to access 
their accounts to determine their TrOOP balance.
    Other commenters recommended requiring Part D plans to operate 24/7 
call centers, stating that the need for prescription drugs may arise 
outside of normal business hours and would necessitate timely 
assistance and resolution of coverage issues. These commenters noted 
that the implications of delayed access are potentially very serious. 
One commenter stated that advice hotlines should be available 24-hour/
7-days a week to assist enrollees and pharmacies in understanding Part 
D plan formularies. Another commenter urged requiring extended service 
hours especially during the initial enrollment period and also ensuring 
that language specialists are available.
    Response: We have retained our proposed requirement (in Sec.  
423.128(d)(1) of our final rule) that Part D plans maintain a toll-free 
customer call center that is open during usual business hours and 
provides customer telephone service, including to pharmacists, in 
accordance with standard business practices. However, Part D plans 
should view this requirement as a floor which they can exceed--
particularly at times such as annual open enrollment periods. Access to 
bilingual customer service representatives may also be appropriate in 
certain parts of the country. Given the need for Part D plans to 
provide timely information on certain time-sensitive issues, however, 
we strongly recommend that Part D plans also provide access to 24/7 
clinical advice hotlines as is customary for many health plans.
    Comment: One commenter recommended that we require formulary 
updates to plans' websites only when actual changes are made, but no 
more than once per month.
    Response: We agree with this commenter. We recognize the need for 
formulary information to be kept as current as possible to allow 
enrollees and prospective enrollees to make the best possible decisions 
regarding coverage of their particular Part D drugs. However, P&T 
committees typically meet quarterly, and we expect that most formulary 
changes recommended by a P&T committee will be implemented following 
regular committee meetings. We have therefore changed the requirement 
in Sec.  423.128(d)(2)(ii) of our proposed rule, which required weekly 
updates of formulary information on Part D plan websites, to require 
monthly updates instead. This requirement is codified at Sec.  
423.128(d)(2)(ii) of our final rule.
    Comment: One commenter asked us to clarify that formulary 
information will be made available through means other than plan 
websites.
    Response: As previously stated, enrollees and prospective enrollees 
will be able to obtain specific Part D plan information, including 
formulary information, upon request via telephone and in writing. In 
addition, we have revised our final rule at Sec.  423.128(b)(4) to 
require Part D plans to provide enrollees with an actual list of drugs 
included on the plan's formulary.
    Comment: One commenter requested clarification that our requirement 
that formulary information be posted on a Part D plan website be 
limited to including only a list of formulary drugs and not the full 
range of clinical information associated with those drugs.

[[Page 4273]]

    Response: Plans will only be required to include a list of drugs 
included on their formularies--and not the clinical information 
associated with those drugs--under our information dissemination 
requirements.
d. Claims Information
    In accordance with the requirements of section 1860D-(4)(a)(4) of 
the Act, Sec.  423.128(e) of the proposed rule required Part D sponsors 
to furnish to enrollees who receive covered Part D drugs an explanation 
of benefits (EOB). EOBs will be required to be written in a form easily 
understandable to beneficiaries. In Sec.  423.128(e)(6) of our proposed 
rule, we proposed that an EOB be provided at least monthly for those 
utilizing their prescription drug benefits in a given month.
    We also proposed in Sec.  423.128(e)(1)-(5) that Part D plans' EOBs 
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.
    Except as otherwise provided below, the final rule adopts the EOB 
standards set forth in Sec.  423.128(e) of the proposed rule.
    Comment: Some commenters supported the requirement to mail 
enrollees an EOB each month that the drug benefits are provided, as 
stated in the proposed regulations. Some commenters recommended 
dissemination of the EOBs quarterly and upon request of the enrollees 
rather than monthly when prescription drug benefits are provided.
    Several commenters urged us to allow Part D plans the flexibility 
to provide an EOB to enrollees through means other than mail, such via 
a plan website, electronically through email, or by telephone inquiry. 
One commenter noted that it is not current practice for health plans to 
mail enrollees an EOB monthly and that this would raise administrative 
costs. Some commenters expressed their objection to providing an EOB at 
pharmacies, stating this would be far beyond pharmacies' technological 
capabilities, and that provision of the EOB via mail or electronically 
should be plans' responsibility.
    Some commenters expressed that the EOBs should also include 
information about appeals right and processes, information about 
formulary information and plan terminations, and information regarding 
whether the deductible and out-of-pocket thresholds have been met. 
Another commenter stated that the EOB should be modified to be 
applicable to beneficiaries who are subsidy eligible individuals due to 
the differences in the deductibles and cumulative spending limits for 
these individuals.
    Response: We appreciate commenters' feedback regarding our proposed 
EOB requirements. As provided in Sec.  423.128(e)(6) of our final rule, 
we are retaining our proposed requirement that an EOB be provided at 
least monthly for those enrollees utilizing their prescription drug 
benefits in a given month. This requirement is consistent with our 
policy regarding the Medicare Summary Notice, which is provided monthly 
for beneficiaries with Part A or Part B utilization.
    We believe it is most appropriate for enrollees to receive a 
written EOB, via U.S. mail, and have provided for this under Sec.  
423.128(e) of our final rule. Plans may offer additional mechanisms for 
the provision of such information--for example, via a website or call 
center. Plans may provide the EOB through alternative means 
electronically via email, for example only to the extent that enrollees 
affirmatively elect to receive their EOBs in such a manner. In the 
preamble, we suggested that Part D plans might explore provision of 
EOBs at the point-of-sale, but that statement was in no way intended to 
impose a requirement on pharmacies to provide Part D plan information 
in the absence of the technological capacity to do so.
    We do not believe that the EOB is the most appropriate mechanism 
for provision of information about appeals rights and processes or 
information about plan terminations; this information will be provided 
through other mechanisms. We clarify, however, that EOBs will be 
required to include 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, 
as well as information about any upcoming formulary changes. For low-
income beneficiaries, the information about the cumulative, year-to-
date total of incurred costs provided by the Part D plan in the EOB 
will include CMS subsidy amounts that count toward incurred costs.
7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs 
(Sec.  423.132)
    Under section 1860D-4(k)(1) of the Act, Part D sponsors will 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 Part D plan at that pharmacy. As stipulated in our proposed rule, 
this information will 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 will 
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, 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 Part D plan enrollees at the point of 
sale (or at the time of delivery of a drug purchased through a mail-
order pharmacy). Accordingly, we proposed waiving the requirement that 
information on lowest-priced generic drug equivalents be provided to 
enrollees for covered Part D drugs purchased by Part D 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). We requested comments on 
the appropriateness of the circumstances we proposed for waiver of the 
requirements in Sec.  423.132(c) of our proposed rule, as well as any 
additional circumstances we may wish to consider.
    We also proposed 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 Part D plan 
enrollees at the point of

[[Page 4274]]

sale when Part D plan enrollees obtain covered Part D drugs in long-
term care pharmacies. We requested comments regarding appropriate 
standards with regard to the timing of disclosure of generic price 
differentials to institutionalized Part D enrollees.
    Except as otherwise provided below, the final rule adopts the 
standards for public disclosure of pharmaceutical prices for equivalent 
drugs set forth in Sec.  423.132 of the proposed rule.
    Comment: One commenter was concerned about the administrative 
burden the disclosure requirement would impose at the community 
pharmacy level and believed it was essential for us to develop 
appropriate guidance to minimize potential problems. The commenter 
noted that the administrative burden required to calculate cost-sharing 
differences should cause us to consider compliance with the 
requirements to be impracticable in all pharmacy settings because while 
many community pharmacies' prescription processing systems currently 
compare retail prices for brand-name and generic medications, the 
systems are not equipped to compare the discount price calculated by a 
Part D plan with the potential discount price by a plan for a generic 
drug. According to this commenter, obtaining this discounted generic 
price would require the pharmacy to process and submit a second 
prescription transaction for the generic, and then require the pharmacy 
to calculate the difference between the two prescriptions; the need to 
compare the enrollee's cost-sharing under the two scenarios would add 
more challenges. Other commenters assured us that this requirement is 
not burdensome for retail pharmacies.
    Response: As provided in section 1860D-4(k) of the Act, Part D 
plans must provide that each pharmacy in their networks with the 
exceptions that we note in Sec.  423.132(c) of our final rule complies 
with the requirement to disclose to beneficiaries information about 
less expensive therapeutically equivalent and bioequivalent covered 
Part D drugs. Given this statutory requirement, we cannot waive it 
wholesale for all community pharmacies. We do not expect this 
requirement will be burdensome for community pharmacists since, given 
that, under Sec.  423.132(b) of our final rule, we are requiring 
disclosure of generic differential information after a claim has been 
adjudicated and for informational purposes only. We clarify that we do 
not expect pharmacies to become involved in substituting a generic 
equivalent in order for Part D plans to comply with the disclosure 
requirement in Sec.  423.132(a) of our final rule. We expect that Part 
D plans will work with their network pharmacies to operationalize this 
requirement, but we do not expect that it will be burdensome to the 
pharmacy industry given the prevalence of generic substitution and 
information programs established by private plans in the market today.
    Comment: One commenter asked that we define ``lowest price'' as 
determined by the Part D plan at the point of sale. Another commenter 
asked that we clarify that ``price'' is defined as what the enrollee 
would pay at the pharmacy subject to the applicable cost sharing. Two 
commenters recommended that pricing comparison should be between the 
brand name drug and the Maximum Allowable Cost (MAC) established by the 
Part D plan for the generic equivalent to the branded drug. Another 
commenter suggested allowing an estimated price differential between 
brand and non-MAC generics to be made available to enrollees rather 
than the exact cost differential between the price of a covered Part D 
drug and the lowest priced generic version because of the technical 
limitations of plans (for example, plans do not have a record of 
generics in stock at all network pharmacies). This commenter claims 
that, otherwise, this requirement would involve enormous administrative 
efforts and costs for Part D plans. This commenter suggested a 
reasonable alternative would be allowing plans to utilize historical 
dispensing patterns and costs to have available relative price 
information in the form of an estimate of the price differential 
transmitted to pharmacies in the electronic claim response when a 
prescription is filled, and that Part D plans would contractually 
require pharmacies to share this information at the point-of-sale.
    Response: Under section 1860D-4(k) of the Act, Part D plans must 
provide that each pharmacy in their networks complies with the 
requirement to disclose to beneficiaries information about less 
expensive therapeutically equivalent and bioequivalent covered Part D 
drugs. Specifically, Part D plans must provide information about the 
differential between the price of the covered Part D drug to the 
enrollee (factoring in any applicable cost-sharing) and the price of 
the lowest-priced therapeutically equivalent and bioequivalent drug 
available at that pharmacy. We expect that Part D plans will work with 
their network pharmacies to operationalize this requirement in the most 
efficient way possible, and in a manner that complies with our 
requirements under Sec.  423.132 of our final rule.
    Comment: One commenter recommended that disclosure of the generic 
drug price be the lowest priced generic available at that pharmacy 
because most pharmacies do not carry multiple generic drug options for 
the same generic entity.
    Response: We agree with the commenter and clarify that Sec.  
423.132(a) requires pharmacies to disclose the differential between the 
price of a covered Part D drug and the price of the lowest-priced 
generic version of that drug available at that pharmacy, consistent 
with section 1860D-4(k)(1) of the Act.
    Comment: One commenter recommended only requiring pharmacists to 
inform patients of price differentials if they are dispensing a high 
cost version of a ``multiple source'' drug that is available at that 
pharmacy. This commenter noted that in many cases these off-patent 
innovator brands, also known as ``multiple source'' drugs, are less 
costly than their generic counterparts (for example, some brand name 
version antibiotics are often equal or lower in price than their 
generic counterparts). Without this technical correction, these drugs 
may not be considered by some Part D plans as generics and the 
pharmacists would not inform the beneficiary that these lower cost 
``multiple source'' drugs are available. Another commenter stated that 
generics should be further defined to include ``multiple source'' brand 
name drugs.
    Response: Section 1860D-4(k) of the Act requires that each pharmacy 
that ``dispenses a covered Part D drug shall inform an enrollee of any 
differential between the price of the drug to the enrollee and the 
price of the lowest priced generic covered part D drug under the plan 
that is therapeutically equivalent and bioequivalent and available at 
such pharmacy.'' While we appreciate the commenter's point that off-
patent innovator drugs may also be available to enrollees at low 
prices, and that this information should be disclosed at the point of 
sale, the statute very specifically applies the requirement to the 
lowest priced generic covered Part D drug available at that pharmacy. 
Our definition of ``generic drug'' at Sec.  423.4 of the final rule 
does not encompass an off-patent innovator drug, however. In addition, 
given that section 1860D-2(b)(4)(A)(i)(I) of the Act specifically 
distinguishes between a ``generic drug'' and a ``preferred drug that is 
a multiple source drug,'' we do not believe it is appropriate to define 
a generic drug to include a ``multiple

[[Page 4275]]

source'' brand-name version of a drug. However, nothing in the statute 
would prohibit Part D plans from requiring their network pharmacies to 
provide pricing information about lower priced off-patent innovator 
drugs, and we encourage Part D plans to do so in the interest of 
ensuring Part D enrollees get the best prices available for their 
covered Part D drugs.
    Comment: One commenter concerned with the burden on pharmacies to 
disclose pricing information stated that the disclosure requirement 
should be limited to cases in which an enrollee asks for this 
information at the pharmacy.
    Response: As provided in section 1860D-4(k) of the Act, Part D 
plans must require network pharmacies, except for those which we have 
specifically exempted from the requirement, to disclose information 
about price differentials. We cannot limit this requirement to 
circumstances in which an enrollee specifically asks for the 
information. Furthermore, we believe such disclosure will provide 
enrollees--many of whom may not know that less expensive generic 
equivalents are available--with valuable information that will save 
money for beneficiaries, Part D plans, and Medicare.
    Comment: One commenter recommended disclosure only when a brand 
name drug is prescribed and the prescriber has not stated ``Do Not 
Substitute.''
    Response: As provided in section 1860D-4(k) of the Act, Part D 
plans must require network pharmacies, except for those which we have 
specifically exempted from the requirement, to disclose information 
about price differentials. We cannot limit this requirement to 
circumstances in which a prescriber has written a prescription for a 
brand name drug and has not specifically stated that the pharmacy must 
not substitute the brand name drug for a generic drug. We believe such 
disclosure will provide enrollees many of whom may not know that less 
expensive generic equivalents are available with valuable information 
that will save money for beneficiaries, Part D plans, and Medicare.
    Comment: Two commenters suggested that we clarify that the lowest 
price generic version that is ``therapeutically equivalent and 
bioequivalent'' is an AB-rated generic equivalent, as AB rated drugs 
have been proved to be bioequivalent (rather than presumed to be 
bioequivalent). Another commenter suggested that we limit disclosure 
requirements to products with ``A'' code, as specified in the FDA 
Orange Book.
    Response: We agree with these commenters and clarify that the 
disclosure requirement in Sec.  423.132(a) of our final rule applies 
only with respect to AB-rated alternatives that are therapeutically 
equivalent and bioequivalent to the covered Part D drug in question.
    Comment: A number of commenters recommended requiring mail-order 
pharmacies to provide price differentials before the prescription is 
filled and delivered rather than at the time of delivery. The 
commenters noted that notification by the time of delivery may be too 
late for beneficiaries to receive possible savings, especially since 
mail-order pharmacies provide a 90-day supply and generally have lower 
dispensing rates than retail pharmacies.
    Response: We do not believe it is practicable to require a mail-
order pharmacy to contact an enrollee with price differential 
information prior to filling and delivering their prescription. We 
believe such a requirement will delay the delivery of needed drugs and 
could potentially compromise beneficiaries' privacy given attempts by 
mail-order pharmacies to contact plan enrollees. In addition, such a 
requirement would be inconsistent with the requirement for retail 
pharmacies in Sec.  423.132(b) of our final rule, which does not 
require that Part D plans provide price differential information before 
the drug is purchased. We have therefore retained our requirement, in 
Sec.  423.132(b) of our final rule, that disclosure must occur at the 
time of delivery of the drug when a drug is dispensed by a mail-order 
pharmacy.
    Comment: One commenter recommended that we not waive the public 
disclosure requirement for private fee-for-service plans offering 
qualified prescription drug coverage because there are many 
opportunities for generic savings that might not be realized in the 
absence of this requirement.
    Response: Section 1860D-12(d)(2) of the Act specifically requires 
us to waive the public disclosure requirement for private fee-for-
service MA plans that offer qualified prescription drug coverage and 
provide plan enrollees with access without charging additional cost-
sharing for covered Part D drugs dispensed at all pharmacies.
    Commenter: One commenter strongly urged that we waive the public 
disclosure requirement for I/T/U pharmacies because these pharmacies 
bear beneficiaries' out-of-pocket costs for covered Part D drugs, 
obviating the need for AI/AN Part D enrollees obtaining covered Part D 
drugs at these pharmacies to have this price comparison information.
    Response: As provided both in our proposed rule and in our final 
rule at Sec.  423.132(c)(3), we will waive the public disclosure 
requirement for I/T/U pharmacies.
    Comment: One commenter requested that MA-PD plans be allowed to 
request a waiver of the public disclosure requirement.
    Response: As provided in Sec.  423.132(c)(5), we will consider 
waiving the public disclosure requirement under circumstances other 
than those specified in Sec.  423.132(c)(1)-(4) to the extent that we 
deem such compliance to be impossible or impracticable. MA-PD plans 
seeking a waiver of the public disclosure requirement for any of their 
network pharmacies will therefore have to demonstrate to us that 
compliance with the public disclosure requirement in Sec.  423.132(a) 
is impossible or impracticable. In addition we note that, as provided 
in section 1860D-21(c), we will waive any Part D requirement for an MA-
PD plan that conflicts with or duplicates a requirement under Part C, 
or the waiver of which is necessary to promote coordination between 
benefits provided under Parts C and D.
    Comment: Another commenter suggested that we specifically waive the 
disclosure requirement for MA-PD plans that own and operate their own 
pharmacies because these pharmacies may carry only one version of any 
particular generic drug at any one time (except when transitioning from 
one manufacturer's product to another).
    Response: We do not believe the commenter has provided us with 
sufficient information to determine that the public disclosure 
requirement is impossible or impracticable for Part D plans that own 
and operate their own pharmacies and should therefore be waived in 
regulation. However, we note that MA-PD plans may also wish to consider 
seeking a waiver of the public disclosure requirement if, as provided 
in section 1860D-21(c) of the Act, they can demonstrate that this 
requirement conflicts with or duplicates a requirement under Part C, or 
that such waiver is necessary to promote coordination between benefits 
provided under Parts C and D.
    Comment: Several commenters supported the applicability of 
disclosure requirements to long-term care pharmacies because many long-
term care facility residents and their families would be interested to 
know if additional savings are possible. Two commenters opposed 
requiring price

[[Page 4276]]

disclosure at long-term care pharmacies because most long-term care 
beneficiaries do not have a choice regarding long-term care pharmacies 
and will likely qualify for low-income subsidies for institutionalized 
Part D enrollees who are full-benefit dual eligible individuals (which 
means they will have no out-of-pocket costs for covered Part D drugs). 
Thus, this information will have little effect on the drugs used by 
this population and will increase administrative burden for long-term 
care pharmacies.
    Response: We agree with commenters who thought long-term care 
residents and their families would be interested to know if additional 
covered Part D drug savings are possible through the use of generic 
drugs, particularly since not all long-term care patients will qualify 
as full subsidy eligible individuals. We are therefore retaining the 
requirement we proposed at Sec.  423.132(d)(1) of our proposed rule, 
but clarify--in Sec.  423.132(d)(1) of our final rule--that long-term 
care pharmacies will have to provide information about differential 
price information required under Sec.  423.132(a) of our final rule to 
Part D plans, which will, in turn, provide that information to their 
institutionalized enrollees via the explanation of benefits required 
under Sec.  423.128(e) of our final rule.
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 required 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. We clarify that the requirements of 
Sec.  423.136 do not apply to PACE organizations and cost plans 
offering qualified prescription drug coverage, since these plans are 
subject to similar requirements under Sec.  460.200(e) and Sec.  
460.210, and Sec.  417.486, respectively.
    PDP sponsors will 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 will be covered entities under the HIPAA 
Privacy Rule because they meet the definition of ``health plan,'' as 
defined 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 Rule violations. 
Thus, any violations by PDP sponsor for its obligations under the 
Privacy Rule as a covered entity are subject to such enforcement by 
OCR. OCR maintains a website with frequently asked questions and other 
compliance guidance at http://hhs.gov/ocr/hipaa.
    Comment: One commenter thought that we should detail the 
confidentiality and disclosure requirements set forth in Sec.  423.136 
of our proposed rule in the final rule, instead of simply referencing 
the requirements in Sec.  422.118. This commenter believes that because 
of the importance of privacy protections, it is necessary that required 
protections are reiterated in our final rule and that PDP sponsors 
adequately understand their responsibilities to safeguard the health 
information of Medicare beneficiaries. Without privacy safeguards built 
directly in the regulation, beneficiaries could be vulnerable to 
another amendment.
    Response: We agree with this commenter and have incorporated the 
provisions of Sec.  422.118 directly into Sec.  423.136 of our final 
rule rather than only referencing the provisions of Sec.  422.118.
    Comment: One commenter recommends that we make privacy provisions 
stronger for PDP sponsors, not only reiterating the protections under 
Sec.  422.118, but also including specific rules regarding uses and 
disclosures of beneficiary information that both incorporate the 
provisions of important laws (such as the notice and authorization 
provisions of the HIPAA privacy rule) and strengthen the provisions of 
those laws to better protect the health information of Medicare 
beneficiaries.
    Response: The requirements in Sec.  423.136 of our final rule make 
clear that PDP sponsors must abide by all Federal and State laws 
regarding confidentiality and disclosure of medical records, or other 
health and enrollment information. This obligation includes compliance 
with the provisions of the HIPAA privacy rule and its specific rules 
regarding uses and disclosures of beneficiary information. Because 
section 1860d-4(i) of the Act stipulates that the privacy provisions 
under section 1852(h) apply to prescription drug plans in the ``same'' 
manner as they apply to MA plans under Medicare Part C, we do not have 
the statutory authority to expand upon those provisions as the 
commenter suggests.
    Comment: One commenter recommends that we permit MA organizations 
and PDP sponsors to prevent pharmacies in their networks and out-of-
network pharmacies from releasing prescriber data to third parties. 
Some MA organizations are concerned that providing data to drug 
manufacturers will have the negative effect of assisting manufacturers 
in targeting their marketing of unnecessary, expensive drugs in a more 
effective manner.
    Response: Pharmacies that engage in electronic transactions are 
covered entities under HIPAA and are thus required to comply with the 
HIPAA Privacy Rule. As provided in 45 CFR 164.508, such pharmacies, as 
covered entities, would be prohibited from releasing individually 
identifiable health information to drug manufacturers for the purpose 
of the manufacturers' marketing unless a patient specifically 
authorizes the disclosure of his or her information for this purpose. 
However, the Privacy Rule protects patient information only, and is 
therefore not implicated regarding the sharing of information about 
prescribers.

D. Cost Control and Quality Improvement Requirements for Part D Plans

1. Overview (Scope) (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 requirements related to the following:
     Drug utilization management programs, Quality assurance 
measures and systems, and Medication Therapy Management programs (MTMP) 
for Part D sponsors;
     Consumer satisfaction surveys of Part D plans;
     Electronic prescription program;

[[Page 4277]]

     Quality Improvement Organization (QIO) activities;
     Compliance deemed on the basis of accreditation;
     Accreditation organizations;
     Procedures for the approval of accreditation as a basis 
for deeming compliance.
    Below we summarize the proposed provisions and respond to comments. 
(For a detailed discussion of our proposals, please refer to the 
proposed rule (69 FR 46666)).
2. Drug Utilization Management, Quality Assurance, and Medication 
Therapy Management Programs (MTMPs) (Sec.  423.153)
    Proposed Sec.  423.153(a) required each Part D sponsor to establish 
a drug utilization management program, quality assurance measures and 
systems, and a MTMP.
    We combined these requirements into one section of the regulation 
because each of these requirements will impact the quality and cost of 
care provided to beneficiaries. We stated that our intent was to ensure 
that the prescription drug benefit was provided using state of the art 
cost management and quality assurance systems. We stated that we also 
understood the overlapping nature of these requirements and that 
provisions under one requirement might complement another requirement.
    We also explained in the proposed rule that although these 
requirements were similar in their underlying goals, they could also be 
quite different, and that while we understood that some members of the 
industry use various quality assurance measures and systems for 
controlling utilization and reducing medication errors, less 
information was available regarding MTMPs.
    After receiving many comments on our proposals, our final policy, 
generally stated, is that cost control and quality improvement 
requirements describe minimum standards for drug utilization 
management, quality assurance, and MTMP so as to provide plans with 
flexibility to develop, implement, and update their programs and 
systems to reflect changing best practices and to continue to provide 
beneficiaries with the best quality prescription drug benefit at the 
lowest possible cost. We expect plans to continuously monitor their 
programs and processes, identify opportunities for improvement, and 
develop improvement plans and strategies.
    As we stated in the proposed rule, we believe that the different 
program and system requirements in this subpart frequently overlap and 
therefore, plans need flexibility to coordinate among the different 
requirements. Moreover, flexibility is required to ensure that plans 
can support forthcoming electronic prescribing standards that we 
envision will dramatically affect the utilization management and 
quality assurance landscape. Nevertheless, despite the lack of 
specificity in our requirements, we expect plans to continually pursue 
innovative improvements for their programs and systems, and maximize 
technological advances when appropriate.
    Ultimately, the evaluation of these programs and systems needs to 
be based upon their impact on therapeutic outcomes. As part of our 
commitment to improving therapeutic outcomes through the Medicare 
Prescription Drug Benefit, we intend to work with industry and other 
stakeholders to develop a comprehensive strategy for evaluating plan 
performance that collectively considers multiple standards and services 
affecting the cost and quality of drug therapy. As industry practices 
evolve, including the expected expansion of electronic prescribing, we 
believe meaningful performance measures can be identified that will 
validate best practices and provide benchmarks that will spur further 
program and system improvements. Accordingly, we will work with 
industry to identify new standards for quality and performance that 
could eventually become plan requirements. Our goal is to ensure that 
the Medicare Prescription Drug Benefit will always provide 
beneficiaries with the highest quality prescription drug benefits at 
the lowest possible cost.
    In addition to our efforts to work with industry and stakeholders 
to develop future performance measures and standards for Part D plans, 
we also intend to implement a plan for utilizing Medicare prescription 
drug data to improve the evidence on risks, benefits, and overall costs 
of drug therapies for the chronically ill and other Medicare 
beneficiaries. This plan will be developed through a public process and 
implemented in a manner that preserves the confidentiality of 
beneficiary information.
a. Drug Utilization Management
    Proposed Sec.  423.153(b) provided flexibility to Part D sponsors 
in their design of drug utilization management, and included minimum 
requirements for drug utilization management programs. These 
requirements were: (1) that plans maintain a program that includes 
incentives to reduce costs where medically appropriate; and (2) that 
plans maintain policies and systems to assist in preventing over-
utilization and under-utilization of prescribed medications. The 
proposed rule also stated that Part D sponsors must inform enrollees of 
program requirements, such as those involving allowable refill 
timeframes, in order to prevent unintended interruption in drug 
therapy.
    In addition, the proposed rule contained a discussion about whether 
drug utilization management techniques should be under the direction 
and oversight of a P&T Committee to ensure an appropriate balance 
between clinical efficacy and cost effectiveness. The discussion on P&T 
Committees and their oversight of drug utilization management is 
contained in subpart C of this final rule.
    We invited comments on whether there are industry standards for 
drug utilization management and whether we should adopt any of these 
standards.
    Comment: We received numerous comments on our proposed standards, 
with several commenters supporting the flexibility we proposed and 
stating that there are no current, widely-accepted standards in the 
area of drug utilization management. Others supported additional detail 
in the regulations and suggested that we should further specify drug 
utilization management program standards. Some expressed concern that 
plans could use drug utilization management programs to restrict 
utilization inappropriately. In addition, several commenters 
recommended that we require plans to focus equally on over-utilization 
and under-utilization to ensure appropriate utilization by enrollees 
and to monitor plan performance in these areas.
    Response: Based on a literature review by Booz-Allen-Hamilton\3\, 
and the public comments received on this topic, we are not adopting 
further specifications for drug utilization management requirements in 
the final rule. While drug utilization management is common practice, 
plans appropriately employ a number of different approaches (for 
example, formularies, step therapy, tiered cost sharing, prior 
authorization) and different combinations of those approaches, and 
therefore, while we will consider additional standards in the future, 
we are adopting the flexibility we proposed in the proposed rule. As we 
stated in the proposed rule, we believe the competitive bidding and 
premium setting processes, combined with the requirements for 
transparency and information availability, will provide powerful 
incentives for plans to

[[Page 4278]]

innovate and adopt the best techniques available.
---------------------------------------------------------------------------

    \3\ Booz-Allen-Hamilton. Final Report for Technical Support for 
the Implementation of Part D. September 15, 2004.
---------------------------------------------------------------------------

    Nevertheless, our requirement for inclusion of incentives to reduce 
costs when medically appropriate must be interpreted broadly to mean 
that all drug utilization management techniques must be medically 
appropriate, and Sec.  423.153(b) requires the utilization management 
program established by plans to be ``reasonable and appropriate.'' As 
outlined in the formulary guidance that will follow this final rule, we 
will review plans' drug utilization management requirements to ensure 
that beneficiaries are given appropriate access to medically necessary 
drugs in a timely manner. In order to ensure that plans appropriately 
employ drug utilization management techniques, and to develop or adopt 
further drug utilization management performance measures, we agree with 
commenters who recommended we track plan performance in this area. 
Therefore, we are adding a reporting requirement at Sec.  423.153(b)(3) 
and we will specify the information that we will require in separate 
guidance.
    Comment: One commenter stated that there are no standard measures 
for drug utilization management and recommended that we investigate 
using HEDIS (Health plan Employer Data and Information Set) measures as 
well as a number of other specific measures. Another commenter 
suggested that we use total health care costs as a measure.
    Response: As discussed in the previous response, we intend to 
develop or adopt further drug utilization management performance 
measures in the future. While we agree that no universally accepted 
performance measures currently exist, and are therefore not prepared to 
specify further requirements in regulation, we also understand that 
there are some performance measures being utilized today and that these 
could provide valuable information. We intend to evaluate existing 
measures, such as HEDIS, and could include these or similar performance 
measures in our formulary guidance or drug utilization management 
reporting guidelines that will follow publication of this rule. In 
general, we expect drug utilization management programs to ensure that 
beneficiaries have appropriate access to medically necessary drugs in a 
timely manner.
b. Quality Assurance
    As with the proposed regulations for drug utilization management 
programs, the proposed rule for quality assurance measures and systems 
provided minimum standards for quality assurance measures and systems, 
while for the most part giving plans flexibility to design such 
measures and systems. Proposed Sec.  423.153(c) required Part D 
sponsors to include quality assurance measures and systems for: (1) 
reducing medication errors; (2) reducing adverse drug interactions; 
and, (3) improving medication use. It also proposed to require plans to 
establish requirements for: (1) drug utilization review (DUR); (2) 
patient counseling; and, (3) patient information record-keeping.
    In the proposed rule, we stated that the DUR, patient counseling 
and patient information record-keeping requirements would generally 
need to comply with section 4401 of the Omnibus Reconciliation Act of 
1990 as codified in Sec.  456.705 and section 1927(g)(2)(A) of the Act, 
and we stated that we were considering such specific requirements for 
the final rule. Although those regulations were written specifically 
for the Medicaid population, we stated that we understood that they 
describe currently accepted standards for contemporary pharmacy 
practice, and our intent was to require plans to continue to comply 
with contemporary standards. We solicited comment on whether the 
Medicaid standards were 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. We also stated our understanding that some 
members of industry use additional quality assurance measures and 
systems. We invited comments on whether there were additional industry 
standards that we might adopt. Furthermore, we proposed that Part D 
sponsors will be required to have systems and measures established to 
ensure that network pharmacy providers are complying with the plans' 
quality assurance requirements. We requested comments on the costs and 
challenges associated with these systems and measures.
    Comment: Most commenters agreed that the relevant parts of OBRA 90 
for DUR, patient counseling and patient information record-keeping 
describe widely accepted standards for pharmacy practice. While no 
other suggestions for widely accepted standards of pharmacy practice 
were offered, one commenter indicated that these requirements will not 
adequately cover appropriate standards for home infusion pharmacies, 
which the commenter recommended should also require patient interviews 
and clinical assessments. Alternatively, several commenters recommended 
that we defer to State laws and State board of pharmacy regulations 
regarding pharmacy practice standards instead of creating a redundant 
Federal standard for pharmacy practice.
    Response: The overwhelming majority of comments confirmed our 
understanding that the relevant parts of OBRA90 for DUR, patient 
counseling, and patient information record-keeping generally describe 
widely accepted standards of pharmacy practice for both Medicaid and 
Non-Medicaid patients. We find that almost all of the State boards of 
pharmacy have adopted regulations for pharmacy practice that, at a 
minimum, generally reflect these relevant parts of the OBRA 90 
requirements. However, upon reconsideration, since our intent was to 
ensure that plans provided access to network providers that are 
required to comply with contemporary pharmacy practice standards, and 
not to create a new Federal standard for pharmacy practice, we agree 
with commenters that recommended that we defer to existing authority 
for regulating pharmacy practice. In fact, this is consistent with the 
Department of Health and Human Service's (HHS) general position of 
deferring to States for regulating the practice of pharmacy. Therefore, 
our requirement at Sec.  423.153(c)(1) in the final rule states that 
plans must provide us with representation that their network providers 
are required to comply with minimum standards for pharmacy practice 
established by the States.
    While we understand that additional quality standards might apply 
to specific pharmacy practice-settings such as home infusion pharmacy, 
specialty pharmacy and long-term care pharmacy practice, we are not 
prepared to adopt additional, practice-setting specific Federal 
standards at this time. We believe that current pharmacy practice 
standards established by the States, whether or not a State has 
additional standards for specific pharmacy practice-settings, still 
provide applicable minimum standards for all pharmacy practice-
settings. Nevertheless, we encourage plans and their network pharmacy 
providers to establish and agree upon additional quality assurance 
standards as necessary, including those required for accreditation by 
recognized accrediting organizations.
    Comment: Several commenters stated that concurrent and 
retrospective drug utilization review (DUR) systems illustrate 
successful examples of industry practices that help prevent 
inappropriate drug therapy. Concurrent DUR systems are used to identify 
potential inappropriate drug therapy before a patient receives a 
prescription while retrospective DUR systems can

[[Page 4279]]

often identify patterns of potential inappropriate prescribing and drug 
utilization based upon drug claim history.
    Response: Based upon these comments as well as similar information 
provided in the Booz-Allen-Hamilton report, we agree that concurrent 
and retrospective DUR must be components of the quality assurance 
systems and measures to be implemented by Part D plans. Accordingly, we 
have specified requirements for concurrent and retrospective DUR 
systems, policies, and procedures at Sec.  423.153(c)(2) and Sec.  
423.153(c)(3), respectively.
    In the proposed rule, we stated that elements we viewed as 
desirable for quality assurance systems were: (1) electronic 
prescribing; (2) clinical decision support systems; (3) educational 
interventions; (4) bar codes; (5) adverse event reporting systems; and, 
(6) provider and patient education.
    While we did not expect Part D plans to adopt all of these 
elements, we stated that we expected 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 invited comments on which, if any, elements of a quality 
assurance system should be contained in our program requirements. We 
were 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 these data could best be 
communicated to providers and beneficiaries to improve medication use.
    We noted that the MMA does not define or explain the term 
``medication error.'' Nevertheless, we stated that we believe a common 
definition was important. Therefore, we cited the following definition 
as one that we might use initially in interpretive guidance, which was 
previously adopted by the FDA in its proposed rule requiring bar codes 
on human drug products:
    ``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)).
    We indicated that in the future we may require quality measures 
that include error reports and stated that we could use this 
information to evaluate plans. In addition, we indicated that we may 
publish this information for enrollees to use when comparing and 
choosing their individual plans. Therefore, we invited specific 
comments on how we could evaluate Part D plans based on the types of 
quality assurance measures and systems they have in place, on this 
proposed definition of ``medication error'', on how error rates can be 
used to compare and evaluate plans, and on how such information could 
best be provided to beneficiaries to assist them in making their 
choices among plans.
    Comment: A number of commenters recommended we include all elements 
discussed in the proposed rule including decision support, electronic 
prescribing, bar codes, adverse event reports, and provider and patient 
education. Most of them recommended that we require adverse event and 
medication error tracking systems. However, many commenters recommended 
that these tracking systems be used internally and that reports not be 
sent to CMS or made public. These commenters argued that there is too 
much inconsistency in the definitions used in the field and that an 
external reporting requirement would actually be counter productive for 
quality improvement. While several commenters generally thought our 
proposed definition for ``medication error'' was accurate, these same 
commenters stated that such a definition would need to be narrowed to 
prove useful for consistent reporting among the plans.
    Response: As to all the elements that we listed in the preamble, we 
agree with the many industry organizations that there are no well 
accepted industry standards to make these mandatory requirements. The 
Booz-Allen-Hamilton report\4\ supports this finding. We continue to 
believe that these are desirable goals and have found that many 
organizations are already using them. We expect that electronic 
prescribing will greatly increase the availability of clinical decision 
support. We intend to work with various stakeholders to further develop 
these and other quality assurance systems enhancements.
---------------------------------------------------------------------------

    \4\Ibid.
---------------------------------------------------------------------------

    We agree with commenters that there are inconsistencies associated 
with the reporting of adverse events and medication errors. Moreover, 
we are not convinced, based upon many of the comments received, that an 
external reporting requirement for medication errors, even if we 
provided a more specific and narrow definition of ``medication error'', 
will lead to improved quality of care. Therefore, instead of requiring 
plans to report medication errors to us, we require plans to implement 
internal medication error identification and reduction systems, and we 
have added this requirement at Sec.  423.153(c)(4). We are also 
requiring plans to provide us with information concerning their quality 
assurance measures and systems, in accordance with guidelines published 
by us. In addition, we encourage plans to utilize the FDA Medwatch form 
for reporting adverse events, as well as educating prescribers and 
pharmacy providers about its availability. Finally, although we will 
not require external medication error reporting at this time, we 
maintain that our proposed definition of ``medication error'' can still 
serve as appropriate guidance for internal medication error 
identification and reduction systems.
c. Medication Therapy Management Programs (MTMPs)
    Proposed Sec.  423.153(d) required Part D sponsors to establish an 
MTMP described in section 1860D-4(c)(2) of the Act that is designed to 
optimize therapeutic outcomes for targeted beneficiaries by improving 
medication use and reducing adverse drug events, including adverse drug 
interactions, that may be furnished by a pharmacist, and that may 
distinguish between services in ambulatory and institutional settings. 
We stated 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, compliance programs, and other appropriate means).
     Detection of adverse drug events and patterns of over-use 
and under-use of prescription drugs.
    We proposed that 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 
may not be limited to, performing patient health status

[[Page 4280]]

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-permitted collaborative drug therapy 
management.
    We specifically sought comment on MTMP best practices, essential 
components of successful MTMPs, appropriate MTMP providers, service 
level requirements, quality assurance requirements for MTMPs, 
information on effective MTMP services that could be publicized and 
used by beneficiaries, and other effective steps to make valuable, 
proven MTMP services available to beneficiaries.
    Comment: Numerous commenters recommended that we specifically 
define a minimum package of services that all plans must offer for 
MTMPs, because plans will not have the economic incentives to offer 
adequate MTMP services otherwise, or because different plans will offer 
such different services that the quality of services provided will vary 
significantly. Although comments suggested a wide variety of possible 
MTMP services, common elements identified in several best practice 
examples provided in the comments included: (1) Initial assessment/
patient interview; (2) Development of a drug plan identifying goals for 
therapy; and, (3) Monitoring and evaluation of therapy. Nevertheless, a 
number of commenters recommended that we maintain the level of 
specificity contained in the proposed rule. These commenters stated 
that no widely accepted MTMP standards exist and plans need flexibility 
to develop and implement MTMPs that can best meet the needs of their 
specific patient populations and therefore, achieve the best outcomes.
    Response: After reviewing extensive comments and conducting 
additional research, we believe that insufficient standards and 
performance measures exist to support further specification for MTMP 
services and service level requirements, and therefore we are adopting 
the flexibility proposed in the proposed rule. Although best practice 
examples identified some common elements, neither the Booz-Allen-
Hamilton report, nor any comments submitted to us, showed that these 
MTMPs reflected widely accepted standards of practice. In fact, until 
the Pharmacist Provider Coalition's recent publication of their 
definition of MTMP, no widely agreed upon definition of MTMP existed, 
let alone standards and measures. While we understand the concern with 
potential disincentives for part D plans to develop robust MTMPs, we 
are not adopting additional regulatory requirements at this time 
because it us unclear which specific, additional requirements would 
enhance MTMPs, and ultimately improve therapeutic outcomes for part D 
beneficiaries.
    We continue to believe that MTMPs can and must offer appropriate 
services for targeted beneficiaries. However, we are concerned that 
further premature regulatory requirements at this time might not only 
fail to improve MTMPs, but could negatively impact their development. 
Requiring a universal set of minimum services and service levels, 
without fully understanding how they could effectively be implemented 
on a much larger platform than illustrated in best practice examples, 
could result in MTMPs becoming perfunctory services offered just to 
satisfy regulatory requirements as opposed to patient focused services 
aimed at improving therapeutic outcomes. For example, several of the 
best practice examples stressed the importance of collaboration with 
prescribers to ensure that MTMP is successful. However, simply 
requiring specific services and service delivery mechanisms will not do 
anything to ensure successful collaboration. Therefore, we believe that 
at the outset of the Medicare Prescription Drug Benefit, plans must 
have maximum flexibility to develop MTMPs that can achieve the 
statutory goal of improving therapeutic outcomes.
    Notwithstanding the lack of current MTMP standards and performance 
measures, we believe that MTMP must evolve and become a cornerstone of 
the Medicare Prescription Drug Benefit. With an understanding that the 
introduction of MTMP requirements can significantly impact the current 
practice of pharmacy, we intend to utilize the Medicare Prescription 
Drug Benefit as a platform for driving the quality improvement of 
prescription drug therapy. We require plans to report details on their 
respective MTMPs, and we intend to collaborate further with industry to 
develop measures that can be used to evaluate programs and establish 
appropriate standards. Our goal is to evaluate MTMPs within the context 
of an overall strategy that evaluates not only MTMP, but also other 
quality of care programs, standards, and services, such as drug 
utilization management, drug utilization review, chronic care 
improvement programs, and the role of QIOs. In so doing, we believe 
that we will identify best practices that will evolve into industry 
practice standards and could eventually be adopted as our standards.
    Comment: Several commenters recommended that we require plans to 
allow beneficiaries to receive MTMP services from their network/non-
network provider of choice. In addition, several commenters recommend 
that we require plans to offer MTMPs that favor face-to-face 
consultations over other forms of intervention.
    Response: Consistent with our overall approach to MTMPs, at this 
time we believe plans need the discretion to decide on which methods 
and which providers are best for providing MTMP services available 
under their specific MTMP. We assume that such providers will include 
some network pharmacy providers, but plans are not obligated to use any 
specific providers as long as those providing services for the plan are 
qualified to provide such services. Furthermore, although we indicated 
in the proposed rule that we believe pharmacists will be the primary 
providers of these services, and that we believe beneficiary choice and 
on-going beneficiary-provider relationships should play a role in 
determining the appropriate providers, we recognize that such 
determinations must be made in the context of the specific, overall 
program design. Moreover, while we understand that face-to-face 
consultations can offer advantages over other methods of service 
delivery, it is still but one component of a successful MTMP. 
Successful MTMPs will need to consider and coordinate not only the 
method of communication and the providers of services, but also other 
components such as the content of the service, the qualifications of 
the providers, the identification of targeted beneficiaries, and the 
documentation requirements associated with services performed. Because 
plans are responsible for designing the programs to improve therapeutic 
outcomes, plans will be in position to make the determinations that 
will maximize overall MTMP effectiveness, taking into account all 
factors that influence successful MTMP.
    In addition, while section1860D-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, we do not believe 
the same authority applies to out of network access for MTMP services. 
Unlike situations when patients face an urgent need for covered Part D 
drugs but do not have access to a network provider, we do not believe 
this urgent need rationale reasonably applies to MTMP. In addition, the 
Congress clearly knows

[[Page 4281]]

how to require out-of-network access and did so specifically for Part D 
drugs in emergency situations. Accordingly, we can not require plans to 
offer MTMP services through out-of-network pharmacies.
    Comment: One commenter noted that MTMP services will fall under the 
consideration of State boards of pharmacy and how States have defined 
the practice of pharmacy and scope of services which pharmacists are 
legally able to provide to patients. Therefore, this commenter 
requested that we work with States and their boards of pharmacy to 
prevent conflicts between MTMP under the Medicare Prescription Drug 
Benefit and State definitions of pharmacy practice and scope of 
allowable pharmacist activities.
    Response: Generally, unless there is a conflict with Federal law, 
we will defer to State laws and regulations pertaining to the practice 
of pharmacy. We do not believe our current MTMP requirements pose any 
conflicts with State laws and therefore, plans need to develop MTMPs 
that comply with State laws and regulations.
    Comment: Several commenters recommended that we clarify that 
providers can offer MTMP to non-targeted beneficiaries and bill the 
beneficiaries for these services.
    Response: We agree that providers can offer MTMP services to non-
targeted beneficiaries because MTMP in these circumstances is not part 
of the Medicare Prescription Drug Benefit. Providers need to notify 
beneficiaries receiving these services that the services are not 
offered as part of the Medicare Prescription Drug Benefit and 
therefore, the beneficiary is responsible for all of the cost of the 
MTMP.
    Similarly, if plans choose to offer MTMP to non-targeted 
beneficiaries, beneficiaries must be notified that they are responsible 
for 100 percent of the cost. Moreover, the costs for these services 
fall entirely outside the Part D cost sharing structure and do not 
count for purposes of tracking beneficiaries' total costs, out-of-
pocket costs, or for purposes of reinsurance and risk sharing with 
Medicare.
    Comment: Several commenters recommended that we prohibit plans from 
implementing MTMPs as a utilization management tool geared towards 
shifting market share as opposed to improving therapeutic outcomes.
    Response: We agree that MTMPs are more than utilization management 
programs focused on shifting market-share. Part D plans must implement 
MTMPs designed to optimize therapeutic outcomes by improving medication 
use and reducing the risk of adverse drug events, including adverse 
drug interactions. Plan sponsors will need to coordinate their MTMPs 
and utilization management strategies to improve therapeutic outcomes 
at the lowest possible costs.
    In the proposed rule, we proposed that MTMP fees be treated as 
administrative fees and incorporated into the premium, rather than 
being billed to the beneficiary on a case-by-case basis. We noted that 
while section 1860D-4(c)(2)(E) of the Act specifies that the time and 
resources necessary to implement the MTMPs must be taken into account 
when establishing fees, it does not specify how these fees should be 
paid. We stated our belief that fees associated with provision of MTMP 
services are separate and distinct from dispensing fees discussed in 
Sec.  423.100. Although section 1860D-4(c)(2)(E) of the Act states that 
Part D 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).
    Comment: Most commenters agreed with our interpretation that MTMP 
should be considered an administrative cost as opposed to a benefit, 
thereby preventing direct beneficiary cost sharing for MTMP services.
    Response: We agree that direct beneficiary cost sharing for MTMP 
services could negatively impact targeted beneficiary participation and 
therefore, our final policy is to consider MTMP as an administrative 
cost (included in the plan bid), incident to appropriate drug therapy, 
and not an additional benefit.
    Comment: Many commenters recommended that we include reporting 
requirements in the final regulation, specifying, for example, that 
plans provide detailed policies and procedures for implementing their 
MTMPs and associated performance measures for evaluating the impact on 
therapeutic outcomes.
    Response: We agree with these commenters that we must include a 
reporting requirement for MTMPs. As we work with industry and other 
stakeholders to improve the therapeutic outcomes by optimizing 
prescription drug therapy, we will need detailed information about each 
MTMP. Therefore, we are adding a reporting requirement at Sec.  
423.153(d)(6) and we will specify the information that we will require 
in separate guidance.
    Comment: Several commenters suggested that we specifically involve 
QIOs with the collecting and analyzing of data from MTMPs and establish 
a mechanism for QIOs to secure information from medical claims to 
identify targets.
    Response: We believe that QIOs could play a significant role with 
MTMPs and this will be reflected in our contracts with the QIOs. 
Specific technical assistance could include collecting and analyzing 
MTMP data.
    Comment: Several commenters responded to our request for incentives 
that would help drive the creation and evolution of significant MTMPs 
by suggesting pay-for-performance incentives and minimum renewal 
criteria, both based upon mutually agreed upon thresholds of patient 
care.
    Response: We have a more complete discussion of pay-for-performance 
in the quality improvement section of the preamble to the final Title 
II rule. We are conducting several demonstrations to test this approach 
and we are very interested in studying this direction for plans. Plans 
are free to develop such arrangements with their providers, and we 
encourage them to do so. Such arrangements have existed for a number of 
years in the Medicare Advantage program. Plans will need to be mindful 
of any restrictions imposed by the anti-kickback statute, and those 
needing further clarification may want to use the OIG's advisory 
opinion process to obtain guidance relating to specific transactions 
and arrangements.
    Comment: CMS should clarify that MTMP services are voluntary and 
that targeted beneficiaries are under no obligation to participate with 
programs in order to receive prescription drug benefits.
    Response: We agree that beneficiaries must not be obligated to 
participate in MTMPs. While we hope that beneficiaries will participate 
to improve their therapeutic outcomes, beneficiaries must not be denied 
access to prescription drugs based upon failure to participate in 
MTMPs.
    Comment: One commenter recommended that we require Part D plans to 
separate MTMP services agreements with providers from standard network 
provider contracts to reduce potential conflict of interest.
    Response: Since we do not know who will be providing MTMP services, 
it is premature for us to require specific terms and conditions for 
such contracts. While MTMP service providers will likely include some 
network pharmacy providers, Part D plans will need to specify, in their 
applications, their approach to determining MTMP fees

[[Page 4282]]

which accounts for the time and resources necessary to perform the 
services. In addition, plans need to comply with any restrictions 
imposed by the anti-kickback statute.
    Comment: One commenter recommended that we change the language at 
Sec.  423.153(d)(1)(i) from ``must assure'' to ``must have processes in 
place so that.''
    Response: Upon review of the proposed language, we agree that Sec.  
423.153(d)(1)(i) must be changed. We have changed ``must assure'' to 
``is designed to ensure.'' We believe this language does not impact the 
intent but better reflects what is required of MTMPs.
    Section 1860D-4(c)(2)(A)(ii) of the Act describes targeted 
beneficiaries as Part D individuals who: (1) have multiple chronic 
diseases (such as diabetes, asthma, hypertension, hyperlipidemia, and 
congestive heart failure); (2) are taking multiple covered part D 
drugs; and (3) are identified as likely to incur annual costs for 
covered Part D drugs that exceed a level specified by the Secretary, 
and we codified this requirement at proposed Sec.  423.153(d)(2).
    We invited comment on further defining ``multiple chronic 
diseases'' and ``multiple covered Part D drugs,'' and whether we should 
add further specifications or leave such determinations to the plans. 
Furthermore, we invited comment on whether we should set the cost 
threshold for determining targeted beneficiaries or if this 
determination could also be left up to the plans. Generally, we invited 
comment on disease, drug and cost issues that we should consider in 
further refining the definition of targeted beneficiary.
    Comment: Many commenters recommended that we specify which chronic 
diseases, the number of chronic diseases, and the number of covered 
part D drugs that will qualify a beneficiary for MTMP services. 
Moreover, several commenters suggested that specific patient 
populations, such as beneficiaries in long term care, should 
automatically be considered eligible for MTMP services in all plans. 
Alternatively, many commenters suggested that such determinations are 
best left to the individual plans for designing their plan specific 
MTMPs.
    Response: At this time, we believe these determinations must be 
left to the plans. Although we are not adding further specific 
requirements for chronic disease and multiple drugs, we do recommend 
that plans take notice of the statutory examples of chronic diseases 
when developing MTMPs. We plan to monitor the programs developed by the 
plans to learn from them as to whether or not further guidance is 
desirable.
    Comment: Many commenters provided recommendations on the level of 
annual costs for Part D drugs likely to be incurred by a beneficiary 
that should be used as a threshold for MTMP eligibility. Some 
commenters argued that any cost threshold is inappropriate because it 
does not indicate those that could benefit from MTMP and in fact, could 
exclude beneficiaries that would benefit most. Others recommended 
various cost thresholds including specific dollar amounts and 
percentage based thresholds (for example, top 5 percent). Most comments 
suggested that we should make this determination and not delegate it to 
the plans.
    Response: Despite our discussion in the proposed rule about leaving 
this determination to the plans, we do not believe we have the 
authority to delegate the cost threshold determination to plans and 
therefore, we will set a cost threshold. While cost might not the be 
best proxy for identifying patients that could benefit most from MTMP, 
the statute requires us to set a threshold and our goal is to identify 
a manageable target population so that plans offer truly valuable 
services to beneficiaries that will benefit from such services. Factors 
we will consider include typical costs associated with the most common 
chronic diseases and co-morbidities for Medicare beneficiaries, the 
relationship between cost and the number of medications a beneficiary 
is taking, the impact specific cost thresholds have on the size of the 
target population, and the alignment of incentives for providing MTMP 
services within the standard part D benefit structure. We intend to 
provide the specific cost threshold in separate guidance.
    Comment: Several commenters recommended that we should require 
plans to allow providers and beneficiaries (self-referral) to identify 
appropriate MTMP targets in addition to plans utilizing system edits to 
identify eligible MTMP targets.
    Response: The identification of targeted beneficiaries will be 
determined by individual plan policies. Therefore, plans will decide if 
and how providers and beneficiaries can participate with identifying 
targets. Once again, we believe that successful MTMPs must be 
coordinated and that plans need to develop appropriate mechanisms for 
notifying and identifying targeted beneficiaries that are eligible for 
MTMP services.
    Section 1860D-4(c)(2)(C) of the Act requires Part D sponsors to 
develop their MTMPs in cooperation with licensed and practicing 
pharmacists and physicians, and we codified this requirement at Sec.  
423.153(d)(3).
    Comment: Several commenters recommended that we specify that 
practicing pharmacists and physicians must be licensed in the United 
States.
    Response: Part D sponsors must comply with State licensure 
requirements for pharmacy practice, and therefore, we believe further 
specific licensure requirements are not warranted.
    Section 1860D-4(c)(2)(D) of the Act requires us to establish 
guidelines for the coordination of MTMPs with chronic care improvement 
programs established under section 1807 of the Act for targeted 
beneficiaries, and we codified this requirement at Sec.  423.153(d)(4).
    The Chronic Care Improvement Program (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.
    We invited comment on how services provided through CCIP could be 
effectively coordinated with MTMP services provided by PDPs. We also 
sought comment on how to integrate MTMP services and financial 
incentives into the CCIP under section 721 of the Act.
    Comment: Several commenters recommended that we share CCIP 
enrollment information with PDPs so that these individuals will be 
excluded from MTMP services. In addition, several other commenters 
recommended that we require PDPs to share their drug data with CCIPs.
    Response: We agree that Part D plans need to share drug data with 
CCIPs and have specified this requirement in our regulation text at 
Sec.  423.153(d)(4). CCIPs need this valuable data in order to provide 
the comprehensive care management that is intended under the CCIP. 
However, plans must determine, in conjunction with CCIPs, whether or 
not it is desirable to offer MTMP services to persons participating in 
CCIPs. We note that in sharing the data, both the CCIP and the Part D 
sponsor will need to abide by the HIPAA privacy rules including 
transmitting only the minimum data necessary. We strongly encourage 
Part D plans to consult with their privacy counsel to ensure that the

[[Page 4283]]

transmission of data complied with all aspects of the HIPAA privacy 
rules.
    In the proposed rule we also discussed the requirement in section 
1860D-4(c)(2)(E) of the Act specifying that the time and resources 
necessary to implement MTMP be taken into account when establishing 
fees for pharmacists or others providing MTMP services under the plan. 
We stated that to implement this section, in evaluating the 
administrative component of a Part D plan's bid, we will ask a Part D 
sponsor 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 will be 
protected under the confidentiality provisions of section 1927(b)(3)(D) 
of the Act. Under those provisions, we are 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 CBO 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.
    We stated, however, that while we expected to perform the due 
diligence described above through application review and potentially 
following up on any complaints, we did not believe we have the 
authority to mandate that Part D sponsors pay pharmacists or other 
providers a certain amount for MTMP services. We also stated that we 
will not adjudicate any specific disputes between Part D and 
pharmacists or other providers regarding the specific fees due for MTMP 
services.
    Comment: Many commenters recommended that we provide further 
requirements for MTMP fees, including establishing a fee schedule, 
identifying a particular documentation and billing mechanism, and 
requiring plans to reimburse for MTMP services provided by out of 
network providers.
    Response: These details are up to the plans and their arrangements 
with pharmacists and other providers. We do not believe the MMA 
provides us with the authority to establish fee schedules or interfere 
with the contracts between plans and providers. While we are familiar 
with the recommendation and accompanying efforts to pursue a CPT coding 
mechanism for MTMP services, which would provide for common billing and 
documentation procedures, the American Medical Association's (AMA) 
Current Procedural Terminology (CPT) Editorial Panel will make that 
determination and it does not directly involve us. Therefore, in the 
final rule, we are adopting our proposed policy to require sponsors to 
discuss their MTMP fees in their applications, but neither to mandate 
any specific MTMP fees nor become involved in payment disputes 
regarding MTMP between pharmacies and sponsors.
    Section 423.153(e) in the proposed rule discussed fraud, waste and 
abuse programs required by section 1860D-4(c)(1)(D) of the Act. In an 
effort to consolidate, the requirements and preamble discussion 
pertaining to fraud, waste and abuse programs, we moved Sec.  
423.504(b)(4)(vi)(H) to subpart K, and included as a component of a 
Part D sponsor's general compliance plan.
d. Exception for Private Fee for Service Plans
    Proposed Sec.  423.153(f) implemented section 1860D-21(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 are still required to establish quality assurance 
measures and systems and a program to control fraud, waste and abuse as 
described in Sec.  423.153(c) and Sec.  423.504(b)(4)(vi)(H), 
respectively.
    We did not receive any comments on these provisions and they have 
been adopted in the final rule at Sec.  423.153(e).
3. Consumer Satisfaction Surveys (Sec.  423.156)
    As proposed under Sec.  423.156, we will conduct consumer 
satisfaction surveys of enrollees of Part D 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 how they are conducted under Sec.  422.152(b) for MA 
plans by using the Consumer Assessment of Health Plans (CAHPs).
    In the proposed rule, we stated that we believed 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. In addition, we stated that we anticipated working 
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 also indicated that we will provide further information 
regarding this survey as it is developed.
    Comment: Commenters had several suggestions and questions regarding 
the design and implementation of the survey, including the following: 
CMS and CAHPs should provide draft models of the survey instruments to 
the Part D plans for input prior to final draft and distribution; 
CAHPs/AHRQ should differentiate satisfaction with the benefit versus 
the service provided by the network pharmacy; if all plans are 
actuarially equivalent as approved by CMS, how will we differentiate 
consumer satisfaction; the first surveys should be conducted starting 
in 2006 with the results available before the fall open season; 
consumers must be included in the survey design process; and, surveys 
should be sent and the results analyzed by CMS, prior to the annual May 
notification to plans about whether or not their contracts will be 
renewed.
    Response: We plan to have a public comment process in the 
development of the survey, and solicit input from key stakeholders. We 
expect that consumers will be included in the design process through 
focus groups, cognitive interviews and testing of the instrument. The 
purpose of the satisfaction survey is to provide information in a 
timely manner for purposes of beneficiary plan choice which occurs 
during the fall of the year. We are still determining the timing for 
survey administration. One major constraint is pilot testing of the 
survey cannot begin until early in 2006.
    Since the purpose of the survey is to help consumers choose among 
the plan options, during the development process we will try our best 
to focus on things that may vary across plans versus satisfaction with 
the overall benefit. Although the plans are actuarially equivalent, 
there will be differences in formularies, customer service, 
informational materials, etc.
    Comment: Additional comments focused on the fact that fully 
integrated MA organizations, unlike other MA organizations and PDP 
sponsors, own and operate their own pharmacies. As a result, survey 
instruments may be confusing to beneficiaries enrolled in these 
organizations if the instrument is designed only for network model 
plans. In addition, to the extent that survey instruments do not 
reflect satisfaction ratings with retail pharmacies under contract to 
network model plans, comparisons between network plans

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and integrated organizations will be unlikely to result in apples-to-
apples comparisons. In addition, consumer satisfaction ratings in 
health care are notoriously suspect to regional variation. In reporting 
satisfaction levels, we should attempt to adjust for these variations.
    Response: We agree that making appropriate comparisons and 
adjustments will be essential to take into account certain factors that 
may impact satisfaction but are not under the control of the Part D 
plans. In the development work, we will be exploring what are the 
appropriate adjusters for this survey.
4. Electronic Prescription Program (Sec.  423.159)
    Section 1860D-4(e) of the Act contains provisions for electronic 
prescription programs. The statute contains specific provisions on when 
voluntary initial standards may be adopted (not later than September 1, 
2005), and when final standards must be published (not later than April 
1, 2008) and then effective (not later than 1 year after the date of 
promulgation of final standards).
    While we included a fairly long discussion of electronic 
prescribing in the proposed rule, shortly we will issue another 
proposed rule devoted to the standards that will be used for electronic 
prescribing and have reserved Sec.  423.159(a) and Sec.  423.159(b) of 
this final rule for such electronic prescribing standards. Therefore, 
the proposals we made for such standards are not being addressed in 
this final rule. Moreover, comments received in response to such 
proposals may be considered in the electronic prescribing-specific 
proposed rule. In addition, commenters who wish to provide additional 
comments on electronic prescribing will be permitted to do so after 
publication of the electronic prescribing proposed rule.
    One standard we are finalizing is the requirement that Part D 
sponsors have the capacity to support electronic prescribing, once 
final standards are in effect, including any standards that are 
established before the drug benefit begins in 2006. We proposed such 
language at Sec.  423.159(a) of the proposed rule. Since Part D 
sponsors will in fact have to support electronic prescribing, once 
standards are in place, we have modified the language in Sec.  
423.159(c) to make clear that Part D sponsors must not just have the 
capacity to support electronic prescribing but will actually have to 
support it. We received no comments on this proposal and are adopting 
it at Sec.  423.159(c).
    We also proposed at Sec.  423.159(b) to 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 electronic prescription program 
that meets standards established under section 1860D-4(e) of the Act. 
We solicited comments on the differential payments provision described 
in Sec.  423.159(b) of the proposed rule as it relates to the 
application of various legal authorities including ``the physician 
self-referral prohibition at Sec.  1877 of the Act'' and the Federal 
anti-kickback provisions at section 1128B(b) of the Act. In order to 
facilitate electronic prescribing by a Part D sponsor, we also invited 
public comment on additional steps to spur adoption of electronic 
prescribing, overcome implementation challenges, and improve Medicare 
operations.
    Comment: Many commenters supported the provision of a separate or 
differential payment to a participating physician that prescribes 
covered Part D drugs in accordance with electronic prescription 
standards.
    Response: We agree that participating physicians have a substantial 
role in electronic prescribing and will have upfront and on-going costs 
of implementation. For this reason, the regulation permits an MA 
organization offering an MA-PD to provide a separate or differential 
payment to a participating physician that prescribes covered Part D 
drugs in accordance with electronic prescription standards, including 
both voluntary standards promulgated by HHS and final standards 
established by HHS once final standards are effective.
    Comment: Many commenters also encouraged us to allow MA-PD plans to 
make similar incentive payments to participating pharmacies and 
pharmacists.
    Response: We agree that pharmacies and pharmacists have a 
substantial role in electronic prescribing and will have upfront and 
on-going costs of implementation. The MMA statute provided for such 
incentives directly to physicians; however MA plans could in compliance 
with the Federal anti-kickback and Stark self-referral statutes offer 
incentives to pharmacies and pharmacists through individual plan 
contract agreements. HHS may consider this issue when developing the 
pilot programs.
    Comment: One comment stated that differential payments should also 
be permissible by PDPs. While ``PDPs sponsors will not have network 
contracts with physicians in the way that MA organizations will, PDPs 
may have service contracts with physicians to provide MTMP services.'' 
The commenter noted that we have the authority to permit such payments 
under section 1860D-4(c)(1)(B) of the Act as part of a quality 
assurance program.
    Response: We disagree. The MMA statute was specific in the use of 
incentives by MA-PD plans to participating physicians that prescribe 
covered Part D drugs in accordance with an electronic prescription 
program that meet the standards established under section 1860D-4(e) of 
the Act.
    Comment: Many commenters expressed concern that separate or 
differential payments should not inappropriately influence physician 
prescribing behavior or restrict provider choice or decision making. 
Many also suggested that we provide guidance to plans to guarantee that 
such incentives do not impact prescribing judgment and that any 
incentives utilized in e-prescribing programs focus on rewarding 
improvements in patient safety and quality.
    Response: We agree with the commenters that incentives must not 
inappropriately influence physician prescribing patterns. We will be 
providing guidance to plans on physician incentives.
    Comment: Many commenters agreed that any differential payments 
provision 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. They urged the Secretary to consider extending the 
applicability of the safe harbor provisions beyond Part D programs and 
to include monetary and non-monetary remuneration.
    Response: As outlined in the preamble in the proposed rule, we are 
sharing any comments regarding the anti-kickback statute with the OIG. 
Additionally, in response to comments we have added language at Sec.  
423.159(d) that such payments be subject to compliance with applicable 
Federal and State laws and regulations related to fraud and abuse.
     In the proposed rule, we also sought comment on measures of MA-PD 
plan quality related to the use of electronic prescribing and other MA-
PD quality

[[Page 4285]]

measures that reflect effective electronic prescribing systems.
    We invited comments on the challenges and on possible Federal 
activities that will promote the effective use of electronic 
prescribing by providers, including publishing best practices, and 
making technical information on electronic 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 requested additional 
information on how those populations may view electronic prescribing 
and what steps may be taken to get them to use this modality and, thus, 
take advantage of the safety and quality benefits it offers.
    We also invited 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 differential payments authorized in 
Sec.  423.159, we invited comments on what incentives could be used to 
spur more widespread adoption, especially for early implementers. We 
also invited 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 sought public input on the ways electronic 
prescribing can further reduce costs to the Medicare program and 
promote quality of care to beneficiaries.
    We received numerous comments in response to our requests.
    Comment: HHS received universal support from all those who 
commented on Sec.  423.159 regarding the establishment of electronic 
prescribing standards and its potential for improved quality of care 
through reduced medication errors, better therapeutic compliance and 
better process and cost efficiencies.
    Response: We agree with the commenters that electronic prescribing 
has great potential to improve the health of Medicare beneficiaries and 
reduce medication errors.
    Comment: Many commenters suggested that HHS should evaluate how 
electronic prescribing may improve patient compliance, clinical 
outcomes and patient safety and facilitate other electronic prescribing 
processes. Additionally commenters provided a variety of areas to focus 
educational efforts and data analyses.
    Response: We agree with the commenters that MA-PD plan quality, 
related to electronic prescribing, must be evaluated to further promote 
quality of care for beneficiaries. We will take these suggested areas 
under consideration as we develop quality measures for MA-PD plans. 
Furthermore, for quality improvement purposes, we will make any plan 
information on electronic prescribing available to our QIOs either 
directly from the Part D plans or through us.
    Comment: Many commenters stated that HHS should publish best 
practices and make technical information on electronic prescribing 
products available so that providers can make informed comparisons. 
Many agreed that these efforts will also spur effective adoption and 
use of electronic prescribing.
    Response: HHS appreciates these thoughtful comments and will take 
them into consideration as we implement electronic prescribing.
    Comment: A few commenters responded that electronic prescribing 
will result in procedural and behavioral changes by beneficiaries. They 
suggested that HHS work to ensure patients are aware of and comfortable 
with the new prescribing method and should disseminate information and 
educate enrollees on the changes resulting from electronic prescribing.
    Response: We agree that electronic prescribing will result in 
procedural and behavioral changes in our beneficiaries. We will 
consider these suggestions as we work with the Part D sponsors on 
information dissemination and outreach.
    Comment: One commenter stated that HHS should work with National 
Center for Vital and Health Statistics (NCVHS) to study the use of 
reduced malpractice insurance premiums as a financial incentive to 
promote the adoption of electronic prescribing.
    Response: HHS will share this comment with the NCVHS.
    Comment: Many commenters provided a variety of areas to focus 
educational efforts and data analyses to spur more widespread adoption.
    Response: We will take these suggested areas for data analyses 
under consideration as we develop our educational efforts and quality 
improvement strategies by making such information on electronic 
prescribing available to our QIOs either directly from the Part D plans 
or through us.
    Comment: Many commenters stated that developing standards for 
electronic prescribing will reduce costs to the Medicare program. Many 
commenters stated that the primary benefits of electronic prescribing 
are increased quality of care, reductions in the use of medical 
resources, and improved patient safety, specifically in the areas of 
reduced adverse events. Additionally, many stated that electronic 
prescribing improves the efficiency of processing prescriptions.
    Response: We agree with the commenters that these electronic 
prescribing areas have great potential to reduce costs to the Medicare 
program.
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, and 
Part D sponsors quality improvement assistance pertaining to health 
care services, including those related to prescription drug therapy.
    In the proposed rule, we stated the QIOs will need access to data 
from transactions between pharmacies and Part D plans. We offered 
examples of the types of data that would likely be required by QIOs and 
also discussed our role in potentially aggregating and distributing the 
data. Finally, we proposed that any information collected by the QIOs 
will be subject to confidentiality requirements in part 480 of our 
regulations. For purposes of applying these confidentiality 
regulations, we also proposed that Part D sponsors fall within the 
definition of health care facilities and that part 480 would apply in 
the same manner as that Part applies to institutions.
    As the QIOs activities under Part D are developed within the 8\th\ 
Scope of Work, and basic decisions are made about the collection, 
storage and use of Part D claims data, CMS will work with QIOs and Part 
D plans to develop a strategy to provide QIOs with data necessary to 
accomplish their task and safeguard patient confidentiality.
    Comment: One commenter believes that PDPs may need additional data 
to identify enrollees to be targeted for MTMP services. They believe 
QIOs could provide that data to plans using information from medical 
claims submissions.
    Response: QIOs cannot share with Part D plans beneficiary-specific 
identifiable data that it has acquired as part of its function as a 
QIO, but we could provide the data necessary to identify enrollees to 
be targeted for MTMP services to the Part D plans if appropriate. QIOs 
can provide other types of technical assistance to Part D plans.
    Comment: One commenter recommends that serious evaluations be

[[Page 4286]]

designed to compare the effectiveness of different MTMP services, 
delivery, and payment methodologies. Another commenter wrote that QIOs 
could potentially perform a valuable role in collecting and analyzing 
the data to be made available to plans for use in establishing or 
revising their MTMP services.
    Response: Once Title I has been implemented, we expect that outcome 
measures will be developed to allow the QIOs to assess the 
effectiveness of the MTMP services. We expect that both plans and 
pharmacies will be able to request technical assistance from QIOs to 
improve their MTMPs.
    Comment: One commenter recommended that the last sentence of Sec.  
423.162(b) be deleted. [``PDP sponsors and MA plans offering MA-PD 
plans are required to provide specified information to CMS for 
distribution to the QIOs as well as directly to QIOs''] They support 
the voluntary nature in terms of whether a Part D plan must contract 
with a QIO. They are concerned about the submission of undefined 
information to CMS for passing through to QIOs as well as directly to 
QIOs regardless as to whether a Part D plan works with a QIO. In 
addition, it is unclear to which QIO such information will be provided, 
particularly since some drug plans may serve more than one State. 
Another commenter stated QIOs must have access to pharmacy and medical 
claims for quality improvement projects and oversight of the PDPs.
    Response: We do not believe that the last sentence of Sec.  
423.162(b) must be deleted. QIOs need, and have the authority under 
section 1154 of the Act and section 109 of the MMA, to access specified 
data from the transactions between pharmacies and Part D plans 
providing the Part D benefit. However, the determination of what actual 
data, if any, that will be made available to QIOs will be made in 
subsequent guidance after QIOs activities under Part D are developed 
within the 8\th\ Scope of Work, and basic decisions are made about the 
collection, storage and use of Part D claims data. We could provide 
specific data to QIOs to use for quality monitoring and extract these 
data from data already required by us for other administrative 
functions of the Title I program, thus not increasing the Part D plans' 
burden. We could also make data available to a QIO from plans that do 
not contract with the QIO but are directly related to the QIO's 
responsibilities as negotiated with us under its 8\th\ scope of work. 
QIOs may also have access to additional data provided by plans working 
directly with a QIO.
Other QIO Activities
    Comment: While PBMs have processes in place to monitor pharmacy 
dispensing and alert a pharmacy in cases where dispensing a medication 
may not be safe for a particular patient, it is critical the PBM or 
drug plan not be held accountable or responsible for activities that 
are beyond its control. Drug plans can be evaluated for having such 
process measures in place but should not be held accountable for 
problems outside their control, such as physician, pharmacist or 
manufacturer errors.
    Response: We expect that the QIOs will work with physicians, 
pharmacists, and plans to improve the quality of beneficiaries' 
medication therapies. The QIOs' goal is to improve quality of care, not 
to assign blame. They can assist each of these players to design 
systems to facilitate the delivery of quality of care.
    Comment: One commenter stated that QIOs should establish 
educational programs to assist drug plans and prescribers in the 
implementation of best practice guidelines through treatment 
algorithms.
    Response: The QIOs' scope of work is being described in their 
contracts rather than in the regulation. The contracting mechanism 
allows flexibility to adjust the QIOs' tasks to be responsive for the 
need for quality improvement. The QIOs' activities will address quality 
improvement for both prescribers and plans.
    Comment: The confidentiality of information collected by QIOs 
should be protected, as CMS has proposed.
    Response: The QIOs will protect the confidentiality of the 
collected information, as specified in part 480. We have clarified 
Sec.  423.162(c) in this final rule to make clear that the provisions 
of part 480 apply in the same manner as they apply to institutions.
    Comment: There were several commenters who expressed concern 
regarding how QIOs will handle beneficiaries' complaints about the 
quality of care in Part D. The final rule in Sec.  423.153(c) needs to 
state clearly that the QIOs will review quality of care complaints and 
lack of access complaints to requested services, as well as to clarify 
how this traditional QIO function will be carried out in the unique 
environment of Part D plans.
    Response: Section 423.564(c), not Sec.  423.153(c), states that 
QIOs must review enrollees' written complaints about the quality of 
services they have received under the Medicare program, as specified in 
section 1154(a)(14) of the Act. For any complaint submitted to a QIO, 
the Part D sponsor must cooperate with the QIO in resolving the 
complaint. For further discussion, please refer to the preamble to 
subpart M.
    Comment: The final regulation should reflect the information 
contained in the summary of the 8\th\ scope of work (SOW) for QIOs. The 
commenter added the regulation should specify that quality improvement 
projects will be performed by the QIO or by a third party (independent 
of the Part D plan) contracted by the QIO.
    Response: This information is typically conveyed in the SOW of the 
contract between each QIO and us rather than in the regulation because 
a contract allows us the flexibility to modify the QIOs' activities 
without modifying the regulation. The contract is an effective way to 
ensure that these important tasks are accomplished.
    Comment: Educational interventions are best done by QIOs or a third 
party independent of the Part D plan contracted by the QIO.
    Response: QIOs will likely do educational interventions either with 
their own staff or with subcontractors, but we do not want to exclude 
other entities from also providing objective, evidence-based 
educational interventions.
    Comment: Oversight of formulary decisions and subsequent review of 
Part D sponsors' formulary decisions could be key components necessary 
for QIO's to assess quality, especially in the dual-eligible long term 
care patients.
    Response: We believe that decisions concerning which medications 
are on a plan's formulary are administrative decisions of the plan. 
These do not fall within the quality review functions of the QIO. The 
QIO will review beneficiary complaints that the plan's rules were not 
executed correctly. We will conduct reviews of plans' applications to 
ensure that formularies are not discriminatory, as well as review 
through program monitoring.
    Comment: MA organizations delivering benefits through their owned 
and operated pharmacies are likely to rely on specialized pharmacy 
information systems that differ from the systems designed for PDP 
sponsors to communicate with their contract network pharmacies. As a 
result, it is possible that pharmacy data may be misinterpreted by a 
QIO. If QIOs will be using data from integrated MA organizations to 
assess quality, it will be important to work closely with the 
organizations to understand the data, or to develop more efficient 
methods to achieve the same result-an appropriate assessment of quality 
performance.
    Response: We expect that QIOs will work cooperatively with plans. 
Because

[[Page 4287]]

QIOs work with identified organizations, they will have the opportunity 
to understand the context of the data they are analyzing.
    Comment: One commenter suggests that QIOs examine the prescription 
drug claims submitted to the plan, specifically looking at the number 
of claims that are rejected and appealed.
    Response: QIOs' activities focus on quality improvement. The number 
of claims rejected is an administrative function, and we do not expect 
the QIOs to be active in this area. It is likely the administrative 
performance of plans will be assessed by our program monitoring.
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 Part D sponsors for:
     Access to covered Part D drugs including the pharmacy 
access requirements and the use of standardized technology and 
formulary requirements;
     Drug utilization management, Quality assurance, Medication 
Therapy Management, and a program to control fraud, waste and abuse as 
described in subpart K Sec.  423.504(b)(4)(vi)(H);
     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.
    Proposed Sec.  423.165 provided the conditions under which a Part D 
sponsor may be deemed to meet our requirements permitted under 
paragraph (b) of that section. We stated that the first condition will 
be that the plan be fully accredited (and periodically reaccredited) by 
a private, national accreditation organization (AO) that we approve. 
The second condition will be that the plan be accredited using the 
standards that we approved for the purposes of assessing compliance 
with Medicare requirements.
    Consistent with our approach in the MA program, in the proposed 
rule we proposed that we will analyze on a standard-by-standard basis 
whether an AO applies and enforces requirements that are no less 
stringent than those in part 423 for the standard at issue. We proposed 
that we will determine the scope of the AO's approval (and, thus, the 
extent to which Part D plans accredited by the organization are deemed 
to meet our requirements) based on a comparison of the AO's standards 
and its procedures for assessing compliance with our deemable 
requirements and our own decision-making standards. We stated that we 
will make those determinations on the basis of the application 
materials submitted by AOs seeking our approval in accordance with 
Sec.  423.168. We also proposed to conduct surveys to validate the AO's 
enforcement on a standard-by-standard basis.
    Proposed Sec.  423.165(d) established the obligations of deemed 
Part D sponsors. A Part D sponsor will be required to submit to our 
surveys. We stated that the proposed surveys were intended to validate 
an AO's process and authorize the AO 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). We stated that such 
activities will be part of our ongoing oversight strategy for ensuring 
that the AO applies and enforces its accreditation standards in a 
manner comparable to ours.
    Proposed Sec.  423.165(e) addressed removal of deemed status and 
proposed Sec.  423.165(f) explained that we retain the authority to 
initiate enforcement action against any Part D 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 stated that we expected the AO to 
have a system in place for enforcing compliance with our standards 
(such as sanctions for motivating correction of deficiencies), but we 
also stated that we could not delegate to the AO the authority to 
impose the intermediate sanctions established by section 1860D-12 of 
the Act or termination of the contract.
    In the proposed rule, we acknowledged that 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.
    Proposed Sec.  423.168 discussed the three conditions for our 
approval of an AO if the organization applies and enforces standards 
for Part D 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.
    Proposed Sec.  423.168(c) established ongoing AO responsibilities. 
These responsibilities largely parallel those currently imposed upon 
accreditors under original Medicare. One exception was the proposed 
requirement that an AO notify us in writing within three days of 
identifying, for an accredited Part D sponsor, a deficiency that poses 
immediate jeopardy to the Part D sponsor's enrollees or to the general 
public.
    Proposed Sec.  423.168(d) established specific criteria and 
procedures for continuing oversight and for withdrawing approval of an 
AO. Oversight consists of equivalency review, validation review, and 
onsite observation.
    In the proposed rule, we stated that we could withdraw our approval 
of an AO at any time if we determine that deeming based on 
accreditation no longer guarantees that the Part D plan 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 AO has failed to 
meet its obligations under Sec.  423.165 through Sec.  423.171.
    Proposed Sec.  423.171 addressed the procedures for approval of 
accreditation as a basis for deeming compliance. As mentioned, the 
process that we stated will be used to deem compliance with Part D 
requirements is virtually identical to the process that is being used 
for deeming compliance with fee-for-service requirements. One 
requirement proposed in Sec.  423.171, and which also appeared in 
regulations governing MA plans at Sec.  422.158(a)(11), but did not 
appear in regulations governing original Medicare, is the requirement 
that an AO applying for approval of deeming authority submit the name 
and address of each person with an ownership or control interest in the 
AO. We proposed that we will use this information to determine whether 
the AO is controlled by the organizations it accredits for the purposes 
of Sec.  423.168. Section 423.171 further provided for reconsideration 
of adverse determinations of accreditation applications.
    Comment: Several consumer groups oppose deeming because they 
believe it will diminish beneficiary protections. Several different 
types of organizations, such as pharmacy organizations, and others want 
to have input into the process, and asked who will be the AOs, how will 
they operate, and what standards will be used. They also commented that 
AOs will not be in place prior to the initiation of the program.
    Response: Section 1860D-4(j) of Act provides for accreditation. We 
have

[[Page 4288]]

successfully administered accreditation programs in:
     Hospital settings, for example, JCAHCO;
     Home health, for example, JCAHCO, NLN; and
     Nursing homes and managed care, for example, NCQA, JCAHCO.
    The advantages of AOs is that they eliminate duplication of efforts 
between us and AOs, since many private purchasers require AOs. 
Furthermore, it reduces the burden on government oversight.
    AOs must demonstrate that their standards are at least as stringent 
as those in part 423 of our final regulations. Given that the 
regulations can only be finalized upon publication of this final rule, 
we agree with the commenters that AOs cannot be in place before the 
bids and contract applications for 2006 are due. Thus, at least in the 
first year of the program, applicants will have to determine on their 
own that they meet all of our standards. Once these rules are in 
effect, we can begin to consider applications for AOs; however, other 
program priorities will influence when we will be able to issue a 
public notice requesting applications. Currently, we do not believe 
that any AOs can meet our standards. Furthermore, it must be noted that 
in the Medicare Advantage program, it was several years before any AOs 
were accredited.
    As to giving stakeholders a chance to comment, our regulation at 
Sec.  423.168(b) provides that we publish a notice in the Federal 
Register whenever we are considering an AO's application. The public 
then has 30 days to comment.
    We will be glad to meet with stakeholders to discuss these issues. 
The AOs must meet or exceed each of our standards. They can pass one or 
all standards, but will only be allowed to administer those standards 
for which they are approved.
    The final rule has adopted the proposed rules on accreditation.

F. Submission of Bids and Monthly Beneficiary Premiums: Plan Approved

1. Overview
    Subpart F will 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. See Subpart T for 
additional information on PACE. Bidding is to be distinguished from the 
application process discussed in subpart K.
    Although in this preamble we use the terminology, prescription drug 
plans and MA-PD plans, the regulations extend to all Part D sponsors 
(including PACE organizations and cost-based HMOs and CMPs) as these 
entities--just like PDP sponsors--will be required to submit bids for 
the prescription drug coverage they plan to offer. Therefore, we have 
changed the accompanying regulation text to use the terminology, ``Part 
D sponsor,'' throughout. We have also indicated in the regulation where 
separate rules would apply to fallback entities.
    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 will 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 will 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 will be required to submit a 
bid for prescription drug coverage for each plan it intends to offer. 
Most bids will 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. Bids will 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 will 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 will 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 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 
will 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.) In the August 2004 proposed rule we solicited comment on 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 must be those for which the 
plan will actually be responsible. Given the structure of qualified 
prescription drug coverage, these costs will not include payments made 
by the enrollee for deductible, coinsurance (including 100 percent 
coinsurance between the initial

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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 will 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 will 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 will require that, with the exception of 
potential employer group waivers under section 1860D-22(b) of the Act 
and section 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 will be subject to the same cost 
sharing structure and will 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 will 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.
    Comment: Two commenters suggested that we assist bidders by making 
accessible relevant drug utilization data from sources such as Tricare, 
PBMs, the National Association of Chain Drug Stores and current 
Medicare Advantage plans with drug benefits.
    Response: We either does not have access to such data or does not 
have the authority for public release. Most of the data suggested by 
the commenters would be considered proprietary. There are other data 
sets that are being used to meet industry's requests that we share 
information from public data sets that could help potential drug plan 
bidders to better understand or estimate the eligible Medicare 
beneficiary population's utilization of prescription drugs. They 
include: 1) data for Federal retirees 65+, enrolled in the Federal 
Employee Health Benefit national Blue Cross Blue Shield plan; 2) data 
from the Medicare Current Beneficiary Survey; and 3) Medicaid Pharmacy 
Benefit Use and Reimbursement in 1999 Statistical Compendium. The 
latter is prepared from Medicaid Analytic eXtract (MAX) files for 
calendar year 1999. For more information, or to download these data see 
http://www.cms.hhs.gov/pdps/default.asp.
    Comment: Several comments urged that bids be rejected from PDPs 
that are owned or financially controlled by a drug manufacturer or 
group of manufactures.
    Response: We note the concern that many stakeholders have had over 
manufacturer acquisition of PBMs in the 1990's. However, the Federal 
Trade Commission's response by imposing restrictions on manufacturers 
acquiring PBMs (for example, offer open formularies, include drugs that 
compete with the parent company's products, etc) has generally led 
manufacturers to divest from PBMs, or to alter their behaviors in order 
to prevent antitrust enforcement actions (see Christopher Sroka's 
November, 2000 report ``Pharmacy benefit managers'' for the 
Congressional Research Service and Regina Johnson's 2002 piece ``PBMs: 
Ripe for regulation'' in Volume 57, Issue 2 of the Food and Drug Law 
Journal). Regardless of future industry activity in this area, the 
statute does not give us the authority to implement a ban as suggested 
by the commenters.
    Comment: One commenter indicated that Part D plans are required to 
submit bids no later than the first Monday in June to be offered in the 
subsequent calendar year. This is not sufficient time for SPAPs that 
need to coordinate benefits. SPAPs will need to know by June of 2005 
what plans will be qualified sponsors and operating in their States.
    Response: Section 1854 of the Act amended by the MMA sets the bid 
submission date as no later than the first Monday of June. PDP sponsors 
and MA organizations with MA-PDs need the maximum amount of time to put 
together a bid. PDPs and MA-PDs will need to keep SPAPs informed in 
order to complete the bid process, so communication between these 
entities should not be an issue.
    Comment: One commenter suggested that plans should be required to 
provide for coverage of services to residents of Long Term Care 
facilities that are required by OBRA 1987 and under OBRA 1990. They 
recommended that this be added to the included costs in Sec.  
423.265(b)(1) under submission of bids. The commenter went on to state 
that Part D plans should not be exempt from providing the same services 
required under Medicare Part A or Medicaid to nursing facility 
residents and recommended that we require plans to incorporate the 
costs of paying for such services into their bid submissions, and that 
plans state clearly how they intend to pay qualified pharmacists for 
providing such services.
    Response: Part D plans are only obligated to pay the negotiated 
price for covered part D drugs, which consists of the ingredient cost 
of the drug and a ``dispensing fee'' and that take into account any 
discounts, direct or indirect subsidies, rebates or other price 
concessions received by the Part D plan). The fee will 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 will 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. The dispensing fee does not include any charges 
associated with administering the drug once the drug has already been 
transferred to the beneficiary. This means that the pharmaceutical 
services listed under 1819(b)(4)(A)(iii) are included within the 
negotiated prices for covered part D drugs only if the term 
``dispensing fee'' as defined in Sec.  423.100 captures such services.
    Comment: Several commenters asked for guidance regarding the costs 
that we view as administrative.
    Response: Administrative costs are not clinical services unless 
part of a Medication Therapy Management Program. Administrative costs 
include such costs as: 1) crossover fees paid to

[[Page 4290]]

obtain information from other payors in order to calculate TROOP (True 
Out-of-Pocket); 2) Medication Therapy Management Program expenses; 3) 
Marketing & Sales; 4) Direct Administration (for example, customer 
service, billing and claims administration); 5) Indirect Administration 
(for example, corporate services, such as accounting operations, 
actuarial, legal and human resources); 6) Net Cost of Private 
Reinsurance (that is, reinsurance premium less projected reinsurance 
recoveries); 7) Medicare User Fees; 8)Uncollected Enrollee Premium; and 
9) return on investment. Additional guidance on administrative costs 
will be given with the release of the bid submission tool. Instructions 
for the tool will include more detail defining administrative costs and 
guidance on how they are to be indicated in the bid submission.
    Comment: One comment urged us to modify the timeline to permit 
bidders to submit a bid for approval before June 6, 2005.
    Response: While bids can be submitted before the first Monday in 
June (June 6 in 2005), they cannot be approved before that date because 
they are reviewed collectively.
    Comment: Several commenters urged that the bid submission process 
use electronic methods and be parsimonious for data requirements.
    Response: We agree with the commenters that electronic methods are 
preferable. Accordingly, bid submitters will upload an electronic Plan 
Benefit Package (PBP) and bid submission pricing tool to the Health 
Plan Management System (HPMS). The bid is to represent the expected 
monthly average cost to be incurred by a plan applicant providing 
qualified prescription drug coverage in an applicable area for a Part D 
eligible beneficiary with a national average risk profile. We are 
cognizant of plan burden and therefore required submission data will be 
limited to what is absolutely necessary for us to fulfill its bid 
review, payment, and negotiation obligations.
    Comment: One commenter asked if plans will get the rebates from 
manufacturers for drugs covered by SPAP wrap around.
    Response: CMS does not have the authority to dictate how 
manufacturers pay rebates to plans. However, we would expect that drugs 
covered by secondary payers would still be subject to rebates.
3. General CMS Guidelines for Actuarial Valuation of Prescription Drug 
Coverage
    As directed by 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 we plan to provide additional information in 
the future in the form of interpretive guidance on these processes, we 
intend on using 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) 
will be required to demonstrate the actuarial equivalence of their 
variations.
     Sponsors offering basic or enhanced alternative 
prescription drug coverage will be required to demonstrate that--
     + The actuarial value of total or gross plan coverage of their 
alternative is at least equal to the actuarial value of total or gross 
coverage of the defined standard benefit.
     + 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 will 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 will 
also be required to determine the actuarial value of coverage beyond 
basic coverage.
     We will further specify in additional guidelines the data 
sources, methodologies, assumptions, and other techniques in accordance 
with generally accepted actuarial principles as either recommended or 
required in further guidance. We will also specify the data elements 
(including format) to be sent to us for evaluation. We will then 
evaluate the analysis and assumptions for compliance and 
reasonableness. For example, we will 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 will also require the separate identification of 
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 will likely focus primarily on outliers 
from the competitive range identified in the bids received. All 
proposals will contain a description of how certain costs are included 
in the calculations. Processes and methods for determining actuarial 
valuation will 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 will have to be loaded into the 
supplemental portion of the bid. In other words, since the existence of 
supplemental coverage will increase total average per capita spending, 
that increase over the average spending (if coverage were limited to 
basic coverage) will be included in the portion of the 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 will 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 
requiring PDP sponsors and MA organizations that do

[[Page 4291]]

not employ qualified actuaries, to use outside actuaries in their 
processes. We proposed in the August proposed rule 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.
    Comment: Several commenters asked for flexibility in the actuarial 
standards. One commenter specifically asked for flexibility in the use 
of methods and actuarial assumptions by permitting the use of internal 
data or normative claims databases.
    Response: Section 1860D-11(c)(1) of the Act instructs the Secretary 
to ``establish processes and methods for determining the actuarial 
valuation of prescription drug coverage including.the use of generally 
accepted actuarial principles and methodologies''. To the extent it is 
possible under this paradigm to be flexible, we will be. Use of 
internal data or normative claims databases is not only acceptable, but 
encouraged. We will however, review the assumptions and results of your 
analysis for reasonableness and appropriateness.
    Comment: One commenter asserted that being a member of the American 
Academy of Actuaries should be a requirement, but should not be 
sufficient by itself.
    Response: Our policy position is to require that an actuary have 
the skills and experience to perform the actuarial certification 
required. Accordingly, in Sec.  423.265(c)(3) we state that a 
``qualified actuary must certify the plan's actuarial valuation, and 
must be a member of the American Academy of Actuaries to be deemed 
qualified.'' By requiring membership in the American Academy of 
Actuaries we are both requiring a minimal standard, and providing an 
additional assurance that the actuary will be qualified. For the latter 
comment, the Code of Professional Conduct for Actuaries states ``an 
Actuary shall perform Actuarial Services only when the Actuary is 
qualified to do so on the basis of basic and continuing education and 
experience.''
    Comment: Two commenters expressed that there could be problems with 
the proposal that the costs associated with any increased utilization 
in the Part D basic benefit arising from enhanced alternative coverage 
would be included in the supplemental benefit portion of the bid. They 
assert that the application of this policy as it applies to the Part D 
program could be problematic because in many instances an enrollee will 
have supplemental coverage arising from another source that would not 
be part of enhanced alternative coverage of the sponsor or 
organization. One commenter gave the example of a beneficiary who may 
elect basic prescription drug coverage under a PDP or MA-PD plan and 
may also receive coverage under an employer/union group plan that wraps 
around the Part D benefit. They argue that in this case, if no 
supplemental benefits were included in the MA-PD plan or PDP, there 
would be no way to take into account in the bid the impact of any 
increased utilization unless it can be reflected in the bid for the 
basic benefit. This problem could be greater for special needs plans 
serving dually eligible beneficiaries who are eligible for substantial 
subsidies under the Part D program. In this instance, if no 
supplemental benefits are included in the MA-PD or PDP plan, the only 
avenue for taking increased utilization the may result from the subsidy 
into account would be the bid for the basic benefit. However, this 
could result in a bid above the benchmark that would produce a premium 
higher than the low-income premium subsidy resulting in an increase in 
the premium obligation for dual eligible enrollees. This situation 
could threaten the viability of a special needs plan.
    Response: Plan bids will take into account the anticipated impact 
of induced utilization due to the structure of the plan benefit, other 
insurance coverage, and the low income subsidy. The impact of induced 
utilization will be addressed directly in the bid for enhanced 
alternative coverage. Note that this is for Part D only and is 
different from what is discussed for Part C in the Title II regulation. 
There are three major mechanisms for adjusting payment to account for 
the utilization of the actual enrolled population in any given plan, 
these are risk adjustment, reinsurance, and risk corridors. One 
intention of risk adjustment is to take into account the utilization of 
dual eligibles and adjust payment appropriately for the level of 
utilization in this population. For all bids, the anticipated impact of 
other insurance coverage on the bid and its effect on reinsurance will 
be taken into account. Risk corridors will serve to decrease the 
exposure of plans where allowed costs exceed plan payments for the 
basic Part D benefit.
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. Thus, we are using 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

[[Page 4292]]

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 ensure 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 
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. Additional guidance will be released concerning this 
matter.
    Comment: Two commenters suggested that we should waive the second 
test of actuarial equivalence because if a plan meets all of the other 
tests the second test would be redundant, and without knowing the true 
value of direct subsidy the second test would be difficult to conduct.
    Response: The second actuarial equivalence test for alternative 
coverage ensures the equivalent unsubsidized value of coverage. As we 
are defining this test, the beneficiary premium for alternative 
coverage must be greater than or equal to the beneficiary premium for 
standard coverage. Since beneficiary premiums will not be determinable 
until after all bids have submitted and applied against the national 
average bid, we interpret the application of this provision to be that 
the total Part D bid for alternative coverage must be greater than or 
equal to the sponsor's bid for defined standard coverage. We note that 
the first test of actuarial equivalence guarantees that the total value 
(including reinsurance) of coverage for the basic alternative benefit 
must be equal to the total value of coverage of the standard benefit. 
The second test then precludes a basic alternative benefit structure 
that increases government reinsurance costs relative to define standard 
coverage. We note that the test imposes no additional burden beyond the 
first test (that is, if you constructed a bid and shown that you meet 
test 1, you would already have all the information available 
to show whether you meet test 2). Given that the program is 
just beginning and we have no practical experience to show that the 
second test adds no value beyond the first test, we see no basis for 
waiving this test at this time.

[[Page 4293]]

(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 ``for 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 result, 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 excluded from this calculation. Any 
alternative coverage that does not include supplemental coverage would 
be, by definition, actuarially equivalent to standard coverage. Any 
utilization effect that supplemental coverage has on the basic benefit 
should be priced into the supplemental portion of the bid.
    Comment: One commenter wants to ensure that they have the ability 
to establish flat copayments rather than the 25 percent coinsurance of 
the standard design. We should permit Part D providers to round flat 
copayments to the nearest $5 dollar level, as these are the benefit 
designs commonly offered in the market place.
    Response: Any copayment structure must meet the test for either 
actuarially equivalent standard coverage or for alternative coverage. 
These tests are available to allow for flexibility in benefit design 
including use of copays rather than coinsurance. While we would 
anticipate that some rounding would be consistent with these tests, 
rounding to the nearest $5 dollar level may create too great a 
difference between rounded and unrounded values.
    Comment: One commenter stated that the regulation text should allow 
for the value of any enhanced benefit design to reflect both the 
potential impact of utilization changes and mix shifts to less 
expensive drugs. Any test of benefit value should also take into 
account the impact of utilization management, which may increase 
utilization, but have a favorable impact on total costs.
    Response: To the extent that a benefit design other than that of 
defined standard coverage will have a projected impact on the mix of 
drugs, this impact will be included in the pricing of that proposed 
design. We anticipate that utilization management will be held constant 
in the pricing of defined standard and the proposed design, as well as 
the population modeled; drug formulary; and drug pricing (except to the 
extent that the proposed design incorporates differential pricing and 
cost sharing based on participation status within the plan's network). 
These issues will be fully discussed in our guidance on ``processes and 
methods using generally accepted actuarial principles and 
methodologies''.
5. Information Included with the Bid
a. Bid Format
    The exact format for the bid submission is detailed in separate CMS 
guidelines with the bid submission tool. Section 1860D-11(c)(1)(D) of 
the Act specifies ``the use of generally accepted actuarial principles 
and methodologies.'' We 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.

[[Page 4294]]

    As provided in section 1860D 11(b)(3) of the Act, we have developed 
(see Draft PDP Bid Instructions and Pricing Tool http://www.cms.hhs.gov/pdps/) the bid submission format to facilitate the 
submission of bids for multiple regions and in all regions, and we have 
taken 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.
    In most cases the information included with the bid would 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. However, 
we may require additional information during the review to support the 
assumptions and methods accompanying the bid. As provided in section 
1860D-11(b)(2) of Act and Sec.  423.265(d) of this 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, utilization 
management techniques, 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
     Any other information that we would require.
Response to public comment
    Comment: Several comments were received concerning privacy 
protections for information submitted during the bidding process. Two 
manufacturers urged adoption of the ``restriction on use of 
information'' standard in Sec.  423.322(b) for bidding information. 
Moreover, they believe that the Trade Secrets Act (18 USC Sec.  1905) 
should apply and be inserted into the regulation to cover manufacturer 
pricing information. Three additional comments were received suggesting 
that we should limit our requests concerning specific pricing and cost 
information. These commenters while not referring to the Trade Secrets 
Act, did seek protection of any information submitted. Additionally, 
one pharmacy benefits manager and one health insurer expressed concern 
that bidding information will not be protected from disclosure under 
the Freedom of Information Act (FOIA).
    Response: We believe that information submitted with the bid that 
is used to pay plans (such as estimations of reinsurance or 
administrative costs) would be protected under Sec.  423.322(b) and 
sections 1860D-15(d)(2)(B) and 1860D-15(f)(2) of the Act. These 
sections protect information that is submitted to us for the purposes 
of carrying out section 1860D-15 of the Act. Because the direct subsidy 
in section 1860D-15(a) of the Act is based upon the plan's standardized 
bid amount, we believe that the portion of the standardized bid which 
is used in calculating that subsidy would be protected. On the other 
hand, information submitted with the bid that is not used in 
calculating the direct subsidy (such as the structure of the formulary 
or the utilization management techniques to be used by the applicant) 
would not be protected under sections 1860D-15(d)(2)(B) and 1860D-
15(f)(2) of the Act. However, bidders can always seek to protect their 
information under the Freedom of Information Act and label truly 
proprietary information ``confidential'' or ``proprietary.'' When 
information is so labeled, the bidder is required to explain the 
applicability of the FOIA exemption they are claiming. When there is a 
request for information that is designated by the submitter as 
confidential or that could reasonably be considered exempt under 
Exemption 4, the Department is required by its FOIA regulation at 45 
C.F.R. Sec.  5.65(d) and by Executive Order 12,600 to give the 
submitter notice before the information is disclosed. To determine 
whether the submitter's information is protected by Exemption 4, the 
submitter must show that- (1) disclosure of the information is likely 
to impair the government's ability to obtain necessary information in 
the future; (2) disclosure of the information is likely to cause 
substantial harm to the competitive position of the submitter; or (3) 
the records are considered valuable commodities in the marketplace 
which, once released through the FOIA, would result in a substantial 
loss of their market value. Consistent with our approach under the Part 
C program, we would not release information under the Part D program 
that would be considered proprietary in nature or that would tend to 
stifle the availability of discounts or rebates from pharmaceutical 
manufacturers negotiated by Part D plans.
    Bidders may identify trade secrets and confidential business 
information (CBI) with their submission. However, if they have not we 
will give them another chance when a FOIA request has been made on 
their records. In this case we will notify the business submitters that 
we are in receipt of FOIA requests for their records. We will then 
provide the business submitters with instructions and ask them to 
identify any trade secret or CBI in order to justify our application of 
Exemption 4. We will then review their justifications and highlighted 
information against FOIA case law to see if we can support their 
requested redactions. Under Executive Order 12600, if the business 
submitters

[[Page 4295]]

disagree with our Exemption 4 analysis (which includes their 
justification) of their identified trade secret or CBI, they are 
provided the opportunity to seek a restraining order or injunction in 
Federal court prohibiting us from releasing their records under FOIA.
    Comment: One commenter suggested that Pharmacy Benefit Managers be 
required to disclose all rebate arrangements with manufacturers.
    Response: It is unclear to whom the commenter wants rebate 
disclosed to and in what context. The comment was made in reference to 
bidding and in this case information on rebates will generally be 
limited to the aggregate level. However, per Sec.  423.272 more 
detailed information may be reviewed if necessary to ensure the 
reasonableness and appropriateness of the bid. Uniform requirements for 
detailed rebate information would unnecessarily increase the burden of 
the bidder. Detailed rebate information will be collected for reasons 
other than the bid.
b. Risk Adjustment of Supplemental Premium
    The portion of the bid attributable to supplemental benefits (part 
of enhanced alternative coverage defined in Sec.  423.104(g)) 
represents the supplemental premium for a beneficiary with a national 
average risk profile. The payment process provided in section 1860D-15 
of the Act will 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 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 will require additional information on the projected 
risk profiles of 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 
will 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 will 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.
    Comment: The proposed rule offers no guidance as to what we view as 
``minimal risk.''
    Response: While the statute allows ``limited risk'' arrangements to 
be accepted in order to ensure that the access requirements are met, 
such arrangements must provide for more than a ``de minimis'' level of 
risk. We would generally consider anything below 10 percent risk as 
``de minimis''. Any proposal for a level of risk above the ``de 
minimis'' but less than the standard full risk contract will be 
considered if there was a need to accept a ``limited risk'' 
arrangement.''
    Comment: One commenter suggested that we should allow PDPs who wish 
to enroll low income subsidy beneficiaries to apply for limited risk, 
but be treated as a full risk plan.
    Response: While it is unclear what the commenter meant by being 
``treated as a full risk plan,'' while being limited risk, full risk 
plans get priority and we will only approve limited risk plans when 
there are not a sufficient number

[[Page 4296]]

of full risk plans to meet the access requirements of section 1860D-
3(a). Also, per section 1860D-11(f)(1), approval of a limited risk plan 
is conditioned on not being able to meet the access requirements but 
for the approval of such a limited risk plan. Thus, if there are 
sufficient full risk plans, we will not approve limited risk plans 
regardless of whether the PDP wishes to specifically enroll low income 
subsidy beneficiaries.
    Comment: One commenter expressed confusion over how the low-income 
cost sharing amounts enter into the bid ``calculation'' since these 
amounts help to satisfy revenue needs already identified by the plans 
as part of the bid. The commenter went on to state that during the 
early years of the program it will be difficult for plans to estimate 
the number of low-income beneficiaries expected to enroll and the 
amounts that would be paid on their behalf. They requested that we 
recognize that these estimates are likely to be subject to error and 
include statement in the preamble to the final rules that a good faith 
standard will apply to these estimates.
    Response: The commenter is correct that the low-income subsidy is 
not part of the bid since it represents a subsidy for enrollee cost-
sharing liability rather than plan liability. We ask for PDP sponsors' 
or MA-PD plans' estimate of their low-income subsidy to assist us in 
determining an interim payment for this subsidy, which is separate from 
the direct and reinsurance subsidies. Their actual low-income subsidy 
payment will be based on the actual experience for this group. 
Estimates will be reviewed for reasonableness and appropriateness using 
``generally accepted actuarial principles and methodologies'' as 
instructed by 1860D-11(c)(1)(D) of the Act.
    Comment: One commenter urged that bids include information on how 
plans will coordinate with SPAPs for Part D wraparounds at the point of 
sale.
    Response: Specific information elements included in the bid 
submission tool are not part of the regulatory text and will be 
released in separate additional guidance on the bidding process.
    Comment: One commenter urged us to specify that bids must include 
information on specific drugs in each formulary tier and their 
corresponding co-pays, in addition to any prior authorization 
requirements.
    Response: Specific details concerning the response fields will be 
released with the guidance materials accompanying the bid pricing tool 
and the Plan Benefit Package; however, formulary tiering structures and 
prior authorizations requirements will be information that we will 
review.
    Comment: One comment stated that we should provide a sample 
actuarial pricing form that illustrates the type of information 
desired.
    Response: Additional guidance on actuarial pricing will be made 
available in a timely manner.
6. Review and Negotiation of Bid and Approval of Plans
a. Authority to Review Bids
    We will 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. In addition to general authority to 
negotiate terms and conditions of the proposed bid submitted and other 
terms and conditions of a proposed plan, the MMA grants use of 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 will have similar 
concerns about the reasonableness of a sponsor's trend assumptions. OPM 
is concerned about cost-sharing changes proposed by plans, and we will 
have similar concerns with regard to supplemental benefits. OPM wants 
to maintain high member satisfaction and ensure top quality service by 
plans, and we will have similar interests.
    Chapter 89 of title 5 USC gives OPM broad discretion to negotiate 
prices and levels of benefits. For example, 5 USC 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, OPM has broad authority to negotiate the level of 
benefits, including the ability to prescribe ``reasonable minimum 
standards for health benefits plans.'' (See 5 USC 8902(e).) 
Notwithstanding our broad negotiating authority and our negotiating 
authority ``similar to'' that of OPM, to the maximum extent feasible 
and consistent with the appropriate discharge of our responsibilities, 
we prefer to rely on competition rather than negotiation.
    We note that the bid requirements will be negotiated and a denial 
of a contract based on a failure to come to an agreement on the bid 
will not be appealable under the administrative procedures for 
appealing a contract denial beginning with reconsideration in Sec.  
423.645. Only the application requirements, which are separate and 
distinct from bid negotiation, can be appealed as detailed in subpart 
N.
    Comment: One commenter urged that we conduct a thorough review of 
Part D providers' estimates of reinsurance to ensure a ``level playing 
field.''
    Response: We will review estimates of reinsurance. Per section 
1860D-11(c)(1) of the Act ``an actuarial valuation of the reinsurance 
subsidy payments'' will be conducted. Moreover, section 1860D-11(d) and 
(e) require a review of the entire bid including the estimates of 
reinsurance. Additional detail for this review will be released in 
documentation supporting the bid submission process.
b. Bid and Benefit Package Review
    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 will evaluate administrative costs for reasonableness 
in comparison to other bidders and in comparison to a PDP sponsor's 
other lines of business. We will examine aggregate costs to determine 
whether the revenue requirements for qualified prescription drug 
coverage are reasonable and equitable. We will be interested in steps 
that the sponsor is taking to control costs, such as through various 
programs to encourage use of generic drugs. We will examine and discuss 
any proposed benefit changes. Finally, we will discuss indicators and 
any identified issues with regard to plan management, such as customer 
service.
    In addition to the negotiation process, we will ensure that bids 
and plan designs meet statutory and regulatory requirements. In 
general, we will 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 rule and in subpart C of this 
preamble. We will examine the actuarial analysis accompanying the bid 
to ensure that it

[[Page 4297]]

has been prepared in accordance with our actuarial guidelines and 
properly certified. We will 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 basis and reasonably and equitably reflect revenue 
requirements for benefits provided under the plan, less the sum of the 
actuarial value of reinsurance payments. We will also 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 will review cost sharing both 
above and below the out-of-pocket threshold with regard to its impact 
on groups of beneficiaries. We will 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 will review benefit plans for features that, when 
applied, have differential impacts on beneficiaries with particular 
medical conditions. Factors we will 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 will 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 
will 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 will 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 will be 
over compensated or under compensated by enrollees for supplemental 
benefits. Therefore, on the basis of this authority, we will 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 will review and 
negotiate that information, and will 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 will 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 will be based on estimates of monthly 
beneficiary premiums. Some of these MA-PD plans will 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 will 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 regulatory 
approach will 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 will 
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 will 
result in a $35.00 monthly beneficiary premium for basic coverage, and 
that it will 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 will end up below 
the

[[Page 4298]]

benchmark and its base beneficiary premium will be adjusted by 
subtracting the difference between the bid and national average monthly 
bid amount. Therefore, the plan's monthly beneficiary premium will be 
less than the projected premium, for instance, $34.00, and the $35.00 
amount allocated from the Part C rebate for Part D premium buy-down 
will be excessive. In that case, we will 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 will 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 will be adjusted by adding the difference between the bid and 
national average monthly bid amount. Therefore, the plan's monthly 
beneficiary premium will 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 will no longer be sufficient to eliminate the Part D 
premium as planned. In that case, we will 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 will be optional since 
the Part C rebate has already been provided to the enrollee. We will 
not permit an MA organization to simply eliminate a minimal premium 
instead of reallocating the rebate because doing so will 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.
    Comment: One comment suggested that we should also allow 
reallocation of rebate dollars to round off premiums and to support to 
support the availability of MA-PD plans to dual eligibles.
    Response: Title II MA-PD rebate dollars (note this is to be 
distinguished from manufacturer rebates) could certainly be used to 
round off premiums (Sec.  422.266(b)(2)), and as stated our regulatory 
approach will be to have a negotiation process for MA-PD plans to 
include the resubmission of modified benefit structures once the 
outcome of the premium finalization process is known. Such a reduction 
in the Part D premium will, however, have to be uniform for all plan 
enrollees.
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 will 
take place between PDP sponsors or MA organizations (or their 
subcontractors) and pharmacies and pharmaceutical manufacturers. We 
believe the Congress used the terms direct and indirect to be all 
inclusive in defining subsidies. Section 1860D-11(i) of the Act 
precludes us 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 with manufacturers will 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 will be higher costs for patients or the plans. The nature of 
the negotiations that we will conduct with bidders is discussed later 
for full-risk and limited-risk bids, and in subpart Q of this preamble 
for fallback plans.
    We expect that the private negotiations between PDP sponsors and 
drug manufacturers will 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 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)). Additional CMS guidelines on formulary review will be made 
available. However, in summary 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 have the authority to develop minimum standards and 
to negotiate the terms and conditions of the bid under section 1860D-
11(d) of the Act. We also have the authority to promulgate additional 
contract terms (section 1860D-12(b)(3)(D) of the Act). Finally, we 
believe the structure of the Part D benefit, as laid out in section 
1860D-2 of the Act, with a requirement for catastrophic coverage, 
anticipates a structure where beneficiaries receive coverage for 
medically necessary drugs. Therefore, 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 for 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). Our

[[Page 4299]]

formulary review will follow four important principles:
    1. Rely On Existing Best Practices: Our review will rely on widely 
recognized best practices for existing drug benefits serving millions 
of seniors and people with disabilities to ensure non-discriminating, 
appropriate access;
    2. Provide Access to Medically Necessary Drugs: We will require 
that drug plans provide access to medically necessary treatments for 
all and do not discriminate against any particular types of 
beneficiaries based on their expected drug costs;
    3. Flexibility: We will allow plans to be flexible in their benefit 
designs to promote real beneficiary choice while protecting 
beneficiaries from discrimination; and
    4. Administrative Efficiency: We will set up a process to conduct 
effective reviews of plan offerings within a compressed period of time.
    Comment: Several comments were made regarding formulary structures 
that are likely to substantially discourage enrollment, with the 
majority merely expressing support for our regulatory text. Ten 
comments were received expressing concern over the definition of 
``substantially discourage'', three of which called for dropping the 
word ``substantially'' from the regulation. One commenter specifically 
argued that step therapy for psychopharmacology should be considered as 
substantially discouraging. Another commenter simply stated that step 
therapy should be reviewed for discriminatory impact.
    Response: The term ``substantially'' comes directly from the 
statute in section 1860D-11(e)(2)(D)(i) of the Act and therefore we do 
not believe it should be eliminated as some commenters recommended. 
According to research conducted for the Agency by Booz Allen Hamilton 
(``Drug Utilization Management and Quality Assurance Best Practices and 
Standards''), step therapy is one method of benefit design currently 
used by industry for the purpose of managing costs by requiring more 
cost effective drugs to be used before more expensive options are 
prescribed. Other research indicated the widespread use of this 
technique. For example, in its June 2004 ``Drug Trend Report,'' Express 
Scripts, a large pharmacy benefits manager, stated that the use of step 
therapy had risen from 4.5 million to 9.8 million lives between 2002 
and 2004 for their members. Moreover, they report that step therapy 
with psychotropics, in particular antidepressants, is common among 
these members. Step therapy is also common among State Medicaid 
programs. Indeed, a 2003 report by the Georgetown University Health 
Policy Institute on behalf of the Kaiser Commission on Medicaid and the 
Uninsured found that 28 Medicaid agencies in 2003 used step therapy in 
their drug programs. The review process will examine the use of step 
therapy as a utilization control, but a categorical ban would be 
inconsistent with Congressional intent in Section 1860D-4(c)(1(A) of 
the Act, which calls on PDPs to have ``a cost-effective drug 
utilization management program, including incentives to reduce costs 
when medically appropriate.'' As we have outlined, step therapy is one 
common method of drug utilization management. The Congress was aware 
that utilization management included step therapy, and they were also 
aware of that some stakeholders have objections to it as evidenced by 
the testimony given during the Subcommittee on Health of the Committee 
on Energy and Commerce hearing ``Designing a Twenty-First Century 
Medicare Prescription Drug Benefit'' on April 8, 2003. We will review 
step therapy and other formulary structures to ensure that they are not 
substantially discouraging. Accordingly, we will rigorously review 
formularies in a number of ways as part of the bid negotiation process. 
This review will include, but not be limited to: (1) reviewing the 
classes and categories in relation to the USP model; (2) reviewing the 
formulary to make sure that all appropriate treatments are available 
for certain complex diseases such as HIV; (3) where possible and 
appropriate, comparing the formularies and utilization management 
programs (including step therapies) to applicable treatment guidelines 
to make sure they support current treatment standards; and (4) 
comparing formularies between plans to identify outlier practices, 
which will include comparing plans for amount and specific drugs that 
they are including in step therapy, quantity limits and prior 
authorization.
    Comment: One commenter indicated concern that SPAPs will incur 
significant costs if PDP sponsors' formularies are inadequate. We 
should establish a formulary evaluation criterion that would trigger a 
detailed evaluation of the adequacy for the formulary.
    Response: Formularies will be evaluated according to the provisions 
of the statute. Regardless of the impact of specific plan formularies, 
we have estimated that Part D will save SPAPs approximately $3 billion 
between 2006--2010 (see the regulatory impact statement for more 
detail).
f. Bid Level Negotiation
    The FEHBP standard in 5 USC 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 will 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.
    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 will be able to inquire as to the ``net cost'' of drugs 
since this is the key dollar value we will need to make accurate 
``apples to apples'' comparisons on drug prices between

[[Page 4300]]

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 will 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 will be using the authority in 5 USC 
section 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 will have the authority to negotiate the 
bids down to a level that is more in keeping with bids from other 
sponsors. 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 will 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.
    Comment: Several comments were received on the MMA provision of 
``authority similar to the authority of the Director of the Office of 
Personnel Management'' for the Federal Employee Health Benefits Program 
(FEHBP) when negotiating bids for Part D. One commenter referenced that 
in the preamble of the proposed rule, we stated that we were 
considering regulations similar to those used by Office of Personnel 
Management (OPM) in 48 CFR Chapter 16, which they note is comprised of 
24 distinct parts and due to the lack of clarity with regard to the 
provisions of the OPM regulations were referring to they would be 
unable to comment. One health insurer asked that we clarify how our 
intended oversight would differ from the Similarly Sized Subscriber 
Groups (SSSGs) requirements in the FEHBP. Another commenter asserted 
that OPM negotiates an annual dollar cap on administrative expenditures 
that can be funded through premiums and that similar negotiations with 
MA plans would not be appropriate given that the MMA works on a 
competitive model. Two commenters suggested that broad use of the OPM 
authority would violate the noninterference clause in the MMA and that 
we should not review every plan during the bidding process in detail on 
pricing structure and the nature of arrangements with manufacturers. 
One commenter agreed with the Agency's interpretation of this authority 
in the proposed rule noting that nothing in our interpretation would 
``set the price for any individual drug or even plans if aggregate 
price levels for groups of drugs were higher than prices observed among 
peer plans''.
    Response: The section 1860D-11(d)(2)(B) of the Act authority will 
be used to review bids and negotiate changes consistent with the 
statute and regulation. Specifically, we intend to evaluate the 
reasonableness and appropriateness of the actuarial assumptions made in 
the bid. We will examine bids to determine whether the revenue 
requirements for qualified prescription drug coverage are accurate and 
reasonable. We also will examine administrative costs for 
reasonableness. We will review profit for reasonableness and 
appropriateness. We also will review the structure of the benefit plan 
design in terms of such features as premiums, deductibles, co-payments, 
and coinsurance charged to beneficiaries to ensure that it is not 
discriminatory.
    There appears to have been confusion caused by our request for 
comments on 48 CFR Chapter 16. These OPM regulations assume 
applicability of the Federal Acquisition Regulation, which is not 
applicable to at-risk or limited risk Part D plans. Therefore we are 
not adopting any of the OPM regulations at this time. We will note 
however that our negotiating authority ``similar to the authority...of 
the Office of Personnel Management'' (section 1860D-11(d)(2)(B) of the 
Act) is in addition to our general authority to ``negotiate the terms 
and conditions of the proposed bid submitted and other terms and 
conditions of a proposed plan'' (Section 1860D-11(d)(2)A) of the Act). 
We have clarified the regulations to reflect these two separate 
authorities.
     With regard to the application of a SSSG concept to Part D, we 
will note that the Part D program generally relies on competition to 
ensure reasonable bids. There is no authority to tie a sponsor's rate 
methodology to that used for a SSSG as applied under FEHBP with regard 
to community-rated plans. Therefore, we do not believe that this type 
of cross product line comparison will be appropriate at this time.
    One comment correctly pointed out that there is no cap on 
administrative costs under Part C or Part D similar to the cap in 
effect in FEHBP experience rated plans. It is assumed that competition 
among plans will generally ensure reasonable bids. The Congress, 
however, did not leave the determination of rates entirely to market 
forces. We are required to determine that the reasonable and equitable 
test is met and is given negotiating authority to ensure this result. 
The initial review will focus in part on low and high cost outliers, 
and on bids in areas with little competition. It must be noted however, 
that bid outliers are not necessarily inappropriate, nor are bids 
within the measure of central tendency automatically correct. Indeed, 
an outlier bid may be reasonable and appropriate after additional 
review and explanation while an ``average'' bid could be based on 
incorrect actuarial assumptions. In summary, all bids will be reviewed 
for their reasonableness whether an outlier or not.
    Two commenters seemed to suggest that they believe that the bid 
review authority will be used as a back door price control mechanism in 
direct violation of the non-interference provision of section 1860D-
11(i) of the Act, which directs the Secretary to not interfere with the 
negotiations between drug manufacturers and pharmacies and PDP 
sponsors; and to not require a particular formulary or institute a 
price structure for the reimbursement of covered part D drugs. In the 
proposed rule we interpreted the non-interference provision as 
prohibiting us from setting the price of any particular drug or from 
requiring 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 allowing us to require justification of 
aggregate price levels. In addition, although we are prohibited from 
negotiating the price levels of drugs, it is authorized to negotiate 
the level of the overall bid. We will evaluate the reasonableness of 
costs submitted by at-risk plans bids through actuarial valuation 
analysis, and noted that this might require information regarding the 
plan's assumptions about expected distribution of costs, including 
average utilization and price by drug coverage tier, for: (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. 
Through actuarial analysis, these assumptions will be tested for 
reasonableness, and compared to industry standards and other

[[Page 4301]]

comparable bids. We also want to clarify that we do not intend on 
universally requiring plans to submit detailed information on pricing 
structure and the nature of arrangements with manufacturers. Requests 
for additional and more detailed information will only be triggered 
questions involving the initial bid submission. We are confident that 
additional bid submission guidance will limit such occurrences from 
happening. We believe that this interpretation ensures that we fulfill 
our duty to review bids for reasonableness while avoiding any direct 
interference in the negotiations between manufacturers, pharmacies, and 
PDP sponsors.
    Under the previous Medicare+Choice program, we permitted 
Medicare+Choice 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 will 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 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 will 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 will 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 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 will approve only the 
minimum number of limited risk plans needed to meet these access 
requirements and will 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 
will not, under any circumstances, approve a plan that elected to bear 
no risk or a de minimis level of risk.
    Comment: One comment urged that we should reject bids that result 
in only one PBM operating as a subcontractor to all the plans in a 
given region.
    Response: The statute does not give us the authority to do this. 
The statute mandates that beneficiaries have the choice of at least one 
PDP in an area in addition to whatever MA-PD options are available. The 
number of PBMs that contract with the PDP sponsors and MA organizations 
has no bearing on the access requirements.
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 the Act) 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 
requirements under Sec.  423.104(h) related to negotiated prices will 
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 rule (requiring certain network access 
standards and the disclosure of the availability of lower cost 
bioequivalent generic drugs) will 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) of the Act is a tautology and simply states that 
PFFS plans without formularies, by definition, cannot have 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 will 
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 will identify a date 
by which the national average monthly bid amount will be published, and 
we will 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 will 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 the 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

[[Page 4302]]

     Generally, provides for payments to such plans (including 
risk adjustment) in the same manner as to non-excluded plan types--
except that PFFS plans receive reinsurance payments according to 
estimates--and not actual costs and are not eligible for risk corridor 
payments.
    Therefore, these excluded plan types will 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 will 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 will 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 will determine the 
enrollment weights on the basis of assumptions that we will develop. In 
the August 2004 proposed rule we outlined that 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 will 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 will be calculated 
by weighting each plan's bid by its assigned weight.
     The national average monthly bid amount will 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 will 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 will 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 will 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 will 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. In the proposed rule we requested comments 
on these and other alternative approaches for how to weight bids in 
2006.
    Note that in this methodology the assigned weights are price 
inelastic, that is, the recommended weight assignment methodology 
implies that price is not a factor in plan selection. We recognize that 
in reality this is not the case, but in the absence of data on which to 
base the relationship between price and plan choice in this population 
for this benefit we cannot model the effect of price variations on 
demand. We believe that the fairest method that is feasible 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 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. 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 and therefore would be announced in the 
45-day notice in advance of the bidding process for that year. 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.
    Comment: We received five comments on the proposed weighting 
methodology for the first year. One health insurer suggested that any 
of the CMS proposals would be acceptable. Another

[[Page 4303]]

commenter focused on the PDP portion of the first approach, supporting 
the equal weighting of PDP sponsors. Another health insurer urged that 
all MA plans be counted, reasoning that virtually all MA plans would 
offer Part D. They also stated their support for giving no weight to 
new MA-PDs. An industry association suggested that new MA plans, 
including regional PPOs and PDPs, should be weighted based on their 
projected enrollment as suggested in the final alternative proposed in 
the proposed rule. Another health insurer urged that we assign MA-PD 
weights based on projected enrollment, but they did not comment on 
weighting for PDPs.
    Response: Although none of the approaches outlined in the proposed 
rule, or by commenters, are perfect we have decided that using MA 
enrollment from a reference month for MA-PDs (new MA-PDs are assigned a 
zero weight) and assigning equal weighting to each sponsor (other than 
fallback entities) for the PDP-eligible enrollment in the region is the 
superior choice. This option most closely mimics how the enrollment 
weighting will be calculated in the future given that it uses reference 
month data for MA-PDs and assigns new MA-PDs a zero weight. The PDP 
portion of the method is the fairest method for 2006, given that we 
cannot know enrollment prior to the launch of the drug benefit program. 
Alternative weighting methodologies using projected enrollment are 
fraught with problems. How would the validity of such projections be 
assessed? What if the aggregate plan projections exceeded the total 
number of Part D eligibles in the region? No commenter offered any 
suggestions for dealing with such dilemmas. We note these comments 
suggested the need to clarify that the weighted average does not work 
unless restricted to Part D plans that submit bids and are included in 
the national average bid amount. Accordingly, we modified Sec.  423.279 
to clarify that the denominator does not include Part D eligible 
individuals enrolled in fallbacks, MA private fee-for-service plans, 
specialized MA plans for special needs individuals, PACE programs under 
section 1894 of the Act, and contracts under reasonable cost 
reimbursement contracts under section 1876(h) of the Act.
    Comment: One commenter believes that MA-PDs would consistently have 
lower bids and including them in the benchmark would disadvantage PDPs. 
They suggest that MA-PDs and PDPs have separate benchmarks.
    Response: Section 1860D-13(a)(4)(A) of the Act instructs the 
Secretary to ``compute a national average monthly bid amount equal to 
the average of the standardized bid amounts (as defined in paragraph 
(5)) for each prescription drug plan and for each MA-PD plan described 
in section 1851(a)(2)(A)(i) of the Act.'' Therefore we cannot have 
separate benchmarks for MA-PDs and PDPs.
    Comment: One commenter stated that we should calculate a unique 
benchmark for Specialized Needs Plans in recognition of the higher 
prescription drug costs these plans will have in providing coverage to 
the high-risk population that they serve.
    Response: In Sec.  423.279(a) we state that bids from specialized 
MA plans for special needs individuals will not be included in the 
national average monthly bid amount or benchmark. However, the payments 
to the special needs plans as with all plans will be risk adjusted to 
take into account the differences in enrolled populations.
    Comment: Several comments were received concerning geographic 
adjustment. Three health insurers urged that geographic adjustment be 
implemented immediately. Another health insurer suggested that 
geographic adjustment not be implemented until we have acquired 
sufficient information on pricing to accurately characterize any 
variation. One commenter urged us to explore other unit price data 
beyond the Federal Employee Health Benefits Program data from Blue 
Cross Blue Shield because using a single data source may misstate 
actual regional variations. One health insurer urged that adjustments 
be made both within and between regions. Another health insurer asked 
that regional variations in prescription drug costs be examined based 
on utilization, not price.
    Response: Section 1860D-15(c)(2)(A) of the Act directs the 
Secretary to establish an appropriate methodology for adjusting the 
national average monthly bid amount (computed under section 1860D-
13(a)(4) of the Act) to take into account differences in prices for 
covered Part D drugs among PDP regions.'' To meet the appropriateness 
standard we will not implement a geographic adjustment until we have 
acquired sufficient information on pricing to accurately characterize 
any variation. We reiterate that we will 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. We 
would also note that our authority for geographic adjustment is based 
on differences in price not utilization. Section 107(a) of the MMA 
requires a report and recommendations on adjusting for geographic 
differences in both price and utilization (not explained by the risk-
adjuster). This report is due not later than January 1, 2009.
8. Rules Regarding Premiums
    In Sec.  423.286, the monthly beneficiary premium will 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 34 percent, which is applied to the 
national average monthly bid amount.
    To determine the uniform plan premium, in Sec.  423.286(d), we will 
adjust the base beneficiary premium for certain plan characteristics 
including whether the plan's bid will 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 if evidence for 
such differences exists as determined in Sec.  423.279(c)). 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 will 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.

[[Page 4304]]



                                                                        Table F-2
                                                                  Premium Illustration
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Benchmark                         Plans in Region          Bids                            Beneficiary Premium
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Applicable
                                                                                                Amount by which   Amount by which Bid   Percent of Nat'l
        National Average Monthly Bid Amount\1\                Plans        Approved Plan Bid      Bid Exceeds      is Below Benchmark     Premium +/-
                                                                                                   Benchmark                               Difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Plan 1                123             14.00                  0.00                 $51
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
109                                                                Plan 2                109              0.00                  0.00                 $37
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Plan 3                 99              0.00                (10.00)                $27
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Est. Reinsurance Percentage                                                                              25.80                  ( Assumed )
------------------------------------------------------------------------------------------------------------------
Applicable Percent =                                                                                      0.3437            (25.5 /(100-25.80)
------------------------------------------------------------------------------------------------------------------
Base Beneficiary Premium =                                                                               37.00              ( 109 * .3437 )\2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Assumes no geographic adjustment
\2\ 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 will be the monthly beneficiary premium. 
The monthly beneficiary premium (except for any supplemental premium) 
will 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 will 
pay all or a portion of the monthly beneficiary premium for subsidy-
eligible individuals.)
    In Sec.  423.286(d)(3), the monthly beneficiary premium will 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) will 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 will be 
added to their premium amount each month. So for example, if the 
penalty amount is 1 percent of the estimated base beneficiary premium 
above, or $0.37 per month in 2004, and is subject to 12 months of this 
penalty, the beneficiary would pay an additional $0.37 * 12 or $4.44 
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 
the penalty amount would be 1 percent of the base beneficiary premium 
per month. Once we have sufficient data on experience under the program 
for individuals who enroll after their Initial Enrollment Periods, we 
would 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.
    Except as provided with regard to any enrollment penalty, low-
income assistance, or employer group waivers under section 1857(i) of 
the Act and section 1860D-22(b) of the Act and Sec.  423.458(c) (as 
discussed in subpart J of the preamble to our 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 rules and in subpart Q of this 
preamble.
    Comment: Section 1860D-13(a)(1) of the Act establishes that the 
monthly beneficiary premium is the base beneficiary premium adjusted to 
reflect the differences between the plan's bid and the national average 
bid. Two commenters argued that the statute anticipated that Part D 
providers may bid so far below the national average bid as to have a 
negative premium. Both commenters assert that we were wrong to 
interpret in the August 2004 proposed rule that negative premiums were 
not allowable by statute. Both proposed that it would be a greater 
benefit to beneficiaries if CMS were to require a Part D provider with 
such a low bid ``to return the value of the savings'' to the 
beneficiary in the form of an enhanced benefit that would be covered by 
the enhanced direct subsidy.
    Response: We agree with the commenters' textual interpretation of 
the formula in the statute. Factoring out the impact of risk 
adjustment, the direct subsidy in absolute dollars is uniform to all 
plans. For the negative premium plans, the proposed rule would have 
offered such plans less than everyone else. We agree with the 
commenters that highly efficient plans that bid below the benchmark 
should not receive less. However, it is clear that the statute did not 
necessarily envisage negative premiums for there are no clear 
directives on how the negative premium dollars should be treated. We 
believe that direct rebates to beneficiaries might run into Federal 
anti-kickback law issues, although a definitive opinion from the Office 
of Inspector General has not been issued. There are other

[[Page 4305]]

potential issues with a direct rebate. For example, it is likely that 
some significant portion of the plan enrollees will lose the rebate 
check or never cash it, thus resulting in an overpayment to the plan 
sponsor. Direct deposit of the rebate in the enrollee's bank would 
address this problem, but would generate significant administrative 
costs. Nevertheless, neither of the commenters argued for beneficiary 
remuneration. Indeed, both expressed a desire for the negative premium 
dollars to be allocated to supplemental benefits, a position we agree 
with. This would require allowing a ``renegotiation'' of the benefit 
package once the national average bid (and the negative premium) are 
known, to incorporate the negative premium as supplemental benefits for 
which there would be no additional enrollee premium. Any marginal 
effects in the basic bid would be negotiated at the same time. As 
supplemental benefits, the dollars must be accounted for in the benefit 
package, and there will be no risk sharing on the amount. The review 
and negotiation of bid and approval of plans submitted by potential PDP 
sponsors or MA organizations planning to offer MA-PD plans (Sec.  
423.272) and the rules regarding premiums (Sec.  423.286) in this 
subpart have been amended to reflect this change.
9. Collection of Monthly Beneficiary Premiums
a. Means of Collection
    In Sec.  423.293(a), the beneficiary will 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 will 
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 will be credited to the appropriate Trust Fund (or Account) and 
will be paid by us to the PDP sponsor or MA organization involved. 
Premiums from beneficiaries enrolled in fallback plans will not be 
collected by the plan. Instead, these premiums will 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 will 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 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 will 
estimate and specify the portion of the penalty that will 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 will 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 will 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 will 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.
    Comment: Several States urged that Sec.  423.293(a) include State 
Pharmacy Assistance Programs (SPAPs) as a payment option for premiums.
    Response: Section 423.293(a) references paragraph (c) of the 
section, which in turn references Sec.  422.262(f)(1). Beneficiary 
premiums in Sec.  422.262(f)(1) allow premiums to be paid by the 
beneficiary through Social Security withholding, electronic funds 
transfer; or by an employer, employment-based retiree health coverage 
or by other third parties such as a State, which will include SPAPs. 
This rule is being adopted as final in the MA final rule, and will 
therefore have final effect for the Part D rule as well. Therefore, 
SPAPs will be able to pay premiums on behalf of enrollees.
    Comment: One advocacy group asked that credit cards not be allowed 
to pay Part D premiums. It is their position that funds transfer 
mechanisms are error prone.
    Response: Section 1860D-13(c)(1) of the Act states that the 
provisions of section 1854(d) of the Act apply to PDP sponsors in the 
same manner as they apply to MA organizations and beneficiary premiums 
under Part C. Section 1854(d)(2)(B) of the Act states that an MA 
organization ``shall permit each enrollee ... to make payment of 
premiums ... through an electronic funds transfer mechanism (such as 
automatic charges of an account at a financial institution or a credit 
or debit card account).'' Given that the Congress specifically stated 
electronic funds transfer will include credit or debit card accounts, 
we cannot prohibit their use.
    Comment: One commenter asked if cost plans could be allowed to have 
their premiums deducted from SSA checks.
    Response: An enrollee of a cost plan with Part D may pay their Part 
D premiums through reduction of their SSA check. The statute however, 
does not give us the authority to mandate an SSA check payment option 
on the Part C side, but we are capable of permitting withholding if 
acceptable to concerned parties.
    Comment: We received several comments concerning the late 
enrollment penalty. While there was universal support for having a late 
enrollment penalty, there were disagreements regarding the amount of 
the penalty. Four commenters suggested that 1 percent of the base 
beneficiary premium may not be sufficient to control for adverse 
selection, but none had a recommendation for a higher amount. By 
contrast, another commenter suggested that beneficiaries will likely 
enroll late due to confusion. They therefore concluded that the late 
enrollment penalty should be less than 1 percent of the base 
beneficiary premium. One commenter urged us to collect data as quickly 
as possible to calculate a penalty amount that fairly reflects any 
higher costs associated with beneficiaries who delay their enrollment.

[[Page 4306]]

    Response: Although, Part D enrollment is voluntary it is sound 
policy to try limiting adverse selection, or the tendency for persons 
with high utilization or risk to enroll in health insurance while 
healthy persons with no or low utilization do not, thus creating an 
unbalanced or biased population. To provide an incentive to enroll, the 
Congress created a late enrollment penalty in Section 1860D-13(b) of 
the Act, which is the greater of ``an amount that the Secretary 
determines is actuarially sound for each uncovered month'' or is ``1 
percent of the base beneficiary premium''.
    There is a paucity of relevant research in this area. Our only 
potentially relevant experience comes from the Part B late enrollment 
penalty, which is 10 percent per 12-month period. On average about 5 to 
6 percent of Medicare Part A enrollees are not enrolled in Part B. It 
should be noted however, that a significant proportion of eligibles not 
enrolled in Part B are either working aged or are living overseas. 
Additionally, the utilization patterns and risks for Part B services 
and Part D drugs are different. Therefore, the Part B experience may 
not predict beneficiary behavior for Part D. Accordingly, we will set 
the late enrollment penalty at 1 percent of the base beneficiary 
premium and revisit the issue when appropriate data are available.

G. Payments to Part D Plan Sponsors For Qualified Prescription Drug 
Coverage

1. Overview (Sec.  423.301)
    Subpart G of part 423 implements section 1860D-15 of the Act and 
the deductible and cost sharing provisions of section 1860D-14(a) of 
the Act. This section sets forth rules for the calculation and payment 
of our direct and reinsurance subsidies for Part D 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 Sec.  422 of our regulations are to 
the new MA rules. In general, the payment rules in this subpart do not 
apply to fallback plans--which are discussed in subpart Q
2. Definitions
    We proposed definitions of 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 discussed these separately in the 
appropriate sections of this preamble. We did this because these terms 
are complex and are best clarified in the context of the discussion of 
the pertinent provisions. We wish to clarify that a covered Part D drug 
for gross prescription drug costs means a Part D drug, as defined in 
Sec.  423.100, that is included in a prescription drug plan's or MA-PD 
plan's formulary, or treated as being included in a plan's formulary as 
a result of a coverage determination or appeal under Sec.  423.566, 
Sec.  423.580, and Sec.  423.600 of our rule.
3. General Payment Provisions (Sec.  423.315)
    The payment provisions required by section 1860D-15 of the Act 
include the following four different payment mechanisms: 1) the direct 
subsidy; 2) reinsurance subsidies; 3) risk corridor payment 
adjustments; and 4) payments to cover certain premium, cost-sharing, 
and extended coverage subsidies for low-income subsidy eligible 
individuals.
    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 on a standardized basis. 
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 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 will be 
made to account for actual enrollment and updated health status 
information.
    The second and third payment mechanisms will 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 will 
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 will 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 will 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 regulations.
    Certain payments will be exceptions to these general payment 
provisions. Under private fee-for-service (PFFS) plans, reinsurance 
will be calculated differently and risk sharing will not be available. 
Reinsurance subsidies and risk sharing will not be available for 
fallback plans, which are paid in accordance with contractual terms 
related to actual costs and management fees tied to performance 
measures.
    Comment: One commenter responded with support for immediate 
implementation of a reinsurance demonstration that would increase 
opportunities to fill in the donut hole in the Part D benefit and allow 
for a more predictable revenue flow that would support enhanced 
benefits for beneficiaries.
    Response: The Conference Committee noted, ``the conditions under 
which the government provides reinsurance subsidies may create 
significant disincentives for private sector plans to provide 
supplemental prescription drug coverage. To address this concern, the 
conference agreement suggested use of the Secretary's current Medicare 
demonstration to ``allow private sector plans maximum flexibility to 
design alternative prescription drug coverage.'' CMS's authority to 
conduct Medicare demonstrations is provided in section 402 of the 
Social Security Amendments of 1967 (42 U.S.C. Sec.  1395b-1). Under 
section 402(b), the Secretary is authorized to waive requirements in 
title XVIII that relate to reimbursement

[[Page 4307]]

and payment. The conferees specifically stated that CMS should 
demonstrate the effect of filling in the gap in coverage by reimbursing 
participating plans a capitated payment that is actuarially equivalent 
to the amount that plans would otherwise receive from the government in 
the form of specific reinsurance when an individual plan enrollee 
reaches the catastrophic attachment point ($3,600). They clarified that 
CMS would not be permitted to waive the minimum benefits provided by 
the plans. In the August proposed rule we stated in the executive 
summary that we were considering establishing a demonstration to 
evaluate possible ways of achieving extended coverage.
    We intend to conduct a reinsurance demonstration that represents an 
alternative payment approach. We are working on the design of the 
budget neutral demonstration and issue separate guidance in the near 
future.
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 regulations, we will 
condition program participation and payment upon the disclosure and 
provision of information needed to carry out the payment provisions. 
Such information will 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). In the 
August proposed rule we asked for comments on the content, format and 
optimal frequency of data feeds. We stated that more frequent feeds 
(that is monthly or quarterly) would allow us to identify and resolve 
data issues and assist the various payment processes.
    We have evaluated our minimum data requirements with regard to 
prescription drug claims. Our goal is to have 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 categories for 
100 percent of prescription drug claims for the processes discussed 
below:
     Beneficiary identification (for example, HIC, 
date of birth, gender, name)
     Prescription identification information (for example, RX 
identification number, NDC, quantity dispensed, fill number, date of 
service)
     Cost information (for example, ingredient cost, dispensing 
fee, sales tax, total gross cost)
     Payment information (beneficiary amount paid, low income 
cost sharing subsidy amount, secondary/other payer amount, supplemental 
amount)
    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 will need these data on prescription drug claims for 
appropriate risk adjustment, reconciliation of reinsurance and low-
income subsidies, calculation of risk sharing payments or savings, and 
program auditing. Data will also be required for assessing and 
improving quality of care. We asked for comments on the nature and 
format of data submission requirements based on the following 
requirements:
     The risk adjustment process will 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 will be required to submit 100 percent of 
prescription drug claims for Part D enrollees for the coverage year. 
Risk adjustment will 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 
will use standardized pricing in the model, cost data on each 
prescription is not a requirement for risk adjustment, although it is 
needed for other purposes.
     The reinsurance subsidy payment process will 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 will be necessary to verify that the 
costs are allowable because the totality and order in which the claims 
are incurred will define which claims will 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 will 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 will require 100 percent of 
claims for all enrollees for the calculation of total allowable risk 
corridor costs. The plan will 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 will be necessary to verify that the 
costs are allowable because the order in which the claims were incurred 
will 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) will count towards risk 
sharing, but another claim (processed identically but immediately after 
the initial coverage limit has been reached) will not. Unlike the 
reinsurance subsidy, which is limited to 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 will 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 will 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 will 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. (Nothing in this data collection discussion 
should be construed as limiting OIG authority to conduct any audits and 
evaluations necessary for carrying out our regulations.)

[[Page 4308]]

    Comment: One commenter urged us to ensure that prescription 
transaction data, be made available to the QIOs. Without this 
information the commenter contends, it will be extremely difficult for 
QIOs to execute the direction of the Congress in section 109 of the 
MMA, to offer assistance to practitioners and plans for the purpose of 
improving the quality of pharmacotherapy received by older and disabled 
Americans enrolled in the Medicare outpatient drug benefit.
    Response: Additional guidelines will be released dealing with QIO 
access to Part D data. QIOs do, however, have their own independent 
authority to collect claims data. Therefore, as we stated in the 
proposed rule, we believe we would have the authority to share claims 
data with QIOs if necessary.
    Comment: One commenter stated that claims creation and submission 
for the pharmacy claims as proposed would probably be even more 
expensive, given the volume of data and the number of data elements. 
They encouraged us to be parsimonious in collecting data, with the 
understanding that plans would retain full data for audits.
    Response: We will endeavor to reduce burden to the maximum extent 
possible. We will require only the data elements necessary to carry out 
the operations of the Part D program.
    Comment: For the timeframe for data submissions, one commenter 
stated that unless all plans can provide information electronically, 
weekly data cycles would be too burdensome. Monthly or quarterly data 
cycles are more in line with other plan financial processes. Another 
commenter suggested that annual submission would be adequate with 
additional data submitted on a quarterly basis. A PBM commented that 
they have the capability of submitting drug utilization data to us on a 
monthly basis in any format required. They also noted that all of the 
data elements listed as proposed requirements in the proposed rule are 
available in their point-of-sale system. Two commenters recommended 
that data transmission use either the NCPDP or the American Society of 
Automation in Pharmacy (ASAP) standard formats. They reasoned that such 
standards are commonly used today and would have minimal impact on 
existing software applications.
    Response: We agree that data submissions should be based on an 
established standardized format, and will be requiring data submissions 
in the NCPDP format. The data required will be from both incoming 
claims and the remittances to those claims. Some of the paid amounts 
that need to be reported are not on the NCPDP format (for example, the 
low income cost-sharing subsidy). Therefore, plans will be responsible 
for calculating and retaining these amounts while calculating 
appropriate payments and cost-sharing for each claim. We will require 
that the data related to drug claims be submitted no less frequently 
than monthly. Further details on data submission will be issued in 
separate guidance.
b. Allowable Costs
    Section 1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act and Sec.  
423.308 of our 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. In the proposed rule we discussed requiring 
average percentage rebates, which upon reflection would represent only 
a rough estimate on the part of a Part D plan. We wish to clarify that 
in order to carry out our responsibilities we will require reporting of 
aggregate (as opposed to at the beneficiary or claim level) rebates at 
the product level on a quarterly basis. Adequate lead time will be 
provided. Additional information will be provided through our payment 
guidelines.
    In the proposed rule we noted, also for rebates, that 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 wish to clarify that 
we will expect reporting of all rebate dollars with no allowance for 
separate administration fees in order to prevent inaccuracies in 
reporting. We note that plans must require and keep accurate records on 
all price concessions. All cost reporting will be subject to inspection 
and audit (including periodic audits) by us and the OIG. Part D plans 
sponsors seeking to limit access to rebate information under this 
provision to Part D business only are advised to seek out separate 
contracts with manufacturers for their Part D and other lines of 
business. To the extent either we or the OIG discover that a sponsor 
has been 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.
    We also wish to clarify our interpretation of allowable costs in 
the context of repackaged drugs. AWP is commonly used as the basis 
through which a plan sponsor or fallback plan calculates payments to 
pharmacies, and is used to when sponsors provide competitive bids for 
the Medicare Part D prescription program. AWP is typically published 
based on the NDC for a particular product, and is specific to the drug, 
strength, distributor and package size. However, AWP can vary between 
differing packages sizes of a drug and strength from a single 
distributor, as well as between multiple distributors that product a 
common drug, as in the case of generic products. AWP may not be 
published for some products that are repacked for a specific buyer, 
such as a mail-order pharmacy or a pharmacy chain. Furthermore, if a 
pharmacy benefit manager or managed care organization owns a pharmacy 
(including a mail-order, specialty, or clinic facility) and refers 
members to that facility, it essentially purchases product from itself. 
In these cases, special care must be taken to ensure that payment is 
made for a prescription ingredient cost that is an accurate reflection 
of the product that the facility purchases in terms of manufacturer, 
strength, and acquisition price.
    The Department of Health and Human Services' Office of Inspector 
General issued the April 2003 report ``Compliance Program Guidance for 
Pharmaceutical Manufacturers'' that addresses AWP. The guidance report 
states that: ``... it is illegal for a manufacturer knowingly to 
establish or inappropriately maintain a particular AWP if one purpose 
is to manipulate the ``spread'' to induce customers to purchase its 
product.'' We believe that the same principle of non-manipulation of 
AWP applies to sponsors of the Part D benefit. Any repricing or 
restatement of price of a pharmaceutical product is subject to audit, 
and potentially constitutes fraudulent behavior if the repricing or 
price restatement is done with the intent of increasing the profits of 
that sponsor or mail order facility by increasing the reimbursement due 
by the Federal government.
    Comment: One commenter believes that administrative fees for 
administering rebates should not be included in the assessment of 
rebate fees.
    Response: We disagree with the commenter. As stated in the proposed 
rule such accounting will be incompatible with the need to report all 
price concessions for purposes of determining allowable reinsurance and 
risk corridor costs. In the preamble to the proposed rule, we said that 
to the extent the administrative fees paid to

[[Page 4309]]

Part D plans (or their subcontractors, such as PBMs) are above the fair 
market value of the services rendered, this differential will be 
considered a price concession. Similarly, to the extent a Part D plans 
pays manufacturers or others administrative fees, and these fees are 
below fair market value, this would also be considered a price 
concession. In sum, as fiduciaries of the Medicare trust fund, we have 
a responsibility to ensure that price concessions are not masked as 
administrative fees, and therefore, we continue to believe that 
administrative fees are important in determining the reinsurance and 
risk-sharing payments.
    Comment: One comment urged clarification of definition of 
``allowable costs'' so to exclude manufacturer-sponsored compliance and 
appropriate use programs.
    Response: Allowable costs are prescription drug costs excluding 
administrative costs, but including dispensing fees costs related to 
the dispensing of covered Part D drugs that are actually paid by the 
PDP sponsor. Thus any service, such as a compliance program, that is 
paid for in conjunction with drug costs as an administrative component 
of managing the drug benefit is not be considered an allowable cost for 
the PDP sponsor.
    Comment: One commenter asked for clarification on how fair market 
value is to be determined.
    Response: The fair market value of administrative fees paid to a 
Part D plan will typically be evaluated in relation to the values 
reported by other Part D plans. In other words, the fair market value 
will be the average or normal value of administrative fees within this 
market. However, this may not be an exclusive methodology. For example, 
if administrative fees paid to all plans were found to be improperly 
inflated they would not reflect fair market value and we would devise 
an alternative methodology.
    Comment: One commenter requested that we require plans to attest to 
the accuracy of information submitted to manufacturers in order to 
ensure that rebates and discounts are based on accurate claims.
    Response: We strongly encourage plans to attest to the accuracy of 
information submitted to manufacturers. However, we do not have the 
authority to require an attestation as the commenter suggests.
    Comment: One commenter recommended the second approach to rebate 
accounting in the proposed rule whereby a plan would calculate 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. The commenter believes this option is 
administratively straightforward and would result in a reasonably 
accurate estimate of these discounts, chargebacks, and rebates.
    Response: We will require reporting of actual rebates requested and 
paid down to the product level on a quarterly basis. Additional 
guidance will be released subsequent to publication of the final rule 
that specifically deals with rebate accounting rules.
c. Coverage Year
    In Sec.  423.308 the term ``coverage year'' is defined as 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 will not be considered part of that 
coverage year (or the next), and will not be used to calculate that 
year's payments or in reconciling risk adjustment payments for the 
year.
    This limit will 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 will 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 will potentially 
be missed will be immaterial, consisting primarily of paper claims. The 
3-month close-out window will not limit the liability of the plan or 
its claims processing contractor for reimbursing any lagging claims, 
but will simply establish a timely cut-off for finalizing payments. We 
note that rebates for the coverage year must be credited against that 
coverage year's costs. Although we are closing the year for claims 
purposes after 3 months, the plan must account for and report to us all 
rebates that occur throughout the coverage year and send us all the 
data within 6 months after the end of the coverage year.
    A shorter period for claims will 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 risk sharing could begin as soon as six 
months after the close of the payment year. If the claims submission 
standard were a longer period, final reconciliations will be 
significantly delayed. We requested 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.
    Comment: Two commenters argued that the definition of the coverage 
year in Sec.  423.308, being three months after the end of the year, 
would not be enough time for certain drug claims, such as those from 
out-of-network providers or those submitted by paper. They went on to 
say that claims made after the 3-month closeout should be appropriately 
accounted for. Another commenter stated that the majority of claims are 
submitted and paid within the 90 day window described in the rule. They 
went on to say that from a processor standpoint no more time is needed 
and based on observed claims patterns at least 98 percent of the drug 
claims are paid within 3 months. One industry association expressed 
support for the proposal to define coverage year to encompass drugs 
dispensed within a calendar year and for which claims have been paid no 
later than three months after the end of the calendar year. The 
commenter believes establishing finality in this manner is absolutely 
essential to promote financial stability by allowing timely 
determination of risk sharing amounts.
    Response: According to Booz Allen Hamilton's August 2004 report 
``Determination of Allowable Costs'' the industry standard is for 
claims to typically be submitted within a three month window period. We 
agree with the two latter comments that the definition of the coverage 
year is both logistically feasible and promotes timely payment. We also 
note that the coverage year is 3 months for claims run-out (Sec.  
423.308), but plans have 6 months to submit data (Sec.  423.343). This 
gives plans the extra time necessary to compile the data necessary for 
retroactive reconciliation. We will adopt the definition of coverage 
year as proposed.
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 will provide direct subsidies to PDP sponsors and 
MA organizations offering MA-PD plans. These subsidies will be in

[[Page 4310]]

the form of advance monthly payments. Payments will 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 will be the 
portion of the plan's bid attributable to basic coverage. This portion 
will be risk adjusted by multiplying by our prescription drug risk 
score attributable to each enrollee. Between the government direct 
subsidy and the adjusted base beneficiary premium, the plan will 
receive its entire risk-adjusted standardized bid in advance each 
month. Payment for supplemental benefits will come from enrollees in 
the form of additional premium. By statute, the sponsor must bear all 
risk for such supplemental benefits. In the proposed rule we said ``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''. 
As outlined in detail in subpart F of this final rule, we have changed 
our policy. We now state that if the standardized bid amount is less 
than the national average monthly bid by an amount so great that it is 
in excess of the base beneficiary premium, the direct subsidy payment 
calculated above will be increased by the amount of the negative 
premium. We, therefore, have modified Sec.  423.329(a)(1) to indicate 
that the direct subsidy payment may be increased by the excess amount 
of a negative premium as described in Sec.  423.286(d)(1), if 
applicable.
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 
establish this risk adjustment methodology. We will 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 subpart C can only be published after 45-day advance 
notice under section 1853(b)(2) of the Act, in general we will use the 
same notice procedures we use under Part C for risk adjustment. We 
believe this will 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 will solicit public 
comment on any change in proposed payment methodologies. We are 
expecting that this new prescription drug risk adjustment methodology 
will initially be based on the relationship of prescription drug 
utilization within the entire Medicare population to medical diagnoses, 
and that it will 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 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, is receiving claims linked to the Medicare 
beneficiary HIC. Other data submission elements are discussed 
in section 4(a) of this part of the preamble. We expect to link these 
data at the plan level and will then require the inclusion of the PDP 
or Medicare Advantage contract identifier (H) as well as the 
plan benefit package identifier. We will use this data to further 
refine our prescription drug risk adjustment factors and methodology in 
order to make payments that accurately reflect plan risk.
    As we noted in the August proposed rule, any risk adjustment 
methodology we adopt must adequately account for low-income subsidy 
(LIS) individuals (and whether such individuals incur higher or lower-
than average drug costs). We stated that our risk adjustment 
methodology should provide neither an incentive nor a disincentive to 
enrolling LIS individuals, and we requested comments on this concern 
and suggestions on how we might address this issue. Our particular 
concern has been that a risk adjustment methodology, coupled with the 
statutory limitation restricting 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). As noted in the proposed rule, the initial risk adjustment 
system, which will be budget neutral across all Part D enrollees, must 
not under compensate 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 are 
attractive to such beneficiaries and also by bidding low.
    Comment: We received several comments generically expressing 
concern over the risk of insuring the low-income subsidy population 
exacerbated by the induced demand likely to be created by the low 
income subsidy itself. Several commenters specifically agreed with our 
proposal to deal with this issue via risk adjustment. No commenters 
rejected the proposal. All the commenters noted that it is critical for 
the risk adjustment methodology to pay fairly and appropriately for all 
enrollees, including income subsidy individuals. Commenters requested 
additional details about the risk adjustment methodology.
    Response: We agree that the Part D risk adjuster must accurately 
predict the drug expenditures for various population subgroups, 
including low income beneficiaries. The best way to achieve this goal 
is to calibrate the risk adjustment model on a sample of beneficiaries 
that includes low income beneficiaries, which we intend on doing. We 
have experience in dealing with an analogous situation with the Part C 
risk adjustment model, where beneficiaries in long term care 
institutions are known to have significantly higher expenditures than 
community enrollees before health status is accounted for. In order to 
accurately risk adjust for this population, we have generated a version 
of the risk adjustment model that explicitly accounts both for these 
higher expenditures and for the different

[[Page 4311]]

relative costs of diseases for the long term institutionalized 
population compared to the community population. For induced demand, we 
have Federal Employee Health Benefit Program and State Medicaid program 
data that will permit us to model this effect. One commenter familiar 
with these data noted that ``it seems reasonable that the risk 
adjustment process be used to correct any underpayments due to LIS 
induced demand.'' Additional details will be provided with the guidance 
accompanying the release of the risk adjustment factors.
    Comment: We also received comments concerning specific elements of 
the risk adjustment model. One health insurer asserted that medical 
diagnoses may not adequately predict drug utilization. A PBM commented 
that some drugs are a very good marker of disease, while other drugs 
can be used to treat a variety of conditions. A manufacturer suggested 
that we should use data on prior medication expenditures and include 
demographics and diagnoses.
    Response: Work by Wrobel and colleagues (Health Care Financing 
Review Winter 2003-2004) using data from the Medicare Current 
Beneficiary Survey and Medicare claims data found a diagnostic based 
risk adjustment model was a powerful predictor of drug expenditures. 
Our current risk adjustment model does not use drugs as a marker of 
disease but use diseases to predict drug spending (see www.cms.hhs.gov/pdps/riskad.zip). A more detailed description of the elements of the 
Part D risk adjustment model will be provided in the Advance Notice of 
Payment Methodology. However, anyone interested in understanding how 
risk adjustment works can read ``Risk Adjustment of Medicare Capitation 
Payments Using the CMS-HCC Model'' in the Health Care Financing Review, 
Volume 25, Number 4 (Summer 2004). These articles are publicly 
available online at www.cms.hhs.gov/review/default.asp.
    The Part D risk adjustment model will use demographics and 
diagnoses. As Part D program data becomes available we will incorporate 
other indicators to enhance the predictive power of the model. This may 
include, if appropriate, indicators of prior use of medication. We will 
provide the usual opportunities for public comment on subsequent 
iterations.
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 will 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 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 will not include payments to fallback plans.)
    For comparison, in the current MA 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, 
MA 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 MA 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 MA is different than the average health status for the 
program as a whole (that is, MA 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 will 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 must be budget neutral to the risk of the 
individuals who actually enroll without any additional adjustment. We 
did not receive any specific comments on this, and therefore will adopt 
as proposed.
d. Reinsurance Subsidies
 Allowable Reinsurance Costs
    As provided in section 1860D-15(e) of the Act and Sec.  423.329(c), 
we will reduce the risk of participating in this new program by 
providing reinsurance subsidies. Subsidies will 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 will be $3,600 in 2006. Under standard coverage 
this corresponds to total gross covered prescription drug costs of 
$5,100, and will 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 will 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 will 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 
will also be associated with higher total drug spending. In this 
instance, however, it will be due to fact that the plan's supplemental 
benefits will be displacing part of the cost sharing that enrollees 
will 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 will exclude any 
amounts not actually incurred by the sponsor. The reinsurance payments 
are then calculated by determining the portion of

[[Page 4312]]

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 will provide 80 percent of such excess amount.
 Payment of Reinsurance Subsidy
Since allowable reinsurance costs (the subset of gross covered drug 
costs that are attributable to basic coverage only and are actually 
paid by the sponsor or plan) can only be fully known after all costs 
have been incurred for the payment year, we proposed to make payments 
on an incurred basis to assist PDP sponsors and MA organizations with 
cash flow. We also proposed that we would consider payments of 
reinsurance amounts on a monthly prospective basis based on the 
reinsurance assumptions submitted and negotiated with each plan's 
approved bid. In the August proposed rule we also stated that 
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.
    Comment: Numerous comments were received on the methodology of 
reinsurance payments. There was a general consensus supporting 
prospective monthly payments, with some commenters suggesting that the 
payment be at 1/12th of the net present value of estimated allowable 
reinsurance costs in each month of the coverage year. One commenter 
urged that plans should be able to choose between incurred and 
prospective payment. One commenter suggested that plans should invoice 
daily for reinsurance costs rather than have prospective monthly 
retrospective payments. Another commenter supported claims payments on 
an incurred rather than prospective or retrospective basis, and 
reimbursement on a monthly basis as proposed. Only one comment was 
received supporting determining payment with either a plan-specific or 
averaging approach
    Response: Based on public comment, as well as on considerations of 
our current systems capabilities, our initial methodology will entail 
making monthly prospective payments of estimated allowable reinsurance 
costs submitted with the bid. We will establish and calculate these 
payments at the plan level so that reinsurance estimates reflect 
individual plan risk and the impact of plan supplemental benefits (if 
any) on when catastrophic benefits and reinsurance payments are 
triggered. At the end of each calendar year, we will reconcile plans' 
allowable incurred reinsurance costs for the year with the year's 
prospective plan payments; we will then reimburse plans for any 
underestimation of costs or recover any agency overpayments. More 
details will be made available in CMS additional guidelines on the 
payment methodology. We have modified Sec.  423.343(d)(1) to clarify 
that CMS data requirements for reconciliation will be specified in 
separate guidance. We note that two commenters suggested that payments 
should be made on an incurred basis. We believe that advancements in 
information systems could make this logistically feasible. We wish to 
clarify that we reserve the right to alter the payment methodology. Any 
future changes would be announced through the Advance Notice of 
Methodological Changes and be subject to public comment.
 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 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.
    Comment: One commenter noted that claims covered under supplemental 
coverage do not count towards TrOOP. The commenter believes that 
reinsurance should be triggered at the point that each enrollee hits 
$5,100 rather than $3,600 in out-of-pocket because there will otherwise 
be a strong disincentive to offer plans with enhanced coverage.
    Response: We agree that the delayed reinsurance attachment point 
that results from the provision of supplemental benefits is one issue 
that must be considered by Part D plan sponsors. However, section 
1860D-15(b)(2) of the Act defines allowable reinsurance costs to be 
``no more than the part of such costs that would have been paid under 
the plan if the prescription drug coverage under the plan were basic 
prescription drug coverage, or, in the case of a plan providing 
supplemental prescription drug coverage, if such coverage were standard 
prescription drug coverage.'' Therefore, by statute, claims for 
supplemental benefits cannot be counted toward allowable reinsurance 
costs and we have no discretionary authority in this area.
 Adjustments for the Insurance Effect of Supplemental Coverage
    In the proposed rule we stated that supplemental benefits increase 
the level of total drug spending after which reinsurance payments begin 
(reinsurance attachment point). Assuming 2 identical groups of 
enrollees for 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 therefore proposed requiring (in the 
definition of allowable reinsurance costs) that allowable reinsurance 
costs be adjusted to reflect the impact of this induced utilization. We 
would make this adjustment to comply with the

[[Page 4313]]

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''.
    Comment: One commenter responded that they were not clear that an 
adjustment for the insurance effect of supplemental coverage would be 
needed. They recommended that we consider allowing time to study this 
issue, both to determine if an adjustment is appropriate at all and if 
it is what the adjustment should be. Another commenter stated that this 
issue is very complex and offered to discuss it further with us. 
Another health insurer noted that if a health plan develops rates for a 
commercial group, the rate for supplemental benefits developed for that 
group will include the revenue needs for the supplemental benefits as 
well as the plan's increased revenue needs to the extent that the 
expected costs of providing the basic benefit are expected to increase 
as a result of the supplemental coverage. They inquired as to how this 
practice would be applied to Part D.
    Response: We continue to believe that an adjustment for the 
insurance effect of supplemental coverage is necessary. The effect of 
reduced cost sharing resulting in increased demand for medical services 
(including drugs) is firmly established in the economics literature and 
has been discussed for decades (see Charles Phelps and Joseph 
Newhouse's seminal review in the August 1974 issue of The Review of 
Economics and Statistics and more recently Phelps' 1997 text ``Health 
Economics''). Specific to the Medicare population, Margaret Artz and 
colleagues report in the August 2002 issue of the American Journal of 
Public Health that regardless of insurance type per capita prescription 
drug expenditures increased as generosity of coverage increased in 
their analysis of data from the Medicare Current Beneficiary Survey. 
Accordingly, plans that offer supplemental benefits will be required to 
provide an induced utilization estimate with their bid, and we have 
adopted this provision without modification. Additional CMS guidelines 
will be provided on estimating the induced utilization.
 Reinsurance Subsidies to Private Fee-For-Service Plans
    As provided under section 1860D-21(d)(4) of the Act and in Sec.  
423.329(c)(3), we will 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 will estimate the amount of reinsurance payments 
that will 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 will 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 will not be subject to any reconciliation 
process to compare the amounts paid to the actual allowable reinsurance 
expenses, and will 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 the regulations, we 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 proposed 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 proposed to 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.
    We also noted in the August proposed rule that low-income cost 
sharing would not necessarily be incurred evenly throughout the 
coverage year and that we were 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 
said in the proposed rule that we were considering an approach paying 
1/12th of the net present value of estimated low-income cost sharing in 
each month of the coverage year. This 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 outlined in the proposed rule 
would have required the submission of a schedule of the estimated 
timing of 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 percent of the total in January, Y percent in 
February, etc.). We also noted that the prospective payment of 
estimated costs might create an incentive to overstate low-income cost 
sharing, and that we are interested in ensuring that our interim 
payments are not excessive. We stated in the proposed rule that we 
would welcome comments on these approaches and on the appropriate 
treatment of interest in any methodology.
    Again, we proposed that 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.
    Comment: Several commenters supported prospective monthly payments 
for the low-income subsidy based on estimates provided in the accepted 
bid submissions. Two commenters suggested that low-income subsidies 
should be paid to plan sponsors on an incurred basis.
    Response: We will make low-income cost sharing subsidy payments on 
a prospective basis using estimates submitted and negotiated with the 
approved bid and will reconcile these payments after the end of the 
coverage year with claims data. We agree with the majority of 
commenters that this method best protects plans from cash flow 
problems. More information will be provided with CMS guidelines on 
payment methodology. We have modified Sec.  423.343(d)(1) to clarify 
that our data requirements for reconciliation will be specified in 
separate guidance.
    Comment: One PBM urged that PDPs should be compensated for premium 
underpayment if the low-income subsidy amount does not meet or exceed 
their premium.
    Response: The PDP will get paid its full premium. In cases where 
the low-income subsidy amount is less that the plan's premium, any low-
income beneficiary enrolling in the plan is responsible for making up 
the difference between the low-income premium subsidy and the plan's 
premium.
    Comment: Two commenters stated that some SPAPs would want to 
supplement the premium subsidy so that their beneficiaries do not have 
to pay first and be reimbursed by the SPAP. They suggested that Section

[[Page 4314]]

423.329 should include a requirement for plans to implement a process, 
similar to the Medicare Part B buy-in process, which will allow States 
to pay Medicare Part D premiums on behalf of SPAP beneficiaries.
    Response: Such authority already exists. Collection of monthly 
premiums are covered in Sec.  423.292. Section 1860D-13(c) of the Act 
instructs that the provisions of 1854(d) shall apply to PDP sponsors 
and premiums under this part be paid in the same manner as they apply 
to MA under part C. Payment options under Sec.  422.262(f)(3) include 
any ``other third parties such as a State''. Moreover, we are required 
to establish standards for effective coordination between Part D plans 
and SPAPs for payment of premiums and coverage, as well as payment for 
supplemental prescription drug benefits. Further information on these 
standards will be issued in separate guidance.
    Comment: One commenter urged us to share all low-income subsidy 
payment data under Sec.  423.315(d) directly with the SPAPs.
    Response: Since nothing in the MMA addresses disclosure of data to 
SPAPs, we believe that FOIA rules apply to these data. Therefore, it is 
possible that we cannot disclose this data under exception 4 of FOIA, 
but such a determination would be done on a case-by-case basis 
following standard FOIA procedure.
7. Risk Sharing Arrangements
a. Risk Sharing Methodology and the Target Amount
    As provided under section 1860D-15(e) of the Act and 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 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.
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 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 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 
(including return on investment) 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 state 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 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.
 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 must 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 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 limit our interpretation of ``the total subsidy 
payments'' to payments related to cost sharing.

[[Page 4315]]

    We note that when adjusted allowable risk corridor costs are 
calculated by subtracting only non-premium subsidies 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 must 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 are adopting this provision as proposed.
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 (1\st\ threshold upper limit) and at or 
below 105 percent of the target (2\nd\ 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 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 1\st\ and 2\nd\ upper 
threshold limits would apply in 2006 and 2007 if we were to determine 
that: (1) 60 percent of Part D 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 to 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
    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), 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 within six months. 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.
    Comment: One State suggested that any savings accrued to the 
government via risk sharing should be shared with the States.
    Response: Risk sharing is symmetrical, meaning that if it were 
permissible to share cost savings, the States would also have to assume 
responsibility for the portion of the cost for specified risk 
percentages above the target amount. Nevertheless, the Congress 
intended for risk sharing to be between the Federal Government and the 
plans with no State involvement whatsoever.
8. Retroactive Adjustments and Reconciliation (Sec.  423.343)
    In Sec.  423.343(a) and Sec.  423.343(b) retroactive adjustments 
are made 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 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

[[Page 4316]]

accordingly. The form and manner in which actual allowable reinsurance 
costs would be submitted for reconciliation will be discussed in 
additional CMS guidelines on payment methodology. 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 we make 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)).
    In the proposed rule we discussed potential remedies 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 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. Therefore, we 
will assume that the sponsor's or organization's adjusted allowable 
risk corridor costs are 50 percent of the target amount. We will use a 
50 percent threshold 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 percent of their total payments. Additional 
guidelines will detail our methodology for reconciliation for these 
payments.
9. Reopening (423.346)
    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, our reopening provisions patterned after 
those used in Medicare claims reopening, found in Part 405 of the 
regulations, subparts G and H. Including reopening provisions will 
allow us to ensure that the discovery of any overpayments or 
underpayments could be rectified. Under our 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. We could initiate a reopening on its own, or a 
sponsor or organization could request reopening, but such reopenings 
will 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 will be interpreted in the same manner as in Part 405 
(see Medicare Carriers Manual section 12100). Thus, good cause will 
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 us 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.
    Comment: One commenter asked for clarification on the criteria that 
we intend to follow in evaluating whether to reopen a determination 
during the first year under Sec.  423.346.
    Response: The criteria for reopening under Sec.  423.346 is no 
different in the first year. 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. We could initiate a reopening on its own, or a sponsor or 
organization could request reopening, but such reopenings will be at 
our discretion. Good cause will exist, if: (1) new and material 
evidence, not readily available at the time of the determination, is 
furnished; (2) 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.
10. Payment appeals (Sec.  423.350)
    Several commenters were concerned with resolving payment accuracy 
issues. Section 1860D-15(d)(1) of the Act gives broad authority to the 
Secretary to develop payment methods and we intend on using this 
authority to establish a payment appeals process to

[[Page 4317]]

help allay the aforementioned concerns. Accordingly, we have added 
Sec.  423.350 to establish a payment appeals process whereby payment 
determinations involving the following may be subject to appeals:
     the reconciled health status risk adjustment of the direct 
subsidy as provided in Sec.  423.343(b);
     the reconciled reinsurance payments under Sec.  
423.343(c);
     the reconciled final payments made for low-income cost 
sharing subsidies provided in Sec.  423.343(d); or
     the final risk-sharing payments made under Sec.  423.336.
    We wish to clarify that the payment appeals process only applies to 
perceived errors in the application of the payment methodology 
described in this subpart and subsequent CMS guidelines. Under no 
circumstances may this process be used to submit new payment 
information after the established deadline. Part D plans are expected 
to submit payment information correctly and within the timelines we 
established.

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

1. Overview
    In our proposed regulation at Sec.  423.401 we implemented the 
requirements of section 1860D-12(a) of the Act that address licensing, 
the assumption of financial risk for unsubsidized coverage, and 
solvency and capital adequacy 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 specified the following:
     A sponsor 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.
     There can be a waiver of the State licensure requirement 
for the reasons and under the conditions set forth under section 1860D 
12(c) 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 could 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.
    Below we summarize some of the proposals outlined in the August 
2004 proposed rule, respond to public comment, and indicate any changes 
we have made to the final rule. For a full explanation of the proposals 
we refer readers to the August 2004 proposed rule.
a. Overview
    We proposed at Sec.  423.410 to 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 using many of the same standards that are 
permitted under Part C for provider-sponsored organizations (PSOs). The 
MMA also added some special rules for PDPs that are in addition to the 
PSO waivers available under Part C. Finally, the MMA allows for 
regional plan waivers under circumstances similar to those permitted 
under Part C for regional plans. We proposed requirements for regional 
plan waivers in Sec.  423.115.
b. Waivers Incorporated from 1855(a)(2)
    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 sections 1855(a)(2)(B), 1855(a)(2)(C) 
and 1855(a)(2)(D) of the Act. Because the Congress directed us to use 
many of the same grounds for approving waivers used in accordance to 
sections 1855(a)(2)(B), 1855(a)(2)(C), and 1855(a)(2)(D), we proposed 
adopting the regulatory provisions in Sec.  422.372. These provisions 
allow a waiver when the State has failed to complete action on a 
licensing application within 90 days of receipt of a substantially 
complete application. This rule was adopted in proposed Sec.  
423.410(c)(1).
    Proposed Sec.  423.410(c)(2) included the standard of Sec.  
422.372(b)(2) (Denial based on discriminatory treatment). Under this 
proposed regulation, a waiver could be granted if a determination by 
CMS were made that: (1) the State denied 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 required as a 
condition of licensure that the PDP sponsor offer any product or plan 
other than a prescription drug plan.
    Proposed Sec.  423.410(c)(3) incorporated the standard of Sec.  
422.372(b)(3) and stated that a waiver may be granted if the State 
denied an application on the basis of procedures or standards relating 
to solvency that are different from the solvency requirements 
established by us. In Sec.  423.420, we proposed that we would use an 
application process in which the waiver applicant would be required to 
submit certain documents that indicate that the State is imposing 
procedures or standards relating to solvency that are different from 
CMS standards.
c. Additional Waivers Available under 1860D-12 of the Act.
    In addition to the waivers available to PSOs under 1855(a)(2)(B), 
(C) and (D) of the Act, the MMA also created additional waiver 
opportunities for PDPs. The first of these was included in proposed 
Sec.  423.410(c)(4) (implementing 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.
    The second and third of these (implementing section 1860D-
12(c)(2)(B) of the Act) were included in proposed Sec.  423.410(d) and 
(e). We proposed granting a waiver in the following scenarios:
     When a State does not have any licensing process for PDP 
sponsors.
     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.
     We also proposed regional plan waivers at Sec.  
423.410(b).
d. Other Sections of the Proposed Rule.
    The proposed rule also included Sec.  423.420 (solvency standards 
for all entities receiving a waiver of State licensure); Sec.  423.425 
which proposed that an approved waiver does not deem the sponsor to 
meet other requirements for a sponsor under Part 423 of the 
regulations, and Sec.  423.440, which proposed prohibiting State 
imposition of premium taxes and included the rules for Federal 
preemption of State law.
2. Waiver of Certain Requirements in Order to Expand Clhoice
    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, as 
well as under section 1860D-12(c)(2)(B) 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 implemented 
the procedures for approving a waiver in regulations at Sec.  
423.410(f). Please see our final regulations at Sec.  423.415 and our 
discussion in section 2b of this preamble for requirements specific to 
entities wishing to offer a prescription drug plan in more than one 
State.
    In proposed Sec.  423.410(f)(1), we established that except in 
States without a licensing process for PDP sponsors and in the case of 
regional plan waivers described in proposed Sec.  423.410(b)

[[Page 4318]]

(Sec.  423.415 in the final rule), a waiver applies only to a specific 
State and is effective for 36 months and cannot be renewed. In the 
final regulation we have made clarifying changes by adding new Sec.  
423.415 which is specific to regional plan waivers. As was proposed in 
Sec.  423.410., in Sec.  423.415(d) of the final rule we indicated that 
regional waivers are valid until the State has completed processing the 
application, but in no case can a regional plan waiver extend beyond 
the end of the calendar year for which it is received. We proposed 
implementing section 1855(a)(2)(F) of the Act at Sec.  423.410(f)(2) by 
specifying that (except for regional plan waivers) 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. We proposed that a substantially complete application would have 
to clearly demonstrate and document an applicant's eligibility for 
waiver. We also proposed, at Sec.  423.410(f)(3) to implement 1860D-
12(c)(3) by establishing that if we determine that a State does not 
have a licensing process for PDP sponsors, we will approve a waiver for 
a PDP sponsor that meets our solvency and capital adequacy standards 
and that this waiver would not be time limited
Comments and our responses to these waiver requirements follow.
    We received several comments questioning, in general, the 
requirement allowing State licensure to be waived when the State 
applies grounds for licensure other than those required by Federal law. 
Below, in the comment and responses section we discuss the specific 
bases of these comments concerning preemption by Federal law, as well 
as other comments we received on the proposed requirements.
    Comments: Several commenters supported limiting our interpretation 
of the preemption authority under State licensure requirements. One of 
these, from a State insurance department, stated that only non-profit 
organizations were eligible to apply under its State HMO licensure law. 
The commenter expressed concern that State licensure waivers could 
interfere with this State licensure requirement, since for-profit 
entities might be able to receive licensure waivers from CMS. Another 
commenter from a State insurance department expressed its hope that 
Federal waiver authority of State licensure would not stop a State from 
devising its own State approach to funding and financial management of 
PDPs within its jurisdiction.
    Response: In the issues raised by these commenters concerning 
general licensing requirements we would need to evaluate a licensure 
waiver request using the standards specified in Sec.  423.410 and Sec.  
423.415 of the regulations. If an applicant met one of these standards 
for waiver, we would grant the waiver, as the Congress required. This 
could mean, for example, that a for-profit entity, operating under a 
Federal waiver, does business in a State that offer HMO licenses only 
to non-profit entities. We believe allowing qualified plans to 
participate in a State or States is essential for establishing the new 
program and, among other things, ensuring access for beneficiaries to 
benefits and other requirements central to the prescription drug 
benefit.
    Concerning the comment about State solvency standards, our 
regulations at Sec.  423.410(b)(3)(i) and (b)(3)(ii) allow a waiver of 
State solvency and information requirements if the State requirements 
concerning these go beyond those specified by Federal law. We are 
finalizing our language from the proposed rule concerning these 
requirements as we believe that the intent of the statute is to ensure 
that entities wishing to offer prescription drug program in a State or 
States not be subjected to requirements beyond those required by 
Federal law.
    Comment: Another organization requested that we specifically 
identify those PDP sponsors which are State licensed and those which 
have received a Federal waiver.
    Response: We concur with the comment in principle that an 
organization that is not State licensed but under a Federal waiver be 
identified as such. As we develop additional guidance for the 
requirements of Part D, we will consider how best to convey such an 
identification. We do not believe, however, that it is necessary to 
include the identification in the requirements of this final rule.
    Comment: A PBM requested that we clarify the rules for States 
without PDP licensure processes. The PBM proposed that if a State does 
not have a specific insurance license for prescription drug-only 
insurance plans, then this should be sufficient grounds for approval of 
the waiver by us.
    Response: The approach that we have in adopted in Sec.  
422.372(b)(4) requires that the State licensing authority give the 
organization written notice that it will not accept its licensure 
application. Following this standard, we would require an organization 
to approach the State licensing authority for review and receive their 
decision prior to filing a request for waiver of State licensure under 
the provisions of this section.
    Comment: A managed care organization and an alliance of cost 
contractors requested that we apply the licensure waiver rules to 
Medicare cost plans as well as to PDPs.
    Response: Section 1860D-12(c) of the Act specifically addresses the 
waivers for prescription drug plans. We believe it would exceed our 
authority to extend these waivers to cost plans, which are not 
mentioned in section 1860D-12(c) of the Act. In addition, cost plans 
are governed by the licensure requirements in Part C and in part 422 of 
the regulations. This final rule is primarily addressed to the 
regulations in the new part 423 of 42 CFR. Therefore, we do not believe 
this final rule would be an appropriate place to adopt rules that 
affect part 422 and not part 423 of the regulations.
    Comment: A Native American council requested that State licensure 
not be imposed upon a PDP that might be sponsored by the Indian Health 
Service or a tribal health program.
    Response: We do not have the authority to add to the waivers 
included in section 1860D-12(c) of the Act. If a PDP sponsored by an 
Indian Health Service or tribal health program meets one of the waiver 
requirements in Sec.  423.410, the PDP applicant should receive a 
waiver.
    With the clarifying language noted we are, then, adopting our 
regulations concerning eligibility for waivers largely as proposed for 
Sec.  423.401 and Sec.  423.410.
3. Temporary Waiver for Entities Seeking to Offer a Prescription Drug 
Plan in more than One State in a Region Sec.  423.115.
    We implemented the regional plan waiver rule provided at section 
1860D-12(c)(1)(B) of the Act in the regulations at proposed Sec.  
423.410. (In this final rule, we have created a new Sec.  423.415 to 
clarify that the regional plan waivers are distinct from the single-
State waivers, and often subject to different standards (for example, 
they endure only until the end of the contract period and not for 36 
months). As we stated, this would allow us to use the proposed waiver 
authority at section 1858(d) of the Act and the temporary waiver would 
be available in the event a prospective PDP sponsor proposed that its 
prescription drug plan would cover a multi-State region, but was not 
yet licensed in all of the States. (Under those circumstances, we 
stated we could waive the State licensure requirement until the State 
had completed processing of the application.) In the interim, the PDP 
sponsor would be

[[Page 4319]]

required to comply with the solvency standards established by us. In 
the event the State ultimately denied the application, we stated that 
we could extend the waiver through the contract year as we deemed 
appropriate to provide for transition.
    In the final rule we have clarified, with the addition the 
distinctions between the temporary waiver (for regional plans) and the 
waiver for entities seeking to offer a plan in a single State, the 
timeline for processing the application for the waiver and the length 
of the waiver itself. Thus in new Sec.  423.415(c) we clarify that 
Secretary will determine the time period appropriate for the processing 
of the application and in new Sec.  423.415(d), we repeat the policy of 
the proposed rule that in no case will the temporary waiver extend 
beyond the end of the calendar year.
4. Solvency Standards for Non-Licensed Entities (Sec.  423.420)
    In proposed Sec.  423.420, we specified that sponsors that have 
been granted a waiver by us must maintain reasonable financial solvency 
and capital adequacy.
    Solvency standards have been developed after statutorily required 
consultation with the National Association of Insurance Commissioners. 
These standards are undergoing internal CMS review. We anticipate that 
these standards, which are required to be published by January 1, 2005 
will be published on the CMS website in the near future in conjunction 
with the initial application forms for PDP organizations. These 
solvency standards will include such items as required minimum net 
worth and liquidity requirements as well as reporting requirements for 
future PDPs who have received waiver of State licensure. We are 
adopting the policy we proposed for reasonable financial solvency and 
capital adequacy in this final rule.
5. Preemption of State Laws and Prohibition of Premium Taxes (Sec.  
423.440)
    In the August 4, 2004 proposed rule, we stated that we would 
implement section 1860D-12(g) of the Act at proposed Sec.  423.440(a), 
by specifying that to the extent there are Federal standards, those 
standards supersede any State Law.
    We proposed that for purposes of Part D, with the exceptions of 
State licensing laws or State laws related to plan solvency, State laws 
would not apply to prescription drug plans and PDP sponsors.
    The proposed rule for the Medicare Advantage program also discussed 
preemption of State laws, and because Part D and Part C incorporate the 
same preemption laws at section 1856(b)(3) of the Act, we believe it is 
necessary to summarize those discussions in this final rule.
    In the Medicare Advantage proposed rule, we noted that prior to 
enactment of the MMA, section 1856(b)(3) of the Act provided for two 
types of preemption: general and specific. The presumption was that a 
State law was not preempted if it did not conflict with an M+C 
requirement, and did not fall into one of the four specified categories 
where preemption was presumed. (These four categories were: benefit 
requirements, including cost-sharing rules; requirements relating to 
the inclusion or treatment of providers; requirements concerning 
coverage determinations and related appeals and grievance processes; 
and requirements relating to marketing materials and summaries and 
schedules of benefits concerning M+C plans.)
    We concluded that the MMA reversed this presumption and provided 
that State laws are presumed to be preempted unless they relate to 
licensure or solvency. We also referenced the Congress' intent that the 
MA program, as a Federal program, operate under Federal rules, and 
referred to the Conference Report of the MMA as making clear the 
Congress' intent to broaden the scope of preemption through its change 
to section 1856(b)(3) of the Act. See 69 FR 46866, 46904. We believe 
that because the Congress incorporated the same preemption standard 
into the Part D program, and because the Congress required the 
preemption rules to apply consistently in Parts C and D, this same 
reasoning would apply to Part D.
    In addition, in the proposed rule for Part D, we stated that 
although the Congress included broad preemption rules in section 
1856(b)(3) of the Act, we did not believe that the Congress intended 
for each and every State requirement applying to PDP sponsors to become 
null and void. Specifically, we stated:
    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 the 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. (69 FR 46696.)
    We also recognized that while the Congress specifically stated that 
State licensure and solvency laws would not be preempted, this did not 
mean that States could condition licensure on a sponsor meeting 
requirements unrelated to what we would consider licensure 
requirements. We also addressed this issue in the Medicare Advantage 
proposed rule, explaining:
    We believe that the exception for State laws that relate to 
``State licensing'' must be limited to State requirements for 
becoming State licensed, and would not extend to any requirement 
that the State might impose on licensed health plans that-absent 
Federal preemption-must be met as a condition for keeping a State 
license. If a State requirement could be considered to relate to 
State licensing simply because the State could revoke a health 
plan's license for a failure to meet the requirement, this would 
mean that States could impose virtually any requirement they wished 
to impose without the requirement being preempted. ... Because we 
believe that it is clear that the Congress intended to broaden the 
scope of Federal preemption, not to narrow it, we also believe that 
the exception for laws relating to State licensing must be limited 
to requirements for becoming State licensed (such as filing articles 
of incorporation with the appropriate State agency, or satisfying 
State governance requirements), and not extended to rules that apply 
to State licensed health plans. (69 FR 46904.)
    We are adopting these preemption interpretations as our final 
policy. We also note that in the accompanying regulation text we have 
replaced PDP sponsor with Part D sponsor, as we believe that the 
preemption of State law and the prohibition against imposition of 
premium taxes should operate uniformly for all Part D sponsors. We note 
that licensure requirements in this Part continue to apply only to PDP 
sponsors, as other Part D sponsors (such as MA organizations and cost-
based HMOs and CMPs) are subject to their own licensing laws.
    Comment: One large insurer felt that our narrow interpretation of 
the statutory preemption authority was contrary to the language of 
section 1856(b)(3) of the Act. This insurer requested that CMS consider 
making clear that all State laws and regulations (with the exception of 
State licensing and solvency laws) are preempted with respect to MA and 
Part D plans.
    Response: As noted in the proposed rule, we do not believe that 
either the

[[Page 4320]]

principles of Federalism or the statute justify such a broad preemption 
interpretation. We do not believe, for example, we could preempt all 
State environmental or civil rights laws, nor do we believe it was the 
Congress' intent to do so. The preemption in section 1860D-12(g) of the 
Act is a preemption that operates only when CMS actually creates 
standards in the area regulated. To the extent we do not create any 
standards whatsoever in a particular area, we do not believe preemption 
would be warranted.
    Comment: A pharmaceutical manufacturer and a pharmaceutical 
manufacturing association requested clarification from us that it is 
not our intent to preempt any State pharmacy laws dealing with the 
practice of therapeutic substitution.
    Response: In general, we do not think we have the authority to 
preempt State pharmacy licensing laws dealing with the practice of 
therapeutic substitution and we do not intend to establish standards in 
this area. However, it should be noted that the forthcoming electronic 
prescription standards do have the potential to impact State pharmacy 
practices and such standards could preempt State pharmacy practice laws 
and regulations that conflict with them.
    We are adopting the requirements of the proposed rule with the 
technical and clarifying changes noted throughout this preamble. We are 
also adopting the premium tax prohibition included in the proposed 
without modification. Both rules are found at Sec.  423.440

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

    Proposed subpart J set forth the application of Medicare Part D 
rules to Medicare Part C plans; established waivers for employer-
sponsored group prescription drug plans, MA-PD plans, cost plans, and 
PACE organizations; and established requirements for coordination of 
benefits with State Pharmaceutical Assistance Programs (SPAPs) and 
other providers of prescription drug coverage.
    Below we summarize the proposed provisions of subpart J and respond 
to public comments. (Please refer to the August 2004 proposed rule (69 
FR 46696) for a detailed discussion of our proposals.)
1. Overview and Terminology (Sec.  423.454)
    Subpart J implemented sections 1860D-2(a)(4), 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, as added 
to the Act by section 101(a) of the MMA. We proposed that, in general, 
the requirements of Part D generally apply under Part C for 
prescription drug coverage offered by MA-PD plans, although certain 
waivers are available. In addition, we implemented section 1860D-22(b) 
of the Act at proposed Sec.  423.458(c) providing us the authority to 
waive the requirements of this part for employer-sponsored group 
prescription drug plans.
a. Part D Plans
    Unless otherwise indicated, references to ``Part D plans'' in the 
proposed rule referred to any or all of MA-PD plans, prescription drug 
plans (PDPs) and fallback prescription drug plans. Likewise, the term 
``Part D plan sponsor'' referred to MA organizations offering MA-PD 
plans, PDP sponsors, and eligible fallback entities offering fallback 
plans. We have moved the definition of ``Part D plan'' to Sec.  423.4 
of our final rule and expanded the definition such that it includes 
cost plans and PACE organizations offering qualified prescription drug 
coverage. Similarly, we have revised the definition of ``Part D 
sponsor'' under Sec.  423.4 of our final rule to include cost plans and 
PACE organizations offering qualified prescription drug coverage.
b. Employer-sponsored Group Prescription Drug Plan
    We used the term ``employer-sponsored group prescription drug 
plan'' to mean a prescription drug plan under a contract between a PDP 
sponsor or 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 (or combination thereof) to furnish 
prescription drug benefits under employment-based retiree health 
coverage.
c. State Pharmaceutical Assistance Program (SPAP)
    We defined an SPAP, for purposes of this part, as a program 
operated by or under contract with a State 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 payer status of a Part D 
plan.
    Comment: Although one commenter supported our proposed definition 
of the term ``SPAP,'' several commenters urged us to allow SPAPs to 
endorse one or more Part D plans for SPAP enrollees. They believe that 
the non-discrimination criteria contained in the definition of the term 
SPAP should be designed to maximize the efficiency and effectiveness of 
offering benefits that supplement the benefits available under Part D 
coverage to enrollees. Some of these commenters believe that a 
preferred plan approach, if accomplished via a competitive bid process, 
supports the competitive, market-based model that the Congress 
envisioned. One commenter stated that such an approach would help it to 
``ratchet down'' administrative costs. Another commenter asserted that 
the statute does not prohibit a State from providing consumer advice to 
its SPAP enrollees regarding which Part D plan might work best with an 
SPAP or offer the best value.
    Commenters believe that this interpretation is consistent with the 
intent to establish an effective coordination mechanism between SPAPs 
and Part D plans. Defining non-discrimination in a way that prohibits 
SPAPs from designating preferred Part D plans and prohibiting auto-
enrollment of SPAP beneficiaries into preferred plans would not 
facilitate enrollment in Part D plans and would further complicate, 
rather than promote, coordination between Part D plans and SPAPs.
    Response: Section 1860D-23(b)(2) of the Act defines an SPAP, in 
part, as a program that ``in determining eligibility and the amount of 
assistance to Part D enrollees, provides assistance to such individuals 
in all Part D plans and does not discriminate based upon the Part D 
plan in which the individual is enrolled.'' We are interpreting the 
non-discrimination language in section 1860D-23(b)(2) of the Act and 
Sec.  423.464(e)(1)(ii) of our final rule to mean that SPAPs, if they 
offer premium assistance or supplemental assistance for Part D cost 
sharing, must not only offer equal assistance to beneficiaries enrolled 
in all Part D plans available in the State, but also may not steer 
beneficiaries to one plan or another through benefit design or 
otherwise. We believe that the law intends that all Part D plans in a 
State be given comparable opportunities. Requiring States to coordinate 
with all Part D plans, without discrimination, levels the playing field 
for Part D plans that want to provide benefits in a particular State.
    We further interpret section 1860D-23(b)(2) of the Act as 
prohibiting SPAPs from automatically enrolling (``auto-enrolling'') 
beneficiaries into a preferred

[[Page 4321]]

plan because this would, in effect, allow the SPAP to choose a Part D 
plan for the beneficiary. The non-discrimination provision is part of 
the definition of an SPAP. Thus, even if under State law a State is the 
authorized representative of its SPAP enrollees for purposes of 
enrolling them in a Part D plan elected by the State, if it auto-
enrolls beneficiaries into a select plan, the State program will no 
longer meet the statutory definition of SPAP under section 1860D-23(b) 
of the Act.
    This will jeopardize the program's special status with respect to 
true out-of-pocket (TrOOP) costs. That is, if a State does not meet the 
definition of an SPAP, its contributions to beneficiary cost sharing 
under a Part D plan do not count toward the TrOOP limit, after which a 
beneficiary is eligible for catastrophic coverage.
    Section 1860D-23(d) of the Act provides for grants to SPAPs for the 
purpose of educating their members who are Part D eligible individuals 
about the options available to them under the Medicare drug benefit, 
including information comparing Part D plans in the State so that SPAP 
enrollees they can choose the Part D plan that provides them with the 
best value. We will reach out to SPAPs and provide them with 
information they can use to help their enrollees who are Part D 
eligible individuals better understand their Part D plan options. We 
will also assist SPAPs in their efforts to ensure that their members 
understand the manner in which the Part D plans in their State 
coordinate with their SPAP benefit. Our outreach to SPAPs will also 
include guidance on the various educational, outreach, and assistance 
activities SPAPs may undertake in a manner that will not discriminate 
among Part D plans, for example: (1) SPAPs can provide beneficiaries 
with objective and comparative education on all available Part D plans 
offered in the State; and (2) SPAPs can advise members on:
     which plans have lower beneficiary premiums than others 
(after application of any low-income premium subsidy under 423.782 of 
our final rule or premium subsidy offered by the SPAP, which must be 
applied uniformly without respect to which Part D plan an individual 
enrolls in),
     which plan formularies include the drugs currently 
utilized by the beneficiary,
     which plans offer the beneficiary the most favorable 
combination of deductibles, coinsurance, and negotiated prices for the 
drugs currently utilized by the beneficiary, and
     which plans' network pharmacies include the same 
pharmacies participating in the SPAP, and which plans (if any) include 
an emblem or symbol on their ID cards indicating their coordination 
with the SPAP to facilitate secondary payment at the point of service.
    The nondiscrimination requirement also bars SPAPs from recommending 
Part D plans based on the SPAP's financial interest in minimizing the 
cost of providing benefits under the SPAP that supplement the benefits 
available under Part D coverage. In addition, to the extent an SPAP 
assists the enrollment into Part D of its members who fail to elect a 
Part D plan during their initial enrollment period or upon joining the 
SPAP, we encourage SPAPs to mirror our procedures for auto-enrollment 
of full-benefit dual eligible individuals into Part D plans, which will 
be done on a random basis.
    Comment: One commenter asked us to clarify whether a hybrid SPAP 
with multiple components, some of which meet our definition of SPAP, 
and some of which do not, would render an entire SPAP ``unqualified'' 
under our definition.
    Response: We agree that components of State programs that provide 
pharmaceutical assistance, provided they meet the definition of the 
term ``SPAP'' in Sec.  423.454(e)(1) of our final rule, may provide 
benefits that supplement the benefits available under Part D coverage, 
and that such supplemental assistance for covered Part D drugs will 
count toward Part D enrollees' TrOOP limit (as defined in Sec.  
423.104(d)(5)(iii) of our final rule). Thus, for example, if an SPAP 
receives Federal program funding for certain enrollees (for example, 
HIV/AIDS patients) or for certain drugs (for example, vaccines or HIV/
AIDS drugs), while the State covers drug costs for other SPAP enrollees 
or for other drugs, only those components of the SPAP program that 
receive no Federal program funds may be considered an SPAP. We do not 
see any reason why the existence of both qualified and non-qualified 
components of a SPAP would interfere with our ability to count the 
spending of the qualified SPAP toward TrOOP, as long as operations and 
funding are appropriately segregated.
    Comment: Several commenters asked for clarification regarding 
whether State Kidney Programs, which are structurally similar to SPAPs, 
can be defined as SPAPs so that their benefits supplementing the 
benefits available under Part D coverage count toward their enrollees' 
TrOOP limit.
    Response: Section 1860D-23(b) of the Act 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 assistance with State funds. Therefore, to the extent that all 
sources of program funding for a State Kidney Program's financial 
assistance for the purchase or provision of supplemental prescription 
drug coverage or benefits on behalf of Part D enrollees are 100 percent 
non-Federal and provided a program that meets the other criteria 
included in the description of an SPAP in Sec.  423.464(e)(1) of our 
final rule, the program will be considered an SPAP. Any benefits 
provided by such a program that supplement the benefits available under 
Part D coverage would therefore count as an incurred cost toward the 
calculation of a beneficiary's TrOOP threshold.
    Comment: One commenter asked us to clarify that a State can use any 
source of funds available to it (other than Federal funds) to finance 
any form of assistance to SPAP enrollees.
    Response: We have clarified in Sec.  423.464(e)(1) of our final 
rule that the term ``SPAP'' excludes any program under which program 
funding is from Federal grants, awards, contracts, entitlement 
programs, or other Federal sources of funding. However, the statutory 
definition of the term SPAP does not address program funding sources. 
We believe that a State program may still be considered an SPAP if some 
or all of its program funding is from private sources (for example, 
from charities or independent foundations). We also clarify that the 
exclusion of Federal program funding does not exclude some Federal 
administrative funding or incidental Federal monies (for example, the 
Federal grants to SPAPs provided for in section 1860D-23(d) of the 
Act).
    In addition, to ensure SPAPs are funded in a manner consistent with 
the Congress' intent in the statute, we clarify that a ``State 
program'' under Sec.  423.454 of our final rule must provide assistance 
based on financial need, age, or medical condition, and cannot do so 
based on current or former employment status. Under section 1860D-23(b) 
of the MMA, an ``SPAP'' is defined as a State program which provides 
financial ``assistance'' for supplemental drug coverage or benefits. 
The term ``assistance'' is defined in Webster's II dictionary as 
``help'' or ``aid.'' We therefore interpret the word ``assistance'' to 
mean financial help or aid provided to any individual in need of such 
support--specifically,

[[Page 4322]]

individuals in financial need, the aged, or those with certain medical 
conditions. Thus, as provided in Sec.  423.454 of our final rule, a 
``State program'' is one that provides financial assistance for 
supplemental drug coverage to individuals based on financial need, age, 
or medical condition, but not based on current or former employment 
status.
    Comment: One commenter suggested that our interpretation of the MMA 
should allow for the continuation and renewal at State discretion of 
the Pharmacy Plus waivers.
    Response: Pharmacy Plus programs can continue with Federal match 
after January 1, 2006, under certain circumstances. Any State that 
operates a Pharmacy Plus demonstration program must determine whether 
it is feasible to continue that Pharmacy Plus program by submitting a 
revised budget neutrality calculation for the demonstration. As 
required in section III (10) of the terms and conditions of approval 
for Pharmacy Plus programs, this calculation must account for the 
reduction in Medicaid drug costs and a lesser diversion of dual 
eligible beneficiaries into the Medicaid program due to the 
implementation of Part D. We will review the revised budget neutrality 
calculation and approve or disapprove the continuation of the 
demonstration for the period after Part D is implemented.
2. Application of Part D Rules to Certain Part D Plans on and after 
January 1, 2006 (Sec.  423.458)
    In accordance with section 1860D-21(c)(1) of the Act, and proposed 
at Sec.  423.458(a) of our notice of proposed rulemaking, the 
provisions of Part D pertaining to the provision of qualified 
prescription drug coverage apply under Part C to prescription drug 
coverage provided by an MA-PD plan in lieu of other Part C provisions 
that would apply to such coverage, unless otherwise provided. Thus, 
Part D requirements not related to the provision of drug coverage (for 
example, licensing requirements) do not apply to MA-PD plans.
    We indicated that we would waive Part D provisions to the extent 
that we determine that 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. In addition, we indicated that we 
would apply our waiver authority to cost plans and PACE organizations 
as proposed at Sec.  423.458(d).
    Except as otherwise provided below, the final rule adopts the 
provisions related to the application of Part D rules to MA-PD plans, 
as well as waivers of Part D requirements for MA-PD plans and cost 
plans, set forth in Sec.  423.458(a), (b), and (d) of the proposed 
rule.
    Comment: Two commenters suggested that waivers of Part D rules 
related to formulary requirements and pharmacy and therapeutic (P&T) 
committee requirements should not be allowed for MA-PD plans under the 
waiver authority provided in section 1860D-21(c)(2) of the Act, since 
there are no comparable provisions under Part C with which the Part D 
rules could conflict. Another commenter believed that waivers of Part D 
rules regarding coverage determinations and appeals should not be 
allowed under the waiver authority provided in section 1860D-21(c)(2) 
of the Act. Another commenter said that Part D appeals and grievances 
requirements should be waived for MA-PD plans to the extent they are 
not identical with Part C appeals and grievances requirements.
    Response: Section 1860D-21(c)(2) of the Act requires the Secretary 
to waive requirements under Part D to the extent the Secretary 
determines they duplicate or are in conflict with provisions otherwise 
applicable under Part C, or they are necessary to waive in order to 
promote coordination of Part C and Part D benefits. In our proposed 
rule, we proposed implementing this authority in Sec.  423.458(b). The 
clear intent of this provision was to recognize that the delivery of 
health care services covered under the original Medicare program under 
Part C takes precedence over the delivery of a drug benefit under Part 
D. Although the Part D drug benefit will become a vital part of the 
health care services offered by an MA-PD plan, to the extent that the 
Part D rules make it impossible for an MA-PD plan to effectively 
deliver Part C benefits, we will exercise Part D waiver authority to 
ensure that Part C benefits continue to be effectively delivered under 
Sec.  423.458(b) of the final rule. We agree with the commenter that 
the three waivers specifically mentioned related to formulary 
requirements, P&T committee requirements, and the Part D appeals 
process will not be waived for MA-PD plans insofar as there are no 
conflicting provisions or rules under Part C that will make these Part 
D requirements impossible for an MA-PD plan to implement.
    Comment: One commenter requested two specific waivers related to 
the Part D benefit offered by MA-PD plans. Specifically, the commenter 
requested a waiver of the pharmacy access standards in Sec.  
423.120(a)(1) of our proposed rule under similar conditions to the 
waivers we have permitted for MA plans related to the Medicare 
Prescription Drug Discount Card and Transitional Assistance Program. 
The commenter also requested a waiver of the requirement that MA 
organizations post their negotiated prices on our website, again saying 
that we had approved a similar waiver for MA plans that are exclusive 
card sponsors under the drug discount card program.
    Response: In our proposed rule, we signaled our intention to waive 
pharmacy network access requirements described at Sec.  423.120(a)(3) 
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 to the extent we 
determine that the network is sufficient to provide comparable access 
for enrollees of the MA-PD plan. In the subpart B preamble of our 
proposed rule, we discussed the information resources available through 
the Internet at www.medicare.gov. Although we discussed information 
available to Medicare-approved discount drug cards in that section of 
the preamble, we did not specifically signal our intention to provide 
identical information related to Part D plans. Therefore, it remains 
unclear that the second waiver would be necessary. More importantly, to 
the extent we discuss the required written waiver process in Sec.  
423.458(b)(2), (c)(1) and (d)(2) of our final rule, it is more 
appropriate at this time to direct the commenter to those sections of 
the rule than it is to speculate as to what waivers would, and would 
not, theoretically be allowed, if they were requested by an appropriate 
party.
3. Application to PACE Organizations
    Section 1860D-21(f) of the Act indicates that Part D provisions 
shall apply to PACE organizations electing to offer qualified 
prescription drug coverage 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 will not be deemed as MA-PD local plans, but will be 
treated in a manner that is similar to MA-PD local plans for Part D 
requirements applicable to the offering of qualified prescription drug 
coverage. Proposed Sec.  423.458(d) established regulatory authority 
for us to waive Part D provisions for PACE organizations to the extent 
the provisions duplicate or conflict with a requirement under PACE, or 
the waiver is necessary to promote coordination of benefits under

[[Page 4323]]

PACE and Part D, and indicates that PACE organizations may request 
waivers from us.
    The final rule adopts the rules regarding waivers of Part D 
requirements for PACE organizations set forth in Sec.  423.458(d) of 
the proposed rule.
    Comment: We received various comments regarding waivers of Part D 
requirements for PACE organizations.
    Response: Please refer to subpart T of this preamble for a detailed 
discussion of these comments and our responses to them.
4. Application to Employer Groups
    Section 1860D-22(b) of the Act extends the waiver authority that is 
provided for MA organizations related to Part C under section 1857(i) 
of the Act and implemented at Sec.  422.106(c) of our proposed MA rule 
to prescription drug plans. This waiver authority is intended to 
provide employment-based retiree health coverage an opportunity to 
furnish prescription drug benefits to its participants or beneficiaries 
through Part D in the most efficient and effective manner possible.
    We invited comment on the process we proposed for authorizing 
waivers for employer-sponsored group prescription drug plans. We also 
asked for comment on the manner in which additional waivers should be 
permitted and what additional waivers, if any, we should not allow.
    Except as otherwise provided below, the final rule adopts the 
provisions related waivers of Part D requirements for employer-
sponsored group prescription drug plans set forth in Sec.  423.458(c) 
of the proposed rule.
    Comment: Most commenters indicated a strong desire to obtain clear 
non-regulatory guidance addressing key issues in the waiver process 
prior to the final regulations being published. Commenters also urged 
us to adopt a process for employer waivers that gives employers maximum 
flexibility while minimizing administrative burden. Several commenters 
stressed the importance of providing waivers to facilitate employers 
becoming their own PDP or MA-PD plan for their retiree population. 
Several employers commented that under ERISA, State licensure 
requirements would not apply. Commenters also suggested waivers for the 
areas of network access, service area, marketing, disclosure, and 
enrollment.
    Response: We are adopting a streamlined approach for implementing 
employer group waivers that allows maximum flexibility for employers to 
retain retiree prescription drug coverage. Details on waivers that we 
will and will not consider will be included in separate guidance. 
Additional waiver requests will be addressed on a flow basis.
    Comment: One commenter requested clarification as to whether we 
will extend to cost plans (as defined under section 1876 of the Act) 
its waiver authority under section 1860D-22(b) of the Act.
    Response: Section 1860D-21(e)(1) of the Act provides that only 
those provisions of Part D (and related provisions of Part C) 
pertaining to the offering of qualified prescription drug coverage by a 
MA-PD local plan would apply to the offering of the coverage by a cost 
plan. Because the employer waiver authority under section 1860D-22(b) 
of the Act pertains to the offering of qualified prescription drug 
coverage, we believe section 1860D-21(e) of the Act extends this waiver 
authority to cost plans. This will facilitate the retention of employer 
sponsored retiree prescription drug coverage under cost plans. However, 
the provisions of Part C and D that do not relate to the offering of 
qualified prescription drug coverage by cost plans, including the 
employer waiver authority under section 1857(i) of the Act, would not 
apply to benefits offered under a cost plan other than any qualified 
prescription drug coverage. Accordingly, we do not interpret these 
statutory provisions as permitting us to apply our waiver authority for 
employer-sponsored group coverage to Part A and B benefits offered 
under cost plans.
    Comment: One commenter stated that a PBM or other third party 
administrator supporting an employer should be able to elect to solely 
serve employer groups without also being required to open enrollment to 
beneficiaries also in the service area but unaffiliated with the 
employer.
    Response: We will include details in separate guidance on waivers 
that we will and will not consider. Section 423.458(c) of our proposed 
rule did not propose interpreting section 1857(i)(2) of the Act as 
permitting entities other than PDP sponsors and MA organizations from 
requesting employer group waivers, or contracting with us to offer an 
employer-sponsored group prescription drug plan. However, given the 
commenter's request for clarification, we note that Sec.  423.458(c) of 
our final rule provides that any entity seeking to offer, sponsor, or 
administer an employer-sponsored group prescription drug plan may 
request a waiver or modification of Part D requirements. We will 
provide separate guidance regarding what entities we will contract 
with, as well as how we will contract with them.
5. Medicare Secondary Payer Procedures (Sec.  423.462)
    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 Part D sponsors and their 
provision of qualified prescription drug coverage. 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, we proposed at Sec.  
423.462 of our proposed rule that Part D sponsors are required to 
follow the same rules as MA organizations regarding:
     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.
    Comment: One commenter notes that MSP rules will apply to Part D 
and that section 1860D-12(g) of the Act extends State law preemption to 
Part D sponsors. This commenter believes that the MSP provisions 
extended to Part D sponsors should also apply to cost plans offering 
qualified prescription drug coverage. They argue that Part D is a 
Federal program and should be implemented by all Part D plans in accord 
with the same Federal rules and without regard to any State laws except 
those governing licensure and solvency.
    Response: Section 1860D-21(e)(1) of the Act provides that those 
provisions of Part D (and related provisions of Part C) pertaining to 
the offering of qualified prescription drug coverage by a MA-PD local 
plan would apply to the offering of such coverage by a cost plan. 
Accordingly, the MSP provisions under section 1860D-2(a)(4) of the Act 
and the preemption provisions under section 1860D-12(g) of the Act are 
extended to cost plans for offering of qualified prescription drug 
coverage under the plans. However, the MSP and preemption provisions of 
both Parts C and D would not apply to benefits offered under a cost 
plan providing other than any qualified prescription drug coverage. 
Accordingly, we do not interpret these statutory provisions as 
permitting us to apply these provisions to Part A and B benefits 
offered under

[[Page 4324]]

cost plans. Cost plans are thus still subject to the MSP and State law 
preemption provisions under Sec.  411.172 for their Part A and B 
benefits.
6. Coordination of Benefits with Other Providers of Prescription Drug 
Coverage. (Sec.  423.464)
    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 an SPAP with respect to payment of 
premiums and coverage, and payment for supplemental prescription drug 
benefits. The elements to be coordinated 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.
    We will establish procedures and requirements for Part D plans no 
later than July 1, 2005, to ensure effective coordination. In addition, 
as specified at section 1860D-24(a) of the Act, we will apply the 
requirements for coordination of benefits with SPAPs to Part D plans 
when they coordinate with entities providing other prescription drug 
coverage, including Medicaid (including a plan operating under a waiver 
under section 1115 of the Act), insurers, group health plans, the 
Federal Employees Health Benefits Program (FEHBP), military coverage 
(including TRICARE), and other coverage that we specify.
    Section 1860D-24(a)(3) of the Act permits us to impose user fees to 
defray the costs of Part D coordination of benefits, but not on SPAPs 
under any method of operation, for the transmittal of benefit 
coordination information under Part D. We are also provided authority 
to retain a portion of these user 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. In the proposed rule, we noted that any user fees, if 
collected, would not be assessed until the implementation of the Part D 
benefit in 2006. We requested comments regarding the method we should 
use to impose user fees, 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.
    As provided in section 1860D-24(c)(1) of the Act, Part D plans may 
continue to use cost management tools (such as tiered or differential 
cost sharing) even if an SPAP or other drug plan provides benefits that 
supplement the benefits available under Part D coverage for individuals 
enrolled in the Part D plan. In the proposed rule, we requested 
comments on how we could ensure that supplemental benefits offered by 
SPAPs and plans providing other prescription drug coverage would not 
undermine or eliminate the cost management tools established by Part D 
plans. We also solicited comments on the most effective way to 
administer this provision without creating undue administrative burden 
on either Part D plans or other prescription drug coverage that 
supplements Part D benefits.
    Except as otherwise provided below, the final rule adopts the 
coordination of benefit provisions set forth in Sec.  423.464 of the 
proposed rule.
    Comment: One commenter indicated that our policies regarding 
coordination of benefits should ensure that this process is as 
administratively simple as possible, and that coordination of benefits 
rules are structured in a way that does not create incentives for 
beneficiaries to switch Part D plans mid-year in order to obtain better 
basic benefits.
    Response: We agree and will keep this in mind as we work to develop 
requirements for coordination of benefits between Part D plans and 
SPAPs and entities providing other prescription drug coverage. We note, 
as well, that Part D enrollees may only switch Part D plans mid-year 
under the limited circumstances triggering a Special Election Period 
(SEP) in accordance with Sec.  423.38(c) of our final rule.
    Comment: One commenter indicated that while section 1860D-23 of the 
Act requires us to establish requirements for coordination of benefits 
beyond the tracking of TrOOP expenditures and claims payment (for 
example, for premium payment with SPAPs), they believe that 
coordination of benefits responsibilities should be limited for now to 
the tracking of TrOOP expenditures and claims payment. This commenter 
believed that an incremental approach is in the best interests of all 
parties, particularly since it is still unclear how many entities will 
choose to participate in or provide supplemental coverage to Part D.
    Response: Section 1860D-23(a)(2) of the Act requires that benefit 
coordination elements include, at a minimum, enrollment file sharing, 
processing of claims, claims payment, claims reconciliation reports, 
and application of the protection against high out of pocket 
expenditures. We must comply with these statutory requirements in 
establishing our coordination requirements for SPAPs and other 
providers of prescription drug coverage, and it is in the best 
interests of Part D enrollees and plans that coordination activities 
begin as soon as possible. We do not believe that an incremental 
approach will be necessary, and we will be issuing further information 
on our coordination requirements and processes soon.
    Comment: One commenter recommended that we establish a technical 
advisory group with representatives from the industry, including 
pharmacy software vendors and switching services, to develop 
coordination of benefits requirements for Part D plans to ensure 
effective coordination with SPAPs and other providers of prescription 
drug coverage. Another commenter recommended that relevant 
stakeholders, including pharmaceutical benefit managers, be consulted 
as we develop our requirements.
    Response: As discussed in our proposed rule, section 1823(a)(4) of 
the Act requires us to consult with SPAPs, MA organizations, States, 
pharmaceutical benefit managers, employers, representatives of Part D 
eligible individuals, data processing experts, pharmacists, 
pharmaceutical manufacturers, and other experts in establishing our 
coordination of benefits requirements. To date, we have not only 
encouraged comments on this issue in our proposed rule, but we have 
also held many consultation sessions with these various stakeholders 
and an Open Door Forum on TrOOP and coordination of benefits. We will 
continue to meet with these parties as we develop our coordination 
requirements and processes.
    Comment: One commenter stated that an unintended consequence of 
requiring Part D plans to collect information on incurred costs for 
purposes of tracking of TrOOP expenditures is that confidential 
negotiated pricing information will be released. This commenter thought 
that we should require Part D plans to collect SPAP payment information 
on ``incurred costs'' on a monthly or other periodic basis, in an 
aggregate form broken out per beneficiary, or require SPAPs to report 
the utilization information for enrollees for whom the SPAPs make 
payments for benefits that supplement the benefits available under Part 
D coverage, and for the Part D plans to

[[Page 4325]]

apply the price that would have prevailed had the plan been responsible 
for payment.
    Response: While we acknowledge the commenter's concern regarding 
disclosure of negotiated pricing in the sharing of claims data, we must 
point out that we will require Part D plans to submit point-of-sale 
pricing data to us for display on a Part D version of Price Compare, so 
this data will become publicly available information anyway. However, 
we emphasize that the cost and price concession information submitted 
on true acquisition costs in the allowable cost reconciliation 
processes will not be disclosed, and that cost and price concession 
information submitted as part of the bid submission process will be 
protected to the extent it is confidential commercial information.
    We wish to clarify that given that section 1860D-2(b)(4)(C)(ii) of 
the Act allows SPAP assistance for covered Part D drugs to count toward 
TrOOP, we do not expect that SPAPs will need to report paid claims 
data. TrOOP calculation will work by counting all amounts not paid by 
the Part D plan, unless such amounts are paid through group health 
plans, insurance or otherwise, or third party payment arrangements. 
Financial assistance with covered Part D drug costs provided by SPAPs 
on behalf of beneficiaries is assumed to be equivalent to payments made 
by the beneficiary and automatically counts toward TrOOP.
    For calculation of a beneficiary's TrOOP expenditures, the Part D 
plan will count the full amount left over after it pays a claim until 
it receives notice through the TrOOP/coordination of benefits process 
that some amount should not count (for example, because it was paid by 
a group health plan, insurance or otherwise, or a third party payment 
arrangement). The plan will then subtract that amount from the TrOOP 
total. Thus, for example, if a beneficiary with spending between the 
deductible and the initial coverage limit has a prescription for a 
covered Part D drug that costs $100, a Part D plan that offers defined 
standard coverage will pay $75 and count $25 toward the beneficiary's 
TrOOP total. If the beneficiary has insurance coverage that pays $20, 
the Part D plan will receive the information through the coordination 
of benefits process and subtract $20 from the TrOOP total. However, 
financial assistance provided by SPAPs will be treated as though the 
beneficiary paid that amount, so the Part D plan will not need to 
distinguish between how much an SPAP and the beneficiary paid, 
respectively. Thus, the entire $25 copay (even though the SPAP paid a 
portion of it) counts toward TrOOP, and it is not necessary for the 
Part D plan to know how much of it the SPAP paid.
    Comment: Multiple commenters asked that we not charge user fees for 
Part D coordination of benefits. Their arguments were that supplemental 
payers, particularly employers, would be more likely to drop benefits 
that supplement the benefits available under Part D coverage because we 
would be imposing burdensome administrative costs on them. One 
commenter also added that Part D coordination of benefits, in 
particular the tracking of TrOOP expenditures, is a feature designed to 
lower costs to Medicare, and so the government (that is, the ultimate 
benefactor of the coordination of benefits) should bear the 
administrative cost of coordination of benefits under Part D.
    Commenters varied in their responses to the methods for imposing 
user fees. One commenter noted that if we were to procure a TrOOP 
facilitation contractor but could not have it running beginning in 
2006, we could charge higher user fees to offset our higher 
administrative costs until the contractor was up and running and then 
switch to a lower fee thereafter. Another commenter proposed that a 
flat fee be used instead of a transmission volume fee because if volume 
were the basis of fee amounts, the fees would be too variable and would 
be too complicated to audit properly.
    Commenters had different ideas about how frequently user fees 
should be levied if indeed we charge them. One commenter said that 
because most health insurance fees are collected monthly, we should 
continue this trend and also collect its fees monthly. Another 
commentator preferred a quarterly collection in order to reduce 
overhead associated with the payment process.
    Response: We appreciate all the feedback provided by commenters 
regarding whether, and how, to assess user fees. We believe that while 
third-party payers of drug claims, pharmacies, and Part D plans will 
all benefit from the use of a coordination of benefits system that 
supports the tracking of TrOOP expenditures, Part D plans are the 
ultimate benefactors of the TrOOP process. Therefore, we expect that we 
will charge a user fee of no more than $1 per beneficiary per year to 
Part D plans, and we may be able to charge considerably less. We will 
issue further guidance regarding the method we will employ for 
assessing such user fees on Part D plans in separate guidance.
    Comment: One commenter argued that we should interpret the language 
in section 1860D-11(j) of the Act to mean that Part D plans may not 
impose unnecessary or unreasonable user fees on SPAPs even when the 
fees are related to coordination of benefits. This commenter added that 
plans should factor coordination of benefits costs into their bids and 
that we should bear these costs. The commenter wanted us to establish a 
``nationwide baseline requirement of coordination'' and only make 
States bear coordination costs if the costs were ``extraordinary,'' 
beyond the baseline, and ``related to the State's unique situation.'' 
The commenter asked that in such situations we negotiate such costs 
with the SPAP in question before a contract with a Part D sponsor is 
executed.
    One commenter wanted us to clarify whether the provision at section 
1860D-24(a)(3)(B) of the Act--which specifies that the Secretary may 
not impose coordination of benefits user fees on SPAPs--meant that only 
we are prohibited from charging such fees, or if the prohibition 
extended to Part D plans as well. If Part D plans are allowed to charge 
coordination of benefits user fees under this provision, the commenter 
asked for clarification regarding the basis upon which we would allow 
plans to charge the fees. They specifically mentioned cost-based fees, 
enrollment-based fees, and flat fees. The commenter also wanted to know 
whether the SPAPs would be allowed to verify or audit the imposition of 
such fees. Another commenter asked if we would monitor Part D plans to 
ensure that the user fees they imposed on SPAPs were reasonable and 
accurate. One commenter argued that Part D plans should be required to 
substantiate their actual costs in determining what to charge, in order 
to avoid unreasonable charges. The commenter argued that Part D plans 
should not be able to impose unrestricted fees on SPAPs.
    Response: Section 1860D-24(a)(3)(B) of the Act prohibits us from 
imposing user fees on SPAPs for the transmittal of third party 
reimbursement information necessary for the tracking of TrOOP 
expenditures. However, section 1860D-11(j) of the Act specifies that a 
Part D sponsor offering a Part D plan must allow SPAPs and other 
prescription drug coverage (described in sections 1860D-23 and 1860D-
24, respectively) to coordinate benefits with the Part D plan. In 
connection with such coordination, Part D sponsors cannot impose any 
user fees that are unrelated to the cost of coordination on SPAPs or 
entities providing other prescription drug coverage. We interpret this

[[Page 4326]]

language to mean that Part D plans may charge user fees to SPAPs and 
entities providing other prescription drug coverage, but only for costs 
that are related to coordination of benefits between Part D plans and 
SPAPs or entities providing other prescription drug coverage. Any user 
fees imposed must be reasonable and related only to the Part D 
sponsor's actual coordination of benefits costs.
    Comment: One commenter states that we should prevent entities 
providing coverage that supplements Part D benefits from removing 
enrollee incentives to choose cost-effective options under their Part D 
coverage. The commenter further stated that we should prohibit coverage 
that supplements the benefits available under Part D coverage from 
eliminating cost-sharing or otherwise reducing these to the extent that 
they lack any force to deter unnecessary drug expenditures. The 
commenter also thought that the supplemental benefits should also not 
be allowed to change or eliminate the tiering of drugs on a formulary.
    Another commenter thought that unless we interpret section 1860D-
24(c)(1) of the Act narrowly, plans could be allowed to veto many forms 
of cost-sharing assistance and benefits that supplement the benefits 
available under Part D coverage that employers, SPAPs, or others might 
want to provide for enrollees in order to ensure that they have at 
least as good drug coverage as they have today. They asked that we 
tightly define ``prohibited'' practices that might impair cost-
management tools and make clear that plans are required to coordinate 
with SPAPs and other prescription drug coverage unless they utilize 
these prohibited practices as identified by us.
    Response: Section 1860D-24(c)(1) of the Act provides that the 
coordination of benefits requirements contained in section 1860D-23 
shall not impair a Part D plan's application of cost-management tools 
(such as tiered or differential cost sharing, prior authorization, step 
therapy, and generic substitution), even if an SPAP or other drug plan 
provides benefits that supplement the benefits available under Part D 
coverage for individuals enrolled in the Part D plan. We do not believe 
that section 1860D-24(c)(1) of the Act gives us the authority to 
override Part D enrollees' benefit rights under SPAPs and other 
prescription drug coverage. For example, we do not have the authority 
to override an employer's contractual obligation to provide its 
retirees generous supplemental drug benefits. Thus, while Part D plans 
may freely apply their cost-management tools, we cannot require these 
supplemental payers to modify their cost-sharing and other coverage 
rules in order to maximize the effectiveness of the Part D plan's cost 
management tools. However, we expect that supplemental payers may have 
some interest in applying utilization management tools as well.
a. Coordination with SPAPs
    The statute envisions close coordination of benefits between SPAPs 
and Part D plans. SPAPs have filled a significant gap in prescription 
drug coverage for many Medicare beneficiaries in the absence of a 
Medicare drug benefit. With many States currently providing 
prescription drug coverage to a large number of Medicare beneficiaries, 
it is important to ensure that coordination between Part D plans and 
SPAPs occurs as efficiently and effectively as possible. However, 
section 1860D-23(c)(5) of the Act provides that nothing in the statute 
shall be construed to require that an SPAP coordinate with or provide 
financial assistance to beneficiaries enrolled in Part D plans.
    We assume that some SPAPs will pay Part D plans' premiums on behalf 
of their SPAP enrollees. For SPAPs that choose to simply supplement the 
coverage provided under a Part D plan, and to forego subsidizing their 
enrollees' monthly beneficiary premiums, we expect to include SPAP 
enrollment information in the coordination of benefits system. In this 
way, pharmacies will know that a claim should be sent to the SPAP 
following adjudication by the Part D plan. We requested comment on this 
proposed approach, including the feasibility of the approach for SPAPs 
and the ease of administration for pharmacies. We also requested 
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.
    Comment: Several commenters suggested that the information that 
Part D plans will be required to share with SPAPs as part of their 
coordination requirements needs to be specifically incorporated in our 
final regulations. In particular, several commenters asked for 
clarification regarding how we will assist States with receiving timely 
data exchanges from commercial insurance plans, employer-sponsored 
plans, Part D plans, and MA programs for cost-avoidance and recovery. 
Some commenters believe this information should include, among other 
things, the exchange of eligibility files, the exchange of claims 
payment files, and information concerning which drugs are on the plan 
formularies. Furthermore, they believed such information should be 
provided through a real-time point-of-sale process. One commenter 
provided extensive recommendations regarding the data and methods by 
which Part D plans should provide information to SPAPs.
    Response: We appreciate the extensive number of comments we 
received on this issue. As specified in section 1860D-23(a)(1) of the 
Act, we will issue requirements by July 1, 2005, for Part D plans to 
ensure the effective coordination between the Part D plans and SPAPs 
and other entities providing prescription drug coverage for payment of 
premiums and coverage and payment for supplemental prescription drug 
benefits. These requirements will specify the specific coordination 
elements that Part D plans must share with SPAPs and other prescription 
drug coverage.
    We note that, from a practical perspective, there may not be much 
need for coordination between Part D plans and SPAPs, since Part D 
plans will need information about supplemental payments that do not 
count toward TrOOP rather than those that do count toward TrOOP (for 
example, those made by SPAPs). To the extent that SPAPs are free-
standing supplemental plans, there may not be much need for 
coordination activities that a Part D plan could charge for, since 
claims will be adjudicated at the point of sale. As we note elsewhere 
in this preamble, Part D enrollees will be required to provide their 
Part D plan with information about third-party coverage so that the 
Part D plan is aware that any supplemental coverage a beneficiary is 
receiving is from an SPAP and not, for example, from a group health 
plan, insurance or otherwise, or other third party payment 
arrangements.
    However, we acknowledge that SPAPs and States have an interest in 
acquiring timely access to paid claims data on SPAP enrollees who are 
also enrollees of State medical assistance programs in order to use 
information on prescription drug utilization in their medical and case 
management activities. We are continuing to work on means to 
practically expedite the required data sharing with SPAPs. In addition, 
although we do not have the authority to require data exchanges between 
Part D plans and the States, we strongly encourage Part D plans to 
independently share data on these shared enrollees with State Medicaid 
plans, provided such disclosure is consistent with the HIPAA Privacy 
Rule provisions for the sharing of protected

[[Page 4327]]

health information with another covered entity. To the extent 
consistent with the applicable provisions of Title XIX, if there were a 
cost to the State for access to this data, we would match as an 
administrative cost at 50 percent.
    Comment: One commenter believes that we should provide States with 
flexibility to provide benefits that supplement the benefits available 
under Part D coverage so as to ensure that SPAP beneficiaries have 
continuous access to covered Part D drugs, even during the coverage 
gap.
    Response: As provided in Sec.  423.464(a) of our final rule, 
Medicare Part D plans may coordinate with SPAPs in a number of ways, 
including coordinating on a claim-specific basis when Part D plan pays 
first and the SPAP is the secondary payer, and this may include 
providing assistance after the initial coverage limit. As provided in 
section 1860D-2(b)(4)(C)(ii) of the Act, SPAP payments for benefits 
that supplement the benefits available under Part D coverage will count 
toward an enrollee's TrOOP limit, which we believe provides SPAPs with 
an incentive to supplement Part D benefits on behalf of Part D 
enrollees, including paying part of a beneficiary's drug costs after 
the beneficiary has met the initial coverage limit (as defined at Sec.  
423.104(d)(3) of our final rule) under their Part D plan.
    Comment: Several commenters were concerned that the coordination of 
prescription drug coverage between Part D plans and SPAPs and other 
prescription drug coverage will fall onto pharmacists. Pharmacists 
would have to file multiple claims to bill both the primary and 
secondary payers. They urged us to address these concerns when 
developing the coordination of benefits system.
    Response: In consultation sessions we held with various groups, 
including pharmacies and companies that run pharmacies, they expressed 
a willingness to perform multiple transactions in order to bill both 
the primary and any secondary payers as necessary in order to get 
billing and payment right the first time. Furthermore, if the pharmacy 
does not perform a secondary transaction with the SPAP, the beneficiary 
must pay everything left after the Part D plan pays. Beneficiaries who 
qualify for SPAP coverage generally do so because they are low-income; 
thus, being required to pay up front themselves and bill the SPAP for 
later reimbursement is likely to be a heavy financial burden that may 
make it impossible for some of these enrollees to purchase their 
prescription drugs.
b. Coordination with Other Prescription Drug Coverage
    As provided under section 1860D-24(a)(1) of the Act, Part D plans 
must also coordinate with the following entities providing other 
prescription drug coverage: (1) Medicaid programs (including a State 
plan operated under a waiver under section 1115 of the Act, such as a 
Pharmacy Plus waiver); (2) group health plans, as defined in 29 U.S.C. 
1167(1); (3) the Federal Employee Health Benefits Program (FEHBP) under 
chapter 89 of title 5 of the United States Code, (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.
    In the proposed rule, we requested comments regarding situations 
that might involve coordination of benefits between States and Part D 
plans (other than situations in which a State is acting as an 
employer). We also invited comments on the other administrative 
processes and requirements that we might identify in order to 
facilitate coordination of benefits between Part D plans and entities 
offering other prescription drug coverage.
    Comment: Two commenters requested that we clarify that States are 
prohibited from requiring pharmaceutical manufacturers to pay rebates 
on medications delivered to beneficiaries through Part D plans. Several 
other commenters thought that States should continue to be able to 
benefit from drug rebates related to drugs purchased by the SPAP as a 
supplemental benefit to SPAP enrollees enrolled in Part D plans.
    Response: Given that the Medicaid rebate program does not apply to 
SPAPs, we do not have the authority under the MMA to regulate or impose 
prohibitions on drug rebate or drug pricing negotiations between SPAPs 
and manufacturers.
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 providing 
prescription drug coverage. The elements that are to be coordinated 
must include: enrollment file sharing; claims processing and payment; 
claims reconciliation reports; application of the protection against 
high out-of-pocket expenditures (by tracking TrOOP expenditures); and 
other processes we specify.
    We considered whether a drug denied Part B coverage because the 
beneficiary fills the prescription at a pharmacy that does not have a 
Medicare supplier number should be considered a Part D drug (provided 
such drug otherwise meets the definition of a Part D drug), and 
requested comments on the relative likelihood of such an occurrence and 
on alternative means of addressing such circumstances.
    For drugs potentially covered by Part B that are dispensed by a 
pharmacy that is not a Medicare supplier, we considered the development 
of automatic cross-over procedures. (Similar cross-over procedures are 
used today in connection with dual-eligible individuals entitled to 
both Medicare and Medicaid and related to coordination between Medicare 
and supplemental insurers.) We also mentioned a potential need for 
similar cross-over procedures for any physician-administered drugs that 
may be covered under Part B or Part D. Our proposed rule invited 
comments on both these issues.
    Comment: Several commenters suggested that we allow drugs and 
biologicals that would otherwise be covered under Part B to be covered 
under Part D when a beneficiary obtains the drug at a pharmacy that has 
no Medicare supplier number. One commenter believed that our failure to 
do so could greatly hinder enrollee access to therapies for which Part 
D benefits should be available. In addition, allowing coverage of such 
drugs under Part D would facilitate the coordination of benefits 
process we have proposed. Another commenter asserted that these drugs 
and supplies are necessary for vulnerable populations at high risk. One 
commenter believed it would circumvent the Medicare statute to cover 
drugs only under Part B or Part D and would also impose a penalty in 
the form of higher out-of-pocket expenses on beneficiaries.
    Response: While we understand the impact this could have on some 
beneficiaries, we do not believe that commenters have provided a 
compelling rationale for automatically covering drugs under Part D that 
are denied coverage under Part B because a beneficiary fills the 
prescription at the wrong pharmacy. Under section 1860D-2(e)(2)(B) of 
the Act, a drug is excluded from coverage under Part D to the extent 
that coverage for that drug is available to an individual under Parts A 
or B. In this case, coverage would have been available under Part B had 
the enrollee obtained the drug at a participating Medicare pharmacy.
    To reduce the risk that beneficiaries do not lose Part B coverage 
by filling a prescription at a pharmacy that does not have a Medicare 
supplier number, we will: (1) encourage Part D plans to enroll 
pharmacies with Medicare supplier

[[Page 4328]]

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 the beneficiary signed an ABN 
notifying him or her that Medicare will deny payment, and agreed to be 
personally responsible for payment), or 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.)
    Comment: Several commenters urged us to provide guidance regarding 
how vaccines not covered under Part B will be covered under Part D, 
including reimbursement for their administration. One commenter 
encouraged us to arrange for Part B carriers to serve as the point of 
contact with physicians for purpose of payment by Part D plans for 
vaccine administration.
    Response: As discussed in subpart C, vaccines (and other covered 
Part D drugs that are appropriately dispensed and administered in a 
physician's office) administered in a physician's office will be 
covered under our out-of-network access rules at Sec.  423.124(a)(2) of 
our final rule, since Part D plan networks are defined as pharmacy 
networks only. A scenario under which a Part D enrollee must obtain a 
Part D-covered vaccine in a physician's office constitutes a situation 
in which out-of-network access would be permitted because a beneficiary 
could not reasonably be expected to obtain that vaccine at a network 
pharmacy.
    Below, we use vaccines as an example of how out-of-network access 
to covered Part D drugs dispensed and administered in physician offices 
will work under Part D. However, it is worth noting that other covered 
Part D drugs that are appropriately dispensed and administered in a 
physician's office will be subject to the same treatment under our out-
of-network access rules. As mentioned in subpart C, we expect the 
application of our out-of-network access rules to covered Part D drugs 
dispensed and administered in physician offices to be limited.
    Costs directly related to vaccine administration may be included in 
the physician fees under Part B, since Part B pays for the medically 
necessary administration of non-Part B covered drugs and biologicals. 
However, there is currently no ready mechanism for physicians to bill 
Part D plans for vaccine costs. Requiring physicians who administer 
such Part D-covered vaccines to submit a claim to the appropriate Part 
B carrier would involve developing automatic cross-over procedures such 
that, if the carrier denies the claim under Part B, it would submit the 
claim to the TrOOP facilitation contractor, discussed elsewhere in this 
preamble, which would in turn create an electronic claim that it would 
send automatically to the Part D plan (or its claims processing agent) 
through which the enrollee has Part D coverage. The Part D plan would 
then pay the physician for the plan allowance for that vaccine.
    While it is possible that we could eventually develop automatic 
cross-over procedures, we are concerned that establishing the cross-
over procedures by January 1, 2006, will be onerous given many other 
systems and implementation challenges that must be addressed by then. 
Therefore, we believe that a two-step approach is the most appropriate 
policy. In the short-term, a Part D enrollee may self-pay the physician 
for the vaccine cost and submit a paper claim for reimbursement to his 
or her Part D plan. We note that this will not be necessary for 
enrollees of MA-PD plans, since medical and pharmacy benefits will be 
integrated. This approach is consistent with how beneficiaries 
accessing covered Part D drugs at an out-of-network pharmacy will be 
reimbursed by Part D plans for costs associated with those drugs. Once 
Part D is implemented, we will get a better sense for the actual volume 
of Part D-covered vaccines and other physician-dispensed and 
administered Part D drugs, and the need and most appropriate mechanisms 
for such automatic cross-over procedures.
    We note that, to the extent that the amount charged by a physician 
for a Part D-covered vaccine and the plan's allowable cost for that 
vaccine vary, a beneficiary may be responsible (depending on the plan's 
out-of-network payment policy) for any out-of-network differential, as 
is the case with other covered Part D drugs obtained out-of-network.
d. Collection of Data on Third Party Coverage
    Section 1860D-2(b)(4)(D)(ii) of the Act permits Part D plans to 
request information on third party insurance from beneficiaries. We 
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 the coverage relative to Medicare. 
Beneficiaries who materially misrepresent information about third party 
coverage may be disenrolled from any Part D plan for a period specified 
by us and may also be subject to late enrollment penalties upon 
subsequent enrollment in another Part D plan.
    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 payers, and for alerting Part D plans about such arrangements. 
In our proposed rule, we also considered 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. We clarify, 
however, that a HIPAA authorization to disclose protected health 
information to Part D plans for purposes of coordination of benefits 
related to reimbursement for health care for an individual is not 
required for third party payers that are covered entities under HIPAA, 
since such disclosures are considered ``payment'' disclosures under the 
HIPAA Privacy Rule.
    Comment: One commenter believes that we should impose mandatory 
reporting requirements on third-party payers regarding the payment of 
out-of-pocket costs and that, as an incentive, the user fees charged to 
third-party payers could be adjusted depending on their degree of 
cooperation in providing TrOOP cost data. This commenter also thought 
we should require enrollees to provide third-party payment information 
in a standardized way as part of the enrollment process. Another

[[Page 4329]]

commenter suggested that the collection of third party enrollment data 
be incorporated into the application process as it is with the Medicaid 
eligibility determination, which requires a mandatory release of 
information by the beneficiary. One commenter agreed that beneficiaries 
must provide third-party payment information and consent to release of 
data held by third parties, which could be validated through a HIPAA-
compliant beneficiary release or authorization.
    Response: The Act does not give us an enforcement mechanism in the 
statute to impose mandatory reporting by third-party payers. However, 
as provided in Sec.  423.32(b)(ii) of our final rule, we will require 
beneficiaries enrolling in or enrolled in a Part D plan to provide, in 
a form and manner that we will specify in separate guidance, third-
party coverage information. Part D enrollees must also consent to the 
release of such information collected or obtained from other sources. 
Failure of beneficiaries to provide such information may be cause for 
termination of Part D coverage, as discussed in greater detail in 
subpart B.
    We would like to clarify that in the event that a beneficiary does 
not disclose alternative coverage payments to the Part D plan, that 
plan has the authority to recover any payments made in error on the 
basis of incorrect assumptions about the level of TrOOP expenditures. 
The plan may recover these payments directly from the beneficiary on 
whose behalf the payments were made. We have modified Sec.  
423.464(f)(2) of our final rule and added paragraph (f)(4) to clarify 
this authority.
e. Tracking True Out-of-Pocket (TrOOP) Costs
    In the proposed rule we considered a number of options for 
facilitating the exchange of data needed in order for Part D plans to 
track a beneficiary's TrOOP costs, and discussed alternatives around 
both mandatory versus voluntary reporting of claims and out-of-pocket 
costs, and centralized versus distributed responsibility for tracking 
the information in the. We considered two options for operationalizing 
the data exchange related to the Part D coordination of benefits system 
and TROOP accounting:
    Option 1: The Part D plans will be solely responsible for tracking 
TrOOP costs.
    Option 2: We will procure a TrOOP facilitation contractor to 
establish a single point of contact between payers, primary or 
secondary.
    Additionally, to foster proper billing and coordination of benefits 
we also considered the establishment of the Medicare beneficiary 
eligibility and other coverage query system using the HIPAA 270/271 
eligibility query and requested comments concerning the development of 
this system.
    Comment: An overwhelming majority of commenters on the issue of 
tracking TrOOP costs supported Option 2--having us procure a TrOOP 
facilitation contractor to establish a single point of contact between 
primary and secondary payers. Generally, commenters thought that a 
single point of contact option would lead to standardization and 
compatible formats among payers, as well as a cost-efficient and 
effective means for providing accurate, consistently interpreted, and 
timely information to all parties involved in operationalizing Part D. 
One commenter stated that PBMs do not calculate this data and would 
therefore be forced to build a new system for performing coordination 
of benefits functions and tracking multiple payers. One commenter 
thought that exchange of data between payers and us must be 
administered efficiently and timely, and using technology and standard 
processing already well established in the pharmacy industry to promote 
online pharmacy benefit management. This commenter also urged us to 
require Part D plans to routinely provide enrollment updates to the 
TrOOP facilitator, including all data needed by payers to coordinate 
benefits, as well as to develop an oversight task force consisting of 
all parties involved in developing user requirements for the data 
system. Another commenter urged us to include community retail 
pharmacies in its single point of contact system, thereby considerably 
increasing the efficiency and effectiveness of this option for tracking 
TrOOP expenditures. One commenter supported our establishing a central 
clearinghouse similar to that used for Medicare Parts A and B, and 
another recommended that we streamline current coordination of benefits 
procedures so that they can be accommodated in a new TrOOP/coordination 
of benefits system.
    Several commenters thought that tracking TrOOP expenditures in real 
time might not be feasible immediately after implementation of the Part 
D but should be a long or medium-range goal. One commenter thought we 
should limit our coordination of benefits responsibilities to tracking 
TrOOP and claims payment and reevaluate our options at a later date 
when it becomes clearer how different parties will participate in or 
interact with Part D. Another commenter urged us to establish interim 
rules that are administratively workable and do not impose compliance 
burdens or risks. Only one commenter thought that we should rely on 
Part D plans to track and report TrOOP amounts rather than involve an 
intermediary or TrOOP facilitation contractor.
    Response: PDP and MA/PDs will be responsible for calculating TrOOP 
for all individuals enrolled in their plan. When a beneficiary has no 
supplemental coverage, TrOOP can be easily calculated. This is because 
the plan has all the necessary data within the claims it processes to 
calculate TrOOP. TrOOP is more complicated to compute when the 
supplemental coverage is through a ``free standing'' plan that wraps 
around Part D.
    The overwhelming majority of responders felt that CMS must have 
some facilitation role in terms of TrOOP. We are considering 
facilitating the tracking of TrOOP in many ways, including: through the 
establishment of a TrOOP facilitation contractor, contractors, or 
blends of other suggested methods. Our goal is to facilitate the 
tracking of TrOOP by leveraging the existing coordination of benefit 
processes for Part D COB and TrOOP. This will include the collection of 
other payer information that can be used by Part D plans as part of the 
ongoing Medicare Secondary Payer processes. This process will be 
modified to include information as to whether these alternative payers 
that are primary to Medicare include coverage for prescription drugs. 
We will also expand the existing trading partner processes for Parts A 
and B supplemental wrap-around agreements to provide for the collection 
of supplemental drug plan information. In situations where an employer 
retiree wrap-around plan is currently wrapping around Medicare Part 
Parts A and B, this will require that a small amount of additional 
information be collected as part of the trading partner agreement to 
ensure coordination with the primary Part D plan. Under this strategy 
only one enrollment file would be required. (Employers, plans or payers 
may choose to submit separate enrollment files for Parts A and B 
crossover and Part D.) Only one file is required because this data will 
be maintained in the CMS Medicare beneficiary database.
    SPAPs can choose this method of enrollment file sharing as well. 
Under this strategy an SPAP or employer will not have to create a 
separate enrollment file for each Part D plan. Data collected through 
these processes will be shared with the Part D plans. In addition to 
our data collection efforts, the Part D plan will also request 
information from beneficiaries on the presence of other

[[Page 4330]]

coverage that is primary or secondary to Part D, and will then have the 
ability to add, change, or delete information about other coverage in 
plan and CMS files.
    We will also work with pharmacy providers, payers, PBMs and other 
affected parties to create an acceptable solution to facilitate 
situations where the pharmacy is lacking information in order to bill 
the appropriate payer. It is our hope that our solution will include, 
among other capabilities, an online eligibility file query function so 
the pharmacy may obtain information sufficient to direct a claim to the 
payer responsible for payment of a beneficiaries' claim.
    We continue to work with industry on a solution to facilitate the 
TrOOP tracking process. A final decision on how best to address TrOOP 
process challenges will be released well before the July 1, 2005 
statutory deadline. We are looking for a solution that will allow TrOOP 
to be calculated in as close to real time as possible.
    Comment: One commenter recommended that we establish a standard for 
the transmission of TrOOP information since there is currently no HIPAA 
standard for the transmission of coordination of benefits information 
between payers in connection with pharmacy transactions. In addition, 
this commenter recommends that we establish a national identifier for 
payers and, with the help of the Congress, for patients as soon as 
possible in order for coordination of benefits to function most 
effectively.
    Response: We intend to establish an efficient and effective process 
for handling coordination of benefits and tracking of TrOOP 
expenditures by the Part D plans in accordance with Federal laws and 
CMS guidelines.
    Comment: Several commenters thought that Part D sponsors should be 
responsible for tracking TrOOP and that enrollees should not be held 
accountable to the extent that another plan providing prescription drug 
coverage does not act. Another commenter suggested that in 
circumstances in which the information maintained by the TrOOP 
facilitation contractor is not consistent with what an enrollee claims 
to be the case at a pharmacy, benefits should be administered based on 
data in the system at that time. The Part D plan should correct the 
errors afterwards, as it is the plan's ultimate responsibility to 
administer the benefit. The Part D plan could, for example, create a 
flag in the system noting that the enrollee believes his or her payment 
obligation is in error because of incorrect data; this flag would 
result in notification to a plan so that the potential error can be 
investigated and resolved. Another commenter thought that Part D plans 
should not be responsible for tracking TrOOP costs when the plan is not 
aware of a third party payer.
    Response: Part D plans will always be responsible for correctly 
calculating TrOOP for their Part D enrollees. In the event that 
enrollees fail to provide information about other prescription drug 
coverage to their Part D plans, and the Part D plan later discovers 
that payments were made by a third-party payer, it must recalculate 
TrOOP and, if necessary, recover overpayments. We agree that, at the 
point-of-sale, the Part D plan's current information will always be the 
basis for its payment; a beneficiary's disagreement with such 
information can only be resolved by contacting the plan. At the 
pharmacy, the beneficiary must either pay the amount specified or 
decline to purchase the prescription until after the dispute is 
resolved. We note that in the course of normal operations, the status 
of beneficiary liability will fluctuate due to events such as failure 
to pick up prescriptions or corrected transactions, and that current 
pharmacy benefit management systems will automatically recalculate 
beneficiary liability after the updating of information in their 
systems. Consequently, any over- or under calculation of TrOOP will 
automatically be adjusted on the next claim once correct information 
has been received.

K. Application Procedures and Contracts with Part D Sponsors

1. Overview
    Subpart K of part 423 implements section 1860D 12(b) of the Act. 
This subpart sets forth requirements for contracts with Part D plans, 
including application procedures, contract terms, procedures for 
termination of contracts, and reporting. We note that while Medicare 
Advantage (MA) organizations offering Part D plans are Part D plans, 
they follow the requirements of part 422 for MA organizations, except 
in cases where the requirements for the qualified prescription drug 
coverage involve additional requirements (for example, the fraud and 
abuse requirements specified in Sec.  423.504(b)(4)(vi)(H) and the 
certification requirements in Sec.  423.505(k). Although in the 
proposed rule we included the requirements of section 1860D-12(b)(2) 
prohibiting a fallback from acting as a PDP sponsor or a subcontractor 
to a PDP sponsor in subpart F of the regulations, we believe these 
requirements are more appropriately viewed as contract requirements, 
and not as bid requirements; therefore, we have moved those regulations 
to this subpart.
    As in the proposed rule, this subpart sets forth the conditions 
necessary for an applicant to be considered qualified to contract with 
Medicare as a Part D sponsor, as well as contract requirements and 
termination procedures that would apply to Medicare-contracting Part D 
sponsors. The final rule specifies those procedures and requirements. 
Additionally, as we stated in the proposed rule, the applicable 
requirements and standards included in Part D of Title XVIII of the Act 
and our provisions under part 423, as well as the terms and conditions 
for payments described in regulation and in the statute, also apply to 
``fallback plans'' found under subpart Q.
    In this final rule, we clarify that any entity offering a Part D 
plan under the Medicare program is considered a Part D plan sponsor for 
the purposes of this subpart. In addition to PDPs that offer fallback 
plans, Part D plan sponsors can also include MA organizations that 
offer MA-PD plans, cost plans, and competitive medical plans (CMPs), as 
well as PACE organizations that offer Part D plans.
    We clarify that entities offering Part D plans under Medicare must 
follow the provisions of this subpart unless requirements specifically 
pertaining to these entities in this final regulation include or allow 
for a waiver of these requirements. Similarly, we also clarify, as is 
the case with MA organizations and cost plans offering prescription 
drug plans, that these organizations follow the requirements of part 
422 for MA organizations except when there are additional requirements 
in part 423 related solely to the prescription drug benefit component 
of the MA plan (In these cases, MA organizations offering the 
prescription drug benefit are directed by part 422 to any additional 
requirements in part 423.).
    As further clarification of the exceptions to, or waiver of, 
requirements of this subpart, please note, for example, that PACE 
programs, though subject to part 423 if offering a prescription drug 
benefit, may waive several of the contract requirements under part 423. 
PACE programs are unique in that they have a Medicaid component and 
have been offering a prescription drug benefit for some time. As a 
result, some of the part 423 requirements are duplicative or not 
applicable. (Please see subpart T for discussion of the PACE program 
and the prescription drug benefit under Part D.)
    In our definitions section at Sec.  423.4 we include, as 
clarification, the entities

[[Page 4331]]

identified above in our definition of ``Part D plan sponsor.''
    The proposed rule discussed at Sec.  423.153(e) requirements for a 
program to control fraud, waste and abuse as required by Section 1860D-
4(c)(1)(D) of the Act. In an effort to consolidate the requirements, we 
are moving them to this subpart at Sec.  423.504(b)(4)(vi)(H) as a 
component of a Part D sponsor's or MA organization offering a MA-PD 
plan's overall compliance plan. In the preamble to this subpart, we 
will discuss our final provisions and the comments we received on the 
proposed requirements concerning fraud, waste, and abuse. For easier 
reference, we discuss this section at the conclusion of this preamble.
    Further, as stated in the proposed rule, the MMA requires that the 
MA contracting provisions incorporated through section 1860D-12(b)(3) 
of the Act be applied to contracts with PDP sponsors in the same manner 
as those provisions apply to contracts with MA organizations under Part 
C of Title XVIII of the Act. Our overarching intent in the proposed 
rule, and our intent in the final rule, is to achieve a high degree of 
uniformity in the contract and application processes for both Part C 
and Part D. The maintenance of a single application and evaluation 
procedure, and a single set of contract requirements for both the Part 
C and Part D programs, brings simplicity, consistency, and reduced 
administrative burden for those entities managing both programs. 
Towards that end, the requirements under Sec.  423.501 through Sec.  
423.516 are similar to the requirements in Sec.  422.500 through Sec.  
422.524. We made every effort to keep the requirements in this subpart 
the same as those requirements for MA organizations; this effort was 
received without objection by any of the commenters; however, we did 
receive some comments asking us to clarify if certain sections were 
exclusive to PDP sponsors and inclusive of MA plans. In this preamble 
we address those and other comments.
2. Definitions (Sec.  423.501)
    We proposed that the definitions pertaining to PDP sponsors and MA 
organizations offering MA-PD plans would be the same as those found in 
Sec.  422.500, except in cases where the Part C definition is 
inapplicable (for example, in definitions that reference hospitals or 
hospital services). In addition, as mentioned above, we have added the 
definition of ``Part D plan sponsor'' to Sec.  423.4 to clarify that we 
consider any entity offering a Part D benefit to be a Part D sponsor 
and, with the exception of requirements that may be waived. We have 
made nomenclature changes throughout the regulations text for this 
subpart as well, revising ``PDP sponsors'' in most cases to ``Part D 
plan sponsors'' to bring this language into line with our definition at 
Sec.  423.4 and to indicate more clearly that a Part D sponsor includes 
any entity offering a Part D plan.
    The majority of the subpart K regulations would also apply to 
fallback entities, since fallback entities are included in the 
definition of Part D sponsor. In addition, under Sec.  423.871(a), 
fallback contracts are required to include the same terms of conditions 
as risk contracts, except as appropriate to carry out the provisions of 
subpart Q. We have also clarified the provisions that would not apply 
to fallback entities. For example, because fallback entities do not 
renew their 3-year contracts on a yearly basis, we have clarified that 
the renewal and non-renewal provisions would not apply to fallback 
entities. Fallback entities are also not required to be risk-bearing 
entities, and at this time we are not requiring that the licensure or 
solvency requirements of subparts I and K apply to fallback entities, 
although we may reconsider this issue in the future and we may use 
holding applicable licenses as a preferred, but not required selection 
criterion. We have clarified these provisions in the accompanying 
regulation text in Sec.  423.504(b)(2).
    We did not receive any comments regarding the proposed definitions 
for this subpart and will be adopting the policies proposed in the 
proposed rule.
3. Application Requirements (Sec.  423.502)
    We proposed application procedures based on those included for the 
Part C program. Interested applicants would need to complete and submit 
a certified application in the form and manner required by CMS. In 
addition, we proposed that applicants must: (1) submit documentation of 
appropriate State licensure; (2) submit documentation of State 
certification that the entity is able to offer health insurance or 
health benefits coverage that meets State specified standards as 
discussed in the proposed subpart I; or (3) submit a Federal waiver as 
described in the proposed subpart I of the proposed rule. An individual 
authorized to act on behalf of the entity applying to become a Part D 
sponsor must describe thoroughly how the entity meets the requirements 
of the rule. We will determine if the applicant is qualified to 
contract with CMS as a Part D sponsor and if that entity meets the 
requirements of part 423. Also, we proposed that, as in the Part C 
program, an applicant submitting material that the applicant believes 
would be protected from disclosure under the Freedom of Information Act 
(FOIA) (5 U.S.C. Sec.  522), 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.
    Comment: We received one comment stating that we were silent on the 
transition application requirements for current MA organizations 
wishing to add a prescription drug component to their MA plans.
    Response: The application requirements for current MA 
organizations, and potential MA organizations wishing to offer MA-PD 
plans, will basically mirror those listed here for other Part D 
sponsors. In other words, MA organizations offering MA-PD plans and 
other entities offering Part D plans will, subject to any specified 
exceptions, follow the same requirements. Technically, MA organizations 
are following these requirements as specified at part 422, while other 
Part D plans are following these requirements at part 423. One 
difference between the requirements at part 422 and those at part 423 
is the provisions for fraud and abuse which apply only to entities 
offering Part D benefits. In this case, the MA organization offering 
Part D benefits is directed at part 422 to follow the additional 
requirements specified in part 423 regarding its prescription drug 
benefits. In general, however, the application and contracting 
provisions in part 422 and part 423 are identical. Thus, while the MA-
PD contract is separate from the PDP contract under Part 423, the 
requirements of this part will be incorporated, with any exceptions 
specified, into the contract of the MA organization offering an MA-PD 
plan. Specific transition guideline procedures will appear on the CMS 
Web site and through other CMS guidance to ensure that the transition 
to the prescription drug benefit under Part D works as smoothly as 
possible. Similar guidance will given to M+C organizations wishing to 
make the transitions to MA organizations.
    To clarify further the transition to the MA-PD plan, for 
organizations interested in offering a MA-PD plan, we are, whenever 
practicable, keeping the contracting application and process the same 
for PDP sponsors and MA organizations. Medicare Advantage contractors 
will be required to apply for qualification to offer a Part D plan as

[[Page 4332]]

part of their MA application if their organization is a new participant 
in the MA program. If the MA organization is transitioning from a 
previous Medicare managed care contract, the Part D application will 
simply be a stand-alone submittal. MA organizations can expect the Part 
D portion of the MA application to be an abbreviated version of the PDP 
sponsor application, as the regulation and the Act at section 1860D-
21(c)(2) of the Act, allow CMS to waive provisions that are duplicative 
of, or in conflict with, MA requirements or where a waiver would be 
necessary to improve coordination of Part C and Part D benefits.
    Comments: In the application process under Sec.  423.502(d), we 
proposed that a PDP sponsor applicant may request to have submitted 
material protected from public view under the Disclosure of Application 
Information under the Freedom of Information Act. A commenter 
recommended that we make it clear that an entire application of a 
potential PDP sponsor may not be protected in this manner. Also, the 
commenter requested that we set standards for when and why exemptions 
would be approved or provide a list of what is, and is not, protected 
from disclosure.
    Response: The final rule, while not specifying `how little' or `how 
much' of an application may be protected, does require the applicant 
submitting material under FOIA to include an explanation of the 
applicability of an exemption specified in 45 CFR Part 5. The 
exemptions specified here serve as the standard for `when' and `why' an 
application in part, or whole, would be protected. Price and cost 
information provided by the bidders marked as ``confidential'' or 
``proprietary'' will generally be protected by the Trade Secrets Act. 
However, FOIA requires the agency to disclose data to a requester if 
the information does not fall within any of the FOIA's exemptions. We 
would need to consider whether the pricing and cost data are covered by 
FOIA Exemption 4, which protects trade secrets and commercial or 
financial information obtained from a person that is privileged or 
confidential. See 5 U.S.C. Sec.  552(b)(4). To facilitate this process, 
submitters of information to the Department may designate part or all 
of the information as exempt under FOIA Exemption 4 at the time the 
records are submitted or within a reasonable time thereafter. See 45 
CFR 5.65(c). When there is a request for information that is designated 
by the submitter as confidential or that could reasonably be considered 
exempt under Exemption 4, the Department is required by its FOIA 
regulation at 45 CFR 5.65(d) and by Executive Order 12,600 to give the 
submitter notice before the information is disclosed. When notice is 
given, in order to determine whether a submitter's information is 
protected by Exemption 4, the submitter must show that: (1) disclosure 
of the information is likely to impair the government's ability to 
obtain necessary information in the future; (2) disclosure of the 
information is likely to cause substantial harm to the competitive 
position of the submitter; or, (3) the records are considered valuable 
commodities in the marketplace which, once released through the FOIA, 
would result in a substantial loss of their market value. (This is the 
general Exemption 4 legal standard used for required submissions to the 
government.) A submission may be ``required'' if it is necessary to get 
the benefits of a voluntary program (for example, applying to be a Part 
D plan sponsor).
4. Evaluation and Determination Procedures for Applications to Be 
Determined Qualified to Act as a Sponsor (Sec.  423.503)
    Under proposed Sec.  423.503, we established procedures to evaluate 
and determine an entity's application for a contract as a Part D plan 
sponsor. These provisions mostly mirrored the provisions applicable to 
MA specified at Sec.  422.502 of our proposed requirements for MA 
organizations. We stated that the evaluation and determination of the 
application would be done on the basis of information contained in the 
application itself, as well as any additional information we obtained 
through on-site visits, publicly available information, and any other 
appropriate procedures. We also proposed rules regarding the timing of 
the application process, as well as the window for applicants to cure 
an incomplete or faulty application. See 69 FR 46709. Comments on these 
provisions are discussed below.
    Comment: Several comments were received asking us to produce the 
final regulations as early as possible in January 2005 and to 
streamline our application process in a way that that does not increase 
administrative burden for MA organizations wishing to apply to offer 
MA-PD plans or for other Part D plan sponsor applicants. A commenter 
stated that the timing of the contracting (and bidding) and appeal 
process would afford too short a time frame for applicants to make the 
June 6 bidding deadline specified in subpart F. One commenter pointed 
out that the timelines for appeals by other Part D sponsors and MA 
organizations (that is, the timelines specified in parts 422 and 423) 
varied widely, and would cause unnecessary confusion and administrative 
burden. Two comments were received asking that we allow the contract 
determination process and the bid application process to run 
concurrently.
    Response: We thank commenters for these comments and, in response, 
we are specifying in the final rule that we will be allowing applicants 
to enter into the bid process without an executed contract, and that 
the application and bid processes will run concurrently. Note that the 
bid application process will include both new bids to initially 
participate as a sponsor, as well as renewal bids. The contract will be 
pre-qualified and left unsigned until a successful bid negotiation has 
been approved by CMS. We will not award a Part D contract to an 
applicant until the applicant's bid is approved.
    The contract application process and the bidding process as 
detailed under subpart F are separate but dependent processes. We view 
the bid application process as a negotiation and the contract process 
as a determination of an entity's qualifications to provide the Part D 
benefit. We have revised this final rule to make clear that the 
application process under subpart K determines only whether an 
applicant is qualified to contract as a Part D plan sponsor. However, 
actually signing the contract will require a successful bid negotiation 
as described under subpart F. Thus, although an entity may be pre-
qualified to enter into a contract, a contract may not be signed if CMS 
and the entity cannot reach agreement on the bid.
    We believe distinguishing between the bidding and the contract 
application processes carries out the intent of the Congress in section 
1860D-11(d)(2) of the Act, under which the Congress provided the 
Secretary with the authority to ``negotiate the terms and conditions of 
the proposed bid . . . and other terms and conditions of a proposed 
plan'' and to exercise authority similar to that provided to the Office 
of Personnel Management under 5 U.S.C. Chapter 89. The bid negotiation 
will focus on the aspects of the bid and the benefit package to be 
provided by the Part D plan sponsor, while the contract application 
process will determine whether the entity offering the benefit package 
has the capability to contract with us under Part D. In addition, 
because the bid process is envisioned as a negotiation, only the 
contracting process under subpart K will be subject to the 
determinations and appeals process described in subpart N of these 
regulations. In order

[[Page 4333]]

to clarify the language concerning this distinction, we have revised 
our proposed rule to include new Sec.  423.503(c)(2). Whether or not 
the entity and CMS are able to reach agreement on the bid and the 
benefit package will not be subject to subpart N. Indeed, we do not 
believe that the Congress intended for the bid to be appealable under 
these administrative provisions, because subjecting the bid to these 
appeals would frustrate our ability to calculate a national average 
premium in time for the annual enrollment period starting November 15 
of each year. (We expect to have calculated the national average 
premium by at least August so that the beneficiary premiums, which are 
based on the national benchmark, can be published in time for open 
enrollment.)
    Furthermore, taking bid negotiations out of the subpart N 
reconsideration process encourages plans to negotiate in good faith, as 
plans will realize that failure to negotiate will not lead to an 
opportunity to appeal, thereby maintaining the integrity of the 
negotiation process. We believe these changes to the contracting 
application and determination process will allow qualified candidates 
more time to prepare for CY 2006.
    Additionally, we will be making the various timelines for appeals 
of determinations under subpart N of part 422 (Part C) and subpart N of 
part 423 (Part D) equivalent to eliminate any confusion and to shorten 
the contract application process.
    Comment: In the proposed rule, we asked for comment on allowing 10 
days for an incomplete application to be cured by an applicant from the 
date of the incomplete notice, and noted 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 also proposed a 10-day time frame for 
responding to an intent to deny. We received comments suggesting that 
the differing timelines between the Part D plan and MA organization 
appeal timelines (that is, the requirements specified in parts 422 and 
423) were confusing in general and expressing concern with the 
relatively short timeline for the contract application process.
    Response: We remain committed to providing successful applicants a 
reasonable time to be prepared to begin operations by the first of the 
year in their selected service area(s). However, we also wish to ensure 
all potential applicants are given every chance to contract with CMS.
    In the event that we determine that an application is incomplete, 
we afford a means for the applicant to cure the contract application. 
However, the bidding process required under the MMA makes the use of 
the `rolling application' system previously used under the Medicare 
Advantage and Medicare+Choice programs impracticable. As a result of 
the new bid calculation requirements for Part C and Part D, we need to 
process all final bids by a certain deadline each year. Therefore, we 
needed to apply a similar deadline to the application review process.
    In order to respond to concerns that the determination application 
process as it was proposed could compromise a Part D plan sponsor's 
ability to effectively prepare for the beginning of a contract period, 
we are making the following modifications: We are no longer considering 
Sec.  423.503(a)(2) as a separate and distinct step in the review 
process. If an applicant's contract is submitted and found to be both 
incomplete, as well as unqualified, (resulting in an intent to deny 
notice) the period to remedy the application will be 10 days from the 
date of the notice. Additionally, if after the initial review of 
applications, we determine that an application is missing information 
necessary for us to make a determination, we will make all reasonable 
efforts to notify the applicant that this is the case. This is not a 
requirement, however, and we are stating in the final rule that our 
procedural rule will be that applicants receiving notification that 
their application is incomplete, but who have not yet received an 
intent to deny notice, respond back to CMS with a cured application 
within two days of receiving the notice (instead of the ten days 
originally proposed). The two days are, thus, a guide; however, we are 
ultimately constrained by the total amount of time it will have to 
review applications. As a result, an applicant that takes longer than 
two days to remedy its incomplete application risks our issuing a 
notice of intent to deny before the Applicant submits the requested 
information. In cases where an Intent to deny notice has been issued, 
either as a result of missing information, information that would lead 
us to deny the application, or both, the applicant has ten days from 
the date of the notice to remedy the application. We believe that the 
amount of time given to applicants to furnish information is a 
procedural rule that is not subject to notice and comment. In addition, 
applicants will still receive the same 10 days included in the proposed 
rule to revise their applications if they fail to respond within 2 
days, and then receive an intent to deny notice from us.
    These changes to the application timelines mirror the changes we 
have included in the final rule for MA organizations. We believe that 
maintaining a single application and evaluation procedure and a single 
set of contract requirements for both the Part C and Part D programs 
brings simplicity, consistency, and reduced administrative burden for 
those entities that are managing both programs.
5. General Provisions (Sec.  423.504)
    In the proposed rule, we stated that the requirements of Sec.  
423.504 would specify the general provisions that apply to Part D 
sponsor contracts. For more details on those proposals please see 69 FR 
46709-11. For the most part, we stated that we planned to adopt the 
provisions that already applied to MA organizations through the Part 
422 regulations. As part of these general provisions, we proposed 
mandatory self-reporting requirements and asked for comments on the 
provisions. Finally, we noted that we would annually audit the 
financial records (including, but not limited to, Medicare utilization, 
costs, reinsurance cost, low-income subsidy payments, and risk corridor 
costs) of at least one-third of the Part D plan sponsors, including 
fallback plans. We asked for comments on the best approach to audit 
fallback plans and whether they would require more frequent auditing 
because of their different payment arrangements. In the proposed rule, 
we also specified that we would use the authority of section 1857(c)(5) 
of the Act (incorporated through section 1860D-12(b)(3)(B) of the Act) 
to enter into Part D plan sponsor contracts without regard to the 
Federal and Departmental acquisition regulations set forth in title 48 
of the CFR. We did not receive any comments regarding fallback plans 
audit methods, but did receive some comments on auditing in general, 
which are discussed in more detail below.
    Comment: One commenter thought that PBMs should be prohibited from 
charging pharmacists a fee for submitting claims, as this has become 
customary in the private sector, and some PBMs have increased their 
fees for claims submission substantially. Some commenters said plans 
should not be allowed to tie Medicare business to other commercial 
business through an existing ``all products'' clause or passively 
enroll pharmacies in Medicare drug plan networks; rather, plans should 
be required to sign a Medicare-specific contract with each pharmacy, or 
at least get a written response from each

[[Page 4334]]

pharmacy confirming its participation. One commenter suggested that 
plans be allowed to set a limited sign-up period in which pharmacies 
can take advantage of the standard contract.
    Response: Concerning the comment that PBMs not be allowed to charge 
pharmacists a fee for submitting claims, we believe that the intent of 
the statute is to let market forces prevail within the regulatory 
provisions outlined in the MMA and this final rule. In other words, if 
a PBM charges a relatively high fee to participating pharmacies to 
process claims, then it follows that a PBM would have difficulty 
securing contractual arrangements with a sufficient number of 
pharmacies to meet ``access'' requirements under Part D.
    As to the comments concerning Medicare-specific contracts, our 
primary goal is to ensure access to Part D drugs for Medicare 
beneficiaries. To the extent a contract is reasonably construed by both 
parties to ensure access to Part D by Medicare beneficiaries, the 
contract is deemed sufficient.
    Comment: As noted in the proposed rule, we proposed changing the 
compliance program requirements for MA organizations at Sec.  
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. We based the compliance 
program requirements for Part D plan sponsors on these new and recently 
proposed MA requirements. Numerous comments, both for and against, were 
received regarding these requirements of mandatory self-reporting of 
misconduct. The very large majority of the comments, however, objected 
that the rule as written was vague and broad, with no basis in statute. 
Other comments directed us to eliminate the proposal, stating that 
current compliance requirements were sufficient.
    Response: In response to these comments, we are eliminating from 
this regulation an explicit requirement that Part D plan sponsors 
report to CMS violations of law, regulation, or other wrongdoing on the 
part of the organization or its employees/officers. While we are not 
requiring Part D plan sponsors to engage in mandatory self-reporting, 
we continue to believe that self-reporting of fraud and abuse is a 
critical element to an effective compliance plan; and we strongly 
encourage Part D plan sponsors to alert CMS, the OIG, or law 
enforcement of any potential fraud or misconduct relating to the Part D 
program. If after reasonable inquiry, the Part D plan sponsor has 
determined that the misconduct has violated or may violate criminal, 
civil or administrative law, the Part D plan sponsor should report the 
existence of the misconduct to the appropriate Government authority 
within a reasonable period, that is, within 60 days after the 
determination that a violation may have occurred.
    The failure to disclose such conduct may result in adverse 
consequences for PDP sponsors, including criminal prosecution. For 
example, Title 42 U.S.C. Section 1320a-7b(a)(3) punishes as a felony 
the knowing failure to disclose an event affecting the initial or 
continued right to a benefit or payment under the Medicare program. The 
Federal civil False Claims Act, 31 U.S.C. Section 3729(a)(7) states 
that any person who knowingly makes, uses, or causes to be made or 
used, a false record or statement to conceal, avoid, or decrease an 
obligation to pay or transmit money or property to the Government, is 
liable to the United States for a civil penalty plus trebled 
restitution for the damages sustained by the government. In addition, 
both DOJ and the OIG have longstanding policies favoring self-
disclosure.
    In summary, we have elected to recommend reporting fraud and abuse 
as part of the compliance plan required as a condition of contracting 
as a Part D plan sponsor. Plans that self-report violations will 
continue to receive the benefits of voluntary self-reporting found in 
the False Claims Act and Federal sentencing guidelines. In the future, 
we will examine mandatory self-reporting of health care fraud and abuse 
across all Medicare providers and contractors.
    Comment: A commenter questioned the need for proposed Sec.  
423.505(h), which would require Part D plan sponsors to comply with 
certain specific Federal laws and rules, other laws applicable to 
recipients of Federal funds, and all other applicable laws and rules. 
The commenter argued that these requirements were on their face 
seemingly inconsistent with our regulatory provisions exempting Federal 
plans from procurement standards and preempting State laws other than 
those relating to licensure. Furthermore, nothing suggests a rationale 
for naming some laws and not others. The commenter also suggested that 
the provisions might more appropriately be replaced with one focused on 
plans committing themselves to compliance with Federal standards aimed 
at preventing or ameliorating waste, fraud, and abuse.
    Response: We agree that our efforts are best focused on 
requirements to prevent fraud, waste, and abuse in the Part D program 
and on issues for which we are responsible to enforce (for example, the 
HIPAA Administrative Simplification rules).. We have, therefore, made 
the suggested changes to reflect this focus. These changes are in no 
way meant to imply that Part D plan sponsors need not comply with other 
Federal laws and regulations as applicable, but rather only that the 
enforcement of these Federal laws and regulations is the responsibility 
of Federal agencies other than CMS. We have made a similar change in 
the Medicare Advantage regulation.
    Comments: We received four comments asking that we add an annual 
audit to proposed Sec.  423.504(d) (protection against fraud and 
beneficiary protections). Commenters requested stronger language to 
clarify that we will perform an annual audit as part standard oversight 
procedures. One commenter referred to a $1.1 million penalty imposed on 
a company found to be switching patients from lower priced generics to 
more expensive brands. Two comments requested that we add language to 
the final rule that reads: ``CMS must audit annually...'' (as opposed 
to reading ``CMS may audit annually.''). (emphasis added), not `may.'''
    Response: Section 1860D-12(b)(3)(C) of the Act requires CMS to 
implement the provisions of section 1857(d) in the same manner as those 
provisions that apply to contracts under Part C of the Medicare 
program. Section 1857(d)(1) of the Act specifies that the Secretary 
will audit ``at least one-third'' of organizations. Therefore, in this 
final rule, we will continue to adopt the regulations used in the MA 
program under which we would expect to audit one-third of contracted 
plans each year. If additional audits are necessary, we would have the 
discretionary authority to perform them as well under Sec.  
423.505(e)(2)(iii).
    Comment: A commenter asked that we require plans to contract with, 
and provide service through, long-term care pharmacies and Indian 
Health Service, Tribal or Urban Indian pharmacies. Additionally, we 
should carefully monitor and report on access to drugs for nursing home 
residents and ensure equal access to prescription drugs for those 
residents.
    Response: We are including this issue here because some readers 
might look for clarification in this subpart. However, we believe that 
this issue is more appropriately discussed in the context of pharmacy 
networks and therefore refer interested readers to a

[[Page 4335]]

discussion of this comment in subpart C of this final regulation.
    Other than the above changes, we are adopting the substance of 
proposed Sec.  423.504.
6. Contract Provisions (Sec.  423.505)
    In the proposed rule we stated that, for the most part, we would be 
adopting the additional contract provisions for the MA program with 
modifications as necessary to accommodate differences between the MA 
program and the prescription drug program. For a full discussion of our 
proposals, please see 69 FR 46711-713. We noted that elsewhere in the 
proposed rule, we identified additional contract terms that would apply 
uniformly to MA organizations offering MA-PD plans and other Part D 
plan sponsors ( for example, the requirement to support e-prescribing). 
These rules continue to be included in the final rule at subpart D.
    Comments: In Sec.  423.505(d), we proposed requiring record 
maintenance and retention for six years, stating that records should be 
kept ``for the current year and 6 prior years.'' This requirement 
mirrored the record retention requirements from the MA program. A 
commenter stated that this should be changed to read, ``6 prior 
contract periods,'' stating that this would better clarify that the 
retention requirements do not precede the execution of the contract. An 
additional request was made to clarify whether the retention periods 
also refer to MA-PD plans. Another commenter asked that we clarify our 
retention of records to include all pertinent documents (whether in 
paper or electronic form). That commenter also asked that our records 
retention policy parallel the statute of limitations that applies to 
False Claims Act (that is, a maximum of 10 years from the time of the 
violation).
    Response: We agree with the commenter that our retention 
requirements should more closely follow the statute of limitations that 
applies to the False Claims Act. As a result, in the final rule at 
Sec.  423.505(e)(4), we are requiring that records be maintained for 10 
years from the last contracting period or audit, whichever is latest, 
to conform to the statute of limitations for the discovery of 
violations under the False Claims Act.
    We recognize that 10 years is the upper limit under the False 
Claims Act, but we believe that this period will best enable us to have 
access to pertinent records should this be necessary. Also, the 10-year 
retention policy is in line with requirements concerning the 
prescription drug rebates under the Medicaid program (Sec.  
447.534(h)). We believe, as is the case with the Medicaid rule, that in 
order to ensure that we have the proper oversight for investigating the 
complex payment and other relationships associated with the delivery of 
prescription drugs under a program like Part D, the 10-year retention 
requirement is necessary. In order to maintain uniformity between 
requirements for MA organizations and other Part D sponsors, we are 
making a similar change to the final MA regulations.
    We do not agree with the commenter, however, that we specify the 
particular medium of records (paper or electronic, for example)that 
must be retained. Specifying the type of record could lead to a 
requirement that is unnecessary, lengthy, and confusing with CMS 
attempting to list every type of medium (past, present, and future) 
that could contain any information. We do believe, however, that all 
pertinent information should be maintained, including any and all 
electronic records.
    In response to the comment requesting that ``6 prior contract 
periods'' be specifically identified as opposed to ``6 years'' for the 
record retention requirement, we continue to specify years in this 
final rule (though 10 years, now, to parallel the statute of limitation 
for the False Claims Act) as we believe there may be occasions when a 
Part D sponsor during a prior period was under contract with us, ceased 
operation, and, at a later time, contracted again with Medicare. 
Specifying contract periods in these cases could make for a partial 
record of information and prevent us from having full access to the 
information over the period in question.
    Comment: In Sec.  423.505(l), we proposed six certifications that 
would be required of PDP sponsors. Although we refer readers to the 
regulations for a full discussion of these certifications, generally 
stated, they include certifying that--
    (1) All data related to payment is accurate, complete and true;
    (2) Each enrollee is validly enrolled in the prescription drug 
plan;
    (3) The claims data submitted is accurate, complete and truthful;
    (4) The information in the bid submission and assumptions related 
to projected reinsurance and the low income subsidy is accurate, 
complete, truthful, and conforms with the regulations;
    (5) The information provided for purposes of supporting allowable 
costs for purposes of calculating risk corridor and reinsurance 
payments is accurate, complete, truthful, and fully conforms to the 
regulations; and
    (6) The data submitted for price comparison is accurate, complete, 
and truthful. These certifications were based on the certifications 
required under the MA program, but were modified to reflect the 
different payment mechanisms under the Part D program. A commenter 
requested that we revise these six certifications and provide general 
authority for requiring the certifications. The commenter requested 
that we remove the specific language related to the content of the 
certifications in order to provide CMS with flexibility in the start-up 
phase of MMA, and to make it easier to integrate the Part D 
certifications with the Part C certifications.
    Response: As we have done elsewhere, we largely based the 
certification process for Part D on the Part C requirements for MA 
organizations. We do this because of the similarity in scope of both 
programs, as well as the familiarity many will have with the MA 
process. However, the Part D program differs in some payment respects 
from the Part C program. Thus, while the MA regulations currently 
require a certification of data included in the ACR, the Part D 
regulations similarly require a certification of the information 
included in the bid submission. Also, because there are additional 
payment mechanisms under Part D (for example, risk corridors and 
reinsurance) that do not exist for Part C, we believe it is appropriate 
to require certifications for these separate types of payment. If at 
the time it is found that additional, or alternate, certifications are 
required we have the discretion to change them through notice and 
comment rulemaking. The final rule requires that the CEO or CFO of a 
Part D sponsor, or an authorized individual, request payment of claims 
on a document that certifies (based on best knowledge information and 
belief) the accuracy, completeness and truthfulness of all data related 
to payment. We highly recommend that Part D sponsors collect 
certification from their downstream partners as well. Further, if claim 
data is 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) 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).
    Comment: A commenter recommended that we explicitly state that the 
certification provisions of

[[Page 4336]]

Sec.  423.505(l) apply not exclusively to PDPs, but also to MA 
organizations offering MA-PD plans as well.
    Response: We note that the certification provisions under Sec.  
423.505(l) apply to all Part D plan sponsors as defined earlier in this 
section and in the definitions section at Sec.  423.4.
    In Sec.  423.505(f)(2)(vii) we have added examples of other matters 
where CMS may require statistical data and information from PDP 
sponsors to further clarify these ``other matters that CMS may 
require.'' For an effective oversight program, for example, CMS may 
require PDP sponsors to submit statistics and information regarding 
performance of operations in the following areas:
    (a) Experience and capabilities.
    (b) Licensure and solvency.
    (c) Business integrity.
    (d) Benefit design.
    (e) Service area and regions.
    (f) Pharmacy network.
    (g) Enrollment and eligibility.
    (h) Exceptions, appeals, and grievances.
    (i) Quality assurance and utilization management.
    (j) Medication Therapy Management Programs.
    (k) HIPAA.
    (l) Customer service and satisfaction.
    (m) Coordination of Benefits (COB).
    (n) Tracking Out-of-Pocket Costs (TrOOP).
    (o) Marketing and beneficiary communications.
    (p) Provider communications.
    (q) Control of fraud, abuse, and waste.
    (r) Claims processing.
    (s) Other performance measures as specified in guidelines provided 
by CMS.
7. Effective Date and Term of Contract (Sec.  423.506)
    In the proposed rule, we specified the term of non-fallback 
contracts (12 months) and specified that contracts could be renewed 
from year to year, but only in the event that we inform the Part D plan 
sponsor that a renewal is authorized, and only if the Part D plan 
sponsor does not provide us with a notice of intent not to renew. We 
stated that we would not require an application process for renewals, 
and that because of the need to establish a national average monthly 
bid amount from the approved bids, PDP contracts could not be effective 
at any time other than the first of the year. We received no comments 
on these provisions and are adopting the policies as stated in the 
proposed rule on this section. We have changed the regulations to 
clarify the distinction between the bidding and the application 
processes. As discussed previously in this subpart, the revisions 
indicate that the renewal process leads only to a determination that a 
sponsor is qualified to renew its contract and that the actual renewal 
of the contract will depend upon whether CMS and the sponsor are able 
to reach agreement on the bid.
8. Nonrenewal of Contract (Sec.  423.507)
    In the proposed rule, we indicated provisions concerning the non-
renewal of a Part D plan sponsor's contract. Under proposed Sec.  
423.507, we required that a Part D plan sponsor not renewing its 
contract provide us with notification in writing by the first Monday of 
June in the year in which the contract ends. The Part D plan 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-PD plans, and other Part D plans, 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 Part D plan sponsor's service 
area.
    We proposed that if a Part D plan sponsor chose to non-renew a 
contract as described in Sec.  423.507(a)(3), we would not enter into a 
contract with the organization for 2 years unless circumstances 
warranted special consideration, as determined by CMS. For purposes of 
this section, we stated that we may elect not to authorize renewal of a 
contract for any of the reasons listed in Sec.  423.509(a)(conditions 
for terminating a contract) or in subpart O (including Sec.  423.752 
(bases for imposing intermediate sanctions or civil money penalties.))
    We proposed providing notice of our decision whether to authorize 
renewal of the contract to the PDP sponsor by May 1 of the contract 
year. In the event we found after May 1\st\ that a plan for whatever 
reason should not be renewed the following year, we stated that we 
retained the right to terminate the Part D plan sponsor contract at any 
time based on any of the reasons stated in Sec.  423.509, regardless of 
whether we renewed a Part D plan sponsor contract. If we decided not to 
authorize a renewal of the contract, we stated we would provide notice 
to the Part D plan sponsor's Medicare enrollees by mail at least 90 
days before the end of the current calendar year. We also stated we 
would 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 stated that we would give the Part D plan 
sponsor written notice of its right to appeal the decision that it was 
not qualified to renew its contract in accordance with proposed Sec.  
423.642(b).
    We received a few comments on this section which we discuss below. 
In the final rule we are adopting the provisions of the proposed rule 
with some minor modifications (in particular to clarify that a decision 
to non-renew a contract constitutes a determination that a contractor 
is not qualified to renew its contract).
    Comment: One commenter indicated that allowing for only four months 
(January 1\st\--May 1\st\) for us to decide whether or not to renew a 
Part D plan contract provides an inadequate amount of time for us to 
make an informed decision.
    Response: We must make the determination that a contractor is not 
qualified to renew its contract by May so that we can know if an 
organization will be entering a bid, and also so that we may calculate 
the benchmarks for that particular area. If, after the deadline for CMS 
non-renewal passes, we uncover additional information causing us to 
question the qualifications of the contractor to continue serving as a 
Part D plan sponsor, we have a range of options available under this 
subpart, as well as under subpart O. (For example, we could impose an 
enrollment freeze, a termination of marketing, or terminate the 
contract if necessary.) In addition, even if we determine an entity is 
qualified to renew its contract, this does not mean the contract will 
necessarily be renewed. If we and the contractor cannot reach agreement 
on the terms of the bid, then the contract will not be renewed.
    Comment: Concern was expressed by a commenter that it was unclear 
how a Part D plan sponsor not renewing its contract could fulfill the 
requirement to inform consumers of other Part D plan options in the 
same service area, especially if other plans are changing or leaving 
the area at the same time.
    Response: The plan is also required to notify the public 90 days 
before the end of the current calendar year. If 90 days is October 1, 
at that point, the plan should know (or should be able to find out from 
CMS) what plans are likely to offer prescription drug coverage for the

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upcoming annual enrollment period in the service area.
9. Modification or termination of contract by mutual consent (Sec.  
423.508).
    In proposed Sec.  423.508, we specified that a contract could be 
modified or terminated at any time by written mutual consent. If the 
contract were terminated by mutual consent, the PDP sponsor would have 
to provide notice to its Medicare enrollees and the general public 
using a timeframe we determine is appropriate. If the contract were 
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 CMS. We received two 
comments concerning this section on the proposed rule.
    Comment: A Part D plan sponsor not intending to renew its contract 
with CMS is required to provide notice by the first Monday in June in 
the year in which the contract ends. Several commenters believed that 
this was not enough lead-time to ensure a complete transfer of files. 
They suggested that, as a condition of participating in the Part D 
program or recovery of surety bonds, Part D sponsors be required to 
cooperate in a timely manner with regard to all file and data 
transfers, including in cases where the Part D sponsor is leaving the 
market.
    Response: We agree with the commenters that we should specify that 
data and files must be transferred timely and are adding language at 
Sec.  423.507(a)(4), Sec.  423.508(d), Sec.  423.509(b)(1)(iv), and 
Sec.  423.510(f) to clarify that these transfers must take place in 
cases of non-renewal, as well as in cases where the plan is ended for 
other reasons..
10. Termination of Contracts by CMS (Sec.  423.509)
    This section discusses reasons for termination by CMS of a Part D 
sponsor. In the proposed rule, we asked for comments on Sec.  
423.509(a)(14), which allows us to immediately terminate a plan's 
contract without making corrective action available. This authority 
would be used if we have credible evidence of false, fraudulent, or 
abusive activities affecting the Medicare program. For the remainder of 
our proposals under this section, please see 69 FR 46714-715. We 
received one comment on this section as discussed below and are 
adopting the proposed policies in this final rule.
    Comment: A commenter stated that our requirements allowing plans to 
cease operations 90 days after a CMS termination decision, and then 
requiring that the terminated Part D sponsor notify enrollees at least 
30 days before the termination, is an unacceptable 60-day delay in 
notifying beneficiaries, and may cause gaps in coverage. Additionally, 
the commenter asked that the regulations stipulate that plans be 
immediately barred from any further marketing as soon as they are 
notified by CMS of their termination.
    Response: We must allow some time between when a termination notice 
is given to an entity and when enrollees are notified of the 
termination so that we can alert other plans in the same service area 
that they are going to have to be open for enrollment and so that we 
can determine which plans have the capacity to accept new enrollees. In 
the event that only one other plan is in the area, we must make every 
effort in a short amount of time to contract with a qualified Part D 
sponsor to preserve beneficiary choice.
    Regarding the comment about ending marketing immediately upon 
termination, sponsors are afforded appeal rights. Terminated sponsors 
have 15 days to file a notice of appeal.
11. Termination of Contract by the Part D Plan Sponsor (Sec.  423.510)
    The proposed requirements for termination of a contract by a Part D 
plan sponsor were discussed at 69 FR 46715. These proposed requirements 
were unchanged from the MA program. We received one comment on 
notifying the States of PDP sponsors that have their contract 
terminated. We expect to adopt this suggestion in other guidance. In 
this final rule, we are adopting the provisions of the proposed rule.
12. Minimum Enrollment Requirements (Sec.  423.512)
    We discussed the minimum enrollment requirements for potential Part 
D plan sponsors at 69 FR 46715 in the preamble of the proposed rule. We 
asked for comments on whether we should retain the minimum enrollment 
requirements from the MA program. We received one comment, discussed 
below, addressing that proposal. In this final rule, we are adopting 
the policies of the proposed rule.
    Comment: Three commenters asked that we raise the minimum 
enrollment amounts from the current levels of at least 5,000 
individuals enrolled for the purpose of receiving prescription drug 
benefits, and at least 1,500 enrollees for those plans serving rural 
areas. Their rationale was that at these low levels, a Part D plan 
sponsor could not be expected to negotiate and receive adequate 
prescription drug discounts or provide quality customer services to its 
beneficiaries.
    Response: Although we have the authority under section 1860D-
12(b)(3)(A)(i) of the Act to increase the minimum number of enrollees 
for PDP sponsors, given that we are in the first phase of the new drug 
benefit, we believe it would be reasonable to maintain the minimum 
enrollment numbers that were proposed. We may, in the future, need to 
adjust these thresholds based on our early experience. For now, 
however, we believe it would be prudent to adopt the minimum enrollment 
thresholds already used in the MA context, as we have greater 
experience with that program. Given that MA organizations offer a 
broader range of services than will be offered by PDP sponsors, and 
given that the minimum enrollment requirements have not seemed to 
stifle negotiation in that context, we believe it is reasonable to 
maintain these minimum enrollment numbers for potential PDP sponsors. 
Additionally, it should be noted that during the first contract year 
for a PDP sponsor in a region, the minimum enrollment requirements are 
waived. In addition, our intention for the final rule is to attract as 
many plans as possible to contract with us, thereby ensuring 
beneficiary choice and price competition. If, in the future, we find 
that the minimum enrollment numbers are too low for plans to garner 
high enough discounts or to provide quality customer service, we may 
increase the number through another round of rulemaking.
13. Reporting Requirements (Sec.  423.514)
    Proposed reporting requirements were discussed at pages 46715 and 
46716 of the proposed rule. We received no comments on this section and 
will be adopting the policies proposed.
14. Prohibition of midyear implementation of significant new regulatory 
requirements. (Sec.  423.516)
    Under proposed Sec.  423.516, we stated that we could not 
implement, other than at the beginning of a calendar year, provisions 
under this section that would impose new, significant regulatory 
requirements on a Part D plan sponsor or a prescription drug plan. We 
did not receive any comments on the provision, and the policy will be 
adopted in the final rule.
15. Fraud, Waste and Abuse.
    Section 423.153(e) of the proposed rule discussed requirements for 
a program to control fraud, waste and abuse as required by Section 
1860D-4(c)(1)(D) of the Act. In an effort to

[[Page 4338]]

consolidate the various compliance requirements in the rule, the 
requirements (and preamble discussion) pertaining to fraud, waste, and 
abuse programs have been moved from subpart D to subpart K, and 
included at Sec.  423.504(b)(4)(vi)(H) as a component of a Part D plan 
sponsor's overall compliance plan.
    Fraud and abuse compliance plans (referred to in this subpart as 
fraud and abuse programs) have been a part of private business 
practices since the early 1990's with the implementation of the Federal 
Sentencing Guidelines for Organizations of 1991. The Guidelines provide 
that a corporation can mitigate its sentencing when convicted of a 
Federal crime if its compliance plan is effective. Additionally, 
prosecutors may use their discretion in pursuing potential criminal 
conduct for those organizations that have an effective compliance plan. 
The Guidelines require an organization to exercise due diligence to 
detect and prevent violations of law (not just criminal law), and to 
promote an organizational culture that encourages compliance. They also 
require that businesses periodically assess the risk that criminal 
conduct might occur notwithstanding the organization's compliance and 
ethics program.
    With these Guidelines in mind, we developed a set of elements for 
Part D plans to consider including in the fraud and abuse program 
component of their Compliance Plan so that they may benefit from an 
effective plan. These elements are similar to what many companies are 
doing in the private industry, including what is being done in the 
Federal Employee Health Benefits Program (FEHBP).
    The Office of Personnel Management (OPM) requires the FEHBP plans 
to have a fraud and abuse program that contains at a minimum these 
components: an anti-fraud policy statement, written plan and 
procedures, formal training, fraud hotlines, education, use of 
technology to combat fraud and abuse, security safeguards to protect 
member and provider information, and a mechanism to address fraud and 
abuse practices that become patient safety issues.
    States are also beginning to develop standards that pharmaceutical 
companies must follow before doing business in their State. For 
example, on September 29, 2004 Governor Arnold Schwarzenegger of 
California signed a new law that requires pharmaceutical companies to 
implement a Comprehensive Compliance Program (CCP). This CCP requires 
companies that sell pharmaceuticals in the State of California to 
comply with the tenets of the Code on Interactions with Health Care 
Professionals of the Pharmaceutical Manufacturers and Researchers of 
America (PhRMA) and the HHS Office of Inspector General's Compliance 
Program Guidelines for Pharmaceutical Manufacturers. In addition, the 
companies must declare in writing compliance with the plan, make its 
CCP and written attestation accessible to the public on its Web site, 
and provide a toll-free number where copies of the CCP and written 
attestation may be obtained.
    Similarly, the current M+C organizations, under Sec.  
422.501(b)(3)(vi), must have a compliance plan that consists of the 
following:
     Written policies, procedures, and standards of conduct 
that articulate the organization's commitment to comply with all 
applicable Federal and State standards related to fraud and abuse.
     The designation of a compliance officer and compliance 
committee who are 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.
     Provision for internal monitoring and auditing.
     Procedures for ensuring prompt response to detected 
offenses and development of corrective action initiatives relating to 
the organization's M+C contract.
    With the emergence of organized criminal groups that have become 
involved in healthcare fraud across the country, the defrauding of 
Medicare and Medicaid has increased program vulnerabilities for CMS. 
For example, prescription drug expenditures constitute one of the 
fastest growing components of all Medicaid programs and amount to more 
than $1 billion a year in Medicaid expenditures on pharmaceuticals. 
Preventing inappropriate expenditures from occurring is preferable to 
recouping inappropriately paid claims. States have been very aggressive 
in responding to many of the fraud schemes used by individuals and 
groups to defraud Medicaid programs. States have addressed fraud and 
abuse by developing systems, processes, and procedures to identify and 
prevent fraudulent providers from entering their programs, thus 
avoiding patterns of payment and recovery.
    As the Medicare Prescription Drug Benefit is implemented, it is 
crucial to the success of the Medicare program to have a fraud 
detection and prevention model in place. The identification and 
analysis of inappropriate activities that are essential aspects of the 
model will help Medicare to proactively combat fraudulent drug schemes.
    After researching best practices currently utilized in the 
industry, we recommend that Part D plan sponsors consider adopting a 
program similar to the one used in FEHBP by including in the fraud, 
waste and abuse component of their overall compliance plan the 
following elements:
    1) Written policies and procedures for detecting and preventing 
fraud, waste, and abuse among Part D plan sponsors, any Pharmacy 
Benefit Managers, pharmacies, drug manufacturers and physicians and 
providers with whom the sponsors and MA organizations do business. In 
developing these policies and procedures, sponsors and MA-PDs may also 
consider requiring pharmacies to adhere to the Code of Ethics of the 
American Pharmaceutical Association as a best practice for its standard 
of conduct.
    2) Designation of a compliance officer and compliance committee 
with responsibility for developing, operating, and monitoring the Fraud 
and Abuse program and with authority to report directly to the board of 
directors, the president, or the CEO. The Part D plan sponsor or MA-PD 
should consider the compliance officer's scope of responsibilities, the 
organization's size and resources, and the complexity of the task in 
determining whether this compliance officer needs to be a different 
individual than the one required in the overall compliance plan.
    3) Effective training and education on fraud, waste, and abuse, 
which would address pertinent laws related to fraud and abuse (for 
example, anti-kickback provisions and False Claims Act provisions) and 
include training for Part D plan sponsor staff and contracted entities 
on common fraudulent schemes in the pharmaceutical industry, identified 
by CMS, the Office of Inspector General or Department of Justice.
    4) Effective lines of communication between the sponsor and the 
following entities: CMS and its contractors; law enforcement; 
Pharmaceutical Benefit Managers; pharmacies; and physicians and 
providers with whom the Part D plan sponsors do business, including an 
effective line of communication between the Part D plan's compliance 
officer and all employees using a process (for example, a hotline or 
other reporting system) to receive complaints or questions. There 
should also be procedures in place to protect the

[[Page 4339]]

anonymity of complainants and protect whistleblowers from retaliation.
    5) Internal monitoring and auditing to protect the Medicare Trust 
Fund from Part D fraud and abuse, including regular monitoring and 
auditing by the Part D plan to ensure that they are in fact taking the 
steps necessary to comply with all Federal and State regulations 
related to fraud and abuse and are following their compliance plan to 
mitigate the potential for fraud, waste, and abuse within their 
organization.
    6) Enforcement of standards through guidelines that are widely 
disseminated to employees, contractors, agents, and directors.
    7) Procedures to ensure prompt responses to detected problems and 
to undertaking corrective action. We recommend these procedures 
include: (a)referral of any abusive or potentially fraudulent conduct 
or inappropriate utilization activities, once identified via proactive 
data analysis or other processes, for further investigation to CMS or 
its contractors; (b) procedures to cooperate with law enforcement; (c) 
reporting of potential violations of Federal law to the HHS Office of 
Inspector General or, alternatively, to appropriate law enforcement 
authorities; and (d) the conduct of appropriate corrective actions, 
including repayment of any overpayments due to the fraud or abuse and 
disciplinary actions against responsible employees.
    The guidelines discussed above will help ensure that the Medicare 
Trust Fund is protected against fraud, waste, and abuse in the Part D 
program. These guidelines should not be misconstrued to mean that Part 
D plans should undertake law enforcement activities. Rather, Part D 
plan sponsors should implement effective fraud and abuse programs, 
consistent with industry standards, to detect problems, make referrals 
to CMS or the appropriate program integrity contractor for further 
investigation and follow-up, and undertake corrective action. These 
provisions are crucial to the success of the Medicare Part D program 
and to the millions of beneficiaries who rely on these benefits.
    As noted in the proposed rule, we proposed changing the compliance 
program requirements for MA organizations at Sec.  422.503(b)(4)(vi)(G) 
to include provisions that would require a MA organization to report 
misconduct it believes may violate various criminal, civil, or 
administrative authorities. We also proposed basing the compliance 
program requirements for Part D plan sponsors on these proposed new MA 
requirements. Numerous comments, both for and against, were received 
regarding these mandatory self-reporting of misconduct requirements. 
The very large majority of the comments, however, objected that the 
rule as written was vague and overbroad, with no basis in statute. 
Other comments mentioned that imposing a self-reporting requirement on 
only specific health providers contracting with Medicare was patently 
unfair, and other comments directed us to eliminate the proposal, 
stating that current compliance requirements were sufficient.
    In response to these comments, we have eliminated the mandatory 
self-reporting requirements that were proposed, but we expect all Part 
D plan sponsors to comply with the requirement for a comprehensive 
fraud and abuse plan as found under Sec.  423.504(b)(4)(vi)(H). We 
continue to believe that self-reporting of fraud and abuse is a 
critical element to an effective compliance plan, and that 
organizations contracting with CMS will find it in their best interests 
to alert CMS, the OIG, or law enforcement to any potential financial 
fraud or misconduct. Part D plan sponsors must continue to have a 
compliance plan as found under Sec.  423.504(b)(4)(vi).
    The potential for fraud, waste, and abuse exists not only in Part D 
plan sponsors offering prescription drug coverage, but also in the 
PBMs, pharmacies, physicians, and other providers with whom Part D 
sponsors do business. Therefore, we recommend that, as part of their 
ongoing screening for abusive or fraudulent activity, one of the many 
fraud and abuse activities that Part D sponsors should screen for is 
the illegal prescribing of narcotics by physicians.
    We recognize that there are many possible approaches to 
implementing a successful waste, fraud, and abuse program, and we have 
given Part D plans sponsors discretion in developing this program as 
part of their overall compliance plan. In developing its fraud and 
abuse program, we recommend that Part D plan sponsors consider the 
previously outlined set of elements as well as other industry best 
practice (for example, compliance guidelines published by the Office of 
the Inspector General).
    Comment: Commenters cautioned CMS against imposing additional 
administrative requirements (for example, periodic reports summarizing 
data analysis activities or reports on illegal prescribing practices) 
unless it has been proven effective in reducing fraud and abuse.
    Response: Based on the comments received, respondents felt that 
these additional reports would be too burdensome to submit. We will not 
be imposing these additional reporting requirements at this time. 
However, while we expect that Part D plan sponsors will have policies 
and procedures in place to effectively screen for wasteful, fraudulent, 
and abusive activity, they should also be expected to produce evidence 
(for example, a summary of data analysis activities, tools used, 
resources employed, or trend analyses performed) of this activity upon 
CMS request.
    Comment: Commenters expressed concern that we were expecting plans 
to be law enforcement-like entities who would take decisive action if 
fraud was identified. Commenters did not believe that plans or their 
contracted entities were in a position to take enforcement action 
regarding physician or patient abuse, and that they did not have the 
medical information necessary to track physician or patient abuse. 
Commenters did not believe that plans or PBMs should be tasked with 
taking, or judged for failing to take, enforcement actions against 
providers or patients.
    Response: We recognize that Part D plan sponsors are not law 
enforcement entities and will not expect these entities to pursue 
fraudulent activity in the same manner that law enforcement would. 
However, just as other contractors who administer Medicare benefits are 
responsible for monitoring for wasteful, abusive, and fraudulent 
activities in their organizations, we have the same expectations for 
Part D plan sponsors. We therefore recommend that Part D plan sponsors 
offering prescription drug plans detect and prevent potentially 
fraudulent or abusive activity. For assistance in identifying what 
constitutes abusive or fraudulent activity, Part D plan sponsors may 
consult a variety of sources including relevant statutes, regulations, 
and case law, as well as media reports, DOJ litigation history, HHS-OIG 
published guidance and CMS policy manuals. Once identified, we 
encourage referrals be made to CMS or appropriate CMS contractors. CMS 
and its contractors will investigate all cases referred as potentially 
fraudulent and then refer them to the appropriate law enforcement 
agency as warranted. Likewise, we encourage Part D sponsors offering 
prescription drug plans to fully cooperate in any investigation that we 
or our law enforcement partners pursue related to fraud identified in a 
particular plan's area.
    Comment: We give no assurance that the proposed rule provides those 
giving

[[Page 4340]]

price concessions protection from liability under fraud and abuse laws. 
CMS should strongly endorse the offering of price concessions as 
entirely consistent with the anti-kickback statute for all 
manufacturers or providers who: (1) identify the price concessions as 
such in the applicable contract; (2) do not interfere with the 
reporting obligations of Part D plans; and (3) contractually obligate 
the plan at issue to accurately report all price concessions provided.
    Response: The anti-kickback statute is enforced by the OIG and the 
Department of Justice. Therefore we cannot respond directly to this 
comment. Interested entities may wish to submit a request to the OIG 
for an advisory opinion on these kinds of questions.
    Comment: We should make clear in the final rule that Part D plan 
sponsors that engage in illegal practices may be subject to sanction 
under the False Claims Act and certify on an annual basis that sponsors 
will meet all of the requirements imposed.
    Response: Part D plan sponsors should devise their compliance 
programs so that their policies and procedures are consistent with the 
False Claims Act. With regard to the issue of annual certification, we 
are not requiring Part D plan sponsors at this time to certify that 
they are in compliance with their fraud and abuse programs.
    Comment: In responding to the proposed rule, commenters questioned 
whether we would develop uniform standards for all Part D plan sponsors 
or if each Part D plan sponsor would develop its own criteria. 
Additionally, commenters wanted to know whether these compliance 
programs would be compared against one another.
    Response: Understanding that there are many approaches to a 
successful fraud, waste, and abuse program, we have developed a set of 
suggested elements for Part D plan sponsors to consider as they develop 
a plan for identifying and reporting fraud and abuse activity within 
the overall compliance plan. We will not compare fraud and abuse plans 
to each other, but expect Part D plan sponsors to follow through with 
the monitoring and compliance initiatives that are identified in their 
own fraud and abuse control plans.
    In addition to plan efforts to control waste, fraud and abuse, we 
will work to develop program level performance measures using our 
oversight data related to costs, benefit structure, and other factors 
to make comparisons with the non-Medicare prescription drug benefit 
market and with Medicare prescription drug baseline data. We will 
review these comparisons as part of our normal, continual review of the 
Part D program. When divergent trends between the Medicare and non-
Medicare markets are identified, we will take appropriate action, as 
necessary. In this way, we can work to ensure that the Medicare 
continues to reflect private sector best practices in the efficient 
delivery of drug benefits and that we can remove unnecessary barriers 
to efficient care delivery.''
    Comment: Commenters expressed concern that the proposed rule 
identified illicit prescribing of narcotics by physicians as a primary 
responsibility for Part D plan sponsors.
    Response: Illegal narcotic prescribing is one of many ongoing 
vulnerabilities we recommend that Part D sponsors should screen for in 
implementing a successful fraud and abuse program. As noted in the 
suggested guidance on developing a fraud and abuse plan, we recommend 
Part D plan sponsors have in place procedures to detect and prevent 
abusive or fraudulent activity in their organization.
    Comment: Several respondents were concerned with the illegal 
switching of medications and drug substitution for financial gain. For 
instance, switching from brand to generic may be appropriate, but 
switching brands, for example, Lipitor to Zocor, may not be appropriate 
without consultation with the prescribing physician.
    Response: We agree that the potential for fraud and abuse 
surrounding drug substitutions programs is of grave concern. We have no 
intention of restricting or targeting providers who are acting in the 
genuine best interests of the patient, but rather are concerned that 
such switching practices could be abused for financial gain. Therefore, 
we recommend that Part D plan sponsors monitor for aberrant or abusive 
behavior related to drug switching both within its own organization 
(through its fraud and abuse component of its compliance program) and 
with its pharmacy network (through proactive data analysis and trending 
capability).
    Comment: Several commenters asked CMS how they should forecast 
fraud and abuse detection and prevention into their solicitation 
proposal to be a Part D plan sponsor.
    Response: Part D plan sponsors should bid these costs in the same 
way they cost-out their current compliance and utilization control 
activity, as fraud and abuse is inherently a utilization control.
    Comment: Some commenters asked that safe harbors be developed for 
Part D plans under the Anti-kickback and physician self-referral laws.
    Response: The anti-kickback statute is enforced by the OIG and the 
Department of Justice. Therefore, we cannot respond with specific 
guidance to comments asking for exceptions to the anti-kickback laws. 
While the physician self-referral rules are under CMS jurisdiction, 
this final rule does not create any exceptions to these rules at this 
time, as nothing on this topic was proposed. However, law concerning 
physician self-referral is generally not implicated in many 
arrangements involving PDPs and MA organizations, unless the 
arrangement involves a referring physician.
    Comment: Some commenters were concerned about unfair extrapolation 
policies in the Part D plan auditing process of pharmacies. It was 
recommended that the same standard required for Part D auditors be 
required of CMS; that is, ``a statistically valid random sample.''
    Response: We recommend that Part D plan sponsors utilize ``a 
statistically valid random sample'' when auditing pharmacies; however, 
Part D plan sponsors and pharmacies should agree on auditing procedures 
in their network contracts.
    Comment: Several commenters expressed concern about unfair ``bounty 
hunting'' practices in the Part D plan auditing process of pharmacies. 
It is recommended that Part D plan sponsors be prohibited from paying 
auditors based on the denial of reimbursement claims. Instead, they 
should be paid based on an objective analysis of reimbursement claims.
    Response: We do not expect Part D plan sponsors to pay auditors 
based on the number of reimbursement claims that auditors deny; rather, 
Part D auditing processes should be based on an objective analysis of 
reimbursement claims. Specific instructions regarding Part D auditing 
practices will be outlined in subsequent policy guidance.
    Comment: One commenter recommended that the Agency utilize the 
regular auditing of plans and pharmacy benefit managers (PBMs) to help 
control fraud, waste, and abuse.
    Response: As a part of our mandated oversight responsibilities, we 
will regularly audit all drug sponsors involved in the Part D program 
as stated under Sec.  423.504(d).
    Comment: Commenters wanted to ensure that providers and pharmacies 
who were on State sanction lists could not participate in Part D.
    Response: Part D entities such as providers, pharmacies, PBMs, and 
plans may be excluded from participating in

[[Page 4341]]

Part D under certain circumstances. The Office of the Inspector General 
maintains the authority to exclude individuals and entities from 
participating in Federal health care programs, including Medicare. 
Therefore, we cannot respond with specific guidance to comments asking 
under what circumstances providers might be excluded from participating 
in Part D.
    Comment: The provider community indicated that they wanted to 
review proposed fraud and abuse plan to ensure the consistent use of 
fraud and abuse tools to mitigate illegal actions.
    Response: Compliance plans are the property of the Part D plan 
sponsors and for their internal use; consequently, we do not expect 
plans to publish these documents for public access. Compliance plans 
will only be available to government and oversight entities upon 
request. However, CMS manuals that outline program integrity 
expectations are available for public access. As for the consistent 
application of fraud and abuse processes and procedures, we have 
suggested in the final rule a set of elements for a fraud and abuse 
control plan for Part D sponsors to consider in developing the fraud, 
waste and abuse component of their overall compliance plans. Any 
requirements in addition to this set of elements are encouraged by CMS 
and are at the discretion of the Part D plan sponsors.

L. Effect of Change of Ownership or Leasing of Facilities During the 
Term of Contract

    Subpart L of part 423 describes the impact that a change of 
ownership (CHOW) or the lease of facilities during the term of a PDP 
sponsor's contract would have on the status of the organization's 
contractual relationship with us, as well as the procedures the 
Prescription Drug Plan sponsor is required to follow when a CHOW 
occurs. The provisions of this subpart apply to PDP sponsor 
organizations and are almost identical to the provisions that apply to 
MA organizations at subpart L of part 422. We proposed making the 
requirements essentially the same since we believe a single set of CHOW 
requirements for both MA organizations and PDP sponsors will simplify 
management, assure consistency, and reduce administrative burden. The 
requirements in Sec.  423.551, Sec.  423.552, and Sec.  423.553 of this 
rule, which apply to PDP sponsors, are, therefore, substantially the 
same as the requirements found in Sec.  422.550, Sec.  422.552, and 
Sec.  422.553, which apply to MA organizations. We received no comment 
on this proposal and will adopt these provisions without modification 
(with the exception of a slight change in wording which we will 
describe below).
    We also sought comments regarding the potential modification of the 
CHOW rules. In particular, we sought comments regarding--
     The situations which constitute a CHOW;
     How these provisions should be applied to large companies 
with multiple business units;
     The notification requirements related to a CHOW and the 
novation agreement provisions; and
     The provision related to the leasing of a PDP sponsor's 
facilities.
    We received only favorable comments on our proposal to consider 
that, under Sec.  423.551(a)(2), an asset sale only occurs when there 
is a transfer of substantially all the assets of the sponsor to another 
party. We requested comments on situations where a sponsor transfers 
substantial assets to another party, but less than substantially all of 
its assets. We received a few comments describing different scenarios 
that commenters believe should not constitute a CHOW. The intent of the 
proposals under subpart L was to fashion requirements that would not 
unfairly burden an organization when something less than substantially 
all of an organization's assets were sold or transferred. When 
reviewing the comments, however, it became apparent that for some 
organizations selling or transferring their entire PDP line of business 
could constitute something less than substantially all of their assets. 
We note that we interpret the sale or transfer of an entire PDP line of 
business as an asset transfer. We recognize that we cannot define all 
possible existing business arrangements and transactions, we are, 
therefore, issuing these rules as a framework and will provide guidance 
as needed via interpretive documents (for example, FAQs,) and on a case 
by case basis. Contracting organizations should be aware that we will 
be alert to situations where organizations may be looking to avoid 
compliance with the CHOW provisions to evade Medicare liabilities and 
obligations.
    In this final rule, we note that contracted PDP sponsors must 
adhere to the Privacy Rule on sharing protected patient health 
information in the course of a CHOW and the preparation of a novation 
agreement. PDP sponsors are not permitted to share protected health 
information, absent authorization from an enrollee, with a new owner 
that is not, or will not, become a covered entity.
    We also proposed a definition of a novation agreement. A novation 
agreement is an agreement among the current PDP sponsor, the 
prospective new owner, and CMS. This agreement would have to be signed 
by all three parties and, to be effective, contain the provisions at 
Sec.  423.552. In the agreement, we will recognize the new owner as the 
successor in interest to the current owner's Medicare contract. This 
definition has been adopted without modification.
1. General Provisions
    We are adopting the provisions we proposed for this Subpart with 
one slight modification to Sec.  423.551(a)(2). This paragraph is now 
entitled, Asset transfer rather than Asset sale.
2. Change of Ownership (Sec.  423.551)
    We asked for comments on the various arrangements between and 
within companies that may, or may not, constitute a CHOW.
    Comment: Commenters requested that we clarify that a CHOW does not 
occur when a change in the structure of an entity's business units 
occurs, but the same entity continues to be the PDP sponsor.
    Response: The commenter did not provide, or otherwise define, what 
was meant by ``change of structure.'' Assuming the entity here is a 
unit of a multi-unit business with the PDP sponsor contract, and that 
the change of structure is within the company, and the same entity 
continues to hold, and be responsible for, the PDP sponsor contract, we 
would agree that a CHOW would not appear to occur in this instance. 
However, as mentioned above, we will be alert for any attempts by any 
Medicare contracted organizations to evade their responsibility to the 
Medicare program and its enrollees by avoiding compliance with the CHOW 
requirements.
    Comment: We sought comments regarding how the CHOW provisions and 
provisions regarding the lease of a PDP sponsor's facilities should be 
applied to large companies with multiple business units. We received a 
number of similar comments regarding this issue. Commenters questioned 
whether the transfer of functions within a multi-State operation that 
centralizes functions within one entity would constitute a CHOW. One 
commenter recommends that the final regulation clarify that the 
transfer of functions within a multi-State company to an entity in 
another State does not constitute a CHOW.
    Response: We believe that the transferring of functions within a

[[Page 4342]]

company consisting of multiple business units is a common practice and 
will in most cases be free of CHOW obligations, regardless of whether 
or not the transfer of functions was from one State to another, and was 
done in compliance with all applicable State licensure laws. What is 
pertinent in this instance is whether the transfer of functions does 
not represent substantially all assets of the organization and is truly 
an intra-company transfer--that is, that the same party, or parties, 
continues to be responsible for the PDP contract. As discussed in a 
previous response we will be scrupulous in ensuring that organizations 
contracting with the Medicare program do not evade their Medicare 
contract obligations. Any transfer of functions, or assets cannot 
result in a change of the entity responsible for the PDP contract 
without complying with all the CHOW provisions at Sec.  423.551, Sec.  
423.552, and Sec.  423.553.
    Comment: A commenter requested that, given the impact a CHOW might 
have on SPAPs and State retirees, the final regulation provide for 
States to be notified of any CHOW.
    Response: We will adopt the commenter's suggestion to notify States 
in the event of a CHOW. We will likely handle this internally and 
notify the appropriate State agencies.
3. Novation Agreement Requirements Sec.  423.552
    In the proposed rule, we identified the three conditions that would 
have to be met for approval of a novation agreement. A novation 
agreement is an agreement among the current PDP sponsor, the 
prospective owner and CMS. All three parties must sign the novation 
agreement for it to be in effect. Consistent with the requirements that 
apply to the MA program, at Sec.  423.552(a) we proposed that three 
conditions would need to be met in order to obtain our approval of a 
novation agreement. First, the PDP sponsor would be required to give us 
notice at least 60 days before the effective date of a CHOW. That 
notice would 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 the CHOW, as described in Sec.  
423.551(c)(2). Second, the PDP sponsor would be required to submit 
three signed copies of the novation agreement (that contains the 
provisions specified in Sec.  423.552(b)) at least 30 days before the 
proposed CHOW date, and submit one copy of other required documents. 
Third, the PDP sponsor would have to obtain our determination that--
     The new owner is in fact a successor in interest to the 
contract;
     Recognition of the new owner as a successor in interest is 
in the best interest of the Medicare program; and
     The successor organization meets the requirements to 
qualify as a PDP sponsor under proposed subpart K.
    At Sec.  423.552(b) we proposed that a valid novation agreement 
would include the following provisions:
     The new owner would assume all obligations under the 
Medicare contract.
     The previous owner would waive its right to reimbursement 
for covered services furnished during the rest of the current contract 
period.
     The previous owner would guarantee performance of the 
contract by the new owner during the contract period, or post a 
performance bond that is satisfactory to us;
     The previous owner would 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 proposed that the new owner would become the successor in 
interest to the current owner's Medicare contract if the novation 
agreement meets all the requirements of Sec.  423.552 and is signed by 
us (and the parties to that agreement).
    Comment: One commenter requested that we require that enrollees of 
the PDP undergoing a CHOW receive detailed notification about any 
change, including any impact the CHOW may have on the ability of the 
new PDP sponsor to provide for enrollees' healthcare. This commenter 
also notes that we do not seem to provide for a special enrollment 
period to ensure continuity of care for beneficiaries in the event a 
novation agreement is not reached between the prior owner of the 
Medicare contact and the new owners, and the commenter requests that a 
special enrollment period be provided to ensure continuity of care.
    Response: If a CHOW takes place that we believe would not be in the 
best interest of the beneficiaries then we will not enter into a 
novation agreement with the parties. Under Sec.  423.551(3)(e), if a 
novation agreement is not reached, the existing contract will become 
invalid. However, before this occurs, we will send out notification of 
the pending CHOW, and will make every effort to ensure that 
beneficiaries are made aware of the alternate PDPs in the same service 
area. In the event that a novation agreement is not executed, an 
enrollee will be allowed to enroll during a Special Enrollment period, 
as provided for at Sec.  423.36(c).
    Comment: A commenter noted that it does not believe the proposed 
requirements are administratively burdensome. However, the commenter 
points to the advance notice requirement under Sec.  423.551(c), which 
requires a PDP sponsor that is considering a CHOW to provide updated 
financial information and a discussion of the financial and solvency 
impact of the CHOW on the surviving organization. With respect to that 
requirement, the commenter suggests that administrative burden could be 
further reduced if the information required be equivalent to the 
documentation routinely submitted to State departments of insurance or 
similar entities.
    Response: We appreciate the commenter's suggestion, but, in order 
to maintain uniformity, we will retain the advance notice requirement 
as proposed. Given that different States require different financial 
solvency information we believe that the advance notice requirement 
will best serve both our interests and the interests of our 
beneficiaries without being unduly burdensome for the PDP sponsors.

M. Grievances, Coverage Determinations, and Appeals

1. Introduction
    Subpart M of part 423 implements sections 1860D-4(f), 1860D-4(g), 
and 1860D-4(h) of the Act, which sets forth the procedures PDP sponsors 
and MA-PDs must follow with regard to grievances, coverage 
determinations, and appeals. The MMA amended the Act to provide the 
following:
     A PDP sponsor or MA-PD must provide meaningful procedures 
for hearing and resolving grievances between the PDP sponsor or MA-PD 
(including any entity or individual through which the PDP sponsor or 
MA-PD provides covered benefits) and enrollees.
     A PDP sponsor's or MA-PD's procedures must meet the same 
requirements as those that apply to MA organizations for organization 
determinations and redeterminations.
     If a PDP sponsor or MA-PD has tiered cost sharing for 
formulary drugs, it must establish an exceptions process.
     PDP sponsors or MA-PDs must follow appeals requirements 
that are similar to those applicable to MA organizations regarding 
independent

[[Page 4343]]

review entity (IRE) review Administrative Law Judge (ALJ) hearings, 
Medicare Appeals Council (MAC) review, and judicial review, 
respectively.
     Appeals involving coverage of a covered part D drug that 
is not on a PDP's or MA-PD'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, will not be 
as effective for the individual as the non-formulary drug, would have 
adverse effects on the individual, or both.
    We received 192 comments on subpart M in response to the August 
2004 proposed rule. Below we summarize the major proposed provisions in 
this subpart and respond to public comments. (For a detailed discussion 
of our proposals, please refer to our proposed rule (69 FR 46,632).) 
Please note that, for the convenience of the reader, we use the term 
``plan'' to connote a PDP sponsor, MA-PD, or other Part D plan sponsor 
throughout the discussion in this subpart.
    Comment: We received several comments that we need to clarify 
whether all of the subpart M provisions apply to PDPs, Medicare 
Advantage plans that offer prescription drug benefits (MA-PDs), and 
Section 1876 of the Act cost plans that offer qualifying Part D 
coverage. Two commenters argued that we should determine which 
provisions in subpart M of Part 423 apply to MA organizations and cost 
plans and incorporate those provisions in Part 422 and Part 417 by 
cross-reference. Alternatively, the commenters suggested that we add 
language to the corresponding sections in Parts 422 and 417.
    Response: We agree with the commenters, and wish to clarify that 
the Part D appeal provisions do apply to PDPs (including fallback 
plans), Medicare Advantage plans that offer prescription drug benefits 
(MA-PDs), and Section 1876 of the Act, cost HMOs that offer qualifying 
Part D coverage. Therefore, this final rule replaces all ``PDP 
sponsor'' references in subpart M with ``Part D plan sponsor,'' which 
is defined in Sec.  423.4 as PDP sponsors (including fallback 
entities), MA organizations offering MA-PD plans, PACE plans offering 
qualified prescription drug coverage, and cost-based HMOs and CMPs.
    We recognize that MA-PDs and cost-based HMOs and CMPs will be 
required to follow two different processes depending on whether a claim 
involves a request for benefits under Part 422 or Part 423. (Note that 
cost-based HMOs and CMPs will be required to follow Part 422 procedures 
no later than January 1, 2006). However, we do not believe that it is 
unduly burdensome for MA-PDs and cost-based HMOs and CMPs to follow two 
sets of rules instead of one. To the contrary, we believe that if we 
adopted the commenters' suggestions, the Part 422 provisions would be 
difficult to follow.
2. General Provisions (Sec.  423.560 through Sec.  423.562)
    We proposed, at Sec.  423.560, several definitions for terms used 
in the subpart. These definitions were generally self-explanatory and 
mirror those used in subpart M of part 422 for MA, but were modified to 
reflect applicability to Part D drug benefits.
    Proposed Sec.  423.562, General Provisions, provided an overview of 
the responsibilities of plans and the rights of enrollees for 
grievances, coverage determinations, and appeals. In general, plans are 
responsible for establishing and maintaining procedures for grievances, 
coverage determinations, exceptions to tiered cost-sharing formulary 
structures, requests for formulary exceptions, and appeals. Enrollees 
must receive written information about the grievance and appeal 
procedures available to them through the plan, and about the QIO 
complaint process available to enrollees. If the plan delegates this 
task, it is still ultimately its responsibility to ensure that the 
requirements are met.
    Section 423.562(b) of our proposed rule explained the basic rights 
of enrollees in relation to plans under subpart M and referenced the 
regulations that explain the rights.
    Proposed Sec.  423.562(c) specified that an enrollee has no appeal 
right when there is no payment liability, or when benefits have been 
provided by a non-network provider, except in those situations in 
which, under subpart C, the plan is obligated to cover such drugs. 
Finally, Sec.  423.562(d) explained that, unless otherwise noted, the 
general Medicare appeals rule under part 422, subpart M, is applicable 
for appeals to an ALJ or the MAC. We note that since new Sec.  
423.562(c) will incorporate part 422, and since part 422 incorporates 
part 405, the provisions of part 405 apply to the extent that they are 
appropriate. This means, for example, that the provisions to implement 
the time and place for a hearing before an ALJ under section 1869 of 
the Act would apply to Part D appeals. Thus, we have added a reference 
to Sec.  423.612(b) that the time and place for a hearing before an ALJ 
will be set in accordance with section 405.1020. Although that section 
has not yet been published in final form, we expect that it will be 
published prior to the effective date of this rule. Readers may refer 
to 67 FR 69311, 69331 (Nov. 15, 2002) for an explanation of the 
proposals and a discussion of the possibility of using video-
teleconferencing in ALJ hearings. On the other hand, the ALJ and MAC 
provisions that are dependent upon qualified independent contractors 
would not apply since an independent review entity will conduct 
reconsiderations for Part D appeals.
    Comment: We received a comment suggesting that we modify the 
definition of appeal in Sec.  423.560 from ``when a delay would 
adversely affect the health of the enrollee'' to ``when a delay could 
adversely affect the health of the enrollee.'' The same commenter 
suggested that we must define ``delay'' in order for it to have 
functional meaning.
    Response: We disagree with the commenter. The ``would adversely 
affect the health of the enrollee'' standard we proposed in the 
proposed rule is consistent with the language governing MA procedures, 
which were incorporated in the Part D regulations. In addition, we do 
not think the term ``delay'' needs to be defined in the regulations. 
The term ``delay'' simply refers to the plan not providing benefits 
within the applicable adjudication timeframe.
    Comment: We received several comments requesting that we not 
prohibit an enrollee's appeal rights when the enrollee has no further 
financial liability for a Part D benefit. The commenters' underlying 
concern is, by prohibiting enrollees who have no financial liability 
for a medication from filing a request for appeal, we are also 
prohibiting State Pharmaceutical Assistance Programs (SPAPs) or other 
secondary payors from acting on behalf of enrollees in the appeals 
process.
    Response: Under our proposal, an enrollee's appointed or authorized 
representative (which could include SPAPs or secondary payors) are able 
to act on behalf of enrollees in the appeals process. However, in the 
proposed rule we took the position that if an enrollee has no further 
financial liability for a medication because the secondary payor (that 
is also the enrollee's appointed or authorized representative) covered 
the enrollee's additional cost-sharing amount, neither the enrollee nor 
the secondary payor would be able to request an appeal. We did not 
intend to preclude SPAPs or other secondary payors from filing appeals 
with Part D plans on behalf of enrollees. Therefore, we agree with the 
commenters and have

[[Page 4344]]

deleted the proposed provision that would prohibit an enrollee's appeal 
rights when he or she has no further liability to pay for prescription 
drugs furnished through a Part D plan.
    Comment: We received one comment requesting that the definition of 
enrollee be revised to include people who are automatically enrolled in 
a PDP or MA-PD.
    Response: We agree with the commenter and have revised the 
definition of enrollee in this final rule to mean a Part D eligible 
individual who has elected or has been enrolled in a Part D plan.
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 plan's 
operations, activities, or behavior, regardless of whether remedial 
action is requested. Our proposed regulations (at Sec.  423.564) 
required that each plan have procedures to ensure that grievances are 
heard and resolved in a timely manner, but the regulations did not 
include prescriptive details on the procedures. The only exception to 
this approach was proposed under Sec.  423.564(d) and involved certain 
limited situations where a plan must respond to a grievance within 24 
hours.
    Section 423.564(c) explained the distinction between the grievance 
procedures of the plan and the quality improvement organization (QIO) 
complaint process. This section further established that when an 
enrollee submits a quality of care complaint to a QIO, the plan must 
cooperate with the QIO in resolving the complaint.
    Proposed Sec.  423.564(e) completed the grievance procedures by 
proposing minimum record keeping requirements for a plan, which 
included recording the receipt date of a grievance, its final 
disposition, and the date the enrollee is notified of the disposition.
    Comment: We received one comment suggesting that the QIO be 
utilized to respond to expedited external appeals related to drug 
benefits, and all complaints regarding quality of care should be 
forwarded to the QIO.
    Response: We thank the commenter for the suggestion, and will take 
it into consideration when determining the entity that will perform the 
IRE workload. In addition, we believe that a complaint involving a 
quality of care issue must be processed by the QIOs since they are 
statutorily required to perform such reviews under section 1154(a)(14) 
of the Act. Although QIOs are required to review complaints involving 
quality of care issues, by statute, plans must establish an internal 
grievance procedure to resolve these types of issues as well. An 
enrollee may choose to file a quality of care complaint with either the 
plan, QIO, or both. Therefore, quality of care complaints will not be 
automatically forwarded to QIOs. In addition, even if the quality of 
care complaints were voluntarily forwarded by a plan, QIOs do not have 
a statutory responsibility to review such complaints. QIOs are 
responsible for reviewing quality of care complaints only when the 
complaint has been filed directly with the QIO, in writing, and by an 
individual (or his or her representative) who is entitled to Medicare 
benefits.
    Comment: We received several comments indicating that the grievance 
procedures should be modeled after MA and include better record-keeping 
requirements for grievances. Other commenters suggested that we allow 
enrollees to appeal grievances directly to the IRE. Commenters also 
requested that we clarify what types of issues can be adjudicated in 
the grievance process, and what types of issues are subject to the 
appeals process. Another commenter recommended allowing enrollees to 
choose whether they want their complaint to be filed as an appeal or a 
grievance.
    Response: We agree with the commenters who suggested that the Part 
D grievance procedures be modeled after the MA grievance procedures. 
Therefore, as proposed, the same grievance requirements (including who 
may request a grievance, the filing procedures and record-keeping 
procedures) that are applicable under MA are applicable under Part D. 
In the MA final rule, we are adopting revised grievance provisions 
similar to those from a January 24, 2001 Medicare+Choice proposed rule. 
See 66 FR 7,593. This is in response to comments we received on the 
August 3, 2004 proposed rule to establish the MA program. See 69 FR 
46,866, 46,913. There, in response to statutory changes in the MA 
Federal rules governing preemption of State requirements, commenters 
recommended that we adopt the January 2001 proposed grievance 
provisions in an effort to establish uniform Federal procedures under 
MA. Once these regulations are in effect, MA organizations will be 
required to notify enrollees of their decisions as expeditiously as the 
case requires, but no later than 30 calendar days after receiving a 
complaint. An extension by up to 14 calendar days may be permitted if 
the enrollee requests the extension, or if the organization justifies a 
need for additional information and the delay is in the best interest 
of the enrollee. Also, grievances that are made orally may be responded 
to orally or in writing, unless the enrollee specifically requests a 
written response. Quality of care issues and written complaints must be 
responded to in writing. An enrollee must file a grievance no later 
than 60 days after the event or incident that precipitates the 
grievance. Because the MMA dictates that the grievance provisions of 
the MA program also apply to the Part D program, the final MA 
requirements have been included under Sec.  423.564, and thus will 
apply to PDP sponsors and MA-PDs as well.
    In the proposed rule, we specified the differences between 
grievances, coverage determinations, and appeals in proposed Sec.  
423.564, paragraphs (b) and (c). Nothing in the proposed rule prohibits 
an enrollee from requesting that his or her complaint be adjudicated 
under the process applicable for appeals or grievances. However, plans 
are required to maintain different processes for each and must 
determine which process applies when a request is received. As stated 
in the proposed rule, any complaint that does not involve a coverage 
determination or quality of care issue may be filed under the grievance 
process. However, if the complaint involves a coverage determination 
issue, plans must process it under its appeals procedures. If the 
complaint involves a quality of care issue, an enrollee may request the 
quality improvement organization or the plan to review the complaint 
using its procedures. When a plan makes a decision on a grievance, its 
resolution is final and is not subject to an appeal. We have retained 
these proposals in the final rule.
4. Coverage Determinations (Sec.  423.566 through Sec.  423.576)
    Proposed Sec.  423.566 through Sec.  423.576 implemented the MMA 
requirement that plans 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 continued standard and expedited requirements for 
coverage determinations and redeterminations.
    Section 423.566(a) of our proposed rule specified that each plan 
must have a procedure for making timely coverage determinations 
regarding the drug benefits an enrollee is entitled to receive

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and the amount, if any, that an enrollee is required to pay for a 
benefit. The plan would be 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 constitute coverage 
determinations include: a plan's decision not to provide or pay for a 
Part D drug (including a decision not to pay because the drug is not on 
the plan's formulary, the drug is determined not to be medically 
necessary, the drug is furnished by an out-of-network pharmacy, or 
because the plan 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. As 
proposed at Sec.  423.566(c), only the enrollee (including his or her 
authorized representative) and the prescribing physician on behalf of 
the enrollee could request a standard coverage determination.
    Similarly, those individuals who could request an expedited 
determination or an expedited redetermination were an enrollee 
(including his or her authorized representative), or the prescribing 
physician on behalf of the enrollee. In these situations we proposed 
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 welcomed 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 were proposed in Sec.  423.568. These requirements, 
which are consistent with MA requirements and were incorporated in Part 
D, included making 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 was for prescription drug 
benefits. An extension of the timeframe by up to 14 calendar days would 
be allowed if the enrollee requests the extension, or if the plan can 
justify how a delay is in the interest of the enrollee. 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 
plan's decision to invoke an extension.
    As specified at proposed Sec.  423.568(b), which is consistent with 
MA requirements and was incorporated in Part D, if the request is for 
payment, the determination would need to be made no later than 30 
calendar days after receipt of the request. This section also 
established, at proposed Sec.  423.568(c), the requirement for written 
notice for plan denials and the form and content of the denial notices, 
including that the notices must explain the reason for the denial and 
the availability of appeal rights.
    Section 423.570 and Sec.  423.572 proposed the requirements 
regarding expedited coverage determinations, including how an enrollee 
or an enrollee's prescribing physician could make an oral or written 
request (Sec.  423.570(b)), and how the plan must process requests 
(Sec.  423.570(c)). We clarified in Sec.  423.570(a) that requests for 
payment of prescription drugs already furnished for an enrollee could 
not be expedited.
    Section 423.570(b)(2) specified that a prescribing physician may 
provide written or oral support for a request for expedition, and under 
Sec.  423.570(c)(3)(ii), we clarified that when requests for expedition 
were made or supported by an enrollee's prescribing physician, the plan 
would grant the request if the physician indicated that applying the 
standard timeframe could seriously jeopardize the enrollee's life, 
health, or the ability to regain maximum function. Section 423.570(d) 
proposed actions following a denial of a request and explained that 
when a plan denies a request for an expedited determination, the 
request would be automatically transferred and processed under the 
standard determination procedures.
    Proposed Sec.  423.572 outlined the timeframe and notice 
requirements for expedited determinations. Specifically, this section 
proposed the following:
     The plan must make its expedited determination and notify 
the enrollee and the prescribing physician of its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than 72 hours after receiving the request.
     The enrollee has the right to file an expedited grievance 
if he or she disagreed with the plan's decision to invoke an extension.
     If the plan first notified an enrollee of an adverse 
expedited determination orally, then it must mail written confirmation 
to the enrollee within 3 calendar days.
     Notice of expedited determination must contain specific 
information outlined by us.
     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 proposed requiring that drug coverage determinations be made 
as expeditiously as the enrollee's health condition requires. Note that 
given the requirement that the timing of determinations (and 
redeterminations) be based on an enrollee's health condition, the plan 
would have a responsibility to ensure that an enrollee's health 
situation and needs are fully considered in reviewing any request (for 
example, if an enrollee has a chronic condition that has necessitated 
ongoing use of the drug in question).
    Comment: Several commenters were unclear about the differences 
between the processes for coverage determinations, exceptions for non-
formulary and non-preferred drugs, and appeals. Some commenters 
believed that the procedures were too complex for enrollees to 
navigate.
    Response: We believe that it is important to clarify the process 
for coverage determinations, including exceptions, and appeals to 
ensure that enrollees, prescribing physicians, and plans understand the 
procedures that apply to disputes involving drug benefits. Section 
1860D-4(g) of the Act addresses the procedures for coverage 
determinations and redeterminations of plans. In general, the MMA 
requires that a plan'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 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 plan 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 non-preferred 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 plan's 
coverage

[[Page 4346]]

determinations and redeterminations. Here, the MMA requires that the 
plans follow appeal requirements that are similar to those applicable 
to MA organizations under paragraphs (4) and (5) of section 1852(g) of 
the Act (regarding IRE review and ALJ hearings, respectively). 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 plan'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 non-formulary drug, would have adverse effects on the 
individual, or both.
    In light of the MMA requirements mentioned above, our final 
regulations at Sec.  423.566 through Sec.  423.630 establish a process 
for addressing coverage determinations and appeals that largely mirror 
the procedures under the MA program. The primary structural difference 
between the Part D requirements and the MA rules involves the unique 
feature whereby enrollees may request exceptions to a plan's formulary 
and tiered cost-sharing structure. (Note that requests for non-
formulary drugs are of course part of the MA program today, but they 
are not addressed separately in either the statute of regulations.) We 
treat these exception requests as requests for coverage determinations. 
Put another way, requests for tiering and formulary exceptions are 
forms of coverage determinations. We have made several technical 
changes to the proposed regulations to help clarify this point.
    Section 423.566(b) of this final rule specifies the actions that we 
consider coverage determinations. They include a plan's decision not to 
provide or pay for a Part D drug (including a decision not 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 plan determines that the 
drug is otherwise excluded under section 1862(a) of the Act) that the 
enrollee believes may be furnished by the plan; failure to provide a 
coverage determination in a timely manner when a delay would adversely 
affect the health of the enrollee; a decision on the amount of cost 
sharing for a drug; and a decision on whether a drug is a preferred 
drug for an enrollee. Although a plan's decision to pay for or provide 
a Part D drug is a coverage determination, these types of 
determinations are not appealable and therefore are not included in the 
definition of a coverage determination for purposes of subpart M. We 
anticipate that only a fraction of all Part D claims will involve 
disputes subject to the appeals and grievance procedures
    Cost-utilization tools employed by plans may also result in 
coverage determinations. For instance, a plan's denial of a request for 
a specific drug based on an enrollee's failure to complete step-therapy 
requirements constitutes a coverage determination. Similarly, a denial 
based on an enrollee's exceeding a plan's quantity limitation also 
constitutes a coverage determination. Although enrollees may appeal 
such determinations if they believe that the cost-utilization 
requirements have been satisfied or the requirements cannot be 
satisfied for reasons of medical necessity, enrollees may not challenge 
the fact that a plan has cost-utilization tools. These tools are 
essentially part of a plan's benefit design, which is reviewed by us as 
part of the plan approval process, and like other parts of the benefit 
design may not discourage enrollment by certain Part D eligible 
individuals as described in Sec.  423.272.
    Only adverse coverage determinations are subject to the appeals 
process. Therefore, if a plan denies an enrollee's request for an 
exception, this action constitutes an adverse coverage determination 
that may be appealed. If we did not treat a plan's decision regarding 
an exceptions request as a coverage determination, then any adverse 
decision by a plan regarding an exceptions request would not be subject 
to the appeals process.
    All of the enrollee filing deadlines; plan decision-making 
timeframes, including rules on when to apply the expedited versus the 
standard procedures; and notice requirements apply to exceptions 
requests in the same manner as they apply to other coverage 
determinations. Thus, Sec.  423.578(c) specifies that a plan's decision 
concerning an exceptions request constitutes a coverage determination 
under Sec.  423.566.
    Consistent with MA appeal procedures, the entity that makes the 
coverage determination has an opportunity to take a second look at its 
original determination. Thus, the first level of the appeals process is 
a redetermination by the plan. One or more individuals who were not 
involved in making the coverage determination must make the 
redetermination. If a lack of medical necessity formed the basis for 
the coverage denial, then a physician with expertise in the field of 
medicine appropriate for the services at issue must make the 
redetermination. The redetermination procedures are set forth under 
Sec.  423.580 through Sec.  423.590.
    Plan redeterminations are subject to reconsideration by an IRE 
under Sec.  423.600 through Sec.  423.604. Further appeals may be made 
to an ALJ under Sec.  423.610 through Sec.  423.612, the MAC under 
Sec.  423.620, and to Federal court under Sec.  423.630. An enrollee 
must meet an amount in controversy threshold, as determined by the 
Secretary on an annual basis, for appeals at the ALJ and Federal court 
levels.
    Comment: We received a significant number of comments indicating 
that the adjudication timeframes were unreasonably long. The commenters 
argued that if we shortened the timeframes for coverage determinations, 
including exceptions, and appeals, the process would be less complex. 
Some commenters recommended designing an expedited exceptions process 
for enrollees with immediate needs such as mental health issues or 
chronic or debilitating conditions, which requires a response within 24 
hours. Many others suggested shortening the proposed 14-day deadline 
for exception requests to 72 hours, or 24 hours for emergencies. One 
commenter stated that requiring plans to respond to all exceptions 
requests within 72 hours would be consistent with the practice typical 
in private plans and would allow enrollees better access to the 
therapies they need. The commenter maintained that the adjudication 
timeframes under Part D should be shorter than the MA adjudication 
timeframes because the majority of Part D claims will involve 
prescription drugs that have not been received by enrollees, while MA 
claims typically relate to payment for physician and hospital benefits 
that enrollees have received. A few commenters supported allowing for 
immediate online point of sale adjudication.
    Response: We agree with the commenters that the proposed 
adjudication timeframes are too long for making decisions involving an 
enrollee's access to drugs. Therefore, we have amended the adjudication 
timeframes for coverage determinations (which includes exception 
requests), redeterminations by the plan, and reconsiderations by the 
IRE. The NAIC created and adopted the Health Carrier Prescription Drug 
Benefit Management Model Act, which has been used by many States to 
develop laws that regulate prescription drug formularies and Pharmacy 
Benefit Managers (PBMs). The NAIC Model Act requires plans to make 
determinations within 72 hours after the date of the receipt of the 
request, or if required by the health

[[Page 4347]]

carrier, the date of the receipt of the physician's supporting 
statement. Many of the States that have created laws requiring plans 
and PBMs to make determinations within a specified time-period have 
adopted adjudication timeframes that are shorted than the 72-hour 
timeframe adopted in the NAIC Model Act. For instance, Michigan, New 
Jersey, Oklahoma, and Virginia requires plans and PBMs to make a 
determination on an exceptions request within 24 hours of receipt, 
while New Hampshire requires determinations on exceptions requests to 
be made within 48 hours of receipt. Like many States, we have relied on 
the adjudication timeframes adopted in the NAIC's Model Act as a 
benchmark for developing the Part D adjudication timeframes. We 
continue to maintain the requirement that all determinations be made as 
expeditiously as the enrollee's health condition requires, but will 
shorten the maximum amount of time that a plan or the IRE can take to 
make a determination. A plan will have 24 hours for expedited coverage 
determinations (including exception requests) and 72 hours for 
expedited redeterminations. The expedited procedures will continue to 
apply to situations where an enrollee's life, health, or ability to 
regain maximum function could be seriously jeopardized by waiting for a 
determination within the standard timeframe. For non-expedited matters, 
plans will have up to 72 hours to make standard coverage determinations 
(including acting on an exceptions request) and no later than 7 days 
for standard redeterminations. In this final rule, the adjudication 
timeframes begin after receipt of the request, or in the case of an 
exceptions request, after receipt of the physician's supporting 
statement. The timeframes of 72 hours for expedited cases and 7 days 
for non-expedited cases used for redeterminations also apply to 
reconsiderations by the IRE.
    Although the MMA requires plans to meet the requirements for plan 
determinations and redeterminations for Part D in the same manner as 
such requirements apply to MA organizations under sections 1852(g)(1) 
through (3) of the Act, we believe that we have the authority under the 
Act to shorten the adjudication timeframes. Section 1852(g)(1)(A) of 
the Act does not require us to mandate a specific amount of time for MA 
plans to make standard coverage determinations. The Act requires only 
that such coverage determinations be made on a ``timely basis.'' Under 
MA, we interpreted ``timely basis'' to mean no more than 14 days from 
the date the request is received. However, we agree with many of the 
commenters that 14 days is not timely for determinations that involve 
prescription drugs. There is too much risk for an enrollee's health if 
determinations are not made sooner than 14 days from the date the 
request is received, since an enrollee often will not be able to pay 
out-of-pocket for a prescribed medication and thus must forgo necessary 
therapy until a determination is made. We agree with the commenter that 
the MA adjudication timeframes do not offer an appropriate standard for 
Part D. We anticipate that the majority of Part D requests for 
exceptions and appeals will involve prescription drugs that have not 
yet been provided to enrollees, in contrast with MA requests, which 
typically involve services that have already been received or are not 
immediately needed, such as procedures that are often scheduled weeks 
in advance of being performed. (Expedited determinations are the 
exception to this general rule.) Clearly, Part D enrollees are likely 
to suffer significant adverse consequences if medications are not 
received quickly.
    Section 1852(g)(2)(A) of the Act gives the Secretary the authority 
to require MA organizations to make standard reconsiderations in a time 
period that is no later than 60 days from the date the request is 
received. In MA, we require MA organizations to complete standard 
reconsiderations in 30 days from the date it receives a request. 
However, in this final rule, we have established adjudication 
timeframes that are shorter than the 60-day maximum imposed by the Act. 
Under our final regulations at Sec.  423.590(a), plans must make 
standard redeterminations within 7 days from the date a request is 
received.
    Because section 1860D-4(h)(1) of the Act only requires plans to 
meet the requirements that apply to Part D IRE reconsiderations or 
higher appeals in a similar manner as they apply to MA organizations, 
we have the authority to revise the adjudication deadlines as 
appropriate. As mentioned previously, we will hold the IRE to the same 
timeframes as Part D plans (that is, as quickly as the beneficiary's 
health requires but no later than 72 hours for expedited 
reconsiderations and 7 days for standard reconsiderations). However, 
ALJ hearings and Departmental Appeals Board (DAB) reviews will follow 
the same timeframes and procedures under MA. The complexities 
associated with in-person hearings and appellate reviews make it 
impossible for an ALJ or the DAB to complete a decision in an 
abbreviated timeframe.
    Section 1852(g)(3)(B)(iii) of the Act requires MA organizations to 
process expedited coverage determinations and reconsiderations ``under 
time limitations established by the Secretary, but no later than 72 
hours of the time of receipt of the request or the information 
necessary to make the determination or reconsideration, or such longer 
period as the Secretary may permit in expedited cases.'' Under MA, 
health plans and the IRE must process expedited reviews no later than 
72 hours. However, given that the final rule reduces the timeframe for 
making a standard coverage determination (including an exceptions 
request) under Part D from 14 calendar days to 72 hours, the 72-hour 
decision-making timeframe we initially proposed for expedited 
determination is unreasonable. We believe that a 24-hour deadline for 
expedited initial coverage determinations (including expedited 
exceptions requests) is more meaningful. This change is reflected under 
Sec.  423.572(a). Expedited redeterminations and reconsiderations will 
be processed no later than 72 hours, as proposed. We note that we have 
removed references to 14-day extensions of the adjudication timeframes. 
We believe that allowing extensions is inconsistent with our rationale 
for shortening the adjudication timeframes.
    Comment: We received many comments from the public suggesting that 
we require plans to provide continued coverage of a prescription drug 
during part or all of the coverage determination and appeals process, 
or provide an emergency supply in limited circumstances. Several of the 
commenters were concerned that the proposed timeframes for making 
coverage determinations were too long, which would result in lapses of 
coverage for enrollees.
    The commenters' recommendations varied on the length of time a drug 
should be supplied, as well as who should bear the burden of cost. Some 
commenters recommended providing enrollees with a 72-hour emergency 
supply of the prescription, while others suggested that enrollees be 
provided with coverage for 45 days. A number of commenters suggested 
that enrollees be permitted to continue receiving a requested drug at 
no cost until the appeal is resolved, while others recommended 
providing enrollees with the requested drug at the preferred cost-
sharing amount until final resolution.
    Response: Although the commenters suggested different solutions, 
each has requested some degree of continued coverage as a means of 
addressing a larger concern--whether and how

[[Page 4348]]

enrollees can continue receiving a prescribed medication until the 
coverage issue is properly adjudicated. We do not believe we have the 
statutory authority to require plans to continue covering a drug that 
has been removed from the plan's formulary, or placed on a different 
tier during the plan year, pending the outcome of an appeal. 
Nevertheless, we believe that we can address the commenters' concern in 
this final rule by minimizing the adjudication timeframes as discussed 
above, and by modifying the proposed provisions related to the 
timelines for notices and coverage and appeals decisions. As required 
under subpart C of this regulation, plans must either provide notice to 
affected enrollees 60 days in advance of a change to its formulary or 
tiering structure, or provide notice regarding the change along with a 
60-day supply after an enrollee's request for a refill of the drug 
affected by a change. As mentioned above, we have also significantly 
reduced the adjudication timeframes for coverage determinations, 
redeterminations, and reconsiderations. As a result, when a formulary 
changes, enrollees will have sufficient time to obtain a determination, 
including an independent review, before their medication runs out. 
Finally, beneficiaries always have the option of paying out of pocket 
for an initially non-covered Part D drug and then appealing to seek 
reimbursement.
    Comment: Some commenters also suggested that we incorporate a fast-
track appeals process for Part D similar to the fast-track appeals 
process provided in the Medicare appeals regulations as a result of the 
Grijalva v. Shalala settlement.
    Response: The MA provisions at Sec.  422.624 and Sec.  422.626 
apply to situations where an MA organization intends to terminate an 
enrollee's services in a skilled nursing facility, home health agency, 
or a comprehensive outpatient rehabilitation facility. The provider 
must deliver a notice two days in advance of the services ending, 
thereby affording an enrollee the ability to request an appeal by an 
IRE before the services end. As noted above, we have created a similar 
concept in Part D by shortening the maximum amount of time that a plan 
or the IRE can take to make a determination and requiring plans to 
either provide notice to affected enrollees 60 days in advance of a 
change to its formulary or tiering structure, or provide notice 
regarding the change along with a 60-day supply after an enrollee's 
request for a refill of the drug affected by a change. Thus, enrollees 
will receive notice in advance of a change to a plan's formulary, 
thereby affording an enrollee the ability to request an appeal by an 
IRE before a lapse in coverage occurs.
    Comment: We received several comments from organizations arguing 
that the regulations proposed in subpart M fail to meet the Due Process 
Clause of the Fifth Amendment of the United States Constitution. 
Specifically, the commenters believe that the proposed rules do not 
afford enrollees with adequate notice explaining the reasons for a 
denial and right to appeal, and an adequate opportunity to a hearing 
with an impartial trier of fact. The commenters also noted that 
Medicaid enrollees whose prescription requests are not being honored 
currently receive a 72-hour supply of medication pending a resolution 
of the initial coverage request, and Medicaid appeals are completed 
more expeditiously than Medicare appeals. The commenters recognize that 
although the most efficient means of protecting enrollees, amending the 
MMA to provide for an appeals process similar to Medicaid, is beyond 
our authority, we can take steps to improve notice and the opportunity 
for a speedy review.
    Response: As noted above, we have addressed the commenters' 
concerns by significantly reducing the adjudication timeframes for 
coverage determinations, redeterminations, and reconsiderations, and 
requiring plans to either deliver notice to affected enrollees 60 days 
in advance of a change to its formulary or tiering structure or provide 
notice regarding the change along with a 60-day supply after an 
enrollee's request for a refill of the drug affected by a change. Under 
Sec.  423.568(d) and Sec.  423.572(c), we require plans to provide 
enrollees with detailed written notices explaining the reason(s) for 
the denial, and the enrollee's right to, and conditions for, obtaining 
a redetermination and the rest of the appeals process. In addition, 
under Sec.  423.590(g), we require plans to provide enrollees with the 
same type of written notices required in Sec.  423.568(d) and Sec.  
423.572(c) when a redetermination is made. Finally, Sec.  423.602 
contains provisions governing the notice issued by an IRE upon a 
reconsideration. Thus, we believe that the Part D process affords 
enrollees with appropriate notice explaining their rights to an 
exceptions process, reasons for any coverage denials, and the 
opportunity to appeal to an independent review entity.
    Comment: We received many comments that we need to clarify whether 
the point-of-sale transaction at the pharmacy counter constitutes a 
coverage determination. Some commenters suggested that the transaction 
should not be considered a coverage determination on the basis that it 
would be unrealistic to treat a pharmacy as an agent of a plan for the 
purpose of accepting and processing appeals, and providing information 
about a plan's benefit design does not constitute a denial triggering 
notice. Others commented that point-of-sale transactions should be 
considered coverage determinations because those transactions result in 
enrollees receiving a decision that a drug is either covered or not, 
and pharmacies receive real-time claims adjudication information from 
plans and deliver that information to enrollees.
    Response: We agree with the commenters who suggested that 
transactions that occur at the pharmacy counter should not be 
considered coverage determinations. Although pharmacists will receive 
information from plans regarding whether to provide or pay for a 
covered Part D drug, the amount of cost sharing, or whether a drug is a 
preferred drug for the enrollee, we do not believe as a policy or 
practical matter that such information by itself should be considered a 
coverage determination. Instead, the pharmacist is conveying 
information regarding the plan's benefit design as it pertains to all 
enrollees, and is exercising no discretion on behalf of a plan. The 
same type of information is provided in writing by the plan to 
enrollees at the beginning of a new plan year, and is often made 
available to enrollees in other formats, for example, online.
    Like MA organizations under Part C, plans must issue written 
notices to enrollees whenever the plans deny a drug benefit in whole or 
in part. The written notice must state the specific reason(s) for the 
denial and explain the enrollee's right to an appeal. It would be 
difficult for pharmacists to create and issue written notices that 
satisfy the coverage determination requirements given the number of 
customers (likely from various plans) that pharmacists assist each day. 
In addition, not all pharmacies have systems capable of receiving 
information specific enough to explain that a prescription is not on a 
plan's formulary or why the level of cost-sharing is higher than the 
enrollee expected to pay.
    The DOL considered a similar issue under 29 CFR 2560.503-1, which 
generally applies to all claims for benefits under plans subject to the 
Employee Retirement Income Security Act (ERISA). Specifically, the DOL

[[Page 4349]]

considered whether, when a group health plan participant presents a 
prescription to a pharmacy to be filled at a cost to the participant 
determined by reference to a formula or schedule established in 
accordance with the terms of such plan and for which the pharmacy 
exercises no discretion on behalf of the plan, the regulation under 
Sec.  2560.503-1 requires that the presentation of the prescription be 
treated as ``claim for benefits.'' The DOL is of the view that neither 
ERISA nor the regulation under Sec.  2560.503-1 requires that a group 
health plan treat interactions between participants and preferred or 
network providers under such circumstances as a ``claim for benefits'' 
governed under Sec.  2560.503-1. See DOL, EBSA, Benefit Claims 
Procedure Regulation Frequently Asked Questions and Answers, A-11, at 
http://www.dol.gov/ebsa/faqs/faq_claims_proc_reg.html. We agree with 
the approach taken by DOL. Under this final rule, therefore, a plan is 
not required to treat the presentation of a prescription as a claim for 
benefits; instead, enrollees must contact their plans to formally 
request coverage determinations. However, consistent with the DOL 
approach, nothing in this rule prohibits a plan from treating the 
presentation of the prescription as a claim for benefits if it chooses 
to. As under Part C, we will require PDP sponsors and MA-PDs to provide 
information in the enrollee's Evidence of Coverage explaining how to 
contact the plan to obtain a coverage determination and an appeal. We 
will also develop standardized notices and require plans under Sec.  
423.562(a)(3) to arrange that their pharmacy networks utilize the 
standardized notices to notify enrollees of the right to receive, upon 
request, a detailed written notice from the Part D plan sponsor 
regarding the enrollee's prescription drug coverage, including 
information about the exceptions process. The standardized notices may, 
for example, be posted in or disseminated by a plan's network 
pharmacies.
    Comment: One commenter requested that we clarify Sec.  
423.566(b)(4), which specifies that a decision on whether a drug is a 
preferred drug for an enrollee is a coverage determination. The 
commenter is concerned that, as proposed, the provision allows an 
enrollee to challenge a plan's formulary development process, without 
regard to whether the enrollee actually received the drug. To remedy 
this problem, the commenter suggested that we ``limit the coverage 
determination in this case to the scope of the exception.''
    Response: We agree that enrollees may not challenge a plan's 
formulary. The intent of Sec.  423.566(b)(4) was to ensure that a 
plan's determination regarding an enrollee's request for an exception 
involving a non-formulary drug is considered a coverage determination. 
To clarify our intent, we have amended Sec.  423.566 (b)(3) and (4) to 
state that a decision concerning an exceptions request under Sec.  
423.578(a), or a decision concerning an exceptions request under Sec.  
423.578(b), is a coverage determination.
    Comment: One commenter requested clarification as to whether a 
decision made by a plan not to pay for drugs obtained at an out-of-
network pharmacy is subject to appeal.
    Response: If a plan decides not to pay for a drug that an enrollee 
obtained at out-of-network pharmacy in accordance with Sec.  
423.124(a), this action constitutes a coverage determination that is 
subject to appeal. Therefore, Sec.  423.566(b)(1) requires that a 
plan's decision not to provide or pay for a Part D drug because the 
drug is furnished by an out-of-network pharmacy is a coverage 
determination. To avoid confusion, we deleted the limitation proposed 
in Sec.  423.562(c)(2), which gave the impression that such 
determinations are not appealable. When a plan denies coverage for a 
drug obtained at an out-of-network pharmacy on the grounds that the 
provisions of Sec.  423.124(a) were not satisfied, but the enrollee 
believes that the denial was unreasonable, for example, the enrollee 
obtained a drug at an out-of-network pharmacy because he or she needed 
the drug at midnight and the only pharmacy open at that time within a 
reasonable driving distance was an out-of-network pharmacy, then the 
enrollee can appeal the plan's determination. However, the policies 
that plans develop to encourage enrollees to use network pharmacies are 
not subject to appeal.
    Comment: We received several comments expressing concern regarding 
the notification procedures when a plan denies a prescribed medication. 
Some commenters suggested that both the physician and enrollee be 
provided with immediate written notification, while others recommended 
providing the prescribing physician and the enrollee with notification 
within 24 hours from the time the determination is made. Several 
commenters requested that denials and approved requests be reported to 
the pharmacists, and a significant number of commenters suggested that 
we require pharmacists to distribute notices to enrollees at the 
pharmacy counter.
    Response: Most commenters who suggested that the point-of-sale 
transaction is a coverage determination also argued that pharmacists 
should deliver written notification of the coverage determination to 
enrollees when they are not able to obtain a prescription at the 
pharmacy counter. Although plans are required under the regulations to 
deliver written notice to enrollees when plans make a coverage 
determination, plans are not required to deliver a notice as a result 
of the transaction that occurs at the pharmacy counter. As mentioned 
above, point-of-sale transactions are not coverage determinations and 
thus do not trigger the notice requirements associated with adverse 
determinations. However, we recognize that it would be helpful for 
enrollees to receive some information at the pharmacy explaining how to 
obtain a coverage determination or request an exception. Therefore, we 
will require plans under Sec.  423.562(a)(3) to arrange that their 
network pharmacies notify enrollees of their right to receive, upon 
request, a detailed written notice from the Part D plan sponsor 
regarding the enrollee's prescription drug coverage, including 
information about the exceptions process. Plans may, for instance, 
require their network pharmacies to post or distribute notices that 
instruct enrollees on how to contact their plans to obtain a coverage 
determination or request an exception when enrollees disagree with the 
information provided by the pharmacist.
    Another concern raised by the commenters involved who would receive 
notices from the entities offering Part D plans. Entities offering Part 
D plans must send written notification to enrollees whenever the plan 
makes any adverse coverage determination. Plans also must notify 
prescribing physicians of any adverse coverage determination when the 
physician requests standard or expedited coverage determinations, and 
expedited redeterminations on behalf of enrollees. Plans must notify 
enrollees and prescribing physicians, if the physician requested the 
determination, for all favorable coverage determinations. Also, when a 
plan denies a request that a determination or redetermination be 
expedited, renders an unfavorable expedited coverage determination, or 
affirms its unfavorable expedited coverage determination, the plan must 
provide oral notification within the applicable timeframe and follow-up 
with a written notice within three days.
    A written notice of any determination must be sent to enrollees, or 
any individual or entity appointed by an enrollee or authorized under 
State or

[[Page 4350]]

other applicable law to act on behalf of an enrollee. We also wish to 
point out in this final rule that we believe it is unnecessary to 
require plans to provide pharmacists with formal written notice of 
plans' coverage determinations or appeals. Plans have established 
customary practices for communicating their benefit determinations with 
pharmacists, and we see no reason to interfere with that relationship.
    Comment: We received many comments expressing concern regarding who 
should be considered an authorized representative. Commenters suggested 
that we modify the definition of authorized representative to include 
any licensed healthcare and social service provider caring for the 
beneficiary, a practitioner's agent who may act on behalf of the 
physician caring for the enrollee, pharmacists where State Pharmacy 
Acts empower collaborative practice agreements, and secondary payors, 
including employers, SPAPs, Medicaid agencies, and charities that 
provide wrap-around coverage or otherwise may pay for a drug when the 
plan denies coverage. One commenter suggested that we limit 
representatives to authorized family members and physicians.
    Response: We considered the comments provided and believe that the 
commenters' concerns are already addressed. We do not need to add to 
the list of individuals or entities permitted to act on behalf of 
enrollees because they have the ability to appoint anyone to be their 
representative under this rule. In addition, individuals or entities 
authorized under State law may also act on behalf of enrollees. 
Therefore, we removed the definition of an ``authorized 
representative'' under Sec.  423.560 and replaced it with ``appointed 
representative'' to clarify that a representative is an authorized 
representative, or is an individual appointed by an enrollee, or 
authorized under State or other applicable law, to act on behalf of the 
enrollee in obtaining a coverage determination or in dealing with any 
of the levels of the appeals process. Thus, any individual or entity 
(including prescribing physicians, secondary payors, charities, and 
pharmacists) appointed by an enrollee, or authorized under State law, 
may file a grievance, request a coverage determination, or appeal on 
behalf of enrollees. We also have clarified that the appointed 
representative will have all of the rights and responsibilities of an 
enrollee in obtaining a coverage determination or in dealing with any 
of the levels of the appeals process.
    In proposed Sec.  423.560, we proposed to define ``enrollee'' as a 
part D eligible individual or his or authorized representative. 
Instead, in our final rule we clarify that an enrollee is a Part D 
eligible individual who has elected or has been enrolled in a 
prescription drug plan offered by a PDP sponsor, MA organization, or 
other Part D plan sponsor. Although we have now clarified that an 
appointed representative is not an enrollee, a plan, nevertheless, has 
an obligation to the appointed representative to fulfill the 
requirements under this subpart in the same manner that it is required 
to do so for the enrollee.
    We also disagree with the commenter who suggested that we limit 
authorized representatives to authorized family members and physicians. 
We have always provided Medicare beneficiaries with the ability to 
choose who may act on their behalf, and we see no reason to deviate 
from this practice in Part D.
    Comment: We received several comments addressing permissible filing 
methods and locations for grievances, appeals, and exceptions. Some 
commenters suggested that we require enrollees to submit requests in 
writing only. Other commenters suggested that we require plans to 
accept requests electronically, or by telephone, fax, or mail. One 
commenter stated that accepting oral requests would be unduly 
burdensome, and another argued that requests only be submitted directly 
to the plans.
    Response: As noted above, an enrollee may file a grievance either 
orally or in writing. Also, as previously mentioned, the MMA requires 
plans to meet the requirements for coverage determinations and 
redeterminations under Part D in the same manner as they apply to 
organization determinations and plan-level reconsiderations in MA. The 
regulations applicable to MA do not specify the method by which 
enrollees must file requests for standard organization determinations. 
However, the MA regulations require MA organizations to have procedures 
for accepting oral or written requests for expedited organization 
determinations. The MA regulations also require requests for 
reconsideration to be filed in writing, but permit requests for 
expedited reconsiderations to be filed orally or in writing. Therefore, 
plans must also have procedures for accepting oral or written requests 
for expedited coverage determinations (including exceptions) and 
requests for expedited redeterminations. However, plans need only 
accept standard requests for redetermination when they are made in 
writing.
    Similar to the MA proposed rule, we proposed to require plans to 
have procedures for accepting oral (including by telephone) or written 
(including by fax or mail) requests for standard redeterminations. 
However, consistent with the MA final rule, Part D enrollees must make 
standard requests for redetermination in writing, unless the plan 
accepts oral requests. Therefore, we deleted the provision in Sec.  
423.582(a) that would have permitted enrollees to file oral requests 
for redetermination with plans. Although the process currently cannot 
accommodate electronic appeal requests, we intend to explore this as 
another filing option for Medicare appeals.
    Comment: We received several comments related to the consequences 
that should apply when a plan fails to meet its adjudication deadlines 
or provide timely notice. Some commenters suggested that this failure 
should be considered a favorable determination because, under the 
proposed rule, plans have no incentive for making coverage 
determinations or redeterminations since the failure to meet the 
adjudication deadlines result in de facto denials. The commenters argue 
that, to ensure enrollee protection, there must be meaningful 
consequences when plans fail to meet adjudication deadlines. Still 
others believed that it should result in an adverse determination that 
may be appealed.
    Response: In the proposed rule, we indicated that the failure to 
provide timely notice of a coverage determination or redetermination 
would constitute an adverse determination that may be appealed. We also 
proposed in Sec.  423.578(c)(2) that when the plan fails to make a 
determination on an exceptions request when a drug is being removed 
from a formulary, the enrollee would be entitled to receive the 
medication in dispute until the plan notified the enrollee of its 
determination. We agree with the commenters who suggested that this 
provision provides little incentive for plans to make determinations 
any sooner than by the end of the adjudication deadline, especially if 
the plan expects to issue an unfavorable determination. Our intent, in 
part, was to require plans to make timely determinations as mandated by 
section 1852(g) of the Act. However, we also wanted to remove any 
barriers for enrollees to accessing needed medications as quickly as 
possible. We now believe that the provisions, as proposed, fall short 
of that policy goal. Under MA, if a plan does not provide the enrollee 
with timely notice of an organization determination, this failure 
constitutes an adverse determination that may be appealed. However, if 
the

[[Page 4351]]

MA plan fails to issue its reconsideration within the appropriate 
timeframe, this failure constitutes an adverse determination that must 
be automatically forwarded to the IRE within 24 hours of the expiration 
of the timeframe. Unlike under MA, however, we did not propose that 
Part D plans be required to automatically forward all adverse 
determinations to the IRE. Instead, we believe that a more effective 
policy under Part D is to require plans to automatically forward 
enrollees' requests for determination or redetermination to the IRE 
only when the plans fail to meet the adjudicatory timeframes for making 
determinations and redeterminations. As under MA, plans must forward 
the enrollees' requests to the IRE within 24 hours of the expiration of 
the adjudication timeframe.
    Comment: Several commenters maintained that enrollees should be 
able to pursue an expedited appeal regardless of whether they already 
paid for the drug in dispute. Commenters believed that low income 
beneficiaries, in particular, would be harmed by having to wait 30 days 
for a plan to make a coverage determination or 60 days to render a 
redetermination.
    Response: A determination regarding benefits is expedited when the 
application of the normal time frame for making a decision could 
seriously jeopardize the life or health of the enrollee or the 
enrollee's ability to regain maximum function. As proposed in Part D 
and like Part C, such a determination would not involve a payment 
request since a medical emergency does not exist for an enrollee who 
already obtained the medication in dispute. Nevertheless, the concern 
raised by the commenters regarding the length of time it takes for an 
enrollee to be reimbursed has been remedied by our decision to no 
longer distinguish between payment and service-related disputes. As a 
result, we have reduced the timeframe for plans to make standard 
coverage determinations to 72 hours in Sec.  423.568(a), and 
redeterminations to 7 days in Sec.  423.590(a). In addition to 
shortening the adjudication timeframes, we also reduced the 
effectuation timeframes for requests involving payment issues to 30 
days. Thus, while plans must make a decision on whether to pay for a 
prescription drug within 72 hours, they must effectuate the decision 
within 30 days. Likewise, although a plan must make a redetermination 
within 7 days, it must effectuate no later than 30 days. The 
effectuation timeframes for requests involving payment issues are 
longer than the effectuation timeframes for requests for benefits 
because our experience is plans normally process claims in 30-day 
cycles. Therefore, plans must effectuate claims for payment no later 
than 30 days after making a favorable coverage determination or 
redetermination, or receiving notice of a reversal by the IRE, ALJ, 
MAC, or Federal court.
    Comment: One commenter suggested that we delete the term 
``seriously'' and add ``or maintain'' to the last sentence of Sec.  
423.566(a) so that it states ``may jeopardize the enrollee's life, 
health, or ability to regain or maintain maximum function, in 
accordance with Sec.  423.570.'' The commenter maintained that such a 
modification is necessary because any amount of jeopardy to an 
enrollee's health or life is serious enough to warrant an expedited 
review, and maintenance of maximum function is just as important as 
regaining maximum function.
    Response: The MMA requires entities that offer Part D plans to meet 
the requirements that apply to Part D coverage determinations and 
redeterminations in the same manner as they apply to MA organizations 
for organization determinations and reconsiderations. Section 
1852(g)(3)(B) of the Act requires MA organizations to establish 
procedures for expediting organization determinations and 
reconsiderations when ``the application of the normal timeframe for 
making a determination...could seriously jeopardize the life or health 
of the enrollee or the enrollee's ability to regain maximum function.'' 
Therefore, we are not adopting the commenter's suggestion.
    Comment: We received one comment suggesting that the prescribing 
physician should make the determination whether to expedite an 
enrollee's request for a coverage determination or redetermination. The 
commenter maintained that the physician, not the plan, is in the best 
position to determine how quickly an enrollee needs a prescribed 
medication.
    Response: We agree with the commenter. Therefore, like under MA, we 
require plans to automatically provide an expedited determination or 
redetermination when the prescribing physician indicates that applying 
the standard timeframe would seriously jeopardize the life or health of 
the enrollee or the enrollee's ability to regain maximum function.
    Comment: Two commenters suggested that prior authorization 
decisions should be included in the list of actions that constitute a 
coverage determination under Sec.  423.566(b). The commenters maintain 
that placing a medication on a prior authorization list has the effect 
of limiting access to such a medication since the administrative cost 
and burden associated with obtaining a prior authorization may cause 
physicians to cease prescribing drugs that require that a prior 
authorization requirement be satisfied.
    Response: As previously noted, information regarding a plan's 
benefit design as it pertains to all enrollees is not a coverage 
determination. We will allow plans the flexibility to determine how to 
structure their formularies, subject to our approval. As a result, 
plans are permitted to determine which medications are placed on their 
prior authorization lists. The decision to place a medication on a 
prior authorization list is not a coverage determination and is not 
subject to appeal. However, when a plan processes a prior authorization 
request, the plan's determination on whether to grant approval of a 
drug for an individual enrollee constitutes a coverage determination 
that is subject to appeal. In addition, if a plan denies a drug, 
because the enrollee failed to seek prior authorization, that would 
also constitute a coverage determination subject to appeal.
    Comment: One commenter requested that we define ``State law'' where 
we stipulate in Sec.  423.560 that a representative authorized under 
State law may act as an authorized representative on behalf of an 
enrollee. The commenter suggests that State law be defined as a 
constitution, statute, regulations, rule, common law, or other State 
action having the force and effect of law.
    Response: We agree that ``State law'' may include a constitution, 
statute, regulation, rule, common law, or other State action having the 
force and effect of law. However, we do not believe that it is 
necessary to define State law under Sec.  423.560.
    Comment: We received one comment suggesting that we define the 
phrase ``furnished by the PDP'' in Sec.  423.566(b)(1), which limits 
actions that are coverage determinations to the failure to provide or 
pay for a covered Part D drug that an enrollee believes may be 
furnished by the plan. The commenter is concerned that if an enrollee 
receives prescription drugs while satisfying the deductible or during 
the period between the initial coverage limit and the out-of-pocket 
threshold, a plan could determine that it did not furnish the drugs to 
the enrollee. As a result, enrollees who receive prescription drugs 
during such periods would not receive a coverage determination and 
would therefore be

[[Page 4352]]

excluded from the appeals process. The commenter maintains that 
enrollees should be entitled to appeal a determination that denies 
coverage even when a plan does not pay for the prescription drug 
because of the enrollee's cost-sharing obligations.
    Response: Our intent in Sec.  423.566(b)(1) was to indicate that 
the failure to provide or pay for a Part D drug that the enrollee 
believes may be covered by the plan results in a coverage 
determination. Rather than define what ``furnished by the PDP'' means, 
we replaced ``furnished'' with ``covered'' to make clear that coverage 
determination and appeals procedures do apply in these situations.
5. Formulary Exceptions Procedures (Sec.  423.578)
a. Exceptions to a Plan's Tiered Cost-Sharing Structure
    The MMA specifies that an enrollee may request an exception to a 
plan's tiered cost-sharing structure and that plans must have a process 
in place to handle such requests. Under such an exception, a ``non-
preferred drug could (emphasis added) be covered under the terms 
applicable for a preferred drug'' under certain conditions. At a 
minimum, the prescribing physician will have to determine that the 
preferred drug either will not be as effective for the individual, or 
will have adverse effects for the individual, or both. Unfavorable 
determinations constitute coverage denials and are subject to all the 
appeal rights discussed in subpart M of part 423.
    We proposed under Sec.  423.578 that a plan must establish a 
tiering 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.
    While we thought it necessary to require plans to include certain 
criteria in the tiering exceptions process, we also recognized the need 
to avoid a situation where a plan's cost-sharing rules are effectively 
driven by the tiering exceptions criteria, rather than the other way 
around.
    At proposed Sec.  423.578(a)(2) we outlined a limited number of 
elements that must be included in any plan's tiering exceptions 
criteria: (1) a description of the process used by the plan to evaluate 
the physician's supporting statement; (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.
    Consistent with existing MA rules, we proposed that an enrollee, 
the enrollee's authorized representative, or the prescribing physician 
may request a tiering 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, constitutes a minimum threshold for 
approving an exception request. We proposed at Sec.  423.578(a)(4) that 
a plan may require a written supporting statement to that effect from 
the prescribing physician, as well as certain limitations on the 
content requirements that plans could impose for these supporting 
statements. We would permit plans flexibility in how this standard 
would be applied. For example, a plan could require that a physician 
certify that the preferred drug would be less effective than the non-
preferred drug, or the plan could choose to apply a more stringent 
standard (such as requiring that the prescribing physician's supporting 
statement also include the enrollee's patient history or require the 
enrollee to first try the plan's preferred formulary drug, absent 
medical contraindications).
    A plan's exceptions procedures will also be required to describe 
how a determination on an exception request will affect the enrollee's 
cost sharing obligations under the plan's tiering structure.
    Comment: Several commenters expressed concern regarding our 
proposal to allow plans the flexibility to establish exceptions 
criteria. Some commenters opposed giving plans the flexibility to 
determine their own exceptions criteria because the MMA requires the 
Secretary to establish guidelines for the exceptions process. Other 
commenters stated that drug plans should establish their own criteria 
to determine whether a preferred drug would not be as effective or 
would have adverse effects for the enrollee's health condition.
    Response: We agree with commenters that plans should impose some 
criteria for making tiering exception determinations, and in this final 
rule, we are requiring that plans grant exceptions when the plan 
determines that the lower-tier drug would not be as effective for the 
enrollee as the requested drug, would have adverse effects for the 
enrollee, or both. Other than the above requirement, however, we will 
not be overly prescriptive in how tiering exception criteria are 
designed and what criteria a plan uses to determine whether a preferred 
drug would not be as effective or would have adverse effects for the 
enrollee. Although the MMA requires plans to develop an exceptions 
process for requests involving a tiered cost-sharing issue that is 
consistent with the guidelines established by the Secretary, it does 
not require the Secretary to establish a comprehensive and uniform set 
of criteria that plans must meet when developing their exceptions 
processes. We have established specific requirements that plans must 
satisfy when processing exceptions requests that are the same as other 
coverage determinations. They include, for example, timeframes for 
decision-making; the consequences for failing to make timely decisions; 
expedited procedures when an enrollee's life, health, or ability to 
regain maximum function could be seriously jeopardized; detailed 
notices when exceptions are denied; the right to appeal through a 4-
tiered administrative process, and if necessary, to request judicial 
review; and when the plan must continue benefits. However, while plans 
must design their exception criteria so that drugs determined by the 
plan to be medically appropriate for the enrollee are covered, we do 
not believe that we should require detailed standards that go beyond 
such a medical necessity requirement. This is particularly the case for 
the reasons previously mentioned, that is, allowing plans flexibility, 
and our uncertainty of how plans will develop formularies. Also, we 
still have ultimate authority over what the criteria will entail. 
Rather than exercise this authority through the establishment of 
specific exceptions criteria, we believe that the most appropriate 
policy is to review the plans' exceptions criteria as part of the 
approval process, to ensure that the criteria are reasonable and 
complete. For example, we would likely expect that a plan would 
establish different types of criteria for different classes of drugs. 
Thus, in some instances, tiering exceptions may be connected to 
demonstrated adverse effects based on previous use of the lower tiered 
drug, while in others, exceptions may be linked to predictive adverse 
effects based on knowledge of the enrollee's medical condition. While 
we are by no means dictating the establishment of separate criteria for 
each drug class or

[[Page 4353]]

category, a plan's criteria should encompass all drug classes. Thus, to 
the extent that the plan chooses to differentiate among drug classes, 
its exceptions procedures need to clearly explain which criteria apply 
for various types of drugs or situations. Additionally, we would not 
approve a plan's tiering procedures if they are unreasonable. 
Similarly, we would not approve a plan's procedure that would require 
demonstrated adverse effects in every situation. Clearly, there are 
situations in which enrollees would suffer significant harm if they are 
required to demonstrate adverse effects.
    Comment: One commenter suggested that plans only be required to 
maintain an exceptions process for instances where an enrollee is 
receiving a drug that is affected by a plan's mid-year tiering change. 
The commenter believed that the four categories established under the 
proposed rule were unnecessary.
    Response: We disagree with the commenter that a plan's exceptions 
procedures need only address instances where an enrollee is using a 
drug that is affected by a plan's mid-year change to its formulary 
tiers. We believe that a plan's exceptions procedures must encompass 
all types of tiering exception requests and have added language to 
Sec.  423.578(a) to make clear that Part D sponsors must have complete 
exceptions procedures that grant exceptions when the plan determines 
that the factors under Sec.  423.578(a)(4) exist (that is, the lower-
tiered drug would not be as effective, would have adverse effects, or 
both). Nevertheless, we also recognize that the circumstances raised by 
the commenter involve perhaps the single most critical aspect of a 
plan's exceptions procedures.
    To reflect and emphasize the importance of such circumstances 
(where a tiering structure changes mid-year and the enrollee has 
already been using the drug), we are modifying Sec.  423.578(a)(1) and 
(b)(1) to mention only that circumstance as a situation that plans must 
specifically address in their exceptions procedures. By no means does 
this change obviate the need for complete exceptions procedures. A plan 
must have exceptions procedures that can be applied to all requests for 
exceptions. Thus, for example, plans' exceptions procedures would need 
to address situations where an enrollee has no pre-existing use of a 
drug in dispute and the tiering structure changes mid-year. However, 
the case of a beneficiary who has a preexisting use of a drug and where 
the tiering structure changes mid-year represents the only set of 
circumstances that needs to be addressed distinctly.
    We recognize that each plan is required to notify enrollees of 
changes that will occur in an annual notice of coverage by October 
31\st\ each year. Since enrollees have the option of switching plans at 
the beginning of a new plan year, an exceptions request that has been 
approved may be reviewed at the end of the year. Consistent with plans 
notifying affected enrollees of changes to their formularies 60 days in 
advance under Sec.  423.120(b)(5), a plan must also notify enrollees if 
the plan intends to change the cost-sharing for a drug on its formulary 
during the next enrollment period. Therefore, enrollees will have 
sufficient notice of any tiering changes made at the beginning of a 
plan year to either choose a new plan, or request an exception.
    Comment: We received numerous comments concerning how the price for 
a drug will be determined when there are mid-year changes in the 
tiering structure and an exception is approved. Some commenters 
suggested that, when there is a mid-year change in the tiering 
structure, enrollees should be granted continued access to drugs at the 
price before the change. Other commenters argued that we should define 
who should receive continued access at the price before the change. One 
commenter argued that it would be impossible to manage a benefit if 
enrollees could obtain an exception that would permit non-preferred 
drugs to be priced at the generic drug level. A few commenters, 
however, believed that, when there is a mid-year change, we should not 
require plans to provide access to drugs at the price before the 
change.
    Response: We agree that enrollees who are receiving a medication 
affected by a mid-year change in the tiering structure must have a 
method for ensuring that they are able to receive a medically necessary 
drug at a given cost-sharing amount when a tiering exception is 
granted. Consistent with section 1860D-4(g)(2) of the Act, Sec.  
423.578(c)(3) requires that where a plan grants an exception to its 
tiered cost-sharing structure, a non-preferred drug will be covered 
under the terms applicable for preferred drugs. Thus, if a plan has a 
generic level in its tiering structure, we would not expect the plan to 
provide a non-preferred drug at the generic level. In addition, if a 
plan has developed a tier in which it places very high cost and unique 
items, for example, genomic and biotech products, a plan may design its 
exception process so that such Part D drugs are not eligible for a 
tiering exception. We have added regulatory language to Sec.  423.578 
to make these two points clear.
    As stated in Sec.  423.578(c), if a tiering exception is granted, 
the enrollee will be approved for coverage as long as the prescribing 
physician continues to prescribe the drug; the drug continues to be 
safe for treating the enrollee's disease or medical condition; and the 
enrollment period has not expired.
    Comment: Many commenters suggested that we develop a single well-
designed exceptions process in which decisions are made based on the 
medical needs of the enrollee. The commenters maintained that a single 
process may help streamline administrative requirements and costs, and 
one based on the medical needs of the enrollee would address all three 
circumstances proposed in Sec.  423.578, that is, where an enrollee is 
using a drug and the applicable tiered cost-sharing structure changes 
mid-year; the enrollee is using a drug and the cost sharing changes at 
the beginning of a new plan year; or there is no pre-existing use of 
the drug by the enrollee. Other commenters recommended that the 
certifying standard for physicians under proposed Sec.  423.578(a)(4) 
be revised to comply with the statute.
    Response: We partially agree with the commenters, and have added 
regulatory language that requires both off-formulary and tiering 
exceptions to be based on the medical needs of the enrollee. However, 
tiering exceptions are not typically offered in private industry 
currently. While tiering exception procedures must be reasonable, 
complete, and based on medical needs, as we discuss above, we do not 
believe that it would be appropriate at this stage to dictate a single 
type of tiering exception procedure that must be used by all plans.
    We also agree with the commenters that the ``certifying'' standard 
for physicians must be revised to comply with section 1860D-4(g)(2) of 
the Act. Note that the statute does not use the term ``certification,'' 
and we believe that this term may be interpreted too formally. 
Therefore, we have modified Sec.  423.578(a)(4) to require plans to 
obtain a ``supporting statement from the prescribing physician that the 
preferred drug for treatment of the same condition either would not be 
as effective for the enrollee, would have adverse effects for the 
enrollee, or both. We have made corresponding technical changes to the 
regulation wherever the term ``certification'' was previously used.
    We also believe that a physician must be able to certify that the 
enrollee meets one or both of these conditions orally or

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in writing. A plan may require a physician who provides an oral 
supporting statement to subsequently follow-up in writing, particularly 
where a plan decides not to grant an exception. The plan may require 
the prescribing physician to provide additional supporting medical 
documentation as part of the written follow-up. A plan may want to 
preserve the record in the event the enrollee or physician requests an 
appeal. However, we do not want to create a process whereby physicians 
must routinely provide written supporting statements. Otherwise, such 
an administrative burden could have the unintended consequence of 
discouraging exceptions requests when enrollees need non-preferred 
drugs. Finally, once a physician provides an oral or written supporting 
statement, the plan will review the request. The plan may obtain other 
evidence, including additional medical information from the prescribing 
physician. After performing its review, the plan must determine if the 
enrollee's condition can be treated with the preferred drug. We removed 
the content requirements for a physician's supporting statement, such 
as the enrollee's name, patient history, primary diagnosis related to 
the exceptions request, and why the non-preferred drug is needed. 
Again, we do not want to mandate that every exceptions request must be 
processed according to a listing of procedures. We believe that plans 
are in the best position to determine on a case-by-case basis the type 
of information they need to overcome the burden.
    Comment: We received two comments suggesting that, instead of 
creating a separate definition of therapeutic equivalence in proposed 
Sec.  423.578(a)(2)(iii), we should apply the same definition proposed 
in Sec.  423.100.
    Response: We agree with the commenter. Therefore, we have deleted 
the definition of therapeutic equivalence in the proposed rule and 
added a cross-reference to Sec.  423.100.
    Comment: A few commenters recommended that we adopt a uniform set 
of exceptions codes to be used by physicians and pharmacists. One 
commenter suggested that we work with the National Council for 
Prescription Drug Programs, Inc. to develop a standard claim processing 
field that payors and pharmacies would be required to use for purposes 
of communicating which tier is applied. Both commenters argued that 
adopting a uniform set of codes to be utilized by plans, pharmacists, 
enrollees, and physicians would streamline the exceptions process and 
make it easier to navigate.
    Response: We appreciate the commenters' suggestions, but we believe 
the entities that provide Part D plans are in the best position to 
determine how to communicate with physicians and pharmacies. As we gain 
a better understanding of how plans intend to develop their 
formularies, we will work with interested parties to ensure that there 
are standard systems or procedures in place to make the process as 
simplistic as possible for pharmacists, physicians, and enrollees to 
navigate.
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 non-formulary 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 plans develop an exceptions process to review 
requests for exceptions for non-formulary drugs. However, the statute 
under section 1860D-4(h)(2) of the Act permits enrollees to appeal a 
determination not to provide for coverage of non-formulary drug only if 
the prescribing physician determines that all of the covered Part D 
drugs on any tier of the formulary for treatment of the same condition 
would not be as effective for the enrollee as the non-formulary drug, 
would have adverse effects, or both. As a result of the statutory 
requirement that enrollees obtain a physician's determination to 
request an appeal, we do not believe that the statute intends to 
preclude an enrollee from obtaining a coverage determination from a 
plan absent a determination by the prescribing physician, or to require 
that the physician's determination alone will result in a favorable 
coverage determination by the plan. Therefore, we proposed to require 
that plans also establish exceptions criteria for addressing these 
situations.
    We stated our belief that requiring plans to use an exceptions 
process to review requests for coverage of non-formulary drugs would 
ensure that enrollees know what standards are to be applied and ensure 
that a plan's formulary is based on scientific evidence rather than 
tailored to fit exceptions and appeals rules for formulary drugs.
    Under the exceptions process proposed at Sec.  423.578(b), a plan 
would be required to allow enrollees to request (1) coverage of Part D 
drugs that are not on a plan's formulary; (2) continued coverage of a 
drug the plan has removed from its formulary; (3) an exception to a 
plan's policy regarding coverage for a step therapy; and (4) an 
exception to a plan's dosing limitation.
    A plan's criteria would have to include a description of the 
criteria it would use to evaluate the prescribing physician's 
determination, clarify how the plan will evaluate 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 appointed or authorized representative, or prescribing 
physician could request an exception, and the plan could require a 
written supporting statement from the prescribing physician that the 
non-covered drug was medically necessary to treat the enrollee's 
disease or medical condition. We proposed that an enrollee would have 
the right to a redetermination by the plan of any unfavorable coverage 
determination.
    Comment: One commenter suggested that we not require plans to 
develop and maintain an exceptions process for non-formulary drugs 
because it would make formulary adherence more difficult for plans to 
control.
    Response: Although the statute does not specifically require that 
plans develop an exceptions process to review requests for exceptions 
for non-formulary drugs, we continue to believe that there is ample 
authority in the statute to require plans to have exception processes 
for off-formulary drugs. First, section 1860D-4(h) of the Act permits a 
beneficiary to request an appeal of an off-formulary drug if the 
prescribing physician determines that all covered part D drugs on any 
tier of the formulary under the plan for treatment of the same 
condition would not be as effective for the individual, would have 
adverse effects, or both. We do not believe that it is reasonable to 
require a beneficiary to wait until the appeal stage in order to 
receive an off-formulary drug, when the plan could

[[Page 4355]]

just as easily determine at the initial coverage determination stage 
that the on-formulary drugs are not appropriate for the beneficiary. In 
addition, the entire structure of the benefit, as explained in section 
1860D-2 of the Act, is a structure that assumes that beneficiaries will 
have access to medically necessary drugs when appropriate, regardless 
of whether such drugs are on or off the formulary. Finally, under 
section 1860D-11(d)(2) of the Act we have the authority to set minimum 
standards for sponsors' benefit packages, and under section 1860D-
12(b)(3)(D) of the Act, we have the authority to add contract terms to 
PDP sponsor contracts. Based on all of these authorities, we believe it 
is appropriate to require plans to maintain exception processes for 
off-formulary drugs. Requiring plans 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. In addition, this requirement is 
consistent with the industry standard where private plans allow 
enrollees to file exceptions to receive non-formulary medications.
    Comment: Several commenters recommended that we require plans to 
establish additional exceptions criteria, including criteria that would 
preclude the use of a formulary drug where the enrollee experiences an 
adverse reaction from the drug previously tried and failed. Commenters 
believed that we should develop exceptions criteria for certain classes 
of drugs, namely those used by special populations such as 
beneficiaries with HIV/AIDS or mental health patients. Other 
commenters, however, believed that the exceptions criteria should be 
limited to whether the requested medication is appropriate for the 
patient, as documented by the prescribing physician.
    Response: First, we agree with commenters that exceptions criteria 
should be designed to grant exceptions in cases where a plan determines 
that an off-formulary drug is medically appropriate for an enrollee and 
that the drug would have been covered but for the fact that the drug is 
off-formulary. We have added language to Sec.  423.578(b) to this 
effect. As stated above, we believe the structure of the benefit under 
section 1860D-2 of the Act, the authority to create minimum standards 
and additional contract terms, and the requirement for off-formulary 
appeals, provide ample authority for this requirement. However, while 
plans must design their exception criteria so that drugs determined by 
the plan to be medically appropriate for the enrollee are covered, we 
do not believe that we should require detailed standards that go beyond 
such a medical necessity requirement. This is particularly the case 
because we do not know how plans will design their formularies. These 
comments illustrate the complexity of attempting to do so. Instead, the 
plan must establish criteria that encompass all exceptions requests and 
the procedural elements that must be followed to process a request. We 
will review these criteria as part of the plan approval process.
    The primary issue that plans must address in a plan's non-formulary 
exceptions criteria is how it will determine medical necessity. 
Although plans must provide access to all Part D drugs that they 
determine are medically necessary (as that is described in Sec.  
423.578(b)(5)), we are not requiring prescriptive requirements for the 
methods that plans use to determine medical necessity. Therefore, plans 
will have some flexibility in creating the criteria or methods, such as 
prior authorization or step-therapy, to determine whether a non-
formulary drug is medically necessary for an enrollee. We agree that 
where an enrollee's prior use of a drug has proven ineffective or 
caused adverse consequences to the enrollee's health, the plan must not 
require the use of the formulary drug as a condition in the exceptions 
process. This is a key component of the exceptions process, which 
entails a written statement from the prescribing physician that all 
covered Part D drugs on any tier of the formulary would not be as 
effective as the non-formulary drug, would have adverse effects for the 
enrollee, or both. Note that such a statement does not necessarily 
result in an automatic approval of the request. Clearly, nothing in 
this rule precludes a plan adopting a process whereby it grants 
automatic approval of a non-formulary drug upon a physician's 
supporting statement. However, some plans may want physicians to 
provide their rationale as to why, for example, the formulary drug 
would not be as effective for treating the enrollee's condition.
    Finally, we do not believe that the statute permits us to develop 
unique exceptions criteria for certain classes of drugs used by special 
populations. Nevertheless, special populations will benefit from the 
rights and protections that the exceptions process affords all 
enrollees.
    Comment: Several commenters requested us to provide an exception 
that would permit an enrollee to obtain a drug that is excluded from 
Part D.
    Response: We strongly disagree with the commenters. The MMA 
mandates that we only provide access to Part D drugs and specifies 
certain categories of drugs as excluded. Therefore, we do not have the 
statutory authority to require plans to provide access to drugs that 
are excluded from Part D. As a result, we have strengthened Sec.  
423.578(e) to emphasize that nothing in the exceptions process shall be 
construed to allow an enrollee to use the exceptions process to request 
or be granted coverage for a prescription drug that is not a Part D 
drug. However, we note that while an enrollee cannot appeal the policy 
that a drug is not a Part D drug if excluded (that is, covered by Part 
B or otherwise excluded from the definition of Part D drug in Sec.  
423.100), the enrollee can request a coverage determination or an 
appeal regarding the policy as it applies to his or her set of facts. 
In other words, the enrollee can seek to demonstrate that the policy is 
not applicable in a particular instance based on the facts of his or 
her case. This is the same standard used in claims appeals where a 
beneficiary cannot appeal a national coverage determination (NCD) 
through the claims appeals process, but may appeal whether the NCD 
should apply in his or her case.
    Comment: One commenter sought clarification on whether formulary 
use includes the type of the dosage, for example, liquid, capsule, 
tablet, and packaging, such as bubble wraps for long-term care facility 
residents. The commenter argued that ``formulary use'' includes more 
than just dose restriction, and Sec.  423.578 must be revised to meet 
the statutory requirements that the Secretary establish guidelines for 
the exceptions process.
    Response: We believe that an enrollee must be permitted to file an 
exception when he or she cannot take the dosage form of a medication 
that is included on a plan's formulary. If a medication is offered in 
tablet and liquid form but the plan only covers the tablet form on its 
formulary, an enrollee must be permitted to file an exception to obtain 
the liquid form of the medication if the prescribing physician 
indicates that the tablet form either would not be as effective for the 
enrollee, would have adverse effects, or both. For example, an elderly 
enrollee may not be able to swallow the tablet form. Therefore, we 
clarified in Sec.  423.578(b) that ``formulary use'' includes the form 
of the dosage. However, we do not agree that ``formulary use'' includes 
packaging because the packaging of a drug, for example, bubble-
wrapping, blister-cards, cassettes, does not impact the

[[Page 4356]]

effectiveness of a medication. In addition, activities related to the 
transfer of Part D drugs are included in the negotiation of the 
dispensing fee under section 1860D-2(d)(1)(D) of the Act.
    Comment: A few commenters requested that we clarify who should make 
the determination as to whether a drug is no longer safe and effective 
for treating an enrollee's disease or medical condition. The commenters 
suggested that an authoritative agency or organization such as the FDA 
should make this type of determination.
    Response: Plans may discontinue coverage of a medication for safety 
reasons, and in their exceptions procedures for non-formulary drugs, 
must include a process for comparing applicable medical and scientific 
evidence on the safety and effectiveness of the requested non-formulary 
drug with the formulary drug. Thus, in some instances, plans themselves 
may make an initial determination whether a drug is no longer safe and 
effective for the treatment of a disease or medical condition, subject 
to the appeals process. Plans also will rely on safety information 
generated by an authoritative government body such as the FDA (for 
example, relying on information released in an FDA Medwatch form) when 
discontinuing coverage of a medication for safety reasons.
c. Exceptions and Appeals Rules for a Plan's Tiered Cost-Sharing 
Structure and Non-Formulary Determinations
    We received several comments that raise issues related to Sec.  
423.578(a) and (b). Instead of addressing the comments in each of the 
preamble discussions in sections 5.a. and 5.b. above, we have 
consolidated the comments and responses in this section since the 
issues are common to exceptions involving tiered cost-sharing structure 
and non-formulary issues.
    Comment: We received numerous comments regarding the weight that 
plans will give a physician's supporting statement. Many commenters 
suggested that the physician's supporting statement carry great weight 
in determining whether an enrollee should receive a prescribed 
medication. Other commenters suggested that, if a physician prescribes 
a medication for an enrollee, he or she should automatically receive 
it. Still other commenters suggested that once a physician certifies 
that an enrollee should receive a prescribed medication, the burden 
should shift to the plan to show why the physician's supporting 
statement is not dispositive. The commenters argued that the burden on 
physicians to justify their drug selection decisions is too great under 
the proposed rule. In order to make the process faster and simpler for 
enrollees, physicians, and pharmacists, the physician's supporting 
statement should be the primary factor in determining whether an 
enrollee should receive a requested medication.
    Response: As noted above, we agree with the commenters that a 
physician's opinion must carry great weight. However, we do not agree 
that a physician's supporting statement necessarily means that an 
enrollee must automatically receive a drug. If the Congress intended 
such an outcome, there would be no need for plans to develop exceptions 
procedures. Therefore, once a physician provides a supporting statement 
that an enrollee should receive a prescribed medication, the plan will 
review the request. The plan may obtain other evidence, including 
additional medical information from the prescribing physician. After 
performing its review, the plan must determine if the enrollee's 
condition can be treated with the preferred or formulary drug. We note 
that if an enrollee disagrees with the plan's exception determination, 
it can still appeal that determination through the regular appeals 
process.
    Comment: We received several comments objecting to an option 
considered by us that would require an enrollee who is using a drug 
that is subsequently removed from the plan'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.
    Response: We agree with the commenters that we must not add an 
exceptions criterion that will require an enrollee to try a preferred 
drug(s) and experience adverse effects before being permitted to resume 
using the original drug. However, we wish to point out that nothing in 
this rule precludes a plan from establishing such a requirement in its 
exceptions process. As mentioned in our earlier response, we do not 
believe that an enrollee who has used a formulary or preferred drug and 
has already experienced adverse consequences should be required to take 
the same harmful drug, as certified by the prescribing physician. For 
instance, most clinicians find it inappropriate to change the 
medication of a patient stabilized on a selective serotonin reuptake 
inhibitor (SSRI) that was moved from a formulary, or from a lower tier 
to a higher tier, because the effectiveness level of SSRIs is not 
reached for two weeks. However, the scenario that the commenters have 
described is quite different. There, the situation involves a drug that 
has been removed from the plan's formulary or moved to a different 
tier, subsequent to an enrollee's use of a drug. Because the enrollee 
would be affected by the plan's formulary or tiering change, the plan 
is obligated to provide a notice to the enrollee 60 days in advance, or 
continue coverage of the drug as required under subpart C of this rule. 
Thus, this gives the enrollee sufficient time to request an exception. 
If the physician indicates that the formulary or preferred drug would 
have an adverse effect on the enrollee's health, the plan likely will 
not require the enrollee to take the drug. However, if the physician's 
supporting statement does not demonstrate that the drug would have 
adverse consequences or would be ineffective, we would not prohibit the 
plan from requiring the enrollee to try the formulary or preferred 
drug. For example, in many instances, a patient may be able to try a 
formulary alternative statin medication when their current statin 
medication is being removed from the formulary. However, if the 
enrollee experiences adverse effects after trying the drug, the plan 
must then grant the exception. In addition, as we state above, there 
may be some cases where requiring a beneficiary to try a drug and 
experience adverse effects would be unreasonable.
d. Treatment of Determinations Regarding Exceptions Requests
    We proposed at Sec.  423.578(c)(1) that determinations on exception 
requests would 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 IRE. If the IRE 
determines that the plan correctly applied its exceptions criteria, the 
plan's determination would be upheld.
    Thus, we proposed that the IRE would not have any discretion 
regarding the validity of the plan's exceptions criteria or formulary. 
Instead, we would be responsible for evaluating and approving a plan's 
exceptions criteria and formulary as part of the annual plan approval 
process. In many instances, however, evaluating whether the plan had 
appropriately applied its own exceptions criteria for a formulary 
exception would necessarily involve an element of medical judgment (for 
example, if the plan had a rule that an enrollee would need to suffer 
significant adverse effects by using the Part D drug covered by the 
plan in order to obtain an exception, the IRE would need to

[[Page 4357]]

review whether such adverse effects had been experienced). In those 
situations, we stated the IRE's medical staff would be responsible for 
reviewing the plan's determination as to whether the formulary 
exceptions criteria had been applied properly. Because the final rule 
requires a Part D plan's formulary and tiering exceptions process to 
grant an exception when the plan determines it is medically 
appropriate, the IREs will likely be reviewing medical necessity in 
numerous cases.
    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 believed that 
certain safeguards would help to ensure that the exceptions process was 
both fair and efficient for enrollees. First, to ensure that enrollees 
who file exceptions requests for drugs that are being removed from a 
plan's formulary are not disadvantaged by a plan's failure to issue a 
timely decision, we proposed in Sec.  423.578(c)(1) and Sec.  
423.578(c)(2) that if a plan failed to issue a timely decision, the 
plan would be required to continue providing coverage until a decision 
was made on the request. Proposed Sec.  423.578(c)(2)(i) allowed 
enrollees to receive up to a one-month supply of the requested drug, 
but a plan could adjust the supply to account for a shorter time frame. 
As noted above, we have revised proposed Sec.  423.578(c)(2) to be 
consistent with our requirement in MA that an MA plan's failure to 
issue its reconsideration within the appropriate timeframe constitutes 
an adverse determination which must be automatically forwarded to the 
IRE within 24 hours of the expiration of the timeframe. We also 
provided, at proposed Sec.  423.578(c)(3), that once a plan approved a 
drug pursuant to the exceptions process, an enrollee would be entitled 
to continue receiving refills of the drug at the prescribing 
physician's discretion.
    The final safeguard implemented under proposed Sec.  423.578 
prohibited plans from assigning drugs approved under either exceptions 
process to a special formulary tier, co-payment, or other cost-sharing 
requirement. In other words, plans must employ reasonable criteria in 
determining the co-payments or other cost-sharing requirements of drugs 
approved for coverage under the exceptions process.
    Comment: We received several comments regarding the level of cost-
sharing that enrollees would be required to pay when an exception is 
approved. Some commenters suggested that all drugs be approved at the 
preferred level of cost-sharing. Another commenter agreed that non-
preferred drugs should be approved at the cost-sharing level applicable 
for preferred drugs when an exception request is approved, but 
recommended that we clarify that non-preferred drugs can not be 
approved at the generic cost-sharing level.
    Response: We agree with the commenters that, when an exceptions 
request involving a tiering issue is approved, the enrollee is entitled 
to the amount of cost-sharing that applies for a preferred drug, but 
not for a generic drug. We have clarified this under Sec.  
423.578(c)(3).
    We do not agree that we must mandate the amount of cost-sharing 
that applies when an exception involving a non-formulary drug is 
approved. Section 1860D-4(h)(2) of the Act requires plans to treat non-
formulary Part D drugs approved under the exceptions process as being 
included on the plan's formulary for purposes of determining whether an 
enrollee has reached the annual out-of-pocket threshold specified in 
section 1860D-2(b)(4)(B)(i) of the Act. However, the MMA does not 
mandate that plans apply the cost-sharing terms of a particular tier 
when plans establish tiers to manage covered Part D benefits. 
Therefore, we do not specify in Sec.  423.578(c) the tier that must be 
applied when a plan approves an exceptions request that involves a non-
formulary drug. Instead, Sec.  423.578(b)(2)(iii) gives plans the 
flexibility to determine which level of cost-sharing will apply when it 
approves an exceptions request involving non-formulary drugs. Plans 
must explain in its exceptions criteria the cost-sharing scheme that 
will be applied. Allowing plans the flexibility to determine which 
level of cost-sharing will apply is consistent with section 1860D-
2(b)(2) of the Act, which permits a plan to establish tiers to manage 
its covered Part D benefits so long as the co-payments associated with 
the plan's tiers meet the actuarial equivalence standard in section 
1860D-2(b)(2)(A)(ii) of the Act. If we required plans to apply the 
cost-sharing amount that applies to covered part D drugs at a specific 
cost-sharing level, we would impede a plan's flexibility to develop its 
tiered cost-sharing structure.
    We note that plans are prohibited under Sec.  423.578(c)(4)(ii) 
from establishing a special formulary tier or other cost-sharing 
requirement that is applicable to non-formulary Part D drugs that are 
approved under the exceptions process. As mentioned previously, we will 
review all of the plans' exceptions criteria and determine if they are 
appropriate and meaningful. We have clarified under Sec.  423.578(c)(3) 
through (4) the difference between how exceptions involving tiering and 
non-formulary issues must be treated after approval.
    We would also like to clarify that, if a plan approves an exception 
for a non-formulary drug, an enrollee may not request a tiering 
exception for the non-formulary drug. Although, section 1860D-4(h)(2) 
of the Act requires plans to treat non-formulary Part D drugs approved 
under the exceptions process as being included on the plan's formulary, 
it does so only for purposes of determining whether an enrollee has 
reached the annual out-of-pocket threshold. Plans are not required to 
add a non-formulary drug to its formulary once an exception is granted. 
Therefore, although a non-formulary drug could be obtained at the 
amount of cost-sharing that applies to drugs on a plan's non-preferred 
tier under the exceptions process, the ``non-formulary drug'' is not a 
``non-preferred drug,'' and only non-preferred drugs are subject to the 
exceptions process.
    Comment: We received one comment recommending that we delete the 
requirement in proposed Sec.  423.578(c)(3)(ii) which would prohibit 
plans from assigning drugs approved under an exceptions request to a 
special formulary tier, co-payment, or other cost-sharing requirement. 
The commenter acknowledges that the provision is derived from the 
statute, but maintains that the provision is unnecessary because the 
commenter believes that we have presented two options for cost-sharing 
(payment at the preferred and generic cost-sharing levels) that 
constitute a special formulary tier.
    Response: We disagree with the commenter that we have created a 
special formulary tier. We believe that it is necessary to include in 
Sec.  423.578(c)(4)(ii) a provision that will ensure that plans do not 
assign drugs approved under a non-formulary exceptions request to a 
special formulary tier, co-payment, or other cost-sharing requirement. 
This policy is consistent with the statute.
    Comment: Several commenters contended that, when an exceptions 
request is approved, the approval should not be for an indefinite 
period of time. The commenters argued that we should include provisions 
for limiting indefinite exceptions based on safety or accepted clinical 
practice standards, including step-therapy and length of therapy edits. 
Some commenters suggested that plans be permitted to annually re-
evaluate exceptions that

[[Page 4358]]

have been approved. However, other commenters believed that proposed 
Sec.  423.578(c)(3) provided important beneficiary protections to the 
extent that the enrollee would not need to renew an exceptions request 
so long as the prescribing physician continues to prescribe the drug.
    Response: We agree that plans must continue providing a drug that 
was approved under the exceptions process so long as the prescribing 
physician continues to prescribe the medication and the medication 
continues to be considered safe for treating the enrollee's condition. 
However, we do not believe that an approval should last indefinitely. 
Therefore, we have added Sec.  423.578(c)(4) to provide that once an 
exceptions request is approved, the plan must provide coverage of the 
drug so long as the enrollee also continues to be a member of the plan, 
or the enrollment period has not expired, whichever is sooner. Thus, in 
no case will a plan be required to continue coverage beyond the plan 
year.
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 plans 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 
plan for a redetermination on the decision.
    The proposed regulations did not identify Social Security 
Administration (SSA) field offices as possible locations 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 believed 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 would not be expedited. The proposed 
requirements for making standard redeterminations for requests 
involving covered benefits in proposed Sec.  423.590(a) specified that 
the plan would issue its redetermination as expeditiously as the 
enrollee's health condition required, but no later than 30 calendar 
days from the date of receipt of the request.
    Under proposed Sec.  423.590(b), for standard redeterminations 
involving requests for payment, the plan would be required to 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) specified that a plan would complete its redetermination and 
give the enrollee and the prescribing physician involved, as 
appropriate, notice of its determination as expeditiously as the 
enrollee's health condition required, but no later than 72 hours after 
receiving the request. For both the standard and expedited 
redetermination for covered benefits, the plan could extend the 
timeframe for making its determination by up to 14 calendar days if the 
enrollee requested the extension, or if the plan justified a need for 
additional information and how the delay would be in the interest of 
the enrollee. An extension would not be provided for redeterminations 
involving requests for payment. If the plan's redetermination resulted 
in an affirmation, in whole or in part, of its original adverse 
coverage determination, the plan would be required to give written 
notification to the enrollee and advise the enrollee of the right to 
file an appeal with the IRE that contracts with us.
    Comment: Several commenters asked us to define ``good cause'' for 
extending the timeframe for filing a redetermination request in Sec.  
423.582(c).
    Response: Although we have not defined ``good cause'' in the 
regulations applicable to either MA or prescription drug appeals, we 
believe that it is useful to provide examples of good cause to plans. 
Examples of circumstances when good cause may be found to exist 
include, but are not limited to, the following situations: (1) the 
enrollee was prevented by serious illness from contacting the plan in 
person, in writing, or through a friend, relative, or other person; (2) 
the enrollee had a death or serious illness in his or her immediate 
family; (3) important records were destroyed or damaged by fire or 
other accidental cause; (4) the plan, or its designated entity, gave 
the enrollee, appointed or authorized representative, or prescribing 
physician incorrect or incomplete information about when and how to 
request a redetermination; (5) the enrollee, appointed or authorized 
representative, or prescribing physician did not receive notice of the 
determination or decision; or, (6) the enrollee, appointed or 
authorized representative, or prescribing physician sent the request to 
another Government agency in good faith within the time limit and the 
request did not reach the correct plan until after the time period had 
expired. Again, these examples are not an exhaustive list, but are 
illustrative of the kinds of scenarios that a plan might find good 
cause for extending the filing deadline.
    Comment: We received many comments that argued that the 30-day 
redetermination timeframes were unreasonably long and should be 
shortened.
    Response: As mentioned earlier, we agree with the commenters that 
the proposed adjudication timeframes are too long. Therefore, 
redeterminations by the plan must be made as expeditiously as the 
enrollee's health condition requires, but no later than 72 hours for 
expedited cases and 7 days for standard cases. In response to the 
concern raised by the commenters regarding the length of time it takes 
for an enrollee to be reimbursed, we are no longer distinguishing 
between payment and service-related disputes. As previously mentioned, 
we reduced the timeframe for plans to make standard redeterminations to 
7 days in Sec.  423.590(a) and (b). Again, redeterminations that 
involve requests for payment cannot be expedited because a medical 
emergency does not exist for an enrollee who already obtained the 
medication in dispute.
    Comment: Some commenters did not support the provision at Sec.  
423.586, which would require plans to have methods in place for 
receiving evidence in person because it is unduly burdensome for plans 
to receive evidence in person.
    Response: We disagree that permitting enrollees or prescribing 
physicians to submit evidence in person is unduly burdensome. The right 
to present evidence in writing as well as in person is consistent with 
MA, and we anticipate that Part D enrollees may want to deliver 
evidence in person rather than mailing their materials to plans. 
Therefore, plans must have procedures in place for accepting evidence 
in person from enrollees, including, for example, the ability to accept 
evidence delivered by enrollees at the plan's physical location or by 
telephone. However, we note that this requirement is not intended to 
require plans to provide in-person hearings for enrollees.
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

[[Page 4359]]

reconsideration process set forth at Sec.  423.600 through Sec.  
423.604 was much like that applicable to MA organizations under Part C. 
Note that when the plan's redetermination affirms, in whole or in part, 
its adverse coverage determination, any issue remaining in dispute 
could be appealed by the enrollee to the IRE that contracts with us. 
However, unlike under the MA program, plan 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 modified the MA 
procedure that affords automatic referral to the IRE whenever the MA 
organization's original denial was upheld by the organization's 
redetermination.
    At Sec.  423.600, we proposed that an enrollee who was dissatisfied 
with the plan's redetermination could file a written request for 
reconsideration by the IRE. We also proposed that when an enrollee 
filed for an appeal, the IRE would be required to solicit the views of 
the prescribing physician. In order to request an off-formulary drug, 
the prescribing physician would be required to indicate 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 non-
formulary drug, would have adverse effects for the individual, or both. 
To be consistent with our requirement in Sec.  423.590(f), we added (e) 
to Sec.  423.600, which requires reconsiderations to be made by a 
physician with expertise in the field of medicine that is appropriate 
for the services at issue 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).
    Section 423.602 proposed the requirements for the IRE 
reconsideration determination notice, including the requirement that if 
the determination were adverse, 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 explained that a 
reconsideration by the IRE was final and binding on the enrollee and 
the plan, unless the enrollee requested an ALJ hearing.
    Comment: We received a number of comments regarding automatic 
forwarding of redeterminations to the IRE. While a few commenters 
supported our decision to require enrollees to request an IRE 
reconsideration, many argued that cases should be automatically 
forwarded as provided in MA to ensure that enrollees receive an 
independent review of a plan's redetermination. The commenters 
maintained that the automatic forwarding of unfavorable 
redeterminations to the IRE is necessary to prevent enrollees from 
experiencing a lapse in coverage due to the length of time that it 
takes for an appeal to receive an independent review. Some commenters 
also disagreed that the dollar value of drug appeals would involve 
relatively small monetary amounts, which we reasoned that forwarding 
all adverse redeterminations to the IRE would be inefficient.
    Response: As previously mentioned, we have streamlined the appeals 
process by shortening the adjudication timeframes and requiring plans 
to either provide notice to enrollees 60 days in advance of a change to 
its formulary or provide notice and a 60-day supply of a medication 
that is affected by a formulary change. Thus, enrollees will not be 
faced with any lapses in coverage of a medication they are already 
taking by being required to request a reconsideration with the IRE 
directly. In addition, even if the amount in controversy for 
reconsiderations is higher on average than originally anticipated by 
us, we do not believe that requiring enrollees to request appeals has 
any bearing on the process. Therefore, Sec.  423.600 requires that an 
enrollee who is dissatisfied with the plan's redetermination may file a 
written request for reconsideration with the IRE. We note that we have 
eliminated the plan as an alternative filing location since the 
decision-making timeframe begins upon receipt of the IRE's request. 
This change ensures that there are no delays in enrollees receiving 
timely responses.
    Comment: Some commenters stated that the scope of an IRE's review 
should not be limited to whether a plan applied its exceptions criteria 
correctly.
    Response: We agree with the commenters that the IRE's review must 
not be limited to whether a plan applied its exceptions criteria 
correctly. As stated above, plans' exceptions procedures must include 
measures to grant an exception when the plan determines that an 
exception would be medically appropriate. Because these determinations 
will be subject to review by the IRE, the IRE will necessarily also 
review whether a drug is medically necessary. Therefore, the IRE's 
medical staff also must review the plan's medical necessity 
determination in addition to whether the plan properly applied its 
exceptions criteria for the individual in question. Examining the 
record de novo using the plan's exceptions criteria, as approved by us, 
and making an independent medical necessity determination will form the 
basis for the IRE's decision. However, the IRE is prohibited from 
ruling on the validity of a plan's exceptions criteria or formulary. 
Only we can evaluate and decide whether to approve a plan's exceptions 
criteria and formulary as part of the annual plan approval process.
    Comment: We received several comments requesting that we specify 
the method under Sec.  423.600(b) by which the IRE can solicit the 
views of the prescribing physician.
    Response: The IRE may solicit the views of the prescribing 
physician either orally, or in writing. We also clarified that a 
written account of the prescribing physician's views (prepared by 
either the prescribing physician or IRE, as appropriate) must be 
contained in the IRE's record so that, if appealed, the ALJ, MAC, or 
Federal court will be able to review all of the evidence considered or 
disregarded by the reviewing entity.
    Comment: A few commenters recommended that we require requests for 
IRE review to be filed directly with the IRE, as opposed to alternative 
locations, to avoid delays.
    Response: We agree with the commenter, and as mentioned above, have 
modified Sec.  423.600(a) to require enrollees to file requests for IRE 
review directly with the IRE instead of permitting enrollees to choose 
whether to file a request with the IRE or plan.
    Comment: One commenter recommended that enrollees and prescribing 
physicians should be able to submit additional evidence to the IRE.
    Response: We agree with the commenter, and like under MA, enrollees 
and prescribing physicians must have an opportunity to submit 
additional evidence to the IRE.
    Comment: We received one comment suggesting that we require 
physician certifications to accompany all requests for reconsideration 
by an IRE and hearing by an ALJ. The commenter believed this 
requirement would ensure that the reconsiderations are focused on 
medical necessity rather than patient preference.
    Response: We agree that supporting statements from prescribing 
physicians are often necessary for making proper determinations, 
especially when medical necessity is at issue. However, since the IRE 
is required to solicit the views of the prescribing physician, it is 
not necessary to require that supporting statements from physicians 
accompany all requests for IRE reconsiderations or ALJ hearings. In 
fact, IREs may not always be called upon to make medical

[[Page 4360]]

judgments. For example, the definition of a Part D drug excludes 
``agents when used for anorexia, weight loss, or weight gain.'' See 
Sec.  423.100 citing section 1927(d)(2) of the Act. An IRE may be 
called upon to review whether an agent was in fact used for anorexia, 
weight loss or weight gain (and therefore excluded from the definition 
of Part D drug), or whether it was used for some other purpose.
    Comment: One commenter suggested that we require IREs to include 
information about an enrollee's right to an ALJ hearing, the procedure 
for requesting it, and the amount in controversy threshold amount 
required for an ALJ hearing in the notices of reconsideration.
    Response: Section 423.602(b) specifies the requirements for the IRE 
reconsideration determination notice, including the requirement that if 
the determination is adverse, the enrollee must be informed of the 
right to request an ALJ hearing if the amount in controversy meets the 
requirements of Sec.  423.610, and the procedures that must be followed 
to obtain the 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'' to the process used for MA organizations under the 
authority of sections 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 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 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.
    As provided in proposed Sec.  423.610, 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. We note that in Sec.  423.612 (a) of the proposed rule, we 
required enrollees to file their requests for ALJ review with the 
entity specified in Sec.  423.582(a). However, we did not intend that 
requests for ALJ hearing be filed with the Part D plan sponsor. 
Therefore, we modified Sec.  423.612(a) of this final rule to require 
enrollees to file written requests for an ALJ hearing with the entity 
specified in the IRE's reconsideration notice. The plan is not 
considered a party to the ALJ hearing, but may participate in the 
hearing at the discretion of the ALJ. If the ALJ hearing does not 
result in a fully favorable determination, the enrollee may request MAC 
review of the ALJ decision. Unlike under MA, the plans do not have the 
right to request an appeal of an ALJ decision with which the plan 
disagrees.
    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.
    Comment: We received several comments expressing concern about how 
we will calculate the amount remaining in controversy. Many commenters 
noted that the proposed rule does not clearly state how ALJs and the 
MAC will determine whether an enrollee has met the applicable amount in 
controversy (AIC) threshold. One commenter recommended that calculation 
of the amount remaining in controversy include the projected cost of 
the drug at issue for at least the duration of the current calendar/
plan year, including consideration of any cost sharing amount paid by 
the enrollee or a third-party. Additionally, commenters asked that we 
define the term ``projected value'' as used under Sec.  423.610(b) of 
the final regulation.
    Response: In order to clarify how the amount remaining in 
controversy will be calculated, we have adopted a modified version of 
the formula used in the Medicare fee-for-service program to determine 
the amount remaining in controversy. Therefore, the amount remaining in 
controversy will be calculated by subtracting any allowed amount under 
Part D, payments made by third parties, deductible, and coinsurance 
amounts applicable to the particular Part D drug at issue from either 
the projected value of the drug, or, where the enrollee is seeking 
reimbursement, the actual amount the enrollee paid for the Part D drug. 
Like the MA program, rather than putting this formula in regulation, we 
will include it in separate guidance, such as CMS manuals, in order to 
adjust the formula if necessary.
    In response to comments we received about defining the term 
``projected value,'' we have amended Sec.  423.610(b) to state that the 
projected value of a Part D drug, for purposes of calculating the 
amount remaining in controversy, shall include any costs the enrollee 
could incur based on the number of refills prescribed for the drug in 
dispute during the plan year.
    Comment: Two commenters were concerned that the aggregation of 
multiple enrollee appeals would limit the consideration given to 
individual cases. Both commenters felt strongly that the assessment of 
a particular prescription drug for an enrollee requires an evaluation 
of the enrollee's individual case, including his or her medical 
condition, medical history and other factors. To ensure that all 
enrollees' cases receive this type of consideration, the commenters 
recommended either reducing the AIC threshold at the ALJ level of 
appeal so that aggregation is almost never necessary or precluding 
aggregation of appeals by multiple enrollees.
    Response: We first note that the ALJ AIC is a statutorily 
established threshold. Neither CMS nor the Secretary has discretion to 
alter this requirement. Nevertheless, we do not agree with the 
commenters' assessment of the consideration individual appeals will 
receive if multiple enrollees elect to aggregate their appeals for 
purposes of meeting the AIC threshold. Currently, in the Medicare fee-
for-service program, two or more beneficiaries may combine claims to 
meet the AIC requirement for obtaining an ALJ hearing, so long as the 
claims involve common issues of law or fact. In adjudicating these 
appeals, ALJs often make individual medical necessity determinations 
for each beneficiary who received the item or service in dispute. Given 
the ALJ's experience in adjudicating aggregated cases, we believe that 
Part D appeals that are aggregated by multiple beneficiaries will 
receive appropriate individual consideration.
    Comment: Several commenters requested that we clarify the 
applicable filing requirements for appeals that an enrollee wishes to 
aggregate for purposes of meeting the AIC threshold for requesting an 
ALJ hearing.
    Response: We agree with the commenters' observation that the 
proposed rule was not clear regarding the applicable filing timeframes 
for appeals an enrollee wishes to aggregate. Therefore, we have to 
amended Sec.  423.610(c)(1)(ii) and (2)(ii) in this final rule to 
specify that multiple appeals,

[[Page 4361]]

filed by either a single enrollee or multiple enrollees, may be 
aggregated to meet the AIC threshold for ALJ hearings so long as all of 
the appeals to be aggregated have been filed in accordance with the 
requirements in Sec.  423.612(b).
    Comment: One commenter suggested that we revise our proposal that 
plans are considered a ``party to the ALJ hearing'' for the limited 
purpose of participating in the hearing. The commenter believes that 
plans should be afforded full party status at the ALJ level so that 
they can defend their redetermination decisions, rather than just 
respond to questions asked by the ALJ. Additionally, the commenter 
suggested that when a plan is a party to an ALJ hearing, it should be 
permitted to file a request for review with the Medicare Appeals 
Council and the appropriate Federal court, just as MA organizations are 
permitted.
    Response: In the proposed rule, we stated in the introduction of 
the preamble to Sec.  423.610 that plans had party status for the 
limited purpose of participating in ALJ hearings. Part 422, subpart M 
gives MA organizations party status at the ALJ level. However, we do 
not agree with the commenter that plans should have full party status 
at the ALJ level as MA organizations. Section 1860D-4(h) of the Act, 
which requires plans to provide Part D enrollees with ALJ hearings and 
MAC review, allows only Part D enrollees to file appeal requests at 
these levels. Thus, the Congress did not grant plans with party status 
at the ALJ levels of the appeals process. To clarify this point, Sec.  
423.620 has been revised to state that the MAC provisions that apply to 
MA organizations apply to plans, to the extent applicable. Even though 
plans are not parties to ALJ hearings, we continue to believe that it 
is important to give plans the ability to participate in ALJ hearings. 
Therefore, plans may participate in hearings at the ALJ's discretion.
    Comment: One commenter suggested that we modify the Part D 
regulations so that if the ALJ issues a decision that is favorable for 
an enrollee and the plan files an appeal with the MAC, the plan does 
not have to effectuate the ALJ's decision until the MAC upholds the 
decision favorably to the enrollee. The commenter also suggested that 
plans be required to effectuate ALJ decisions within 60 days after the 
decision has been issued if the plan does not request a review by the 
MAC within the 60-day timeframe. The commenter argued that adding these 
provisions would be consistent with the MA regulations.
    Response: As indicated above, Sec.  423.620 permits only Part D 
enrollees to appeal ALJ decisions. Therefore, in accordance with the 
requirements set out in Sec.  423.636(c), plans are required to 
effectuate favorable ALJ decisions involving payment issues no later 
than 30 calendar days after a final decision is issued and all other 
cases as quickly as the enrollee's condition warrants, but no longer 
than 72 hours after a final decision is issued. These effectuation 
timeframes have been reduced from the proposed 60-day deadline in light 
of our decision to shorten the adjudication timeframes.
7. Effectuation of Reconsideration Determinations (Sec.  423.636 
through Sec.  423.638)
    Section 423.636 and Sec.  423.638 proposed the requirements for 
effectuation of coverage determinations reversed by the plan, 
redeterminations reversed by the IRE, or reversals by an ALJ or higher 
level of appeal. When the plan's redetermination is reversed by the 
IRE, Sec.  423.636(b)(1) required that it must authorize the benefit 
under dispute within 72 hours from the date it received notice 
reversing the redetermination, or provide the benefit as expeditiously 
as the enrollee's health required, but no later than 14 calendar days 
from the date of the reversal notice. For redeterminations of requests 
for payment, proposed Sec.  423.636(a)(2) required that if the plan 
reversed its coverage determination, it must pay for the benefit no 
later than 60 calendar days after the date it received the request for 
reconsideration. Under Sec.  423.636(b)(2), if a plan's redetermination 
was reversed by the IRE, it must pay for the benefit no later than 30 
calendar days from the date it received notice reversing the 
redetermination.
    Section 423.638 proposed that for expedited redeterminations 
reversed by the plan or the IRE, the plan must authorize or provide the 
benefit under dispute as expeditiously as the enrollee's health 
condition required but no later than 72 hours after the date it 
received the request for redetermination, or in the case of reversal by 
the IRE, from the date it received the reversal notice.
    Finally, for reversals by an ALJ or higher level of appeal, we 
proposed under Sec.  423.636(c) and Sec.  423.638(c) that the plan must 
pay for, authorize, or provide the benefit under dispute as 
expeditiously as the enrollee's health condition required, but no later 
than 60 calendar days from the date it received notice reversing its 
determination.
    Comment: We received a number of comments requesting us to revise 
the effectuation timeframes. Several commenters recommended that plans 
effectuate IRE determinations within 24-48 hours, ALJ hearing decisions 
within 48 hours, and the MAC review decisions within 48 hours. The 
commenters also suggested that plans be required to authorize benefits 
within 72 hours after receiving notice from the IRE.
    Response: As mentioned previously, we agree that the proposed 
adjudication timeframes were too long. As a result, we need to make 
corresponding changes to the effectuation timeframes in Sec.  423.636 
and Sec.  423.638. Therefore, the effectuation timeframes for appeals 
involving non-payment issues are no later than 72 hours (expedited) or 
7 calendar days (standard) from the date the plan receives the request 
for redetermination if the plan is reversing its previous 
determination, or no later than 24 hours (expedited) or 72 hours 
(standard) from the date the plan receives notice of a reversal by the 
IRE, ALJ, MAC, or Federal court. For payment issues, the plan must 
authorize payment within 7 calendar days from the date it receives the 
request for redetermination and make payment within 30 days from the 
date from the date it receives the request for redetermination if the 
plan is reversing its previous determination, or it must authorize 
payment for the benefit within 72 hours and make payment no later than 
30 calendar days from the date it receives notice reversing the 
coverage determination by the IRE, ALJ, MAC, or Federal court.
    Comment: We received a comment suggesting that we remove the term 
``completely'' from Sec.  423.638(a) when describing a plan's 
obligation to effectuate a coverage determination the plan reversed.
    Response: We agree with the commenter. Under MA, the term 
``completely'' was added to Sec.  422.638(a) because any MA 
reconsideration that was not completely favorable was automatically 
forwarded to the IRE for reconsideration. However, under Part D, the 
regulations, except in limited circumstances where a Part D plan 
sponsor has missed its claims adjudication or redetermination deadline, 
do not allow automatic forwarding of unfavorable redeterminations to 
the IRE. Therefore, we have deleted the term ``completely'' from Sec.  
423.638(a).

[[Page 4362]]

8. Federal Preemption of Grievances and Appeals
    Section 232(a) of the MMA amended section 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 plans.
    We believe that the grievance procedures for the Part D Drug 
Program under Title I must be the same as those that apply to the MA 
program under Title II. In the proposed rule, we proposed continuing to 
defer to State law on the issue of authorized representatives of 
enrollees in the appeals process.
    We did not believe that the Congress intended for the Secretary to 
regulate matters for which the Secretary was 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 were concerned that State 
grievance requirements would now be preempted, thereby requiring us to 
reexamine our Federal grievance requirements. We requested 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 noted 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 did not believe we would have the 
authority under Part D to set specific tort remedies or to govern 
resolution of private contracting disputes between plans and their 
subcontractors. We believed that the Congress did not intend for our 
regulations to supersede each and every State requirement applying to 
plans--particularly those for which the Secretary lacks expertise and 
authority to regulate. Thus, we did not believe, for example, that 
wrongful death or similar lawsuits 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 plans 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 will 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.
    Comment: We solicited comments on whether the proposed Federal 
grievance procedures should preempt State grievance requirements. We 
received several comments on this issue, which primarily supported 
adopting a single set of grievance procedures to reduce enrollee 
confusion and plan burden. Some commenters recommended that we adopt 
the provisions proposed by us for Medicare+Choice organizations in a 
January 24, 2001 proposed rule. See 66 FR 7,593. However, one commenter 
opposed Federal law preempting State law where Part D appeals are 
concerned.
    Response: We agree with the commenters that establishing a uniform 
set of grievance standards will reduce confusion and burden for 
enrollees and plans. We also believe that one set of rules will ensure 
better beneficiary protections and achieve consistency among plan 
operations. Thus, Sec.  423.564 implements the specific guidelines for 
Part D grievances that we proposed in January 2001 for Medicare+Choice 
organizations. We disagree with the commenter that Federal provisions 
should not preempt State requirements for appeals. We believe that such 
an approach is inconsistent with Sec.  232(a) of the MMA, which 
preempts State appeal and grievance requirements and which is 
incorporated into the Part D laws through section 1860D-12(g) of the 
Act.
    Under the grievance requirements, plans must notify enrollees of 
decisions as expeditiously as the enrollee's case requires, but no 
later than 30 calendar days after receiving a complaint. Plans may 
extend the timeframe by up to 14 calendar days if the enrollee requests 
the extension, or if the plan justifies a need for additional 
information and the delay is in the interest of the enrollee. We 
believe that the timeframes must be according to the enrollee's case as 
opposed to the enrollee's health since not all grievances involve 
medical care. For example, an enrollee may complain that a network 
pharmacy does not offer convenient hours for getting prescriptions 
filled. In addition, we believe that most plans will be able to respond 
to most grievances within 30 days. If an enrollee makes a grievance 
orally, the plan may respond to it orally or in writing, unless the 
enrollee requests a written response. If an enrollee files a written 
grievance, then the plan must respond in writing. In addition, a plan 
must provide information to enrollees on their right to request a 
review by a Quality Improvement Organization (QIO) if the grievance 
involves a quality of care issue. For any complaint involving a QIO, 
the plan must cooperate with the QIO in resolving the complaint. Plans 
must establish a 72-hour expedited grievance process for complaints 
involving certain procedural matters in the appeals process. Finally, 
plans must create a system to track and maintain records on all 
grievances.
    We note that under MMA, enrollees will still have access to various 
State remedies available in cases in which an issue is unrelated to the 
plan's status as a PDP or MA-PD plan.
9. Employer Sponsored Prescription Drug Programs and Appeals
    As explained above, MA-PDs and PDPs are subject to the requirements 
of Part 423 for Part D benefits. In addition, when an employer, whether 
by contracting with an MA-PD, PDP, or otherwise, provides prescription 
drug benefits in addition to those covered under Part C and Part D of 
Title XVIII of the 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 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, that is, Part D benefits through an MA-PD or PDP and 
supplemental benefits through an ERISA-covered plan. For example, an 
ERISA-covered plan could pay all or part of the retiree's cost sharing 
amount (for example, deductibles and coinsurance amounts specified in 
subpart C of Part 423) for a covered Part D drug provided through an 
MA-PD or PDP. Clearly, if the enrollee had a dispute about Part D 
coverage, he or she could file an appeal under the provisions in 
subpart M of Part 423. If the enrollee's dispute involved only the 
amount of cost sharing paid by the ERISA plan, he or she would file an 
appeal in accordance with the

[[Page 4363]]

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 solicited comments on whether, and 
to what extent, the application of parallel procedures in this context 
might be a problem for plans, employers, and eligible individuals. We 
also solicited suggestions for addressing problems, if any, resulting 
from the application of parallel procedures.
    Comment: Generally, commenters supported utilizing only the 
Medicare appeal procedures for claims involving integrated ERISA and 
Part D benefits. One commenter stated that enrollees probably do not 
distinguish between ERISA and CMS approved benefits when they are 
integrated, and therefore, a single appeals process would be less 
confusing. Another commenter agreed, recommending that to the extent 
any benefits received by an individual are part of an underlying Part D 
plan, including benefits separately negotiated between the Part D 
sponsor or organization and an employer (or labor organization), those 
benefits should be governed by the Part D regulations rather than by 
two separate processes. One commenter suggested that, where possible, 
we make our requirements consistent with the existing DOL final rule 
that establishes standards for processing benefit claims under an 
ERISA-covered plan.
    Three commenters agreed that adopting and applying a single, 
uniform appeals process for all benefits would be easier for the 
enrollee to understand. Other commenters pointed out that parallel 
appeal processes for enrollees with Medicare and ERISA benefits were 
costly, redundant, and burdensome to administer, with the potential for 
conflicting determinations. Only one commenter promoted Part D plans to 
process appeals under an employer-sponsored plan.
    Response: After reviewing the public comment and conferring with 
representatives of DOL, we have concluded that changes (not only to our 
regulations but also to the DOL regulations) are needed to properly 
address this issue. Accordingly, we have added Sec.  423.562(d), which 
is intended to give ERISA plans the option, pursuant to regulations of 
the Secretary of Labor, of electing the Part D process rather than the 
procedures under 29 CFR 2560.503-1 for claims involving supplemental 
benefits provided by contract with a Part D plan. In this regard, DOL 
has agreed to work with us to develop such regulations. We note that 
the language in Sec.  423.562(d) is intended to demonstrate our 
commitment to make the entire Part D process available in this context. 
The provision in Sec.  423.562(d) will not take effect in the absence 
of regulations by the Secretary of Labor.
10. Miscellaneous
    Comment: Two commenters believed that there would be an additional 
administrative workload for physicians and their staff in light of the 
appeals and exceptions processes. They asked whether we would provide 
reimbursement for these activities, as they are not currently reflected 
on the physician fee schedule.
    Response: We were mindful of any administrative burden that 
physicians might encounter as they help enrollees pursue prescription 
drugs through the exception and appeals processes. As a result, we 
eliminated the requirement that a physician's supporting statement, 
which the statute requires for tiering and non-formulary exceptions, be 
in writing. We also provide that the IRE may solicit the view of the 
prescribing physician orally or in writing. Thus, a prescribing 
physician need not in all circumstances provide a written account of 
the medical necessity or appropriateness of the prescription drug. We 
anticipate that physicians and other healthcare providers will assist 
enrollees with their Part D appeals to the same extent that they 
currently help beneficiaries with Part A, Part B, and Part C appeals. 
We do not pay physicians for their assistance with appeals under Part 
A, B, or C. Likewise, we do not expect to pay physicians under Part D 
for certifying and sharing their views on an enrollee's need for a 
medication.
    Comment: Some commenters expressed concern about the lack of 
enrollee participation in the formulary development process. These 
commenters felt that we should either include enrollees in the 
formulary development process or alternatively, allow enrollees to 
challenge the formulary development process.
    Response: The formulary development process is outside the scope of 
the grievance and appeals process. Additionally, section 1860D-4(h) of 
the Act does not provide a mechanism for Part D eligible individuals to 
challenge the formulary development process. Finally, the MMA intends 
for plans to compete in regards to benefit package and premium, which 
ensures that enrollees receive the best package for the lowest premium. 
The competitive model contemplated by the MMA would be undermined if 
enrollees are permitted to challenge the formulary development process.
    We also believe that that permitting enrollees to challenge the 
formulary development process is not necessary. Enrollees are aware of 
a plan's formulary before they choose a plan. If an enrollee does not 
agree with a plan's formulary, he or she is free to enroll in a 
different plan. Once enrollees choose a plan, we have required plans to 
provide significant protections that will ensure that enrollees either 
receive the drug in dispute or are switched to an appropriate 
alternative medication if a plan changes its formulary during the plan 
year. In addition, enrollees have available to them an exceptions and 
appeals processes under which they may request coverage of non-
formulary drugs. If enrollees continue to be unsatisfied with a plan, 
they are able to change plans at the end of the plan year.
    Comment: Another commenter suggested that we establish a drug 
manufacturer appeals process to evaluate the discriminatory effect of a 
plan's negative formulary inclusion decision and to review negative 
formulary inclusion decisions.
    Response: We are required by MMA to model the Part D grievance and 
appeals procedures after the Part C grievance and appeals procedures. 
Neither the MMA, nor the applicable provisions of the Act provide for 
the type of appeals process suggested by the commenter. As a result, we 
do not have the statutory authority to create an appeals process for 
drug manufacturers. In addition, allowing manufacturers to challenge 
how plans choose to place drugs on their formularies would also 
undermine the competitive model since it would negate any benefit that 
could be obtained by negotiating with plans.
    Comment: We received many comments about the new notification 
requirements established under Part D, particularly those regarding how 
plans must communicate information about coverage determinations and 
appeals. Several commenters recommended that enrollees, physicians, and 
authorized representatives receive appeals notices giving the reason 
for denial, right to appeal, and information about accessing the 
appeals process. Another commenter suggested that denial notices be 
written at a 6\th\ grade reading level, while another commenter 
suggested that plans provide notices in alternative formats (for 
example for the visually impaired and in different languages). Other 
commenters requested that detailed appeals notices, like those provided 
for coverage determinations,

[[Page 4364]]

be provided at the redetermination level.
    In addition to the appeals notices, many commenters also made 
recommendations about other important information they felt plans ought 
to be required to provide to enrollees. First, many commenters 
requested that we require plans to provide enrollees with written 
information about the exceptions and grievance processes. Finally, we 
received one comment suggesting that we require plans to notify 
enrollees of their potential cost-sharing obligations if an appeal is 
successful.
    Response: We agree with many of the suggestions offered by the 
commenters. Therefore, in Sec.  423.568(g) of the final rule, we 
require plans to include specific types of information in denial 
notices, including the reason for denial, the right to appeal, and 
information about the appeals process. We also require denial notices 
to be written in a readable and understandable form. These notices will 
be developed or approved by us based on consumer-testing and marketing 
guidelines. We agree that notices must be made available in alternative 
formats, and expect that they will be made available in all the same 
formats MA notices are currently offered. We also agree that plans must 
include information about the potential cost-sharing obligation if an 
exception regarding tiering is successful. As previously mentioned, we 
specify that when an exception for a lower cost-sharing is approved, 
the enrollee is entitled to the amount of cost-sharing that applies for 
a preferred drug, but not for a generic drug. Finally, as mentioned 
earlier, plans must provide written notices to enrollees 60 days in 
advance when plans change their formularies. These advance notices must 
contain information about the exceptions process. We also require plans 
to provide written information about the grievance, exceptions, and 
appeals processes in enrollment materials.
    We agree with the commenters who suggested that we require detailed 
notices at the redetermination level. Therefore, we added Sec.  
423.590(g) to require plans to provide detailed written notices to 
enrollees whenever plans make adverse redeterminations. The 
redetermination notices must: be written in approved language that is 
in a readable and understandable; state the specific reasons for the 
denial; inform the enrollee of his or her right to a reconsideration 
(including a description of the standard and expedited reconsideration 
processes, and the enrollee's right to, and conditions for, obtaining 
an expedited reconsideration and the rest of the appeals process); and 
comply with any other notice requirements specified by us.
    Finally, as previously mentioned, the final rule requires that 
notice of any determination be sent to enrollees or their appointed or 
authorized representative.
    Comment: We received a few comments indicating that plans should be 
required to track and report denial rates for the purpose of 
identifying plans with high rates of inappropriate denials. One 
commenter suggested using the IRE to evaluate the data submitted by the 
plans.
    Response: We appreciate the commenters' suggestions and share their 
desire to have plans provide information on the disposition of their 
decisions. We are in the process of developing an appeals system that 
will capture case-specific appeals data. Because appeals are generated 
as a result of coverage denials, we believe that the appeals 
information will enable us to identify potential inappropriate denials.
    Comment: We received one comment suggesting that we create a 
special election period of 30 days during which enrollees who receive 
unfavorable coverage determinations or responses to exceptions requests 
may elect to enroll in a different plan.
    Response: We strongly disagree with the commenters that enrollees 
should be granted a special election period (SEP) to enroll in a 
different plan when they receive unfavorable coverage determinations or 
responses to exceptions requests. Although section 1860D-1(b)(3)(C) and 
section 1851(e)(4) of the Act provides us with the authority to grant 
SEPs for exceptional circumstances, we decline to establish an SEP for 
enrollees who have received unfavorable determinations because we do 
not view this as an exceptional circumstance under the Part D program. 
The Congress anticipated that unfavorable determinations would be made, 
and therefore required us to establish an extensive appeals process. 
However, we do retain the authority to establish additional SEPs 
through operational guidance if necessary.
    Comment: A few commenters suggested that we require plans to assign 
consumer advocates to enrollees who need assistance with the appeals 
process. One commenter suggested that we make available the Medicare 
Beneficiary Ombudsman to assist Part D enrollees, or provide the 
telephone number of an appropriate ombudsman in coverage determinations 
and appeal notices.
    Response: The commenters raise a very valid point and we agree that 
Part D enrollees must be permitted to obtain assistance with the 
grievance and appeals processes, but we do not believe that we have the 
authority to use Trust Fund dollars to pay for consumer advocates on 
behalf beneficiaries accessing the appeals process.
    The Medicare Ombudsman is designed to utilize most inquiry and 
appeals processes in place, while providing enhancements and 
efficiencies through monitored performance metrics, continuous quality 
improvement feedback, and standardized data management. Fiscal 
Intermediaries, Carriers, Regional Offices and SHIPs are all part of 
the whole Ombudsman system. These entities, in addition to others, are 
being trained in Part D enrollment, will handle most routine concerns, 
and have the ability to forward any serious concerns to the Office of 
the Ombudsman for resolution.
    In addition to obtaining assistance from the Medicare Ombudsman, we 
permit Part D enrollees who are in need of assistance to select an 
individual or an entity to serve as their appointed representative. 
Additionally, we recognize individuals who are authorized under State 
or other applicable law to represent the enrollee. Both appointed and 
authorized representatives may act on behalf of Part D enrollees in 
obtaining coverage determinations or in dealing with any of the levels 
of the appeals process, subject to the rules described in part 422, 
subpart M.
    Comment: One commenter suggested that we clarify the difference 
between a ``non-preferred'' drug and a ``non-formulary'' drug since 
there are different processes for requesting each and the differences 
may not be apparent to enrollees.
    Response: We have required plans to establish different exceptions 
processes for handling exceptions requests involving tiered formulary 
drugs and exceptions requests involving non-formulary drugs. Under a 
tiered cost-sharing structure, drugs are assigned to different co-
payment tiers based on cost-sharing, clinical considerations, or both. 
An enrollee's level of cost-sharing is based on the tier into which the 
prescribed drug falls. Typically, drugs fall into one of three tiers--
generic drugs, preferred brand-name drugs, or non-preferred brand-name 
drugs. All of a plan's cost-sharing tiers make up its formulary, and an 
exceptions request that involves a drug covered under one of a plan's 
tiers must be processed in accordance with Sec.  423.578(a). A non-

[[Page 4365]]

formulary drug is simply a drug that is not on a plan's formulary. An 
exceptions request that involves a non-formulary drug must be processed 
in accordance with Sec.  423.578(b). Alternatively, if a plan organizes 
its drug benefits by providing coverage only for formulary drugs and 
requires enrollees to pay for prescriptions out-of-pocket if they are 
not on the formulary, the plan has established a closed formulary. A 
drug that is not on a plan's formulary under this type of cost-sharing 
arrangement is also considered a non-formulary drug and must be 
processed in accordance with Sec.  423.578(b).

N. Medicare Contract Determinations and Appeals

1. Overview
    Subpart N implements section 1860D-12(b)(3)(F) of the Act which 
directs the ``procedures for termination'' in section 1857(h) of the 
Act be incorporated into the requirements for PDP sponsors. As we 
stated in the proposed rule, to enhance the flow of the rule, we have 
separated the provisions of section 1857(h) of the Act into two 
portions and addressed the two portions in separate subparts--subpart K 
(Application Procedures and Contracts with PDP Sponsors) and this 
subpart of the preamble and regulations.
2. Provisions of the Final Rule
    Subpart N establishes administrative appeals procedures available 
to an applicant or PDP sponsor in the event that we--
     Determine that an entity is not qualified to contract with 
us as a PDP sponsor under Part D of title XVIII of the Act.;
     Determine that an entity is not authorized to renew its 
contract as a PDP sponsor in accordance with Sec.  423.507(b); or
     Make a determination to terminate the contract with a PDP 
sponsor in accordance with Sec.  423.509.
    We note that in subpart K, in response to comments, we have 
explained that the contract application (or renewal) process and the 
bid process under subpart F will run concurrently. In other words, we 
could review and pre-approve a contract even though the bid process was 
not yet complete. In this situation, the actual approval of the 
contract would be dependent upon us and the sponsor reaching agreement 
on the bid. We have revised our regulations at Sec.  423.506(d) to 
reflect this change. As discussed in the subpart K preamble, we will 
make determinations that an entity is qualified to contract as a PDP 
sponsor or authorized to renew its PDP sponsor contract, and these 
determinations will be subject to the procedures of subpart N. However, 
although an entity may be determined qualified to enter into or renew 
its contract, the contract might not be signed if we are unable to 
reach agreement on the bid with the entity under subpart F. This 
failure to reach an agreement on the bid will not be subject to the 
procedures of subpart N. We revised our proposed regulation by adding 
Sec.  423.502(c)(2) to subpart K in order to clarify this distinction. 
We refer readers to subpart K for a full discussion of the concurrent 
processes and an explanation of those policies.
    In order to clarify the timeline for valid contracts, in the event 
of a redetermination, we have added new Sec.  423.647(c) to subpart N. 
This provision specifies that in the case of a favorable 
redetermination, to include favorable decisions as the result of a 
hearing or Administrative review, such determination must be made by 
July 15 for the contract in question to be effective on January of the 
following year. We have made a corresponding change to the MA 
regulations by adding Sec.  422.654(c).
    We had proposed that a single set of procedures relating to 
contract determinations and appeals would apply to both MA and PDP 
sponsor contractors and that the requirements in Sec.  423.641 through 
Sec.  423.669 would mirror the requirements at Sec.  422.641 through 
Sec.  422.698 for the MA program. We refer readers to the preamble of 
the Medicare Prescription Drug Benefit proposed rule (69 FR 46723-4) 
for a fuller discussion of our proposals.
    Comment: We received one comment on this subpart. The commenter--
while acknowledging the provisions in this subpart duplicate those 
relating to MA contractors in part 422, subpart N--asked that we state 
in the final rule specifically that part 423, subpart N, applies only 
to PDP sponsors, not to MA plans.
    Response: We do not believe it is necessary to amend the regulation 
text to make clear that the subpart N rules apply only to PDP sponsors, 
since the MA organization contracts will, by definition, be subject to 
the appeals procedures in part 422 and not part 423. We have, however, 
clarified that because fallback prescription drug plan contracts are 
entered into using a competitive process, except to the extent a 
fallback contract is terminated, fallback entities will not be subject 
to the procedures of subpart N. We thank the commenter for the 
suggestion and do acknowledge that the subpart N procedures of part 423 
would apply only to PDP sponsors or PDP sponsor applicants.
    With the clarifying language noted above, in this final rule we 
have adopted these proposed changes almost entirely without change.

O. Intermediate Sanctions (Sec.  423.750)

    As required by 1860D-12(b)(3)(E) of the Act, Subpart O provides 
that the provisions governing ``intermediate sanctions'' for MA 
organizations, with two exceptions, will apply to contracts for Part D 
Plan sponsors. Specifically, we would not impose sanctions on a Part D 
Plan 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. We did not receive any comments regarding this proposal. 
We also proposed that the requirements in Sec.  423.750 through Sec.  
423.760 would mirror the requirements at Sec.  422.750 through Sec.  
422.760. However, we recently discovered that these requirements do not 
mirror each other and, further, that recent changes to the requirements 
at Sec.  422.750 through Sec.  422.760 require us to make conforming 
changes in this final rule. We learned that the regulation text, as 
proposed, did not reflect revisions made to the requirements at Sec.  
422.750 through Sec.  422.760 in the August 22, 2003 final rule for MA 
plans entitled, ``Modifications to Medicare Rules'' (68 FR 50840). 
However, several errors were made in modifying the regulation text in 
the August 2003 final rule. Consequently, an interim final rule with a 
comment period was published on December 30, 2004 to correct this 
technical error. We are making changes to the provisions in Part 423 to 
reflect the substance of changes to the regulations at Sec.  422.750 
through Sec.  422.760 as corrected by the interim final rule published 
on December 30, 2004. Additionally, we proposed, and asked, for 
comments on our goal to have a consistent policy on how sanctions are 
imposed. The MMA requires at least two qualified plans, at least one of 
which is a Part D Plan per region. If we were to freeze the enrollment 
or marketing of a Part D Plan sponsor, that is one of only two plans in 
a region, beneficiaries would no longer have the breadth of choice the 
MMA intended. If we are contemplating sanctioning a plan that is one of 
only two Part D Plan sponsors in a region, we may have to consider 
using other remedies including

[[Page 4366]]

civil monetary penalties (CMPs) to maintain an adequate level of choice 
for beneficiaries. However, we would like to have consistent policies 
and procedures for Part D Plan sponsors and across all regions with 
regard to sanctions. We received two comments asking us how we would 
expect to preserve beneficiary choice if the above instance should 
occur. In this final rule, we decided to adopt the proposed 
requirements as final and rely on the number and kinds of sanctions 
available to us under subpart O and deal with offending entities on a 
case-by-case basis.
    While we are adopting the substance of the proposed rule as final, 
in reviewing and responding to comments we discovered a need for some 
technical revisions in the interest of clarity. Consequently, we are 
making the following changes in this final rule:
     At Sec.  423.752 (Basis for imposing sanctions.), 
paragraph (a), we clarified our authority to impose more than one 
sanction at a time.
     At Sec.  423.752, paragraph (a)(6), we added the word 
``excluded'' for clarification.
     Under Sec.  423.752, paragraph (b), we are deleting 
references to Sec.  423.756(c)(1) and (c)(3) because they are listed 
under procedures for imposing sanctions, and replacing them with Sec.  
423.750(a)(2) and (a)(4) which fall under ``Kinds of Sanctions''. This 
clarifies in this final rule that we are cross-referencing the basis 
for sanctions with the kind of sanctions that could result and not the 
procedure for imposing sanctions.
     At Sec.  423.756(f)(2) a reference to ``part 1005 of this 
chapter'' was incorrect. The reference should be to ``part 1003 of this 
chapter'' since part 1003 includes the OIG procedures for imposing 
sanctions, whereas part 1005 is appeal procedures.
     At Sec.  423.756(f)(3), we have deleted a reference to 
``part 1005 of this chapter,'' because this subparagraph discusses CMS' 
authority to impose CMPs, as opposed to the OIG's authority.
     At Sec.  423.758, we revised the language to better 
clarify the basis for CMPs imposed by us.
1. Kinds of Sanctions (Sec.  423.750)
    Comment: Several commenters requested that the final regulation 
clarify how the imposition of the sanction of suspension of enrollment 
of Medicare beneficiaries (Sec.  423.750(a)(1)) would impact the 
statutory requirement that a consumer have a choice of at least two 
Part D Plans. One commenter suggested that, in the event CMS imposes an 
enrollment freeze on a Part D Plan sponsor which results in there being 
only Part D Plan in a given region, that we add a fallback plan to the 
region.
    Response: While freezing marketing or enrollments has generally 
been our first and most frequently used sanction authority, other kinds 
of sanctions are available to us under Subpart O. These include 
suspension of our payments to the Part D Plan sponsor and CMPs (or a 
combination of both). The MMA intends for beneficiary choice to be 
preserved and directs us to make every reasonable effort to preserve 
that choice. We have the option of imposing these other sanctions if 
the suspension of enrollment of one of only two Part D Plans in the 
same region would eliminate beneficiary choice.
    Comment: Several commenters suggested that CMS establish a range of 
civil money penalties that vary according to the nature and extent of 
the Part D Plan sponsor's noncompliance with legal requirements.
    Response: Section 423.750 allows us to impose CMPs from $10,000 to 
$100,000 depending on the offense.
2. Basis for Imposing Sanctions (Sec.  423.752)
    Section 423.752(a) and (b) of this final rule lists the seven 
violations for which sanctions may be imposed on a Part D Plan sponsor 
organization. These violations are the same as those that warrant the 
imposition of sanctions for MA organizations, with the exception of two 
deletions we are proposing below. Specifically, sanctions are imposed 
if the Part D Plan sponsor engages in any of the following:
     Fails substantially to provide, to a Part D Plan enrollee, 
medically necessary services that the organization is required to 
provide (under law or under the contract) to a Part D Plan enrollee, 
and that failure adversely affects (or is substantially likely to 
adversely affect) the enrollee.
     Imposes, on Part D Plan enrollees, premiums in excess of 
the monthly basic and supplemental beneficiary premiums permitted under 
section 1860D of the Act and subpart F of this final rule.
     Acts to expel or refuses to reenroll a beneficiary in 
violation of the provisions of subpart O of this final rule.
     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 (that is, health screening or ``cherry 
picking'').
     Misrepresents or falsifies information furnished to us, 
any other entity, or individual under the Part D drug benefit program.
     Employs or contracts with an individual or entity excluded 
from participation in the Medicare program as specified under sections 
1128 or 1128A of the Act (or with an entity that employs or contracts 
with an excluded 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) will provide that a 
Part D Plan sponsor organization may be sanctioned if it fails to carry 
out the terms of its contract as specified under this section.
    We will not impose sanctions on a Part D Plan 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.
    We received three comments asking us to detail our methodology for 
imposing sanctions. As we have noted below, we believe that since the 
law grants us the discretion to choose from multiple options on a case-
by-case basis we should retain this approach. We received other 
comments asking that we explain how we determine if a Part D Plan 
sponsor deserves to be sanctioned. Additionally, one comment suggested 
that we amend Sec.  423.752(a) to clarify that CMS may impose more than 
one sanction at a time. In this final rule, we clarify that one or more 
sanctions may be imposed by us when a sanctionable offense as described 
under Sec.  423.752 has been discovered.
    Comment: Several commenters asked that CMS provide a methodology as 
to what sanction, or sanctions, will be imposed on a Part D Plan 
sponsor in response to a specific set of circumstance(s). Additionally, 
the commenters note that it is their understanding that all of the 
sanctions are permissive and they believe this increases the likelihood 
that sanctions will not be imposed.
    Response: We have intentionally retained discretion as to what 
sanctions will be imposed on a Part D Plan. The rule lists a variety of 
sanctions that may be imposed so as to permit us to tailor the sanction 
to the particular offense. As a condition of contracting with Medicare, 
we require that a Part D Plan sponsor agree to be subject to these

[[Page 4367]]

sanctions. This approach has been successful in the Medicare managed 
care program, and we believe it will also be successful in sanction 
actions against Part D Plan sponsors. We should not be confined to only 
one sanction option for a certain violation, since the law grants us 
the discretion to choose from multiple options on a case-by-case basis. 
We believe that this approach will improve the oversight of Part D Plan 
sponsors and the protection of Medicare beneficiaries.
    Comment: Three commenters state that it is not clear from the 
proposed rule how CMS would determine that a Part D Plan sponsor is not 
in compliance with legal requirements. The commenters also suggest that 
CMS publicize, through press releases in the Federal Register, an 
annual report, or other statements, citations against Part D Plan 
sponsors and any sanctions imposed against Part D Plan sponsors.
    Response: We will determine compliance by a variety of means. We 
will be monitoring field reports, performing random periodic audits and 
conducting enrollee surveys. In addition, we perform random audits 
annually in order to ensure that those entities contracting with us are 
in compliance. The corrective action plans of contractors are subject 
to public disclosure under the Freedom of Information Act. Therefore, 
we do not believe it is necessary to publicly disclose the compliance 
status of each contracted organization. Some organizations that have 
received sanctions have later become solid examples of compliant 
contract administration. We believe that a public listing of sanctioned 
Part D Plans may not portray the current level of compliance by 
contracted organizations and could unfairly impede business 
opportunities for fully compliant contractors that were sanctioned in 
prior years. The purpose of a sanction is to protect beneficiaries and 
public funds by improving the compliance of contracted organizations. 
When an organization resumes compliant behavior, the sanction is ended. 
Sanction authority is not designed to be punitive.
    Comment: Two commenters recommend that we revise one of the bases 
for sanctions under Sec.  423.752(a). Section 423.752(a)(1) currently 
states that sanctions may be imposed if a Part D Plan sponsor ``[f]ails 
to provide required medically necessary services with an adverse effect 
on the enrollee.'' (emphasis added) The commenters recommend that we 
remove the phrase ``adverse effect'' from this provision.
    Response: The specific wording of this provision is based on the 
language in the statute. We have not included the phrase ``adverse 
effect'' in an attempt to impose an obstacle that prevents the 
imposition of a sanction on a Part D Plan sponsor that fails to provide 
a medically necessary service to an enrollee.
    Comment: One commenter suggested we amend Sec.  423.752(a) to 
clarify that CMS may impose more than one sanction at a time, as we 
stated in the preamble to the proposed rule.
    Response: We do have the authority to impose more than one sanction 
at a time, but we have taken the commenter's suggestion and made this 
authority explicit under Sec.  423.752(a).
3. Procedures for Imposing Sanctions (Sec.  423.756)
    Section 423.756 details our procedures for imposing sanctions on 
Part D Plan 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 written notification of the sanction 
to the Part D Plan sponsor, outlining the nature and basis of the 
proposed sanction, and copy OIG.
     We must provide the Part D Plan sponsor with 15 days, or 
if an extension is granted, 30 days 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 money 
penalties.
    Comment: One commenter suggested that Sec.  423.756(e) be expanded 
to allow CMS to impose civil money penalties when CMS declines to renew 
or terminate a Part D Plan contract.
    Response: We have authority to impose CMPs under the circumstances 
described in Sec.  423.758. If we make a determination under Sec.  
423.509(a) (except a determination under Sec.  423.509(a)(4)), we may 
impose CMPs.

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

    Section 1860D-14 of the Act requires us to subsidize the monthly 
beneficiary premium and cost-sharing amounts incurred under this Part 
by Part D eligible individuals with lower income and resources. The 
regulations in this subpart and 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 premium 
assistance and reductions in cost-sharing. Full-benefit subsidy 
eligible individuals are entitled to further reductions if they are 
eligible for full benefits under both Medicare/Medicaid and have income 
below a certain income threshold or if they are institutionalized in 
medical institutions or nursing facilities for which Medicaid will make 
payment.
    In the proposed regulation, we defined the eligibility criteria and 
the amounts of subsidy assistance provided. We received several hundred 
comments on subpart P. Below we summarize our proposed rule and respond 
to comments. (For a detailed discussion of our proposals, please refer 
to the August 2004 proposed rule.)
General
    We received general comments related to delayed implementation of 
the Part D program for full-benefit dual eligible individuals (as 
defined under 423.772) as well as the transition of shifting coverage 
for Part D drugs from the Medicaid program to the Medicare program for 
full-benefit dual eligible individuals, as discussed below.
    Comment: Many commenters suggested that we delay implementation of 
the Part D program for full-benefit dual eligible individuals by at 
least five or six months, and some recommended a year's delay, although 
the commenters recognized that such a delay would require a legislative 
change. The commenters also expressed concern about the feasibility of 
identifying, educating and enrolling the population of full-benefit 
dual eligible individuals in time for a smooth transition. Some 
commenters pointed out the need to ensure adequate time for physicians 
and patients to navigate administrative barriers and change medications 
to comply with formularies. Others expressed concern that full-benefit 
dual eligible individuals tend to have complex medical or mental health 
problems, thus reinforcing the need for an appropriate transition from 
coverage for Part D drugs under Medicaid to Medicare.
    Response: As mentioned by the commenters themselves, such a delay 
requires a legislative change. Absent

[[Page 4368]]

such a change we cannot delay implementation of the Part D program for 
dual eligibles.
    Comment: Many commenters also expressed concern about the 
transition of coverage for Part D drugs from Medicaid to Medicare for 
the population of full-benefit dual eligible individuals. Commenters 
were particularly concerned about identifying, educating, and enrolling 
these individuals in Part D plans in a timely and efficient manner and 
desire to avoid noncoverage on plan formularies of drugs currently used 
for this vulnerable population, particularly those with AIDS or mental 
illness.
    Response: We recognize the special needs of the dual eligible 
population and those with serious medical or mental health conditions. 
We have addressed in Subpart B of this rule the efforts to be made to 
avoid any interruption in coverage for this population by auto-
enrolling full-benefit dual eligible individuals in Part D plans no 
later than January 1, 2006. Full-benefit dual eligible individuals and 
those eligible for Medicare Savings Programs as QMBs, SLMBs, and QIs 
are automatically deemed eligible for the low-income subsidy. We are 
working with State Medicaid Directors to develop strategies to educate 
dual eligible beneficiaries about the new Medicare prescription drug 
benefit, how this new program impacts their coverage under Medicaid, 
and the process to enroll in prescription drug plans.
    We note that Subpart C addresses the steps that will be taken as 
part of the formulary review process to provide safeguards that ensure 
a drug coverage transition process for new enrollees taking a drug not 
covered under a plan. We expect that our review of Part D plan 
formularies and transition plans as outlined broadly under the 
requirements in subpart C, and our review of the plan appeals process 
as described in subpart G, will ensure that all Medicare beneficiaries, 
including dual eligibles, have prompt access to the prescriptions they 
need.
1. Definitions (Sec.  423.772)
    In the proposed rule we discussed definitions relevant to the low-
income subsidy provisions of this subpart. These definitions were 
explained in detail in the Preamble discussion related to Sec.  423.773 
of the proposed rule. Comments related to these definitions are 
addressed below.
2. Eligibility for the Low-Income Subsidy (Sec.  423.773)
    The proposed rule provided that full subsidy eligible individuals 
are eligible for the premium assistance and cost-sharing subsidies set 
forth in Sec.  423.780 and Sec.  423.782 of the proposed rule. We have 
added a definition of full subsidy at 423.772 of the final rule to mean 
the premium assistance and cost-sharing subsidies for which full 
subsidy eligible individuals are eligible for under Sec.  423.780(a) 
and Sec.  423.782(a) of the final rule.
    In order to qualify as a full subsidy eligible individual, 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 line for the individual's family size. For purposes of this 
section, we said in the proposed rule that ``Federal poverty line'' 
(FPL) has the meaning given that term in section 673(2) of the 
Community Services Block Grant Act (42 USC 9902(2)), including any 
revision required by that section.
    In addition, the proposed rule provided that to be considered a 
full subsidy eligible individual, an individual must have resources 
that do not exceed three times the resource limit under section 1613 of 
the Act 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 would 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 as full subsidy eligible individuals may 
be eligible as other low-income subsidy eligible individuals 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 would 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. The proposed 
rule provided that other low-income subsidy eligible individuals are 
entitled to the premium assistance and cost-sharing subsidies set forth 
in Sec.  423.780 and Sec.  423.782 of the proposed rule.
    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 the proposed rule addressed 
the provision of covered Part D drugs to low-income individuals 
residing in the territories.
    For making income and resource determinations for the low-income 
subsidy for Part D, the statute refers to certain sections of the SSI 
statute. 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 
statutory provisions(specifically, section 1612 of the Act, which 
applies to determining income under the SSI program). Our proposed 
definition of income was consistent with the MMA in that it references 
SSI statutory provisions.
    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 existing 
definitions of family size, we proposed 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 said in the proposed rule that we considered limiting family 
size to 1 or 2 individuals to more closely resemble the SSI statutory 
provisions, 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 use in determining eligibility for 
Transitional Assistance under the Medicare-approved prescription drug 
card program (See 42 CFR 402.802). The decision to limit family size 
under the Medicare-approved prescription drug card program 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 did 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 for the low-income subsidy program 
that give the Secretary specific authority to define family size. 
Instead, we believed that the term ``family of the size involved'' 
implies a definition that is greater than an individual or couple and 
that includes other dependent relatives residing in the applicant's 
household. In

[[Page 4369]]

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 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 included 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 comported 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 would consider the income of one spouse as available to the 
other spouse. Moreover, since both spouses would be considered in the 
family size determination, it would be illogical to count a spouse's 
presence while not including that spouse's income. Other members who 
meet the one-half support test would 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.
    Section 1860D-14(a)(3)(D) of the Act 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 sections 
1860D-14(a)(3)(D) and (E) of the Act and H.R. Conference Report No. 
108-391 at 470.) However, section 1613 of the Act does not define 
resources, but rather only defines what are not resources.
    Sections 1860D-14(a)(3)(E)(ii) and (iii) of the Act 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 intended 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 would not consider other 
non-liquid resources (for example, a second car) to be available to the 
applicant for this purpose.
    We did not believe this policy would have a significant impact on 
program costs. We believed any program costs that would result from 
counting only liquid resources and countable real estate would be 
offset by the administrative savings resulting from a more simplified 
program. As we indicated further in this section, we are working with 
SSA on a quality assurance strategy that would strike an appropriate 
balance between administrative costs and program goals and objectives.
    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 or cost sharing, such as payment of Medicare deductibles and 
coinsurance. These groups are certain qualified Medicare beneficiaries 
(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, in the 
proposed rule we proposed to define the term ``full-benefit dual 
eligible individual'' as an individual who for any month has coverage 
under a PDP or MA-PD plan 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. We proposed that comprehensive benefits referred to in this 
section do not include those benefits received under Pharmacy Plus 
demonstrations authorized under section 1115 of the Act. For 
individuals who become medically needy by ``spending down'' excess 
income; that is, incurring medical expenses which are subtracted from 
the individual's income, the individual is not eligible as medically 
needy until he or she satisfies their spenddown obligation. This 
requirement was 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 proposed at Sec.  423.773(c), the 
Secretary elects to exercise this authority and treat these QMBs, 
SLMBs, and QIs as being eligible for the full subsidy.
    This decision was based on the fact that nearly all QMBs, SLMBs, 
and QIs, by definition, would likely meet the requirements to be 
considered a full subsidy eligible individual. Generally, QMB, SLMB, 
and QI individuals have income below 135 percent of the FPL applicable 
to their family size and resources that do not exceed twice the SSI 
limit. The exception would 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 did not believe that treating these groups as 
full subsidy eligible individuals will have a large cost impact. 
Further, we believed that it would ease the administrative burden of 
having to educate these individuals on the need to apply for the 
subsidy.
    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. In the proposed rule, 
we chose not to exercise this option.
    This means that when making eligibility determinations for other 
low-income subsidy eligibles, all States would use the same resource 
methodologies across the country. The rationale for not electing this 
authority was twofold. First, uniformity in the

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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 saw 
very little benefit in terms of the number of individuals who would be 
determined subsidy eligible.
    Comment: A number of commenters supported our definition of family 
size. Some of those supporting our definition further urged that the 
regulations specify that applicants will be able to self-attest as to 
the number of family members they claim without the need for further 
documentation.
    Response: As explained elsewhere in the preamble in our discussion 
of the use of a simplified low-income subsidy application, we 
anticipate that such things as income and resources will be verified to 
the extent possible using automated data matches. This reduces both the 
administrative cost of making eligibility determinations, and the 
burden on applicants to provide documentation as to their income and 
resources. Similarly, we anticipate that in most cases an applicant's 
declaration of the size of his or her family will be accepted without 
the need for further documentation from the applicant.
    Comment: While a number of commenters supported our definition of 
family size, a number of other commenters requested clarification or 
objected to the definition. All of these commenters argued that our 
definition did not follow SSI statutory rules, and therefore would make 
it more difficult and complex to determine eligibility for a low-income 
subsidy. Many of these commenters argued that since low-income subsidy 
eligibility was supposed to be based on SSI statutory income and 
resource rules, the rules under which SSI pays benefits to individuals 
or couples should also be followed.
    Response: We understand the concerns expressed by these commenters. 
As explained previously, and in the preamble to the proposed 
regulations, we did consider using the SSI statutory framework of 
individual or couple. However, as we also explained, we do not believe 
that the Congress intended the definition of family size to be so 
restrictive for low-income subsidy eligibility purposes. Moreover, the 
SSI statute does not include a definition of family size. Therefore, we 
proposed to define family size to include the applicant, his or her 
spouse who lives in the same residence, and any individuals related to 
the applicant who live in the same residence and depend on the 
applicant or the applicant's spouse for at least one-half of their 
financial support.
    While we recognize that our definition may result in some 
additional complexity in making eligibility determinations, we believe 
the definition we have adopted is necessary to take into account the 
impact that supporting dependent family members may have on the need of 
an applicant for a low-income subsidy.
    Comment: A few commenters suggested that our definition of family 
size should be revised to automatically include any children under the 
age of 21 as members of the family, regardless of other considerations 
such as whether the applicant was providing one-half of the child's 
support. This commenter also suggested that a pregnant woman should be 
counted as two family members.
    Another commenter stated that the one-half child support test is 
different than what is used for Medicaid and that there will be 
additional burden placed on States to do this test.
    Response: We do not agree with either of this commenter's 
suggestions. We included relatives who are dependent on the applicant 
for one-half of their support in the definition in recognition of the 
impact supporting such relatives can have on the applicant's financial 
situation. For this reason, we do not believe it is appropriate to 
include all children in the applicant's household under age 21 even if 
they are not dependent on the applicant, or to count a pregnant woman 
as two family members.
    Comment: One commenter said that the definition of family size is 
vague as to whether relatives of the spouse of an applicant can count 
toward family size, and suggested that the definition be revised to 
make that explicit.
    Response: We do not believe the definition is as vague as the 
commenter suggests. Under our proposed definition, family size includes 
the number of individuals living in the household who are related to 
the applicant or applicants, and who are dependent on the applicant or 
the applicant's spouse for at least one-half of their support. The 
definition places no restrictions on what is meant by ``related'' to 
the applicant other than that a recognized family relationship exists, 
and further provides that dependence on the applicant's spouse will 
allow a person to be counted as a family member. Therefore, we do not 
believe the definition needs revision as suggested by the commenter.
    Comment: We received two comments on our definition of ``full-
benefit dual eligible individuals'' in Sec.  423.772. One commenter 
noted that the proposed regulation defines the term (in part) as 
someone who 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. The commenter believes this language creates a technical 
problem with the auto-enrollment provisions set forth in Sec.  
423.34(d) of the proposed regulations. That section provides that full-
benefit dual eligible individuals who fail to enroll in a PDP or MA-PD 
during their initial enrollment period will be automatically enrolled 
into a plan.
    The commenter believes these two sections are inherently 
contradictory because one requires a person to be enrolled in a PDP or 
MA-PD to be considered a full-benefit dual eligible individual, while 
the other provides for automatically enrolling someone who is 
considered to be a full-benefit dual eligible individual in a PDP or 
MA-PD, even though under the first section the person could not be a 
full-benefit dual eligible individual because he or she was not already 
enrolled in a PDP or MA-PD. The commenter suggests revising the 
language in Sec.  423.772 to define (in part) a full-benefit dual 
eligible individual as someone who has coverage, or who will have 
coverage as a result of automatic enrollment for the month under a 
prescription drug plan.
    Response: We understand the commenter's concern. The definition of 
a full-benefit dual eligible individual in Sec.  423.772 reflects the 
statutory definition of that term found at section 1935(c)(6) of the 
Act, which defines a full-benefit dual eligible individual to include 
individuals who have coverage under a Part D plan. We do not believe we 
have the authority to change our regulatory definition of ``full-
benefit dual eligible individual'' for purposes of this subpart. 
However, we agree with the commenter that this definition of the term 
``full-benefit dual eligible individual'' is problematic for 
application of the auto-enrollment rules under Sec.  423.34. As 
discussed more fully in subpart B, section 1860D-1(b)(1)(C) of the Act 
requires CMS to auto-enroll into PDPs an individual ``who is a full-
benefit dual eligible individual'' who ``has failed to enroll in a 
prescription drug plan or an MA-PD plan.'' Although this statutory 
provision specifically references the statutory definition of ``full-
benefit dual eligible individual'' under section 1935(c)(6) of the Act, 
if interpreted literally, section 1860D-1(b)(1)(C) of the Act would 
require CMS to auto-enroll into Part D plans only individuals receiving 
full-benefits under Medicaid who are already enrolled in

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Part D but who have ``failed to enroll in'' a Part D plan, a patently 
absurd result. We have an obligation to interpret the statute so as to 
avoid an absurd result and give full effect to the Congress' intended 
policy. We think it is clear that the Congress required CMS to 
establish an auto-enrollment process to ensure that individuals who 
currently receive coverage for Part D drugs under Medicaid continue to 
receive coverage for such drugs through enrollment in Part D beginning 
in 2006. Therefore, for purposes of implementing the auto-enrollment 
process of full-benefit dual eligible individuals, at Sec.  423.34 of 
subpart B the final rule we define ``full-benefit dual eligible 
individuals'' as Part D eligible individuals who meet the conditions 
under section 1935(c)(6)(A)(ii) of the Act but are not enrolled in a 
Part D plan.
    Comment: One commenter expressed concern about what the commenter 
saw as a possible inequity in the definition of a full-benefit dual 
eligible individual. Under that definition in our proposed rule, anyone 
with coverage under a PDP or MA-PD plan who is determined by a State as 
eligible for full Medicaid benefits under any eligibility group is a 
full-benefit dual eligible individual. However, the commenter noted 
that some eligibility groups in some States are not subject to an asset 
test. The commenter believes this can lead to situations where some 
persons receiving the full subsidy under Part D would be subject to an 
asset test but others would not, depending on whether they were in an 
eligibility group to which an asset test did not apply in a particular 
State.
    Response: While we understand the point the commenter is making, we 
must note that the definition of a full-benefit dual eligible 
individual as someone who has been determined eligible for Medicaid 
under any eligibility group covered under a State's plan is a statutory 
definition. Accordingly, we have no authority to change that definition 
in the Part D low-income subsidy regulations.
    Comment: One commenter argued that the definition of full-benefit 
dual eligible individual should be interpreted to include persons 
participating in that State's optional work incentives buy-in 
eligibility group, as well as persons eligible because of the State's 
use of more liberal income disregards under section 1902(r)(2) of the 
Act. The commenter suggested that if this was not our intention, the 
regulatory definition should be clarified. Another commenter suggested 
we clarify the definition to include other protected classes of 
Medicaid-covered individuals, specifically, individuals covered under 
Medicaid pursuant to 1915(c) and 1619(b) of the Social Security Act.
    Response: As we believe the definition makes clear, a full-benefit 
dual eligible individual is a person who is eligible for full Medicaid 
benefits under any group covered under a State's plan. Therefore, we do 
not believe the definition needs further clarification.
    Comment: One commenter noted that full-benefit dual eligible 
individuals include all persons eligible for full Medicaid benefits 
under a group covered under a State's plan even if they have income in 
excess of 135 percent of the Federal poverty line applicable to the 
individual's family size. The commenter asked if any analysis has been 
done to determine whether tying eligibility for a low-income subsidy to 
eligibility for Medicaid will lead to an increased use of qualifying 
income (also known as Miller) trusts in States where the trusts are 
recognized under Medicaid.
    Response: We are not aware of any analysis that has been done on 
that subject. Further, even if analysis were to indicate the 
possibility of increased use of the trusts under these circumstances, 
the statutory definition of a full-benefit dual eligible individual is 
clear, and therefore is not subject to change under our regulations to 
address the possibility.
    Comment: We received one comment on the definition of ``full 
subsidy eligible individuals'' in Sec.  423.772. That section provides 
that a full subsidy eligible individual is an individual who meets the 
eligibility requirements under Sec.  423.773(b). The commenter 
suggested that the latter reference should be changed to Sec.  
423.773(b) and (c) to avoid ambiguity.
    Response: We do not agree with the commenter's suggestion. Section 
423.773(b), as cited in section 423.772, defines a ``full subsidy 
eligible'' individual, while Sec.  423.773(c), which is the reference 
the commenter suggests adding, provides that certain individuals must 
be treated as if they did meet the definition of full subsidy eligible 
individuals as defined in Sec.  423.773(b). Section 423.773(c) does not 
change the definition of a full subsidy eligible individual. We believe 
that adding the reference the commenter suggests would create ambiguity 
where none exists now.
    Comment: One commenter indicated that for any subset of individuals 
for whom States provide pharmacy-only benefits under a section 1115 
demonstration, that subset be excluded from the definition of full-
benefit dual eligible, since these programs generally provide the same 
benefits as offered under Pharmacy Plus Programs.
    Response: We agree with this commenter and have further clarified 
the definition of full-benefit dual eligible individual at Sec.  
423.772 to exclude those individuals enrolled in 1115 demonstration 
programs that provide pharmacy-only benefits to a portion of its 
demonstration population.
    Comment: We received some comments on our proposed definition of 
income. One comment, which was submitted by several different 
commenters, was that the definition of income should make it clear that 
income not legally owned by the applicant, even if his or her name is 
on the check, should not be counted. Another comment, submitted by two 
commenters, was that the definition should exclude the same income 
currently excluded under the Medicaid program when determining Medicaid 
eligibility for American Indians and Alaska Natives. And finally, one 
commenter asked if income of another family member from SSI and TANF 
will be included.
    Response: For these comments it is important to note that under the 
Part D statute, income eligibility for a low-income subsidy is 
determined using the statutory provisions of the Supplemental Security 
Income (SSI) program. The statute does not give us the authority to 
change the way those provisions apply to subsidy eligibility 
determinations for the low-income subsidy under this subpart. Under the 
SSI statutory provisions, some income may be counted even if the person 
does not actually receive it, just as some income a person does receive 
may not be counted. Similarly, SSI excludes certain types of income 
received by American Indians and Alaska Natives. The Social Security 
Administration (SSA), which operates the SSI program, is publishing its 
own regulations which will explain how the SSI statutory provisions 
will apply to eligibility determinations for the low-income subsidy. We 
expect that SSA's regulations will explain in detail how income will be 
counted when determining eligibility for a low-income subsidy.
    Comment: Another commenter noted that under Sec.  423.772, income 
is defined differently from Medicaid in two ways; the regulatory 
definition does not include the use of more liberal income 
methodologies under the authority of section 1902(r)(2) of the Act, and 
eligibility is based on a family size that can be greater than the one 
or two that Medicaid normally uses when determining eligibility for the 
aged and

[[Page 4372]]

disabled. The commenter further noted that this means that if States 
are making eligibility determinations for low-income subsidies, they 
will have to use different rules than they use under their Medicaid 
programs.
    Response: While the commenter is correct on both points, we note 
that section 1860D-14 (a)(3)(C) of the Act specifically precludes the 
use of income disregards authorized under section 1902(r)(2) of the Act 
in determining low-income subsidy eligibility. With regard to the 
commenter's point about family size, as we explain elsewhere, we 
believe the definition of family size we have adopted most closely 
reflects the intent of the Congress with regard to low-income subsidy 
eligibility. Therefore, we do not believe we can or should revise the 
proposed regulations to accommodate the commenter's arguments.
    Comment: We received a number of comments about the definition of 
an institutionalized individual as it applies to cost-sharing subsidies 
under Sec.  423.782 of the proposed regulation. That section provides 
that institutionalized individuals have no cost-sharing for covered 
Part D drugs under their Part D plans. The term ``institutionalized 
individual'' is defined in Sec.  423.772 of the proposed rule as 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 in section 1902(q)(1)(B) of the 
Act.
    Almost all of the commenters urged that persons receiving home and 
community-based waiver services under the waiver authority under 
section 1915(c) of the Act be treated as institutionalized individuals 
for purposes of Sec.  423.782 so that they would not be subject to 
cost-sharing. Several commenters also suggested that institutions for 
the mentally retarded (ICFs/MR) be specifically included in the 
regulations as meeting the definition of a medical institution for 
purposes of this section. At least one commenter believed that persons 
in other living arrangements such as assisted living facilities, 
residential care homes, and boarding homes should be treated as 
institutionalized individuals under Sec.  423.782. One commenter urged 
that persons receiving PACE services also be treated as 
institutionalized individuals for purposes of this Subpart.
    The commenters' rationale was that in most of the situations cited 
in the various comments, the individuals were receiving services in the 
community as an alternative to institutionalization. Individuals 
eligible for Medicaid under a waiver under section 1915(c) of the Act 
are often eligible for waiver services using rules that normally apply 
in institutions. Therefore, the commenters believe these persons should 
also be treated as institutionalized individuals for Part D cost-
sharing purposes. Some commenters also cited the Olmstead U.S. Supreme 
Court decision, which requires States to place persons with disability 
in community rather than institutional settings when possible, as a 
basis for the commenters' position.
    Response: For comments suggesting that ICFs/MR be specifically 
included in the regulations meeting the definition of a medical 
institution, we do not believe such inclusion is either necessary or 
desirable. If we state that ICFs/MR in general meet the definition of a 
medical institution it could be misleading because one ICF/MR could 
meet the various certification and service provision requirements set 
forth in current regulations while others would not. Therefore, we 
would not want to give the erroneous impression that all ICFs/MR would 
meet the definition of a medical institution for purposes of the 
provision under discussion.
    For comments urging that persons receiving waiver services, PACE 
services, or those in various living arrangements such as assisted 
living facilities and residential care homes be treated as 
institutionalized individuals for purposes of cost-sharing under Sec.  
423.782, we understand why the commenters believe such treatment would 
be to the advantage of those persons. However, the regulatory 
provisions under discussion are based on specific statutory language, 
and we do not believe that language contains the latitude necessary to 
treat persons in the various situations described by the commenters as 
institutionalized individuals.
    Section 1860D-14(a)(1)(D)(i) of the Act provides that for purposes 
of cost-sharing, an institutionalized individual is one who meets the 
definition of that term in section 1902(q)(1)(B) of the Act. That 
section in turn defines an institutionalized individual as someone who 
is an inpatient in a medical institution or nursing facility for which 
payments are made under the Medicaid program throughout a month, and 
who is determined to be eligible for medical assistance under the State 
plan. An inpatient is someone who is physically in a medical 
institution. However, assisted living facilities, boarding homes, 
residential care homes, etc., do not meet the general definition of 
medical institutions under the Medicaid or Medicare programs. 
Individuals receiving services under the waiver authority provided by 
section 1915(c) of the Act, or under the PACE program, are not 
inpatients of a medical institution since they are living in the 
community. When the Congress intends to include such individuals, or 
give States the option of including such individuals, within the 
definition of ``institutionalized individuals'', it does so explicitly 
in the statute. In the absence of such explicit inclusion in the Part D 
statute, we cannot consider the persons to whom the commenters refer to 
be institutionalized individuals for Part D cost-sharing purposes. We 
believe the Congress intended this provision to address the fact that 
dual-eligible persons residing as inpatients in medical institutions 
are permitted to retain only a small personal needs allowance, which 
preclude payment of even nominal copayments. For PACE enrollees, we 
refer commenters to Subpart T.
    Comment: Three commenters objected to the language in the 
definition of institutionalized individual concerning payment being 
made under the Medicaid program throughout a month, arguing that an 
individual could be a full-benefit dual eligible individual recently 
returned from a hospital stay whose nursing facility stay would be paid 
for by Medicare Part A for the entire month.
    Response: While we understand the commenters' concern, the language 
in question is a specific statutory requirement under section 
1902(q)(1)(B) of the Act. Therefore, we do not believe we can eliminate 
or even revise that requirement in the regulations. It is worth noting 
that that if Medicare Part A is paying for the nursing home stay, an 
individual's drug costs will in all likelihood be covered through 
Medicare Part A payment, and so the issue of Part D cost-sharing 
liability does not apply.
    Comment: We received several comments on our proposed definition of 
a personal representative in Sec.  423.772. In the proposed rule we 
defined a personal representative as someone who is (1) authorized to 
act on behalf of the applicant; (2) someone acting responsibly on 
behalf of the applicant if the applicant is incapacitated or 
incompetent, 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.
    One commenter urged that ``authorized'' to act on behalf of the 
applicant be defined to mean authorized under State law, and that 
``State law'' in turn be defined as including a constitution, statute, 
regulation, rule,

[[Page 4373]]

common law, or other State action having the force and effect of law.
    Response: While we understand the commenter's concern, we do not 
believe that the term ``authorized'' should be restricted in the manner 
suggested. The intent of this portion of our proposed definition was to 
enable applicants to designate someone whom they trust to act on their 
behalf in filing an application for a low-income subsidy. Defining the 
term ``authorized'' to mean only persons who meet State law-based 
requirements could effectively restrict an applicant's choice of 
personal representative to someone with what could amount to a 
guardianship relationship with the applicant, even if the applicant is 
not in need of a formal guardian. This could make it very difficult if 
not impossible for an applicant to even find a qualified personal 
representative.
    Comment: Several commenters suggested that the term ``acting 
responsibly'' needed further clarification as to who would determine 
that a personal representative is acting responsibly, and under what 
circumstances a conflict of interest could be presumed to exist. Two 
commenters suggested that certain entities for whom the commenters 
apparently believe a conflict of interest can be presumed to exist, 
such as insurance agents, Medicare and PDP marketing representatives, 
and anyone charging a fee for assistance, should be prohibited from 
acting as a personal representative.
    Response: We understand the commenters' concerns about the 
possibility of personal representatives not acting in the best 
interests of the applicant. However, we do not believe it is 
appropriate to establish rules that effectively prohibit entire classes 
of individuals from acting as personal representatives for applicants 
based solely on a possibility. If, based on actual program experience, 
we find that personal representatives are abusing the trust placed in 
them by applicants and the low-income subsidy program, we will refer 
for investigation these potential program abuses and publish guidelines 
to address any specific patterns of abuse that emerge. In the absence 
of evidence to the contrary, however, we believe that at this time we 
should assume that personal representatives will for the most part act 
in the best interests of the applicants who appoint them.
    Comment: One commenter expressed concern about a requirement in 
Sec.  423.904(d)(2)(ii) of the proposed regulations that when taking a 
low-income subsidy application, States must require a personal 
representative to certify under penalty of perjury as to the accuracy 
of the information provided. The commenter believes this requirement 
will greatly inhibit outreach and enrollment activities by social 
workers and community service organizations. The commenter believes 
this requirement would expose any agency, volunteer, SHIP program 
staff, friend or neighbor to legal liability.
    Response: We do not believe this requirement will have the dire 
consequences the commenter fears. The requirement the commenter cites 
is a standard part of most if not all applications for Federal 
benefits, and in all likelihood the majority of State benefits as well. 
This requirement is intended to deter applicants or their 
representatives from knowingly falsifying applications for low-income 
subsidies, and thus only requires the applicants or their 
representatives to the best of their knowledge. It is not intended to 
lead to, nor would it be used for the purpose of, prosecuting 
applicants or representatives for simple errors or inadvertent 
omissions.
    Comment: One commenter indicated that the definition of personal 
representative should also include an SPAP when the SPAP is functioning 
as an authorized representative.
    Response: Our definition would encompass an SPAP when the SPAP is 
functioning as an authorized representative. In such a case, the SPAP 
as an authorized representative, can exercise all the rights of the 
applicant including completing the low-income subsidy application.
    Comment: We received a number of comments on our proposed 
definition of ``resources'' in Sec.  423.772, and referenced elsewhere 
in the proposed regulations. In that section we proposed defining the 
term ``resources'' to mean liquid resources of the individual (and if 
living in the same household, his or her spouse if the individual is 
married), 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 residence is located. We included this definition of 
resources because individuals are subsidy eligible individuals only if 
they have resources (or assets) below certain limits established under 
section 1860D-14(a)(3)(D) and (E).
    Several commenters urged that the asset test eligibility for the 
low-income subsidy be eliminated entirely. Eligibility would then be 
based solely on an applicant's income.
    Response: An asset test for low-income subsidy eligibility is 
specifically required under section 1860D-14(a)(3)(D) and (E). In view 
of this clear statutory requirement, we have no authority to eliminate 
the asset test in its regulations.
    It should be noted that the Social Security Administration (SSA), 
which operates the SSI program, is publishing its own regulations which 
will explain how the SSI statutory provisions, including those 
pertaining to resources, will apply to low-income subsidy eligibility. 
We expect that SSA's regulations will explain in detail how resources 
will be counted when determining eligibility for a low-income subsidy.
    Comment: Several commenters suggested that if the asset test could 
not be eliminated entirely, at least certain specific assets should be 
excluded from being counted when determining eligibility for a low-
income subsidy. Specifically mentioned by commenters were any life 
insurance, including the cash surrender value of life insurance, burial 
funds and burial plots, all officially designated retirement funds such 
as IRAs and 401(k) plans, and vehicles.
    Response: We note that of the specific assets mentioned by 
commenters, burial plots are already excluded from being counted as 
assets under the SSI program, and vehicles are also excluded from being 
counted for low-income subsidy purposes because they are not considered 
liquid assets. For the other assets mentioned, we do not agree that 
they should be eliminated from the resource test. Section 1860D-
14(a)(3)(D) provides that resources will be determined according to 
section 1613 of the Act, which designates the exclusions from resources 
for the SSI program. As we explain in the preamble to the proposed 
rule, we believe that we have some flexibility to narrow our definition 
of resources to exclude non-liquid resources that would be counted 
under the SSI program, since the section 1860D-14(a)(3)(E)(ii) of the 
Act also provides for the development of a simplified application in 
which applicants attest to their level of resources and submit only 
minimal documentation. We believe that the implication of this 
provision is that the Congress envisioned a simple process. Therefore, 
in order to keep the process simple and minimize administrative cost, 
we will 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

[[Page 4374]]

primary residence as resources that are available to the applicant to 
pay for the Part D premiums, deductibles and copayments. While, in the 
interest of simplicity, we were willing to exclude certain non-liquid 
resources, we do not believe that the Congress intended to authorize a 
wholesale departure from SSI resource rules in making subsidy 
eligibility determinations. Therefore, for purposes of counting liquid 
resources, we believe it is important to adhere to the resource rules 
of the SSI program. These include counting items such as the cash 
surrender value of life insurance and the value of IRAs and 401(k) 
plans.
    Comment: Some commenters suggested that if the assets discussed 
above could not be excluded entirely from being counted, any disregards 
applying to them should be substantially increased.
    Response: For the reasons explained in the previous discussion, we 
will not increase disregards for these or any other assets beyond 
whatever disregards are applicable under the SSI program.
    Comment: Many commenters said that the examples of countable 
resources we included in the proposed definition of resources under 
Sec.  423.772 was not detailed enough. They urged that the final rule 
provide a specific list of the resources that would be counted (or, 
alternatively, that would not be counted) in determining low-income 
subsidy eligibility. Many commenters also expressed concerns about the 
provision that resources that can be readily converted to cash within 
20 days would be counted. These commenters said the 20-day conversion 
rule was vague, and needed to be clarified. Another commenter suggested 
that we exclude resources if liquidating that resource would result in 
a financial loss or penalty.
    Response: For these comments, and as we explain in our discussion 
of the definition of income elsewhere in this section of the preamble, 
it is important to note that under sections 1860D-14(a)(3)(D) and (E) 
of the Act , the resource component of the eligibility determinations 
for a low-income subsidy is generally determined using the statutory 
rules of the Supplemental Security Income (SSI) program which govern 
resource exclusions under that program. As noted earlier, the Social 
Security Administration (SSA), which operates the SSI program, is 
publishing its own regulations which will explain how the SSI statutory 
provisions, including those pertaining to resources, will apply to 
eligibility determinations for the low-income subsidy. We expect that 
SSA's regulations will explain in detail how resources will be counted 
when determining eligibility for a low-income subsidy.
    Comment: A few commenters suggested that the rules for counting 
resources for making eligibility determinations of the low-income 
subsidy be exactly the same rules as are used by the SSI program when 
counting resources. These commenters argued that any deviation from the 
standard SSI rules would make it more difficult for States to determine 
low-income subsidy eligibility.
    Response: As we explained in the preamble to the proposed 
regulations, the rules for counting resources for low-income subsidy 
determination purposes are for the most part the same as the standard 
SSI resource rules. The primary difference is that most non-liquid 
resources will not be counted when determining eligibility for the low-
income subsidy, whereas many such non-liquid resources would be counted 
under SSI. We believe that rather than making eligibility for a subsidy 
more difficult to determine, not counting most non-liquid resources 
will actually make the eligibility determination process easier.
    Comment: Several commenters noted that under the Part D statute, 
the Secretary has the option of allowing States to use the more liberal 
resource rules that the States may use to determine resource 
eligibility for QMBs, SLMBs, and QIs when determining low-income 
subsidy eligibility. These commenters urged that we exercise that 
option and allow States to use their more liberal resource rules rather 
than require States to use only the SSI statutory resource provisions, 
as we have proposed.
    Response: As we explained in the preamble to the proposed 
regulations, a primary goal under the low-income subsidy program is to 
have nationally uniform standards and rules for determining eligibility 
for a subsidy. We believe national uniformity is desirable because the 
low-income subsidy is a national program, and thus to the greatest 
extent possible should be operated under the same rules regardless of 
where in the country an applicant lives. Allowing States to use 
resource rules that would vary from State to State would compromise 
that uniformity. Also, as we explained in the preamble, we do not 
believe allowing States to use different resource rules to determine 
low-income subsidy eligibility would significantly change the number of 
persons who might be found to be eligible for the low-income subsidy. 
This is because the option to allow States to use more liberal resource 
rules could be exercised only in cases where the Secretary found, in a 
particular State, that use of those rules would not materially increase 
the number of individuals who would be subsidy-eligible individuals.
    Comment: One commenter suggested that in addition to allowing 
States to use more liberal resource rules, we should require SSA to use 
a State's more liberal rules as well when making low-income subsidy 
eligibility determinations.
    Response: As explained above, we are not exercising the option to 
allow States to use more liberal resource rules. However, even if we 
were to exercise that option, the option applies only to eligibility 
determinations for the low-income subsidy by a State. The Part D 
statute contains no authority under which a requirement such as the 
commenter suggests could be imposed on SSA.
    Comment: One commenter suggested that we apply the low-income 
subsidy resource rules across the board to the Medicare Savings Program 
groups (that is, the QMBs, SLMBs, and QIs). The commenter believes this 
would make more people eligible for the Medicare Savings Program 
because the basic subsidy resource rules count fewer resources than the 
basic Medicare Savings Program rules.
    Response: We would note that to a large degree individual States 
already have the option to do as the commenter suggests. Under the 
authority of section 1902(r)(2) of the Act, States can elect to count 
fewer resources, or disregard greater amounts of resources, for 
Medicare Savings Program groups than they would otherwise under the 
basic resource rules. However, while this is an option for States, we 
do not have the statutory authority to impose the low-income subsidy 
rules on States' Medicare Savings Programs.
    Comment: A few commenters urged that we consider not applying 
transfers of resources for less than fair market value penalties to 
low-income subsidy applicants, as we have proposed in our regulations.
    Response: For purposes of determining eligibility for the low-
income subsidy, we will not be considering the value of assets 
transferred for less than fair market value. We do not believe that 
penalties associated with transfers translate into an appropriate 
method of counting resources for the low-income subsidy.
    Comment: We received at least one comment that our definition of 
resources should exclude the same resources currently excluded under 
the Medicaid program when determining

[[Page 4375]]

Medicaid eligibility for American Indians and Alaska Natives.
    Response: As we have explained previously in this section of the 
preamble, under section 1860D-14(a)(3)(D) and (E) of the Act, resource 
eligibility for a low-income subsidy is determined using the statutory 
provisions of section 1613 of the Social Security Act, which governs 
resource exclusions under the SSI program. Under the SSI program, a 
number of types and amounts of resources belonging to American Indians 
and Alaska Natives are already excluded. If they are excluded under SSI 
statutory provisions, they will also be excluded when determining low-
income subsidy eligibility.
    Comment: One commenter objected to the provision under which the 
low-income subsidy resource standards will be increased each year by 
the percentage increase in the Consumer Price Index, rounded to the 
nearest multiple of $10. The commenter believes this adds complexity to 
administering the low-income subsidy program, and suggested that 
resource standards be consistent across all poverty-level-based Federal 
programs.
    Response: While we understand the commenter's concern, we must note 
that the process for increasing the resource standards is mandated by 
section 1860D-14(a)(3)(D) and (E) of the Act. Therefore, we do not have 
authority to change or eliminate that process under its regulations.
    Comment: Several commenters suggested that we clarify the 
regulations to reflect that an individual can apply and be determined a 
subsidy eligible individual before enrolling in a Part D plan. Other 
commenters remarked that the proposed rule implies that an individual 
must be enrolled in a Part D plan in order to apply for low-income 
subsidies. They assert that the final regulations should make clear 
that determinations could be made both before and after enrollment in a 
Part D plan, and specify the effective date of that coverage. Other 
commenters suggest that we clarify how information verifying enrollment 
in a plan is provided to States and how States will be notified if an 
individual disenrolls from a plan.
    Response: Determinations for the low-income subsidy program can be 
made in advance of a person enrolling in a Part D plan. We believe that 
fact is clearly articulated in the proposed regulation which requires 
States to take subsidy applications starting July 1, 2005, well in 
advance of the open enrollment period for the new Part D benefit, a 
requirement we retain in the final rule. Therefore, we do not believe 
we need to make further clarifications in the final rule.
    We believe it is important to emphasize here that while 
determinations may be made in advance of the initial enrollment period 
beginning on July 1, 2005, a subsidy eligible individual is not 
entitled to the subsidy until such time as the person's enrollment in a 
plan is effective. Up until that time, there are no premiums or cost 
sharing obligations under Part D for which we must subsidize payment 
under the low-income subsidy. Accordingly, States need only to send us 
information on whether a person is eligible for the low-income income 
subsidy. We will provide information on subsidy eligible individuals to 
Part D plans and will reimburse plans for enrollees who are subsidy 
eligible individuals as provided under Sec.  423.329(d). We acknowledge 
that States may require plan enrollment information for purposes of 
coordination of benefits, but we do not believe that such information 
is necessary for purposes of determining whether a beneficiary is 
eligible for the low-income subsidy. Therefore, we will not share 
enrollment data with the States on a routine basis for the purpose of 
determining eligibility for the low-income subsidy. In Subpart J, we 
address the need for this information sharing for coordination of 
benefit purposes.
    Comment: One commenter indicated that the proposed rule 
disadvantages Social Security Title II beneficiaries who receive 
Medicare and will receive low-income subsidies. The proposed regulation 
provides that low-income Medicare beneficiaries will pay little or 
nothing for prescriptions, while those earning over 150 percent of the 
Federal poverty line applicable to the individual's family size may 
have to pay as much as 50 percent of the cost of their prescription for 
covered Part D drugs, giving them a financial disincentive to return to 
work if they incur significant prescription expenses. The commenter 
urges us to consult with SSA about these changes.
    Response: The income threshold of 150 percent of the Federal 
poverty line for low-income subsidy eligibility is established by 
section 1860D-14(a)3)(E) of the Act, and cannot be changed without a 
change in the law itself. However, while eligibility for the low-income 
subsidy is based on income, it is important to be aware that income can 
be earned income or unearned income. Under the statutory rules of the 
supplemental Security Income (SSI) program, which are used to determine 
low-income subsidy eligibility, there are significant disregards for 
earned income. Under those rules, the first $85 of earned income, plus 
one-half of any remaining earned income, will not be counted when 
determining low-income subsidy eligibility. Other earned income 
disregards may also apply, depending on each applicant's personal 
situation. Thus, those Social Security Title II beneficiaries who 
choose to return to work will have the potential for total income that 
is actually higher than 150 percent of the Federal poverty line as a 
result of the earned income disregards that will be applied in 
determining low-income subsidy eligibility.
    Comment: Several commenters suggested that our regulations should 
indicate that the indexing of resources would be rounded up in 
multiples of $10.
    Response: We do not have authority to make this change in the final 
rule. The reference in sections 1860D-14(a)(3)(D) and (E) of the Act to 
the ``nearest multiple of $10'' does not provide the discretion to 
always round up or to always round down. For purposes of indexing, the 
nearest multiple will be rounded up if it is equal to or greater than 
$5 and down if it is less than $5.
    Comment: Several commenters suggested that we needed to clarify 
that individuals deemed to be subsidy eligible do not have to take any 
further action for the low-income subsidy; rather, they only need to 
enroll in a Part D plan.
    Response: We have further clarified in the final rule that 
individuals deemed subsidy eligible individuals do not need to apply 
for the low-income subsidy.
    Comment: Several commenters expressed support for the proposed 
deeming of Medicare Savings Program individuals as full subsidy 
eligible individuals, but expressed concern that SSA will not apply 
more generous income and asset eligibility rules under Medicaid for 
individuals potentially eligible for Medicare Savings programs. These 
commenters indicated that the requirements should be the same for all 
subsidy-eligible individuals in a State, regardless of where and how 
they apply.
    Response: While States may use more liberalized methodologies under 
Medicaid for purposes of determining eligibility for Medicare Savings 
Programs, they may not employ more liberal methodologies under the 
Medicare Part D low-income subsidy eligibility should an individual 
apply and request a State eligibility determination. (However, if the 
State determines the individual is Medicare Savings Program-eligible 
under its rules

[[Page 4376]]

(that is, as a QMB, SLMB, or QI), the individual is deemed eligible for 
the subsidy) The requirements for counting income and assets are the 
same under the low-income subsidy program regardless of whether an 
individual applies at a State office or an SSA field office. These 
requirements are based on the statutory provisions of the SSI program. 
For counting income, States and the SSA are specifically precluded from 
using the more liberalized methodologies permitted under Medicaid under 
section 1902(r)(2) of the Act. For counting resources, we acknowledge 
in the proposed rule that we could have permitted States to use the 
same resources standards that States employ under Medicaid for purposes 
of determining eligibility for Medicare Savings Programs. However, we 
elected not to exercise this discretion since this authority does not 
extend to SSA and we believe national uniformity for purposes of 
eligibility determinations is a desirable goal.
    Comment: Some commenters expressed concern that the proposed rule 
does not address eligibility issues for Medicaid beneficiaries who 
become eligible after a spenddown period, either under a medically 
needy program or in a 209(b) State (that is, a State which does not 
provide Medicaid automatically to all of its SSI recipients but which 
uses more restrictive rules than those of the SSI program). They 
suggested that these beneficiaries should be informed of their 
eligibility for the low-income subsidy and given an opportunity to 
apply for the subsidy. When they have met their spenddown, they should 
be informed of their entitlement to the low-income subsidy as a full-
benefit dual eligible individuals.
    Response: We agree that the eligibility rules may be confusing for 
Medicare beneficiaries who become eligible for Medicaid after a 
spenddown period. In the final rule, we have clarified that individuals 
treated as full-subsidy eligible individuals will be deemed eligible 
for a period up to one year. Thus, individuals who have met their 
spenddown obligation and are eligible for full Medicaid coverage will 
be notified that they are eligible for a full subsidy under Part D for 
up to one year without interruption. If the individuals periodically go 
off Medicaid because they have to meet a new spenddown budget, they 
will still be ``deemed'' full subsidy eligible individuals for the 
remaining period of subsidy eligibility. We have specified ``a period 
up to one year'' to allow us the operational flexibility to deem full 
subsidy eligible individuals for a period less than 12 months during a 
calendar year if they are newly identified to us in a month later than 
January. Thus, an individual may be deemed subsidy eligible for 9 
months if they are reported by the State as a full-benefit dual 
eligible individual in March, for example. If the same person continues 
to be a full-benefit dual eligible individual in the fall of the same 
year, he or she will be deemed a full subsidy eligible the next year 
for the full calendar year.
    Comment: We received several comments that proposed Sec.  
423.773(c), which requires the State to notify full-benefit dual 
eligible individuals that they are full subsidy eligible, should 
conform to proposed Sec.  423.904(c)(3) in subpart S which requires 
States to notify all individuals deemed full subsidy eligible 
individuals of their eligibility for the full subsidy. These commenters 
suggested that the notice be given by July 1, 2005, for those eligible 
at that time, or at the time they attain eligibility for the Medicaid 
program that enables them to be treated as full subsidy eligible, if 
after July 1, 2005. Further, the commenters suggested that the notice 
should make clear the actions required of individuals treated as full 
subsidy eligible individuals, should direct individuals to information 
sources where they may gather additional information, counseling and 
assistance; and apprise individuals of appeal rights for loss of 
Medicaid coverage and appeal rights associated with the determination 
on the level of subsidy. They also suggest that we should develop model 
notices based on input from beneficiaries and encourage States to 
include a reminder in their notice letter of the need to recertify 
their eligibility under the applicable benefits program.
    Other commenters suggest that we should modify its final rule to 
clarify that States will notify full-benefit dual eligible individuals 
and low-income Medicaid beneficiaries participating in the Medicare 
Savings Program that they qualify for a full subsidy under the new drug 
benefit. In addition, we should develop a similar notification with the 
SSA, or require States to coordinate with SSA, for to SSI recipients in 
209(b) States and non-1634 States (that is, a non-209(b) State which 
requires SSI recipients to file a separate Medicaid application) since 
there could be SSI recipients in these States who are not receiving 
Medicaid and who would not appear under the States' eligibility 
systems.
    Response: We have clarified in the final rule that we will send 
notices of eligibility to all deemed full subsidy eligible individuals. 
We believe that if we send the notices to all the individuals rather 
than States, it will ensure more uniformity in the content of and 
timeliness of the notices. Additionally, our sending the notices to 
individuals deemed eligible for the full subsidy will ensure we reach 
people States may not be able to identify, namely Medicare 
beneficiaries receiving SSI benefits in States where SSI does not 
automatically entitle a person to Medicaid. Our goal is to begin 
sending notices to individuals deemed to be subsidy eligible in the 
Spring of 2005, before the start of taking applications for individuals 
who are not deemed eligible for the low-income subsidy. We will ensure 
that the notices clarify that individuals deemed eligible for a full 
subsidy need not apply to receive the subsidy.
    Comment: One commenter suggested that we explain how Part D plans 
are notified of an enrollees' eligibility for a low-income subsidy.
    Response: Once a subsidy individual enrolls in a Part D plan, CMS, 
through a data match, will inform Part D plans that the individual 
qualifies for a low-income subsidy.
    Comment: One State commenter remarked that the draft regulation 
does not specify which agency is financially responsible for sending 
notices to individuals deemed eligible for the full subsidy. The 
commenter pointed to section 1860D-14(a)(3)(B)(i) of the Act, which 
references funds to be appropriated to the SSA necessary for the 
determination of the low-income eligibility determinations. Some 
commenters asked if the SSA would provide an appropriation to each 
State to enable States to provide notices to dual eligibles as 
specified in the proposed rules. The commenters also wondered which 
entity had responsibility for explaining to full-benefit dual eligible 
individuals how coverage of Part D drugs in Part D plans work and how 
such coverage will differ from the coverage they received under the 
State's Medicaid program.
    Response: For reasons discussed above, we have clarified in the 
final rule that we will send notices of eligibility to all individuals 
deemed full subsidy eligible individuals. This should relieve States of 
the financial burden of sending notices to these individuals. We will 
also educate Medicare beneficiaries, including full-benefit dual 
eligible individuals, through a variety of methods about prescription 
drug coverage under the new Part D benefit. (See discussion in Subpart 
B). However, we expect that States will have an important role in 
educating Medicare beneficiaries, particularly full-benefit

[[Page 4377]]

dual eligible individuals, about the low-income subsidy program and the 
new Medicare drug benefit. We also note that during Federal Fiscal 
Years 2005 and 2006, a total of $125 million in grants are made 
available under 1860D-23(d) of the Act to States with SPAPs to assist 
in the outreach and education of SPAP enrollees transitioning to 
Medicare Part D.
    Comment: A few commenters suggested that proposed Sec.  423.773(c) 
should be edited to replace the term ``full-benefit dual eligible'' 
with ``full subsidy eligible,'' where appropriate. They specifically 
reference the requirement on States to notify full-benefit dual 
eligible individuals that they are eligible for full subsidy premiums 
and deductible, noting that in subpart S a similar requirement is 
imposed on States to notify full subsidy eligible individuals. The 
commenters suggest that this inconsistency represents an error in the 
proposed rule.
    Response: We agree that this inconsistency is an error. For reasons 
previously addressed, we have clarified the final rule to correct this 
inconsistency and to indicate that we (not States) will send notices to 
all individuals deemed to be full subsidy eligible individuals.
    Comment: Some commenters suggest that SSA should screen 
applications to identify individuals who appear to have excess assets 
or income for the subsidy but who may qualify for Medicare Savings 
Programs in States that use more liberal eligibility rules for such 
programs. Alternatively, the commenters suggest SSA forward such 
applications to State offices or use State-specific income and asset 
rules to determine eligibility.
    The commenters noted that by qualifying for Medicare Savings 
Programs, an individual will automatically be eligible for the low-
income subsidy, despite the fact that if the same individual applied, 
he or she may not have qualified for the subsidy as a result of excess 
income or resources. The commenters suggest that individuals who 
qualify should be automatically enrolled by States in Medicare Savings 
Programs with an opt-out provision. Further, we should make benefit 
counseling available to these beneficiaries since enrollment in a 
Medicare Savings Program can affect the amount of assistance a 
beneficiary may receive through other public assistance programs. 
Finally, the commenters suggest that individuals who do not enroll in a 
Medicare Savings Program but who qualify for such a program should 
still be considered automatically eligible for the subsidy.
    Response: We acknowledge that some individuals who apply and 
qualify for a Medicare Savings Program (as a QMB, SLMB, or QI) with a 
State's Medicaid office will be considered automatically eligible for 
the full subsidy, despite the fact that if the same individual applied 
for a low-income subsidy at the State or SSA, they may not have 
qualified for the full subsidy as a result of excess income or 
resources. This scenario is more a function of Medicaid rules 
permitting States to use more liberalized income and asset 
methodologies than a lack of uniformity for the rules of the low-income 
subsidy program. In those States that use more liberalized income and 
asset methodologies under section 1902(r)(2) of the Act for purposes of 
determining eligibility for Medicare Savings Programs, individuals may 
find it more advantageous to apply for Medicare Savings Programs rather 
than applying for the low-income subsidy directly with States or SSA.
    We are working with SSA to design a process that will provide high-
level information which does not include income or resource information 
but will provide the outcome of the subsidy determinations to States 
for purposes of identifying individuals who apply at SSA and who may 
also qualify for full Medicaid benefits or Medicare Savings Programs. 
With this process, we hope to avoid situations in which an individual 
applies for a low-income subsidy at an SSA office, finds out that he or 
she has excess income or resources to qualify for the full subsidy or 
even the subsidy available to other low-income subsidy eligible 
individuals, and remains unaware that he or she may automatically 
qualify for a full subsidy if the individual chooses to enroll in a 
State's Medicare Savings Program (as a QMB, SLMB, or QI).
    Comment: We received one comment that SSA needs to use information 
provided from beneficiaries applying for low-income subsidies to better 
target the mailings that SSA is required to do under section 1144 of 
the Act. Commenters note that this provision requires SSA to annually 
identify beneficiaries potentially eligible for Medicare Savings 
programs, notify them about the programs, and send copies of the list 
of individuals identified as potentially eligible for the Medicare 
Savings Programs to the appropriate State agencies. In addition to 
using the data on income and assets for the section 1144 of the Act 
mailings, the commenters suggest that SSA could provide States the 
income and resource data for determining eligibility for Medicare 
Savings Program eligibles. Providing this information could reduce the 
burden on beneficiaries from having to submit this information twice 
(that is, to SSA for the low-income subsidy and to States for 
enrollment in Medicare Savings Programs). The commenters suggest that 
while privacy issues may be of concern, one option to address those 
concerns would be to allow applicants to consent to sharing information 
with their State agency to assist the State in determining whether they 
are eligible for Medicare Savings Programs.
    Response: Again, we are working with SSA to design a process to 
provide subsidy determinations to States for purposes of identifying 
individuals who apply at SSA and who may also qualify for a Medicare 
Savings Program in the State. We expect that States will use the 
determination to contact individuals who may qualify and to assist them 
in the application process. As the commenter suggests, SSA is unable to 
provide income and resource information directly to States for privacy 
reasons. Therefore, the information provided to States will be limited 
to high-level information on the outcome of the subsidy determination.
    Comment: Some State commenters noted that States lack a practical 
way to determine whether applicants have also applied for the low-
income subsidy through SSA. They note that if SSA and States make 
separate determinations that do not agree some form of reconciliation 
will be needed. They further note that this need for reconciliation 
will further complicate processing and add to administrative burden and 
costs.
    Other commenters requested clarification on the data exchange 
process. The commenters assert that they cannot envision a data 
exchange process that would be fast enough to prevent an applicant from 
receiving a denial from SSA and subsequently applying at the State 
office. They noted that this could result in duplicative work for the 
State and SSA. The commenters ask that the rule be clarified for this 
coordination.
    Response: We agree that it will be important to design a process in 
which States can determine if an individual has already filed an 
application with SSA, and vice versa. We expect to provide further 
information on this process through operational guidance. We also note 
that, based on comments, we have clarified in the final rule that 
multiple applications will not be permitted in cases where an 
individual has received a positive determination from either SSA or the 
State. In other words, an individual may not file a second application 
for the remainder of the eligibility period with the alternate

[[Page 4378]]

agency if he or she has received a positive determination from the 
State or SSA. This requirement is not intended to preclude an 
individual from reporting subsidy changing events in accordance with 
the determining agency's rules, but rather to prevent confusion that 
could arise if a State and SSA process determinations for the same 
individual.
3. 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 Part D 
plans 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.
    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.
    In the proposed rule we noted 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 Part D plan 
. Initial eligibility determinations would remain in effect for a 
period not to exceed 1 year, beginning no earlier than January 1, 2006.
    Because States and Social Security offices will be performing 
subsidy determinations, States and SSA would need to share data with 
us. We would then use the data to notify the Part D plan in which the 
individual is enrolled of the individual's eligibility for the low-
income subsidy. We would also use the data to provide information on 
the individual's income bracket so that Part D plans may identify the 
cost-sharing amounts and, in the case of other subsidy eligible 
individuals, the monthly beneficiary premiums that may be charged to a 
subsidy eligible individual as discussed later in this subpart of the 
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. 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 have been 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.
    For 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 to the Medicare program 
from such verification. Therefore, as stated in the proprosed rule, we 
intend to use the most efficient and cost-effective process that will 
balance the need for program integrity with the goal of reducing the 
paperwork burden and cost.
    We envisioned a process based on an operations research strategy 
whereby States and SSA would build on existing verification processes 
used for other programs. We planned 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 would 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, countable 
real estate). By developing a targeted approach, we believed we could 
strike an appropriate balance between administrative costs and program 
goals and objectives. We requested 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 rule permits a personal representative to assist 
in the application process. We proposed 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. We believe 
States and SSA will be able to verify information through data matches 
with other sources that will substantially eliminate the need for the 
beneficiaries to bring statements from financial institutions with them 
when they apply.
    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 indicate 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) required the submission of 
statements from financial institutions only if requested by the State 
or SSA.
    Comment: Some commenters suggested that the regulations should 
specify that a determination notice be sent to the applicant no later 
than 30 days after the application is filed. Additionally, they 
suggested that SSA and States should be required to notify

[[Page 4379]]

CMS within 24 hours of an individual being determined eligible for the 
subsidy. Other commenters questioned whether the State Medicaid agency 
is required to complete determinations within 45 days as is required 
for most Medicaid eligibility determinations under Sec.  435.911. These 
commenters argue that the regulations should specify a time standard 
that would apply to determinations made by either the State or SSA.
    Response: We do not have authority to direct SSA to determine 
subsidy eligibility within a given time period, and have decided not to 
impose a specified period on States through regulation. Instead, we 
will provide operational guidance to States, monitor the time period 
for determining subsidy eligibility, and take action as appropriate. As 
general guidance, we expect that States will determine subsidy 
eligibility within time periods that are at least consistent with the 
processing of State Medicaid applications.
    Comment: Some commenters suggested that in order to avoid delays in 
beneficiaries being able to use their subsidy benefits while their 
application is pending, the final rule should offer beneficiaries the 
option of applying through a presumptive eligibility system. Commenters 
suggested that the system could be designed in a manner whereby an 
applicant can complete a form at a provider's office or other location 
where they declare their family size, income and assets. If the 
individual's income and resources are below the eligibility levels, 
they could be found presumptively eligible. The individual could then 
have the obligation placed on him or her to fill out the complete 
application within a prescribed period of time. The commenters argue 
that such a system would encourage beneficiaries to apply since they 
would see the benefits of the system.
    Response: We appreciate that it is important for subsidy 
determinations to be made as quickly as possible so that individuals 
will be able to receive extra help with the payment of cost sharing and 
premiums when enrolled in a Part D plan. We are working with States and 
SSA on an outreach strategy to try to encourage individuals potentially 
eligible for the low-income subsidy to apply for the subsidy as early 
as possible, starting July 1, 2005. Under this outreach strategy, we 
will encourage individuals to apply and ``pre-qualify'' for the low-
income subsidy before enrolling in a Part D plan so that they will know 
ahead of time whether or not they are eligible for extra assistance 
with the payment of premiums and cost sharing. However, the subsidy 
will not be effective until the start of the program when the 
individual is actually enrolled in a Part D plan.
    At this time, we decline to implement a presumptive eligibility 
process for individuals not deemed to be subsidy eligible individuals. 
We believe our streamlined process that relies on self-attestation of 
the information on the application with such verification as SSA or the 
States determine is appropriate will ensure that individuals quickly 
receive subsidy determinations from SSA or States, so that they can get 
the extra help they need. It is worth noting that the simplified 
application being developed in consultation with SSA will be available 
on the Internet and will be available to providers if they choose to 
offer them at their locations. In addition, it is important to note 
that individuals do not need to apply at State offices or SSA field 
offices in person. They may apply over the phone via SSA's 1-800 
number, they may send applications via the mail or over the internet, 
and they may have individuals assist them in completing the 
applications on their behalf.
    Comment: Some commenters suggest that we clarify whether 
individuals who currently receive benefits as a full-benefit dual 
eligible individual, SSI recipient or under the Medicare Savings 
Program (as a QMB, SLMB, or QI) are required to undergo a separate and 
new eligibility determination in order to qualify as a full subsidy 
eligible individual. The commenters suggested that these individuals 
should be required to recertify their eligibility under these programs 
in accordance with existing requirements pertaining to recertification 
or redetermination.
    Response: Individuals who currently receive benefits as a full-
benefit dual eligible, SSI recipient or under the Medicare Savings 
Program are not required to undergo a separate eligibility 
determination in order to qualify as a full subsidy eligible. They are 
``deemed'' or treated as full subsidy eligible individuals without 
having to complete a separate application. We have clarified this in 
the final rule at Sec.  423.773(c).
    As part of our yearly notice to deemed subsidy eligibiles, we will 
explain that the loss of Medicaid near the end of the calendar year 
could impact an individual's status as a full subsidy eligible 
individual in the next year. Thus if someone loses Medicaid and does 
not regain eligibility during a year, he or she will retain subsidy 
eligibility during the remainder of the calendar year, but will no 
longer be automatically deemed for the full subsidy in the next 
calendar year.
    Comment: Some commenters would like us to better define eligibility 
determination periods for the low-income subsidy. The commenters 
suggest that the eligibility determination should be defined as one 
year. Further, it should not be associated with either a State Medicaid 
program redetermination or an SSA redetermination.
    Another commenter suggested that we should interpret the ``month of 
application'' for a low-income subsidy individual to mean the first day 
of the month a Part D plan is notified by us of the individual's 
eligibility for the low-income subsidy. Alternatively, the commenter 
suggests that the application processing timeframes be developed and 
implemented in such a way as to avoid administrative burden and 
beneficiary confusion. For example, we should specify that the 
application processing timeframes would start beginning with the month 
in which the State agency received a ``complete'' application. The 
commenter asserts that incomplete applications must be rendered 
``complete'' or rejected within 30 days. Further, complete applications 
should be processed no later than 30 days from the date the application 
was rendered complete, meaning Part D plans should be notified within 
30 days of the date the application was rendered complete that an 
individual is eligible for a low-income subsidy. Once notified, these 
individuals would be moved into the appropriate internal plan and cost-
sharing would be appropriately reflected for that individual sooner 
rather than later.
    Response: We do not have the authority to accept the first 
commenters' suggestion. Under section 1860D-14(a)(3)(B)(ii) of the Act, 
the statute, initial determinations for individuals who apply for the 
subsidy are effective beginning with the month the individual applies, 
but no earlier than January 1, 2006. These initial determinations shall 
remain in effect for a period specified by the Secretary, but not to 
exceed one year, regardless of whether the determination is made by a 
State or SSA. Redeterminations of eligibility for those applications 
processed by States are to be made in accordance with the frequency and 
manner in which the State makes Medicaid redeterminations, which must 
be conducted at least annually. Redeterminations made by SSA may be of 
a frequency determined by the Commissioner.
    We will address the issue associated with the completeness and 
timeframe

[[Page 4380]]

for processing an application through operational guidance. It is 
important to note that we do not have authority to direct SSA to 
determine subsidy eligibility within a given time period, and we have 
decided not to impose a specified period on States through 
codification.
    Comment: Some commenters question whether retroactive eligibility 
will be allowed for full-benefit dual eligible individuals. They 
suggest that the regulations be clarified for that possibility.
    Response: Retroactive eligibility for the low-income subsidy is 
only an issue if a full-benefit dual eligible individual is already 
enrolled in a Part D plan. For instance, if a person is enrolled in a 
Part D plan and decides not to apply for the subsidy, he or she may 
have retroactive subsidy eligibility if the individual later qualifies 
for Medicaid. By extension of being entitled to full benefits under 
Medicaid, the individual will automatically be eligible for the low-
income subsidy. In this case, subsidy eligibility will extend back to 
the start date of Medicaid eligibility, which could be up to three 
months earlier if the individual would have qualified for Medicaid 
during the three month retroactive period. As such, the individual will 
be reimbursed by the plan for any extra cost sharing he or she 
otherwise would not have paid as a full subsidy eligible individual. 
This would also apply to individuals eligible under a Medicare Savings 
Program as a SLMB or a QI(but not as QMB, because QMBs cannot receive 
retroactive benefits under Medicaid statute). For QMBs and other, non-
dual eligible individuals who are enrolled in a Part D plan, and later 
apply and are determined eligible for low income subsidy assistance, 
their eligibility, consistent with the statute, would be effective on 
the first day of the month in which they applied for the low income 
subsidy.
    Comment: One commenter indicated that the proposed regulations do 
not address whether eligibility determinations in one State are 
transferable to another State. The commenter also noted that there is 
no discussion of the transfer of information between the State agency 
and SSA, or the transfer of information between States.
    Response: If the eligibility determination for an individual not 
deemed to be a full subsidy eligible individual was processed by SSA, 
then SSA ``owns'' the beneficiary for redeterminations and appeals. 
Since SSA is a national agency applying uniform national standards, 
redeterminations and appeals will be processed even if a beneficiary 
moves between States. However, if the beneficiary no longer resides in 
a State and the State processed the subsidy determination under its own 
system, the State can no longer reasonably be expected to be held 
liable for the subsidy redeterminations and appeals, consistent with 
the manner and frequency a State would redetermine eligibility under 
Medicaid. The beneficiary in this instance would need to apply in the 
new State of residence, or could apply with SSA unless otherwise deemed 
eligible for the full subsidy.
    Comment: Several commenters question whether changes in 
circumstances, such as increases or decreases in income, need to be 
reported by the beneficiary.
    Response: For individuals who apply for the low-income subsidy, 
changes in financial circumstances that could impact the individual's 
eligibility for the low-income subsidy should be reported to the agency 
that processed the subsidy application in accordance with that agency's 
rules.
    SSA will be publishing rules regarding subsidy changing events that 
could impact low-income subsidy eligibility. For individuals who are 
deemed eligible for the full subsidy, changes in circumstances that 
would impact eligibility for Medicaid or SSA should be reported as 
required under those programs. However, it is important to note that, 
for administrative ease, we will deem individuals as subsidy eligible 
for a period not to exceed one year, even if changes in circumstances 
may cause someone to lose Medicaid or SSI for a period of time. If the 
person is no longer eligible for Medicaid or SSI after the period of 
deemed subsidy eligibility, he or she will no longer be automatically 
eligible for the low-income subsidy and must apply in order to continue 
receiving the benefit.
    Comment: One commenter believes that we should provide prompt 
identification of an individual's institutional status for the purpose 
of overriding the cost sharing at the point of sale.
    Response: States will be providing information on a full-benefit 
dual eligible individual's institutional status on a monthly basis to 
us. We will provide this information to Part D plans. We will address 
through operational guidance how plans should address situations in 
which an enrollee's institutional status is different than the 
information provided to them from us.
    Comment: One commenter makes an argument that the statute permits 
SSA to contract with SPAPs to make determinations of eligibility for 
financial assistance in accordance with SSA's procedures. In addition, 
the commenter argues that there is no legal impediment to a State's 
designation of its SPAP as the State enrollment agency, so long as 
eligibility determinations and redeterminations are made in the same 
manner as for Medicaid recipients. The commenters assert there is 
precedent for this practice. One commenter said that we should ensure 
that any arrangements with SPAPs to make eligibility determinations are 
considered for Federal matching funds. Finally, the commenters suggest 
that SPAPs have direct on-line access to on-line reporting systems to 
facilitate the SPAP's ability to determine a person's eligibility for 
the low-income subsidy. They suggest that we clarify in the final 
regulations and in guidance that State Medicaid programs have the 
option to permit SPAPS to make initial eligibility determination and 
redeterminations for subsidies for low-income persons who apply for 
benefits through an SPAP.
    Response: By statute, eligibility for the low-income subsidy 
program must be determined by the State Medicaid agency or the Social 
Security Administration. While it cannot be the entity ultimately 
responsible for determining eligibility, SPAPs can serve as an intake 
point for low-income subsidy applications. SPAP offices will be able to 
access the SSA application from the Internet in order to assist 
individuals in applying for a subsidy. We also note that entities other 
than SPAPs, including community organizations and other non-Medicaid 
State offices, can provide assistance to individuals in completing the 
SSA application.
    Comment: Some commenters note that the enrollment process for Part 
D plans is separate from the application process for the low-income 
subsidy. They note that there is no mechanism in the proposed rule to 
permit a beneficiary to apply for the low-income subsidy at the time of 
enrollment in a Part D plan. They also note that Part D plans are not 
required to inform beneficiaries that a subsidy may be available to 
them. They suggest that SPAPs should be allowed to make determinations 
and redeterminations of subsidy eligibility in order to facilitate 
applications for SPAP enrollees.
    Response: Again, while SPAPs may serve as an intake point for low-
income subsidy applications the State Medicaid agency or the Social 
Security Administration retains ultimately responsible for eligibility 
determinations. For the comment that

[[Page 4381]]

Part D plans are not required to inform beneficiaries that a subsidy 
may be available, we agree. However, we believe many Part D plans will 
encourage their enrollees to apply if they indicate they are low-income 
and need extra assistance with premiums and cost sharing. We also 
encourage SPAPs to inform their members of the availability of the low-
income subsidy to provide extra assistance with premiums and cost 
sharing under Medicare Part D, and to assist their members in 
completing the SSA application.
    Comment: Many State commenters suggest that States should be 
allowed to meet their statutory obligation for the low-income subsidy 
by receiving applications and passing them to SSA for the determination 
process. They assert that use by States of a streamlined low-income 
subsidy application process through SSA would reduce the burden on 
States of doing separate determinations. They also suggest that the 
process include use of web-based applications accessed with Federally 
funded computers at Medicaid eligibility sites, paper applications that 
are batched and sent to SSA by the eligibility sites, and phone 
applications conducted directly with SSA. Another commenter suggested 
that States that only collect applications and forward them to SSA 
should not be responsible for redeterminations and appeals for these 
applications. This commenter also believes these States should not be 
responsible for screening applications for Medicare buy-in programs.
    A few State commenters also assert that we have made contradictory 
statements with regard to the role of SSA and States in taking 
applications for the low-income subsidy. They indicate that we have 
issued guidance that States could batch up applications and ship them 
to SSA for processing, and that SSA would make the determinations, send 
the notifications, and conduct the appeals for the low-income subsidy 
program. However, the commenters point out that the regulations in 
Sec.  423.774 and Sec.  423.904(a), and the statute at section 1935 of 
the Act, direct States to make eligibility determinations and 
redeterminations for low-income premium and subsidies.
    Finally, several State commenters seek clarification on whether 
States could be required to perform administrative functions such as 
providing personnel resources for answering questions and assisting 
applicants, making determinations and redeterminations, making systems 
changes to record determinations and redeterminations made by the 
State, printing applications, conducting appeals, sending notices to 
clients, coordinating with financial institutions for verification and 
developing and sending reports to us.
    Response: The statute clearly sets forth the requirement that 
eligibility for the low-income subsidy program will be determined by 
either State Medicaid agencies or by the Social Security 
Administration. As such, States must have the ability to determine 
eligibility if someone requests a ``State'' subsidy determination. As 
part of this obligation, States are required to send notices of subsidy 
determinations, process redeterminations, and handle appeals.
    We encourage States to consider using the SSA application form and 
process as their default process for processing low-income subsidy 
applications. Under this process, States would assist individuals who 
agree to complete an SSA application. Once completed, States would 
submit the applications to SSA for processing. While States would still 
have to develop a process to determine eligibility for an individual 
who specifically requests a ``State'' determination as opposed to an 
``SSA'' determination, States could offer the SSA low-income subsidy 
application process to individuals in order to reduce the 
administrative burden associated with sending notices, processing 
appeals and redeterminations, and verifying information reported on 
subsidy eligibility applications. Again, States should be mindful that 
the statute does not permit States to refuse to accept and act on 
subsidy eligibility applications if the applicants insist on having 
them treated as applications with the State agency.
    We will be working with SSA to provide operational guidance to 
States on how they may utilize the SSA process for those applicants who 
agree to use the SSA application. The SSA process includes an internet-
based application that may also be accessed in paper form. Under this 
process, individuals need not apply in person with the SSA or States; 
however, if they do apply in person at a State office, the State would 
be obligated to assist individuals in completing the application and to 
screen individuals for Medicare Savings Program eligibility.
    Comment: Some State commenters expressed concern that, should the 
States process determinations, redeterminations, and appeals, as well 
as SSA, it is not possible to create equal systems for clients, 
resulting in two competing processes in an already complex system. They 
note that in some States, beneficiaries have limited access to field 
offices compared to State offices. They also argue that, even if the 
State follows the Federal guidelines, it does not seem likely that a 
beneficiary following the State process will experience the same 
procedure as a client using the SSA process. The commenters ask for 
reconsideration of this issue, or alternatively, clarification about 
how continuity would be assured.
    Response: For individuals who apply for the subsidy, one notable 
area of inconsistency could be the timing and manner of 
redeterminations of subsidy eligibility. This process, by statute, is 
dependent on which entity processed the application. If SSA processed 
the application, SSA will determine the manner and frequency of the 
redeterminations. If a State processed the application through its own 
subsidy eligibility determination system, the manner and frequency of 
the redetermination will be consistent with how the State redetermines 
eligibility for Medicaid. For individuals deemed eligible for the full 
subsidy, the redetermination process will be based on the underlying 
program that automatically qualified the individual for the subsidy, 
for example, Medicaid or SSI.
    Comment: Some State commenters indicated that they did not believe 
States would be able to achieve the degree of automation at the start 
of the program as envisioned by CMS in the preamble of the proposed 
rule for purposes of verifying an applicants' income and resources. 
They also noted that existing State eligibility systems are not easily 
modified or adapted without considerable State expense. Finally, a few 
commenters suggested that the regulation implies that States may be 
able to access other agencies' databases to verify income and 
resources. The commenters suggest that such databases be listed or 
otherwise specified.
    Response: We recognize that existing State eligibility systems are 
not easily modified or adapted without considerable State expense; 
however, the law is clear that States must be able to determine low-
income subsidy eligibility. States therefore need to develop a process 
to support the determinations when specifically requested of them.
    We strongly recommend that States consider using the SSA 
application as their default application for processing low-income 
subsidy applications and encourage States to assist applicants in 
filing their applications with SSA. While States would still have to 
develop a process to determine eligibility for an

[[Page 4382]]

individual who requests a ``State'' determination as opposed to an 
``SSA'' determination, States may use the SSA low-income subsidy 
application and process in order to reduce the administrative burden 
associated with sending notices, processing appeals and 
redeterminations, and verifying information reported on subsidy 
applications. States could focus most of their attention on assisting 
individual with completing the SSA application, and screening and 
enrolling individuals in the Medicare Savings Program.
    Comment: One commenter asks that we keep the period of comment on 
the proposed rule open until comments are due on the SSA's regulation.
    Response: We cannot keep the comment period open on this proposed 
rule until the comments are due on the SSA regulation regarding low-
income subsidy determinations. We are working closely with SSA during 
the regulations process to ensure consistent rules regarding low-income 
subsidy are put in place by both agencies.
    Comment: Since generally only 50 percent Federal financial 
participation (FFP) is provided for the State's role in the 
administration of the low-income subsidy program, several State 
commenters asserted that the cost associated with administration of the 
Medicare program could prohibit the provision of other State services. 
States noted that they would have to use a significant amount of 
resources from their general fund and asked us to consider reducing the 
State's responsibilities due of the lack of funding for the costs 
associated with implementation of the low-income subsidy program. The 
State commenters suggest that FFP associated with the State role in 
this program should be derived from a cost allocation methodology that 
attributes 100 percent to the Medicare program.
    Response: While we sympathize with the commenters' concerns, we do 
not have the authority to change the Federal financial participation 
rate available to States. The statute specifies that States are to be 
reimbursed according to the normal Federal match for administrative 
costs, which is generally 50 percent.
    Comment: A few commenters expressed concern that the eligibility 
process for the low-income subsidy is different than the process the 
State uses to determine eligibility for Medicaid. The commenter 
indicated that by having different methodologies, States will be more 
error prone in making determinations. The commenters also noted that 
they would incur programming costs and additional staff training to 
incorporate this new method, and suggested that Federal financial 
participation be increased to 100 percent to account for these costs.
    Response: The process for determining eligibility for the low-
income subsidy is based on statutory provisions that specifically 
preclude States and SSA from using the more liberalized methodologies 
permitted under Medicaid for purposes of counting income. For counting 
resources, we acknowledge in the proposed rule that we could have 
permitted States to use the same resources standards that States employ 
under Medicaid for purposes of determining eligibility for Medicare 
Savings Programs, if such standards would not significantly increase 
the numbers of individuals who are eligible for the low-income subsidy. 
However, as we noted in the preamble to the proposed rule, we elected 
not to exercise this discretion since, as we noted in responses to 
previous comments, we believe national uniformity for purposes of 
eligibility determinations is a desirable goal.
    For the suggestion that the Federal financial participation rate 
should be 100 percent, we note that we do not have the authority to 
change the Federal financial participation rate available to States. 
The statute specifies that States are to be reimbursed according to the 
normal Federal match for administrative costs, which is generally 50 
percent.
    Comment: Some commenters believe that it is unclear whether the 
Federal government will require subsidy applicants to show proof of 
Medicare enrollment in order to apply for the subsidy. If not, the 
commenters expect that States will have coordination problems, as they 
are reliant on periodic, and not real-time, data matches to assess 
Medicare enrollment.
    Response: We are exploring options for States to verify Medicare 
eligibility if the applicant cannot provide proof.
    Comment: Some commenters suggested that low-income subsidy 
applicants, no matter where they apply, should have the opportunity to 
be considered for full Medicaid eligibility. They suggest that the 
simplified application form should include an option for persons to 
have their application reviewed for Medicaid eligibility.
    Response: The statute specifies that, in addition to determining 
eligibility for the low-income subsidy, States are directed to screen 
for eligibility for medical assistance programs for the payment of 
Medicare cost sharing, and to offer enrollment to eligible individuals 
for such programs. As a practical matter, we believe States will 
identify individuals with limited income and resources who may qualify 
for full Medicaid benefits as part of this process. In addition, it is 
important to emphasize that we are working with SSA to design a process 
to provide subsidy eligibility determinations to States for purposes of 
identifying individuals who apply at SSA and who may also qualify for a 
Medicare Savings Program in the State. We expect that States will use 
this information to contact individuals who may qualify for assistance 
with Medicare cost sharing and to assist them in the application 
process for the Medicare Savings Programs.
    Comment: Some commenters suggest that the verification process for 
information provided on low-income subsidy applications should not 
impose an undue burden on applicants. They argue that the need to 
provide documentation of income and assets is one of the most 
significant barriers to enrollment in Medicare Savings Programs. They 
suggest that States should have access to SSA's automated systems to 
verify financial eligibility information for the low-income subsidy 
program. Further, States should only be permitted to ask for one bank 
statement and only in such cases where an applicant refuses to sign an 
authorization form to permit the eligibility worker to obtain the 
information directly from the financial institution. Some commenters 
also suggest that documentation should be produced as a last possible 
resort.
    Response: Individuals will not have to bring volumes of information 
with them when they apply using the SSA application process. The 
simplified application developed by SSA, in consultation with CMS, is 
based on the principle of self-attestation. While some information may 
be requested from applicants on an exception basis, based on responses 
to certain questions or based on inconsistencies from electronic data 
matches, the majority of applicants will not need to provide additional 
information beyond what is submitted and attested to in the application 
form.
    As we have indicated in other responses, we recommend that States 
encourage and assist applicants in applying for the low-income subsidy 
using the SSA application (that is, assist applicants in completing the 
SSA application and forward it to the SSA to make the determination). 
In such cases, SSA would verify income and resources for the low-income 
subsidy utilizing its automated systems. For individuals who prefer a 
``State'' rather than ``SSA'' determination, we encourage States to use 
an application form similar to the

[[Page 4383]]

one utilized by SSA and also to find ways to streamline the 
verification process by utilizing electronic data matches to the 
greatest degree possible. However, we recognize that States may not be 
able to achieve the same verification process utilized by SSA. This may 
encourage some applicants to apply using the SSA process rather than 
the State process.
    Comment: Some commenters encourage CMS and SSA to retain the 
strategy to devise a uniform application that reflects uniform 
eligibility requirements. The commenters suggest that the application 
be designed to serve as the Medicare Savings Program application and 
full Medicaid application as well. The commenters also suggest that the 
combined form should reflect our proposed definition of countable 
assets in Sec.  443.772 and be at least as streamlined as the model 
Medicare Savings Program application adopted by CMS and States. The 
commenters assert that the draft SSA application includes questions on 
life insurance, burial accounts, in-kind support and maintenance, and 
transfers of assets that do not appear on the model Medicare Savings 
Program application.
    Response: While nothing prevents a State from developing a special 
addendum to the low-income subsidy application to address questions 
specific to Medicaid or Medicare Savings Programs eligibility, the 
application for the low-income subsidy program must reflect the 
definition of countable income and resources outlined in this final 
rule. For reasons we have previously explained, the definition of 
income and resources used for purposes of the low-income subsidy 
program could vary from the definitions used by State Medicaid programs 
for purposes of determining eligibility for full Medicaid or for 
programs that provide assistance with Medicare cost sharing. Some 
States may use more liberalized methodologies than the basic SSI 
statutory rules for counting income and resources, on which the low-
income subsidy application is based. For these reasons, questions on 
life insurance, burial accounts, and in-kind support and maintenance 
need to be clearly articulated in the application in order to determine 
income and resources for the low-income subsidy. Questions regarding 
transfers of assets for less than fair market value will not be 
included on the application as we do not believe that penalties 
associated with such transfers are appropriate when counting resources 
for the low-income subsidy.
    Comment: A few commenters suggest that Sec.  423.774 be 
strengthened and revised to ensure that eligible older adults and 
persons with disabilities remain enrolled in the low-income subsidy 
from year to year. They suggest that we rewrite the final rule to 
define the eligibility period as one year, regardless of which entity 
made the determination. They argue that the statute and Congressional 
intent support an interpretation giving the Secretary of HHS the 
authority to determine the term of the eligibility determination period 
and the Commissioner and the States the authority to determine the 
manner in which redetermination or appeals are made. They argue that 
redeterminations in this context are meant to convey reconsiderations, 
not renewals of eligibility. Commenters further suggest the Secretary 
use his discretion to establish an annual, passive reenrollment process 
that would apply regardless of whether the initial determination was 
made under a State Medicaid plan or by the Commissioner of SSA. They 
suggest that the process should entail the use of a pre-printed renewal 
post-card with instructions to return the card only if there are 
corrections about eligibility status.
    Response: We do not agree that we have the discretion outlined by 
the commenter. Consistent with the statute, the proposed and final 
regulations state that the initial determination is effective for up to 
a year. Thereafter, the timing of redeterminations of eligibility 
depends on which entity processed the application. If SSA processed the 
application, SSA will determine the manner and frequency of the 
redetermination. If a State processed the application under its own 
subsidy eligibility determination system, the manner and frequency of a 
redetermination will be consistent with how the State redetermines 
eligibility for Medicaid.
    Comment: One commenter questioned whether the proxy signature 
process discussed in the preamble meant that we are relaxing its 
requirement for signatures on applications.
    Another commenter suggested that the regulation clearly set limits 
as to how telephonic proxy designations are made and acted upon. Also, 
proxy certification should only apply to the accuracy of the proxy's 
transcription, and not to the accuracy of the underlying information.
    Response: Under a proxy signature process, an applicant verbally 
attests under penalty of perjury that the information provided in an 
application is correct and valid. As specified in the preamble to the 
proposed rule, we permit the use of proxy signatures for the low-income 
subsidy application. SSA plans to use a proxy signature for the 
application it is developing to allow individuals to attest to their 
income and resources when applying over the telephone and Internet. If 
States develop their own application, we encourage them to consider a 
similar signature proxy process. We do not agree that we need to 
provide further specificity in the regulation on this issue. This 
process does not alter our position on requirements for signatures in 
any other contexts.
    Comment: Some commenters suggest that the Commissioner of SSA 
should handle all appeals in order to ensure uniformity in the appeals 
process. One commenter suggested that requiring the States to handle 
Medicare appeals would require an investment in additional staff and 
resources and represent an unfair burden on States because only one-
half the costs would be covered by the Federal government. Another 
commenter recommends that the redetermination and appeals process be 
consistent among SSA and Medicaid agencies to eliminate confusion among 
applicants.
    A few other commenters request clarification in the final rule as 
to whether fair hearing rights under State Medicaid programs apply to 
adverse eligibility or renewal decisions made by the State. Similarly, 
they request clarification as to whether decisions made by the State or 
SSA to reduce or terminate a subsidy upon renewal triggers continued 
coverage at the pre-reduction levels pending the appeal. One commenter 
argued that this right derives from Supreme Court precedent which 
established the absolute right to a pre-determination hearing pending 
the loss of welfare of Medicaid benefits.
    Response: Appeals of subsidy eligibility determinations will be 
handled by the entity that made the underlying decision. If SSA 
processed the initial application or redetermination, SSA will handle 
the appeal based on procedures established by the Commissioner. If a 
State processed the application or redetermination, the appeal will be 
consistent with the process the State uses for appeals under Medicaid. 
Consistent with the statute, States will receive normal administrative 
match for activities associated with appeals of eligibility for the 
low-income subsidy.
    For the question of continued coverage, we agree with the commenter 
that decisions made by the State or SSA to reduce or terminate a 
subsidy would trigger a right to continued coverage at the pre-
reduction levels pending the appeal. This is based on the fact that the 
subsidy program, unlike the Medicare

[[Page 4384]]

drug benefit itself, is a needs-based program. This is also consistent 
with how States process appeals under Medicaid.
    Comment: Some commenters assert that there should be a provision 
for prompt reconsideration of a subsidy eligibility determination for 
beneficiaries who believe that they have been erroneously denied 
eligibility or approved for the wrong subsidy category.
    Other commenters suggest that we need to clarify that all aspects 
of subsidy determinations, including eligibility, calculation of 
subsidy or copayment categories, the premium subsidy amount, or the 
amount of any late enrollment penalty, are subject to appeal.
    Response: As indicated earlier, subsidy eligibility determinations 
or appeals are acted upon by the entity that made the underlying 
decision. We will be implementing operational guidance regarding when 
someone does not agree with the premium subsidy amount or late 
enrollment penalty.
4. Premium Subsidy (Sec.  423.780) and Cost-Sharing Subsidy (Sec.  
423.782)
    In accordance with section 1860D-14 of the Act, the proposed 
regulations specified 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.
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 monthly beneficiary premium for a Part D plan (other than an MA-PD 
plan) offering basic prescription drug coverage, that portion of the 
monthly beneficiary premium attributable to basic prescription drug 
coverage for a Part D plan (other than an MA-PD plan) offering enhanced 
alternative coverage, or the MA monthly prescription drug beneficiary 
premium (as defined in section 1854(b)(2)(B) of the Act) for a MA-PD 
plan selected by the beneficiary.
    Under section 1860D-14(b)(2) of the Act, the premium subsidy amount 
for a PDP region 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. 
Further, 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 if the PDPs in the region are 
offered by more than one PDP sponsor, the weighted average of (i) the 
monthly beneficiary premiums for all PDPs in the region (including any 
fallback plans) consisting of basic prescription drug coverage, (ii) 
the monthly beneficiary premiums attributable to basic prescription 
drug coverage for all PDPs in the region offering alternative 
prescription drug coverage, and (iii) the MA monthly prescription drug 
beneficiary premium for 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, 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.
    Table P-I below is an illustration of the premium subsidy 
determination.

                                                    Table P-1
                                   Determination of the Premium Subsidy Amount
----------------------------------------------------------------------------------------------------------------
                Plan Options in Region                             Low-Income Premium Subsidy (Full)
----------------------------------------------------------------------------------------------------------------
                                                                                                Maximum Premium
                                         Monthly         Percentage of       Premium times        Subsidy for
              Plans                    Beneficiary      Part D enrollees      Percentage           Eligible
                                        Premium 1        in each plan 2   (weighted average)      Individual
                                                                                               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
----------------------------------------------------------------------------------------------------------------
Weighted Average Basic Premium in Region =                   25.30
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, and for MA-PD plans, any reduction in premium
 due to application of a credit against the premium of a rebate under 42 CFR 422.266(b).
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 monthly beneficiary premium for basic 
prescription drug coverage and the plan percentage of Part D enrollment 
in the region, and equals $25.30. The lowest monthly beneficiary 
premium for a PDP in the region, however, is $36.00. Therefore, in this 
exhibit, the full monthly premium subsidy amount for the region is 
determined to be $36.00. Consequently, a full subsidy eligible 
individual would have a choice of 3 zero-premium plans in which to 
enroll

[[Page 4385]]

(PDP 2, MA-PD plan 2, and MA-PD plan 3), because the maximum premium 
subsidy amount equals or exceeds the monthly beneficiary premiums for 
these plans. However, if a full subsidy eligible individual chose to 
enroll in PDP 1 or MA-PD plan 1 , 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 also stated in the proposed rule 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 an additional 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 
sections 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(d)(5)) through the out-of-pocket threshold 
(under paragraph (5) of the same section and Sec.  423.104(d)(5)(iii)). 
In other words, there is no coverage gap, for these individuals and 
Medicare pays for the full benefit once the catastrophic level is 
reached. In addition, the cost-sharing subsidies paid by CMS under this 
subpart will count toward the application of the out-of-pocket 
threshold.
    In accordance with section 1860D-14(a)(1)(D)(i) of the Act, 
institutionalized full-benefit dual eligible individuals have no cost-
sharing below, or above, the out-of-pocket threshold. We proposed 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, non-institutional 
full-benefit dual eligible individuals in 2006 with incomes that do not 
exceed 100 percent of the Federal poverty line for their family size 
will pay no more than $1 for generic drugs or preferred drugs that are 
multiple source drugs (as defined in section 1927(k)(7)(A)(i) of the 
Act),$3 for any other drug, or, if less, the amount charged to other 
full subsidy eligible individuals (other than institutionalized full-
benefit dual eligible individuals) 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.
    In accordance with section 1860D-14(a)(1)(D)(iii) of the Act, all 
other full subsidy eligible individuals and full-benefit dual eligible 
individuals with income above 100 percent of the FPL for their family 
size in 2006 will pay copayment amounts of $2 for a generic drug or 
preferred drugs that are multiple source drugs (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).
    In the proposed rule we noted that a question had been raised 
concerning whether an MA-PD plan could choose to reduce or eliminate 
copayments for full-benefit dual eligible individuals. We stated that 
specialized MA plans (under section 231 of the MMA, as defined in 
proposed Title II regulations at Sec.  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) of the proposed 
rule. 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.
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, we proposed and in the final rule set a scale for the premium 
subsidy in a stepped fashion. The sliding scale premium subsidy will 
range from 100 percent of the benchmark premium amount 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, other low-income subsidy 
eligible individuals subject to the late enrollment penalties under 
Sec.  423.46 will be responsible for 100 percent of the penalties. In 
the proposed rule we invited comments concerning the manner in which 
the sliding scale premium subsidy would be calculated for individuals 
with income from 135 percent up to 150 percent of the FPL for their 
family sizeOther low-income subsidy eligible individuals will have 
their annual deductible reduced from $250 to $50 in 2006. This $50 is 
indexed to grow 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 Part D drugs, rounded to the 
nearest multiple of $1. Other subsidy eligible individuals will have 
continuation of coverage from the initial coverage limit (under 
paragraph (3) of section 1860D-2(b) of the Act and 423.104(d)(4) 
through the out-of-pocket threshold (under paragraph (4) of that 
section and 423.104(d)(5)), meaning no coverage gap or ``donut hole.'' 
For coverage through the out-of-pocket threshold, these individuals 
would pay cost sharing that would not exceed the 15 percent 
coinsurance, substituting for the higher beneficiary coinsurance 
described in section 1860D-2(b)(2) of the Act (see Sec.  423.104(d)(2) 
of this proposed rule). The cost-sharing subsidies will count toward 
the application of the out-of-pocket threshold. After the out-of-pocket 
threshold is reached, these individuals' cost-sharing will 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(d)(5)), 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 sections 1860D-2(b)(4) and 1860D-
2(b)(6) of the Act, the $2 and $5 copayments will be indexed based on

[[Page 4386]]

an annual percentage increase in average per capita aggregate 
expenditures for covered Part D drugs, rounded to the nearest multiple 
of 5 cents.
 Premium Subsidy (Sec.  423.780)
    Comment: Some commenters were interested in what types of data 
interfaces we envisioned so that States would know coverage details.
    Response: We are working through the data system requirements and 
will address these issues in further operational guidance.
    Comment: Several commenters requested clarification on how we plan 
to arrive at the weighted average required to calculate the premium 
subsidy amount for a given region. Some were concerned that the term 
``weighted average'' is not defined in the context of calculating the 
low-income premium benchmark.
    Response: In response to public comment on this methodology, we are 
including new language in regulatory text to clarify our policy on how 
the weighted average will be determined for the low-income benchmark 
premium. We intend to use the same methodology for determining the 
weighted average for the low-income premium benchmark as is used in 
Sec.  423.279(b) for determining the weighted average for the national 
average monthly bid amount. The low-income benchmark premium amount for 
a region is a weighted average of the monthly beneficiary premiums for 
plans, 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 Part D plans in a PDP region included in 
the calculation of the low-income benchmark premium amount in the 
reference month.
    For purposes of calculating the low-income benchmark premium amount 
for 2006, we assign equal weighting to PDP sponsors (including fallback 
entities) and assigns MA-PD plans a weight based on prior enrollment. 
New MA-PD plans are assigned a zero weight. Again, PACE, private fee-
for-service plans and 1876 cost plans are not included.
    Comment: One commenter recommends that PDP premium amounts be 
regulated to ensure that subsidy eligible individuals may enroll in any 
PDP and be assured a fully subsidized premium. Another commenter 
suggested that full- benefit dual eligible individuals not pay 
additional amounts over the premium subsidy amount. The commenter 
argued that if a dual enrolls with a higher premium plan, that is the 
fault of the enrollment system. Another commenter also suggests that 
CMS or the Part D plans provide clear notice to consumers about set 
premium standards, ``benchmark premiums,'' so consumers can evaluate 
plans with full understanding of their premium options and liability.
    Response: We disagree with the first two comments. Subsidy eligible 
individuals, including full subsidy eligible individuals, may choose to 
pay a higher premium in order to enroll in the Part D plan of his or 
her choice, and we do not have the authority under the statute to limit 
these individuals' choices. The Part D plan with the higher premium may 
provide a richer benefit package that better meets the individual's 
prescription needs than other plans. We will ensure that beneficiaries 
are provided complete information in which to evaluate their options, 
including understanding premium liability, if any.
    Comment: Several commenters requested certain clarifications in the 
regulations regarding American Indian and Alaska Native (AI/AN) 
Medicare beneficiaries. The Indian Health Service (IHS), Indian Tribes 
and Tribal organizations, and urban Indian organizations (collectively, 
I/T/Us) provide various services and other benefits to AI/ANs, 
including operating pharmacies and sometimes paying premiums, cost 
sharing, and similar charges for those AI/ANs who are eligible for 
various public and private health insurance and health care programs. 
Commenters requested that the regulations clarify that I/T/U pharmacies 
may pay Part D premium amounts, either in full for non-subsidy 
eligibles, or amounts remaining after application of low-income 
subsidies, for AI/AN Medicare beneficiaries that they also serve.
    Response: The clarification requested by the commenters is a matter 
for the Indian Health Service rather than for CMS and we therefore will 
not address this issue in this regulation.
    Comment: Commenters asked for clarification in the regulations as 
to how the requirement to apply the ``greater'' premium calculation 
(for example, premium subsidy amount) options will be applied and 
enforced.
    Response: We are working through the data system and collections 
requirements and will address these issues in further operational 
guidance.
    Comment: Some commenters requested clarification about the linear 
sliding scale for the premium subsidy and whether this will be for 
ranges of percentages of the Federal poverty level or by individual 
percentages. The commenters prefer the simplest methodology to 
implement the scale and request guidance from us on how this should be 
calculated. We received comments suggesting that there should be as few 
as possible different premiums reductions for low-income beneficiaries 
between 135 percent and 150 percent of FPL (that is, as few ``steps'' 
as possible). Commenters said the administrative burden of tracking and 
implementing a multitude of different premiums for these other low-
income beneficiaries would vastly outweigh any perceived equity 
achieved by setting the premium in many steps carefully calibrated to 
relate directly to the individual's income level.
    Response: We requested comments on this issue and had proposed the 
breakdown be in 5 percent increments. Given the comments received, we 
will be implementing the sliding scale premium in four groups as 
follows: beneficiaries with incomes at 135 percent of the FPL will 
receive a 100 percent premium subsidy; beneficiaries with income 
greater than 135 percent but at or below 140 percent of the Federal 
poverty level will receive a 75 percent premium subsidy; beneficiaries 
with incomes greater than 140 percent but at or below 145 percent of 
Federal poverty level will receive a 50 percent premium subsidy; and 
beneficiaries with incomes greater than 145 percent but below 150 
percent of Federal poverty level will receive a 25 percent premium 
subsidy.
    Comment: One commenter indicated that there should be no late 
penalty, or at most a minimum late penalty, if an SPAP is paying for an 
individual's premiums for Part D.
    Response: We do not have the legal authority to make the changes 
requested by this commenter. In addition, SPAPs are not obligated to 
pay a late penalty fee on behalf of the subsidy eligible individual.
    Comment: Some commenters requested that the premium subsidy for any 
late enrollment penalty should be 100 percent for at least the first 
year in which a beneficiary is enrolled in the Part D program.
    Other commenters argued that imposing any late enrollment premium 
penalties on individuals eligible for the low-income subsidies is 
overly punitive. They suggested that we delay the late enrollment 
penalties for those eligible for the low-income subsidies or waive any 
late enrollment penalties for this population.
    Some commenters suggested that we should allow the 100 percent 
subsidy of

[[Page 4387]]

the late enrollment penalty as soon as a beneficiary becomes eligible 
for the full premium subsidy just as it now proposes to do after month 
60.
    Comments were also received requesting that the reduced late 
enrollment penalty under Sec.  423.780(c) apply for beneficiaries for 
whom SPAPs pay premium costs, including the late enrollment penalties.
    Response: We recognize the concern of the commenters for the needs 
of low-income beneficiaries. However, this change would require a 
legislative change as Sec.  1860D-14(a)(1)(A) of the Social Security 
Act requires late enrollment penalties. Section 1860D-13(b) of the Act 
imposes the same late penalty on all beneficiaries; section 1860D-
14(a)(1)(A)(ii) of the Act however, provides that full subsidy eligible 
individuals will only be responsible for paying 20 percent of any late 
enrollment penalty imposed for the first 60 months during which these 
beneficiaries are enrolled in a Part D plan and no late enrollment 
penalty thereafter. Late enrollment penalties for full subsidy eligible 
individuals enrolled in SPAPs are subsidized in the same manner as full 
subsidy eligible individuals who are not enrolled in an SPAP.
    Comment: Some commenters asked for operational clarification as to 
how we will determine that the enrollee is subject to a late enrollment 
penalty. Clarification was requested as to who will ask for information 
and documentation; how the information would get to us; and, how the 
enrollee can question or appeal the imposition of the penalty.
    Response: We will issue further operational guidance on these 
processes.
 Cost-sharing subsidy (Sec.  423.782)
    Comment: Many commenters expressed concern that the cost-sharing 
requirement would impose a burden on full-benefit dual eligible 
individuals and were particularly concerned that a beneficiary could be 
forced to choose between paying for medications and meeting other 
needs. Under the Medicaid statute, an individual cannot be denied 
medication for failure to pay a copayment, and commenters urged 
inclusion of the same standard for full-benefit dual eligible 
individuals under the Medicare prescription drug program.
    Response: Requiring providers to give prescriptions to individuals 
who cannot meet copayment requirements would necessitate a legislative 
change because the MMA does not include the same prohibition that is 
contained in the Medicaid statute. Therefore, we are unable to make 
this recommended change.
    We note that institutionalized full-benefit dual eligible 
individuals have no cost-sharing responsibilities. For the remaining 
full-benefit dual eligible individuals with income below 100 percent of 
the Federal poverty level, the law specifies a ceiling in 2006 of 
copayments that do not exceed $1 for a generic drug or a preferred drug 
that is a multiple source drug, and $3 for any other drug. Copayment 
amounts are increased on an annual basis from these base amounts, as 
required by Sec.  1860D-14(a)(4)(A) of the Act.
    Additionally, under the law, specialized MA plans offering drug 
benefits to dual eligible individuals and pharmacies may exercise the 
option of reducing or eliminating copayments for dual eligible 
beneficiaries. Alternatively, States may elect to pay such copayments 
on behalf of these individuals.
    Specifically, specialized MA plans (as defined in Sec.  1859(b)(6) 
of the Act) offering benefits only to dual eligible individuals may 
choose to reduce or eliminate copayments for their members as a 
supplemental benefit. For all other plans, Part D copayments cannot be 
reduced or eliminated for dual eligible individuals by a non-
specialized MA-PD plan unless reduced or eliminated for all other plan 
enrollees. However, we note that sections 1894(b)(1)(A)(i) and 
1934(b)(1)(A)(i) of the Act preclude beneficiary cost sharing, 
including copayments, for PACE enrollees. We have included discussion 
of the conflicting MMA and PACE statutory copayment provisions in 
subpart T preamble language of this regulation.
    Further, pharmacies may also waive or reduce cost-sharing 
requirements on behalf of a subsidy eligible individual, provided the 
waiver is not offered as part of any advertisement or solicitation, as 
specified in section 1128(B)(3) of the Social Security Act, as amended 
by section 101(e)(2) of the MMA.
    Finally, the new Medicare drug benefit will replace significant 
State spending on dual eligible individuals' drug costs. States, in 
turn, may choose to use State dollars to pay for cost-sharing and 
provide supplemental drug coverage, although they will not receive a 
Federal match under Medicaid if they choose to do so.
    Comment: One commenter questioned whether reduction of cost-sharing 
obligations by specialized MA plans (using premium rebate dollars) 
violates the uniformity of benefits provision.
    Response: The reduction of cost-sharing obligations by specialized 
MA plans does not constitute a violation of the uniformity of benefits 
provision in the law, as long as the reduction is applied uniformly to 
all enrollees in the plan.
    Comment: One commenter requested, for full-benefit dual eligible 
individuals, clearer guidance on ensuring that plans are providing 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. Specifically, 
the commenter requested guidance on dealing with noncompliance by plans 
and ensuring that non-institutionalized dual eligibles are informed of 
this provision.
    Response: The regulation does clarify the first point raised by the 
commenter. In addition, we are currently working on an oversight 
process for noncompliance and will release further operational guidance 
on this issue.
    Comment: One commenter suggested that adjustments made to cost-
sharing amounts be rounded down to the nearest multiple of 5 cents or 
10 cents (of the percentage increase in CPI), rather than rounded 
upward. The commenter cites that it is illogical to round upward and 
charge consumers more than their estimated spending limit.
    Response: Rounding downward to the nearest multiple of 5 cents or 
10 cents for any adjustment made to cost-sharing amounts would 
necessitate a legislative change because the methodology for making 
adjustments is stated in Sec.  1860D-14(a)(4)(A)(ii) of the Social 
Security Act as ``adjustments in $1 and $3 cost-sharing amounts be 
rounded to the nearest multiple of 5 cents and 10 cents, 
respectively.'' Therefore, this change cannot be adopted.
    Comment: One commenter sought clarification on the definition of 
out-of-pocket limits/thresholds, particularly if subsidy eligible are 
subject to copayments after reaching the out-of-pocket limit.
    Response: For 2006, the premium and cost-sharing subsidy amounts 
for various subsidy eligible groups are as follows (Preamble, subpart 
P, Table P-2):
    For 2006, the premium and cost-sharing subsidy amounts for various 
subsidy eligible groups are as follows (Table P-2):

[[Page 4388]]



------------------------------------------------------------------------
                            Percentage              Copayment  Copayment
                            of Premium              up to out- above out-
       FPL & Assets           Subsidy   Deductible  of-pocket  of-pocket
                            Amount (1)                limit      limit
------------------------------------------------------------------------
Full-benefit dual           100%*       $0          $0         $0
 eligible--institutionaliz
 ed individual
------------------------------------------------------------------------
Full-benefit dual eligible- 100%*       $0          The        $0
  Income at or below 100%                            lesser
 FPL (non-                                           of: (1)
 institutionalized                                   an
 individual)                                         amount
                                                     that
                                                     does not
                                                     exceed
                                                     $1-
                                                     generic/
                                                     preferre
                                                     d
                                                     multiple
                                                     source
                                                     and $3-
                                                     other
                                                     drugs,
                                                     or (2)
                                                     the
                                                     amount
                                                     charged
                                                     to other
                                                     full
                                                     subsidy
                                                     eligible
                                                     individu
                                                     als who
                                                     are not
                                                     full-
                                                     benefit
                                                     dual
                                                     eligible
                                                     individu
                                                     als or
                                                     whose
                                                     incomes
                                                     exceed
                                                     100% of
                                                     the FPL
------------------------------------------------------------------------
Full-benefit dual eligible- 100%*       $0          An amount  $0
  Income above 100% FPL                              that
 (non-institutionalized                              does not
 individual)                                         exceed
                                                     $2-
                                                     generic/
                                                     preferre
                                                     d
                                                     multiple
                                                     source
                                                     and $5-
                                                     other
                                                     drugs
------------------------------------------------------------------------
Non-full benefit dual       100%*       $0          An amount  $0
 eligible beneficiary with                           that
 income below 135% FPL and                           does not
 with assets that do not                             exceed
 exceed $6,000                                       $2-gener
 (individuals) or $9,000                             ic/
 (couples)                                           preferre
                                                     d
                                                     multiple
                                                     source
                                                     and $5-
                                                     other
                                                     drugs
------------------------------------------------------------------------
Non-full benefit dual       100%*       $50         15%        An amount
 eligible beneficiary with                           coinsura   that
 income below 135% FPL and                           nce        does not
 with assets that exceed                                        exceed
 $6,000 but do not exceed                                       $2-gener
 $10,000 (individuals) or                                       ic/
 with assets that exceed                                        preferre
 $9,000 but do not exceed                                       d
 $20,000 (couples)                                              multiple
                                                                source
                                                                drug or
                                                                $5-other
                                                                drugs
------------------------------------------------------------------------
Non-full benefit dual       Sliding     $50         15%        An amount
 eligible beneficiary with   scale                   coinsura   that
 income at or above 135%     premium                 nce        does not
 FPL but below 150% FPL,     subsidy                            exceed
 and with assets that do     (100%-0%)                          $2-gener
 not exceed $10,000         See                                 ic/
 (individuals) or $20,000    attached                           preferre
 (couples)                   chart                              d
                                                                multiple
                                                                source
                                                                drug or
                                                                $5-other
                                                                drugs
------------------------------------------------------------------------
(1) Premium subsidy amount as defined in Sec.   423.780(b)
*The percentage shown in the table is the greater of the low income
  benchmark premium amount or the lowest PDP premium for basic coverage
  in the region.

For 2006, the sliding scale premium and cost-sharing subsidy amounts 
for other subsidy eligible individuals are as follows:

------------------------------------------------------------------------
                                         Percentage of Premium Subsidy
            FPL & Assets                           Amount(1)
------------------------------------------------------------------------
Income at 135% FPL, and with assets                                 100%
 that do not exceed $10,000
 (individuals) or $20,000 (couples)
------------------------------------------------------------------------
Income above 135% FPL but at or                                      75%
 below 140% FPL, and with assets
 that do not exceed $10,000
 (individuals) or $20,000 (couples)
------------------------------------------------------------------------
Income above 140% FPL but at or                                      50%
 below 145% FPL, and with assets
 that do not exceed $10,000
 (individuals) or $20,000 (couples)
------------------------------------------------------------------------

[[Page 4389]]

 
Income above 145% FPL but below 150%                                 25%
 FPL, and with assets that do not
 exceed $10,000 (individuals) or
 $20,000 (couples)
------------------------------------------------------------------------
(1) Premium subsidy amount as defined in Sec.   423.780(b)

    Comment: One commenter requested that MA organizations be allowed 
to obtain OIG advisory opinions that expressly permit them to reduce or 
waive premiums and cost-sharing for low-income members enrolled in MA 
plans.
    Response: The law does not permit general/nonspecialized MA 
organizations to reduce or waive premiums and cost-sharing because 
these actions will violate bid integrity and uniform premium 
requirements.
    Comment: A few commenters questioned whether a non-specialized MA 
plan can reduce cost sharing for its enrollees, as long as the 
reduction applies uniformly to all of its enrollees.
    Response: The reduction would be classified as a supplemental 
benefit and cannot be included in the basic bid. The non-specialized MA 
plan may buy down the supplemental premium with beneficiary or rebate 
dollars. Reduction through the use of subsidy dollars is prohibited and 
inclusion of reduction costs in the basic bid or in allowable costs for 
purposes of reinsurance or risk sharing is also not permitted.
    Comment: One commenter requested specification that plans cannot 
use an alternative benefit design to charge cost-sharing to low-income 
beneficiaries that exceeds the amounts set out in the regulation.
    Response: Plans may not use alternative benefit designs to charge 
cost-sharing that exceeds the applicable $1/$3 and $2/$5 amounts set in 
the law. In the case of the other subsidy eligible individuals, they 
may not be charged cost sharing that exceeds 15 percent coinsurance for 
covered part D drugs obtained between the deductible and out-of-pocket 
threshold. The Part D plans may establish an alternative cost sharing 
structure with cost-sharing tiers based on an expected coinsurance of 
25 percent. If a subsidy eligible individual enrolls in the plan with 
an alternative cost sharing structure, the beneficiary is responsible 
for the cost-sharing under the plan for a particular drug up to 15 
percent, with our paying the difference if any. For example, if under a 
plan a covered part D drug has coinsurance of 10 percent, the 
beneficiary is responsible for the full 10 percent. If under a plan a 
covered part D drug has coinsurance of 20 percent, the beneficiary is 
responsible for 15 percent and CMS for 5 percent, provided this design 
is actuarially equivalent.
5. Administration of Subsidy Program (Sec.  423.800)
    In the proposed rule we discussed establishing a process to notify 
the Part D sponsor that an individual is both eligible for the subsidy 
and the amount of the subsidy. Because we had not yet developed such a 
process, comments were invited concerning notification to the Part D 
sponsor that an individual is eligible for a subsidy and the amount of 
the subsidy.
    Similarly, we requested comments on the proposed requirement that 
the Part D sponsor notify us that premiums or cost-sharing have been 
reduced and the amount of the reduction. We were also considering the 
process for reimbursing the Part D sponsor for the amount of the 
premium or cost-sharing reductions. Finally, we requested comments on 
how to best reimburse subsidy eligible individuals for out-of-pocket 
costs relating to excess premiums and cost-sharing incurred before the 
date the individual was notified of his or her subsidy eligibility but 
after the effective date the individual became a subsidy eligible.
    We also requested 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 specifically requested 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 requested 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 Part D plans 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 rule for a discussion of interim payments 
and final reconciliation payments.)
    Subsidy amounts under section 1860D-14 of the Act are counted 
toward the out-of-pocket threshold at section 1860D-2(b)(4)(C)(ii) of 
the Act. Part D plans will be responsible for tracking the application 
of the low-income subsidy amounts as described in Sec.  423.100.
    Comment: Many commenters expressed concern about the lack of a 
specified timeframe in which we must notify plans that enrollees are 
eligible for a subsidy, raising concerns that if there were lengthy 
periods between enrollment in a Part D plan and notification of subsidy 
eligibility, low-income beneficiaries would have to pay prohibitive 
costs and they may not use their Part D benefits. Some commenters 
suggested that we be required to notify plans within 24 hours after an 
application for the subsidy is approved. One commenter suggested that 
we should provide a daily tape match to Part D plans that provides the 
low-income subsidy enrollee identifier. One commenter expressed concern 
about retroactive determinations of low-income subsidy eligibility and 
the burden this could place on a MA organization that would have to 
refund premium and cost-sharing amounts paid by a member before either 
the member or the MA organization was informed of the member's low-
income subsidy eligibility. The commenter suggested that we limit the 
period of retroactivity of low-income subsidy eligibility determination 
to no more than three months. One commenter asked for specific guidance 
on the data exchange requirements for a Part D plan. One commenter 
believed that the proposed rule did not adequately explain how Part D 
plans are to determine which beneficiaries are enrolled in the low-
income subsidy. One commenter asked if the notification of the Part D 
plan would occur after a full-benefit dual eligible individual enrolls 
in a plan. Finally, one commenter asked if we could also notify SPAPs 
when notification is sent to Part D plans about low-income subsidy 
eligibility.
    Response: We do not have authority to direct SSA to determine an 
individual's eligibility for the low-income subsidy within a given time 
period. In further operational guidance,

[[Page 4390]]

we will work with States to ensure timely State determinations of 
subsidy eligibility. As general guidance, we expect that States will 
determine subsidy eligibility within time periods that are at least 
consistent with the processing of State Medicaid applications. 
Retroactive eligibility is only an issue if an individual is enrolled 
in a Part D plan, and subsequently applies for and is determined 
eligible as a full-benefit dual eligible individual. For instance, if 
an individual is enrolled in a Part D plan and decides not to apply for 
the low-income subsidy, he or she may have retroactive subsidy 
eligibility if the individual later qualifies for Medicaid. By virtue 
of being entitled to full benefits under Medicaid, the individual will 
automatically be eligible for the low-income subsidy. In this case, 
subsidy eligibility will extend back to the start date of Medicaid 
eligibility, which could be three months earlier if the individual 
would have qualified for Medicaid during the three-month retroactive 
period. In such cases, the individual will be reimbursed for the extra 
cost sharing he or she otherwise would not have paid as a full subsidy 
eligible individual. This would also apply to individuals under a 
Medicare Savings Program as a SLMB or QI (but not as a QMB, because 
QMBs cannot receive retroactive benefits under the Medicaid statute). 
In further operational guidance, we will specify how these 
reimbursements will be made. For QMBs and other individuals who are 
enrolled in a Part D plan, and later apply and are determined eligible 
for low-income subsidy assistance, consistent with the statute, their 
eligibility would be effective on the first day of the month in which 
they applied for the low-income subsidy.
    We will address the method of notification of Part D plans and will 
explore issues involving notification to SPAPs in future operational 
guidance.
    Comment: Two commenters suggested the need for additional 
clarification about the manner in which plans must notify us on the 
amount of the subsidy reductions received by beneficiaries. One of 
these two commenters suggested we provide a methodology while the other 
commenter suggested that Part D sponsors have up to 60 days to inform 
us that the reduction in premium and cost-sharing has been implemented 
and that implementation should be effective no later than the first day 
of the second month following the month in which the low-income 
determination was sent by us to the Part D sponsor. The commenter 
further suggested that there should not be any special or separate 
notice that the Part D sponsor must send to CMS to indicate that the 
reduction in premium or cost-sharing has been implemented noting that 
this notification will be part of the monthly membership transaction 
file that Part D providers send to us.
    Response: We will issue further operational guidance on the 
notification methodology that Part D plans must use. However, we will 
expedite notification to plans that its enrollee is a subsidy eligible 
individual. In addition, we similarly expect Part D plans to confirm 
that the reductions in premiums and cost-sharing have been implemented 
by plans in a timely fashion.
    Comment: One commenter expressed concern that the rule does not 
explain how reimbursements will be made to Part D plans. Another 
commenter expressed concern that pharmacies will impose the cost-
sharing reduction at the point-of-sale for low-income subsidy 
individuals. The commenter suggested we develop an explicit regulatory 
requirement to ensure such reductions occur at the point-of-sale. The 
commenter suggested we add a pass-through requirement to the final 
regulation.
    Response: This comment is addressed by the regulation at Sec.  
423.329(d)(2). The interim payments referenced in section Sec.  
423.329(d)(2)(i) are made in anticipation of low income subsidies that 
will reduce beneficiary cost-sharing at the point of sale. The final 
payments in Sec.  423.329(d)(2)(ii) will reimburse plans for 
adjustments made at the point of sale. There is no need for an 
additional pass-through requirement, since plans will only be 
reimbursed for subsidies that actually were used to reduce beneficiary 
cost sharing at the point of sale.
    Comment: Commenters expressed concern about the methodology that 
will be developed to implement reimbursement for cost-sharing on a 
capitated basis. One commenter asked that Part D plans have the 
opportunity to work with us as it develops a methodology, while another 
commenter noted that reimbursement for low-income subsidies on an 
aggregated capitation basis--rather than on an individual member 
basis--would make calculation of individual subsidies difficult for 
purposes of counting them toward TROOP as required by the statute. One 
commenter recommended that Part D sponsors offering Part D plans that 
serve a significant number of American Indians/Alaska Natives not have 
available to them the option of having the cost-sharing subsidies 
reimbursed to them on a capitated basis.
    Response: Subsection (d) of Sec.  423.800 was inadvertently 
included in the proposed rule and has been removed. This is addressed 
in Sec.  423.329(d)(2). Plans will be reimbursed for subsidies that 
actually were incurred to reduce beneficiary cost sharing at the point 
of sale. Interim estimated payments related to plan assumptions may be 
included with monthly capitated payments to assist plans with cash 
flow, and later reconciled to actual incurred costs. Although we 
initially will pay the low-income subsidy on a claims-paid basis, we 
reserve the right to pay on a capitated basis as allowed by 1860D-
14(c)(2). Further information on payment methodology will be issued in 
separate guidance.
    Comment: Commenters raised concerns about the reimbursement of 
cost-sharing expenses incurred by subsidy eligible individuals before 
they have been notified of their eligibility but after the date the 
subsidy eligibility is effective. Several commenters expressed concern 
that low-income enrollees cannot afford to pay cost-sharing even with 
the expectation that these out-of-pocket costs will eventually be 
reimbursed and recommended, as an alternative, that we adopt a 
presumptive eligibility system. Alternatively, these commenters 
suggested that the regulations provide that beneficiaries may present 
their notice of approval for the subsidy to their pharmacy and that 
pharmacies would accept this notice as adequate to relieve the 
beneficiary from making a copayment. One commenter expressed concern 
that plans would violate the requirement to reimburse these costs 
unless more stringent compliance requirements are adopted in the 
regulations, including a requirement that plans have a 10-day period 
for reimbursement after the date a beneficiary's subsidy is effective. 
Another commenter suggested strengthening the reimbursement requirement 
by explicitly stating that Part D plans must make these reimbursements 
on their own initiative without requiring beneficiaries to 
affirmatively seek the reimbursement and that these reimbursements must 
be made 15 days after the eligibility has been received by the plans. 
One commenter requested that we permit SPAPs, which may pay the cost-
sharing for individuals who are subsequently determined to be subsidy 
eligible, to be reimbursed for their contributions.
    Response: Individuals may incur out-of-pocket costs from premiums 
and cost-sharing before eligibility determinations and notification to 
plans are made.
    The rule requires plans to directly reimburse the beneficiary, 
according to

[[Page 4391]]

the data it has kept on the beneficiary's incurred and paid expenses. 
We will then reimburse the plan for these expenses. We will have in 
place a mechanism to pay plans directly for the incurred and paid 
expenses. We will issue further operational guidance on this issue.
    Programs like the Ryan White AIDS Drug Assistance Program or SPAPs 
may pay the premiums and cost-sharing for beneficiaries until the low-
income subsidy eligibility determinations are made. The rule requires 
plans to reimburse these programs for payments made after the effective 
date of the eligibility determination. Therefore, we have revised Sec.  
423.800, new subsection (d), to reflect this change.
    Comment: One commenter recommends that Part D plans be required to 
reimburse State programs and charitable organizations that pay cost 
sharing on behalf of the Part D beneficiaries who are later found to be 
low-income subsidy eligible individuals.
    Response: We have clarified in the final rule that plans must 
reimburse organizations paying cost-sharing on behalf of such 
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.

Q. Guaranteeing Access to a Choice of Coverage

1. Overview (Sec.  423.851)
    Subpart Q implements 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 Medicare options for prescription drug coverage; 
the requirements and limitations on fallback plan bidding; review and 
approval of fallback prescription drug plans; contract requirements 
specific to fallback plans; and the determination of fallback plan 
enrollee premiums and CMS payments to those plans.
2. Terminology (Sec.  423.855)
a. Eligible Fallback Entity
    In Sec.  423.855 we state that an eligible fallback entity is 
defined for a given contract period and is an entity that meets all the 
requirements to be a PDP sponsor, (except that it does not have to be a 
risk-bearing entity) and does not submit a risk bid under Sec.  423.265 
for any prescription drug plan for any PDP region for the first year of 
that contract period. We also state that an entity will be treated as 
submitting a risk bid if that particular legal entity is acting as a 
subcontractor for an integral part of the drug benefit management 
activities of a PDP sponsor (or an entity applying to become a non-
fallback PDP sponsor) that is submitting a risk bid; however, the same 
is not true if the entity is a subcontractor to an MA organization 
offering an MA-PD plan (or a subcontractor to an entity applying to 
offer an MA-PD plan).
    Comment: A commenter asks that we not allow under any circumstances 
for the pharmacy benefits management (PBM) component of the fallback 
plan to be the same entity contracted with either as an MA-PD or a risk 
PDP in the same area. The commenter stated that to do so would reduce 
competition in the area, which could ultimately reduce beneficiary 
choice and access to drugs. Another related comment stated that under 
the current definition and contracting requirements described in the 
preamble and proposed regulation that it may be possible for two 
legally independent, but affiliated PDP sponsors to submit bids in the 
same region and undercut the clear intent of the statute requiring that 
plans be offered by different organizations in order to meet the access 
requirements.
    Response: Section 1860D-3(a) of the Act requires that each Part D 
eligible individual have access to a choice of at least two plans in 
the area in which they reside. Additionally, the statute makes it clear 
that the beneficiary access requirement is not satisfied for an area if 
only one entity offers all the qualifying plans in the area. We will be 
closely monitoring PDP sponsors, MA organizations and their 
subcontractors to ensure that the same legal entity is not operating 
both plans in a fallback area. We note that there is no prohibition 
against a PBM operating as a subcontractor to an MA-PD plan as well as 
being a sponsor of a fallback PDP. We also note that a PBM can operate 
as a subcontractor to all kinds of PDPs, including fallback PDPs, and 
to MA-PDs in any region. There is also no prohibition against an MA 
organization offering both an MA-PD plan and a fallback plan in the 
same region.
    In the proposed rule we incorrectly stated at 69 FR 46670 that MA 
organizations offering MA-PD plans could not simultaneously offer 
fallbacks. We clarify in this final rule our belief that such a reading 
would not comply with the clear language of sections 1860D-12(b)(2) of 
the Act which governs contracts with PDP sponsors and not MA 
organizations offering MA-PDs or with section 1860D-11(g)(2)(B) of the 
Act which speaks only in terms of prescription drug plans, and not MA-
PD plans. We will be diligent in reviewing applications in order to 
exclude entities that have been set up to serve no other function than 
to circumvent the statute. An entity will not be considered separate 
and distinct if it is merely the instrumentality, agency, conduit, or 
adjunct of the other entity. However, to the extent that other 
legitimate legal arrangements are negotiated in the marketplace to 
facilitate the offering of Part D risk plans, we will not preclude such 
arrangements. We have not made any further changes to the definitions 
of PDP sponsors or eligible fallback entities to further restrict 
qualifications in response to these comments.
    Comment: Many commenters asked that governmental entities be able 
to sponsor fallback PDPs in order to provide for a smooth transition of 
prescription drug coverage from Medicaid or other Federally-matched 
programs. Some asked that Medicaid agencies be considered as potential 
fallback plan sponsors. Several commenters asked whether the definition 
of an eligible fallback entity should be modified so that an SPAP can 
serve as the fallback plan for SPAP clients in the event that the 
fallback option must be implemented because not enough PDPs or MA-PD 
plans express interest in service in a State (all other beneficiaries 
would enroll with the Part D fallback provider).
    Response: We are unable to accept these suggestions because under 
section 1860D-41(a)(13) of the MMA, governmental entities are not 
eligible to become PDP sponsors. This is consistent with the MMA 
transfer of responsibility for providing prescription drug benefits for 
dual eligibles from State programs to the Medicare program (under Sec.  
1935(d)(1) of the Act), and is set up for the most part so as not to 
supplant other government funding for prescription drug benefits (under 
section 1860D-24(c)(2) of the Act). As modified in Sec.  423.4 and 
discussed in subpart A of this preamble, the definition of PDP sponsors 
includes sponsors of fallback plans.
    Comment: One commenter suggested that in order to encourage 
traditional PBMs to serve as ``risk bearing'' entities, we should only 
allow pharmacy benefit administrators (PBA) to serve as fallback plans. 
According to the commenter, these entities serve as traditional 
administrators of prescription drug programs, rather than the PBM 
entities that have evolved from the PBA model, and this PBA model for 
the fallback plans would prevent the conflict of interest that exists 
today when a PBM

[[Page 4392]]

owns and operates its own mail order facility.
    Response: Although we appreciate the intent behind this comment to 
avoid conflicts of interest that could theoretically result in higher 
costs for the Part D program, we believe that restricting eligible 
fallback plan entities to only pharmacy benefit administrators would be 
unnecessarily restrictive and inconsistent with the statutory 
definition provided in section 1860D-11(g)(2) and described in Sec.  
423.855. The statute does not limit the type of entities that can apply 
to meet the requirements to be either PDPs or MA-PDs, and we do not 
think there is any benefit to doing so. On the contrary, our goal is to 
do everything possible to maximize participation in the Part D program 
by any and all qualified entities in order to maximize beneficiary 
access to a choice of private plans and competition among these plans. 
Therefore, we have not modified the definition of eligible fallback 
entity, other than to clarify that it is a form of PDP plan, and have 
adopted it as proposed.
    In the preamble to the proposed rule we interpreted the bidding 
restrictions to mean that if an organization wins the fallback bidding, 
that is, signs a fallback contract, 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 4\th\ year, it is barred from bidding as a risk plan in that 
region. As we described in the proposed rule, this is because eligible 
fallback entities are restricted to only those entities that have not 
submitted an at-risk bid, or agreed to serve as a subcontractor to an 
entity that has submitted an at-risk bid to sponsor a PDP. As a result 
of this restriction in bidding, eligible fallback entities must decide 
not to submit either a full-risk, or limited-risk bid in any region 
(either as a primary sponsor or as a subcontractor for a PDP sponsor) 
in order to be eligible to be a fallback prescription drug plan in any 
region. If an organization is awarded a fallback contract and ``offers 
a fallback plan'', 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 4\th\ year, it is 
barred from bidding as a risk plan in any region in which it offered a 
fallback plan. A fallback contractor is arguably offering a fallback 
plan even if it is only ``on standby'' to do so.
    In the proposed rule we also suggested 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, that is, 
not just signing the contract, but also actually offering prescription 
drug benefits to enrollees after a fallback service area has been 
identified. With the second interpretation, 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.
    Comment: We received several comments on our interpretation of our 
authority in this area. One commenter asserted that we do not have the 
statutory authority to bar a fallback entity from at risk bidding for 
up to 4 years. Another commenter supported the alternative 
interpretation of what it means to ``offer a fallback plan'' in a 
region. This commenter agreed with CMS that the alternative 
interpretation is ``reasonable and consistent'' with the statutory 
intent ``to prevent plans from converting their enrollment under a 
fallback contract to enrollment under an at-risk plan''. They also 
suggested that if a fallback plan were not activated in year one or 
year two of the contract cycle, it should be able to submit a risk bid 
for years two and three, respectively. They encouraged us to adopt this 
interpretation in the final rule--believing it to be in the best 
interests of the program in that it will provide for better competition 
if more entities are encouraged to participate in Part D, whether as 
potential fallback plans or PDPs.
    Response: We appreciate this comment and agree that this 
interpretation furthers the goal of facilitating competition by 
allowing former fallback contractors to enter the risk bidding a year 
sooner (assuming they did not actually provide a fallback plan in year 
3 of the contract cycle). We do not agree, however, that a fallback 
contractor should be released from its three-year contract and, 
therefore, free to submit a risk bid any earlier than year 4. If we 
were to permit this, we would be undermining the safety net provided by 
the three-year contract cycle that exists to ensure timely access to 
fallback coverage in the event that a sufficient number of risk plans 
were to withdraw from the market to create a fallback service area 
during or after years 1 or 2. Moreover, we would also be undermining 
the attractiveness of risk bidding by eliminating an important 
disincentive to stay out of the market in year one. Thus, an entity 
that is awarded a fallback contract--even if it is only on standby--may 
not submit a risk bid for the 3 years that it maintains its fallback 
contract. For example, a fallback contractor for the period 2006-2008 
may not submit a risk bid for any of those years (even if the fallback 
contractor is merely on standby for that entire period). In addition, 
if the sponsor offers a fallback plan in regions 1 and 2 for 2008, then 
such sponsor is prohibited from risk bidding in such regions for 2009. 
The sponsor may, however, submit risk bids for regions other than 
regions 1 and 2 for 2009 (although if it does so, it may not seek a 
fallback contract for the period 2009-2011). In addition, if the 
sponsor was on standby for all of 2008, but never actually offered a 
fallback plan in 2008, the sponsor may submit a risk bid for any region 
for 2009 (but again, if it does so, it is prohibited from seeking to 
become a fallback contractor for the period 2009-2011). Therefore, we 
have adopted the provisions in Sec.  423.855 and Sec.  423.265(a)(2) 
that provide these limitations as proposed.
    Comment: Numerous commenters asserted that the contracting 
restrictions and other (unspecified) requirements to become an eligible 
fallback plan are too severe, and that they believe we will not have 
any organizations stepping forward to become fallback plans.
    Response: We agree the requirements for fallback plans are more 
severe than for full risk plans. We have intentionally made these 
requirements stricter than for risk-bearing plans because we believe 
this is an important strategy to maximizing participation in the 
competitive bidding program and to limit the attractiveness of 
participating as a fallback PDP for those plans that could participate 
on an at-risk basis. Our goal is to have either full or limited risk 
plans provide MA-PD and PDP prescription drug coverage in all regions. 
To that end, one of our selection criteria will likely be an appraisal 
of whether the fallback entity's pharmacy benefit management 
subcontractor is also participating as a subcontractor under risk plan 
offerings. The implementation of the fallback plan is viewed as a last 
resort--as its name implies--a plan to ``fall back'' on in the event a 
choice of two qualifying drug prescription plans is unavailable in a 
service area or region. We are aiming to design our bidding process so 
that fallback plans are not required at all, that is, to do everything 
possible to facilitate full-risk plans and to provide for limited-risk 
plans in a particular region if full-risk plans are not available. In 
fact, if any fallback plans are needed, the Congress requires us to 
submit an annual report with recommendations for further limiting the 
need for such plans and maximizing future participation by limited risk 
plans.
b. Fallback Prescription Drug Plan (Fallback Plan)

[[Page 4393]]

    In the proposed rule under Sec.  423.855 we stated that a fallback 
prescription drug plan is a PDP offered by an eligible fallback entity 
that provides only actuarially equivalent standard prescription drug 
coverage, as well as access to negotiated prices, including discounts 
from manufacturers, and that meets other requirements as specified by 
CMS.
    Comment: Several commenters stated that we should amend the phrase 
`actuarially equivalent standard prescription drug coverage'' with the 
phrase `defined standard coverage' to reflect the clear intent of the 
Congress to limit the benefit offered by a fallback plan. Others urged 
us to make sure the final regulation is clear about what structures 
such as premiums or cost sharing can be different and about what 
protections must be in place to ensure that consumers are clearly 
informed of the differences and are protected against unfair practices.
    Response: We agree that the statute requires fallback plans to 
offer standard coverage, but we point out that it makes a distinction 
between two types of coverage that are both considered ``standard''. 
For purposes of administering the Part D benefit we must maintain the 
distinction between defined standard coverage and actuarially 
equivalent standard coverage as described in Sec.  423.100. We continue 
to think that beneficiaries and taxpayers may be able to get better 
value from actuarially equivalent packages that employ all of the cost 
and utilization management tools, particularly co-payment tiering, to 
drive to the most cost-effective utilization on the part of 
beneficiaries and the best price concessions from manufacturers, so we 
certainly will not preclude such offerings. However, we cannot say with 
impunity that PDPs offering defined standard coverage could not offer 
equal value through other formulary management tools and competitive 
negotiations with manufacturers. Consequently, we have modified Sec.  
423.855 to reflect that fallback PDPs may offer either defined or 
actuarially equivalent standard benefits. We do not believe this 
flexibility in any way impedes PDP plans from offering competitive 
plans that beneficiaries would prefer. We also note that we will be 
closely reviewing fallback plan formularies and benefit designs, as 
well as cost, quality and utilization management programs to ensure 
that they are reasonable and appropriate for a region in which 
beneficiaries do not have alternative plans from which to choose.
    Comment: Several commenters recommended that we require that all 
price concessions be passed through to the beneficiary. One commenter 
also recommended that we not allow any pricing differentials on what is 
paid to pharmacies for reimbursement of the dispensing fee or 
ingredient costs. They also believe the fallback plan should be 
required to adequately reimburse pharmacies with appropriate dispensing 
fees and an appropriate product cost reimbursement.
    Response: We agree with the commenters that fallback plans must 
pass through all price concessions that are known and available at 
point-of-sale to the beneficiary and, furthermore, must operate under 
conditions of complete price transparency in general. All other price 
concessions obtained (as discussed in detail in subpart G) must be 
reported to CMS and subtracted from paid claim amounts upon 
reconciliation. We note that some portion of these latter price 
concessions are passed through to the beneficiary in the form of lower 
premiums, but another portion is not and is passed through solely to 
the Medicare program in the form of lower program expenditures. It 
would be impractical to require that all price concessions be passed 
through to the beneficiary at the point of sale because certain price 
concessions can only be calculated retrospectively.
    Nonetheless, we require that fallback plans pass through all price 
concessions that are known at the time of the sale in the point-of-sale 
price, because we do not believe that section 1860D-11(g)(5)(A)(i) of 
the Act allows us to reimburse fallback plans for any amount in excess 
of actual costs incurred. Therefore, fallback plans may not claim any 
amount in excess of the discounts and dispensing fees obtained from 
participating pharmacies as drug claim costs. All returns on investment 
must be negotiated as part of the management fees and performance 
measures. We note that this policy differs somewhat from our 
requirements for risk plans. We believe that risk plans will be 
motivated to pass through as much discount as practicable at the point-
of-sale due to price competition, and we will encourage this through 
our Price Compare website. Even if they do not, however, they are paid 
prospectively and are in compliance with Sec.  1860D-2(d)(1)(B) of the 
Act and Sec.  423.104(g)(1) of this rule, so long as all price 
concessions are reported and deducted from claims costs in the 
reinsurance and risk corridor final payment processes. Fallback plans, 
on the other hand, are paid on the basis of 1860D-11(g)(5)(A)(i) of the 
Act and Sec.  423.871(e)(1) of this rule, and our payments must be 
limited to the actual costs of covered Part D drugs provided to the 
fallback plan enrollees. Since fallback plans will submit their claim 
costs to us for direct reimbursement, we require that these claims 
represent actual point-of-sale costs. We have added a definition of 
actual costs to Sec.  423.855 and modified Sec.  423.871(e)(1) to 
clarify this interpretation.
    As for the recommendation to prohibit pricing differentials among 
fallback plan contracts with network pharmacies, we do not believe that 
such a requirement would be consistent with the goal of creating a 
competitive market for prescription drugs and obtaining the best 
possible prices for beneficiaries and the Medicare program. We also do 
not believe that there is any prohibition on fallback plans contracting 
with subset(s) of preferred pharmacies, just as risk plans may; such 
subsets of preferred pharmacies may indeed have different pricing 
arrangements. Although we agree with the commenter that fallback plans 
should adequately reimburse pharmacies through appropriate dispensing 
fees and product cost reimbursement, we note that this result must be 
obtained through competitive price negotiations and that we may not 
interfere in such negotiations by attempting to define or require 
``appropriate'' fees.
    Comment: Several commenters asked that certain PDP requirements be 
extended to fallback plans. For instance, one commenter argued that the 
same out-of-network requirements applicable to PDPs should apply to 
fallback plans, and others suggested that they should be required by 
regulation to coordinate benefits with SPAP's in the same manner as 
must PDPs, or that they should comply with all the access and quality 
standards applicable to PDPs and MA-PD plans, including all grievances 
and appeal procedures.
    Response: We agree and wish to clarify that a fallback plan is a 
special type of PDP and as such must meet all of the requirements 
established for Part D plans, including prescription drug plans, in 
these regulations, except as otherwise specified by CMS in this subpart 
or in separate guidance. In some cases, the statutory provisions 
applying to fallbacks will be such that to apply the requirements of 
PDPs to fallbacks would create a conflict in the statute. For example, 
fallback plans obviously could not be required to submit bids under 
section 1860D-11(b) of the Act, since fallbacks are paid on a different 
basis from risk contractors. Similarly, fallback contractors will not 
be required

[[Page 4394]]

to report information necessary for calculating reinsurance, because 
fallbacks do not receive any reinsurance payments. In these cases, 
where there is an apparent conflict in the statute, this subpart, or in 
our guidance, we would not require fallback plans to meet the 
requirements of PDPs. However, where there is no conflict, we believe 
that fallback plans should be considered PDPs and have amended the 
definition of PDP in subpart A to include a fallback plan. Thus, for 
example, a fallback plan will be required to meet all of the 
requirements for beneficiary protections under subpart C that apply to 
other Part D plans. In addition, fallbacks would be subject to most of 
the provisions in subpart K governing the terms of the contract and 
procedures for termination. However, a fallback plan would not be 
subject to the same licensure and solvency requirements that apply to 
PDP sponsors under subpart I. Fallback plans would be required to have 
regional networks that meet the access requirements specified in Sec.  
423.120, including meeting the Tricare standards for retail pharmacies 
at the State level, but they would not necessarily have to meet the 
Tricare standards at the local level of the eventual fallback service 
area, as this particular area could not have been foreseen. We have 
amended the definition of fallback plan in Sec.  423.855, and the 
definitions of PDP and PDP sponsor in Sec.  423.4, accordingly.
c. Qualifying Plan
    Under Sec.  423.855, 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. 
Similarly, we have modified Sec.  423.855 to clarify that a PDP must 
not be operating under a restricted enrollment waiver, such as those 
that may be granted to special needs plans or employer group plans, in 
order to be counted as a qualifying plan in an area. No comments were 
received on these provisions, and they will be adopted as proposed.
3. Assuring Access to a Choice of Coverage (Sec.  423.859)
a. Access Standards
    In Sec.  423.859(a) we state that we will 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. There were no comments on these statutorily-based 
requirements and we are adopting Sec.  423.859(a) as proposed.
b. Fallback Service Area
    In Sec.  423.859(b) we state that if before the start of a contract 
year (or at any other time) we determine that Part D eligible 
individuals in a PDP region do not have available a choice of 
enrollment in a minimum of two qualified plans as described in Sec.  
423.859(a), we will 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.
    Comment: One commenter stated that a fallback plan should at a 
minimum be Statewide.
    Response: In the MMA the Congress directed CMS to form Medicare 
Advantage regions of not less than 10 and no more than 50 encompassing 
the 50 States and the District of Columbia, and to create PDP regions 
that are consistent with these to the extent practicable. Discussion of 
the analysis and comments on the PPO and PDP regions has been published 
separately. However, in the event that we determine that only sections 
of a region are fallback service areas, we are prohibited by law from 
allowing the fallback plan to service the entire region, no matter its 
size. We recognize that this policy may result in fallback service 
areas that are much smaller than the regions on which the contracts are 
based. Our compensatory strategy is to encourage national or other 
large-scale fallback contracts in order to maximize operational 
efficiencies while operating under this sort of uncertainty.
c. Waivers for Territories
    Section Sec.  423.859(c) of this regulation makes Medicare 
beneficiaries residing in the U.S. territories--which include American 
Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto 
Rico, and the U. S. Virgin Islands--eligible to enroll in Part D. We 
have the authority to waive any Part D requirements, including the 
requirement that access to two qualifying plans is available in each 
service area, as required to ensure access to qualified prescription 
drug coverage for Part D eligible individuals residing in the U.S. 
territories. 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.
    In the proposed rule we suggested a number of Part D requirements 
that we were considering waiving and requested comments on these and 
any other potential waivers that would facilitate the offering of Part 
D coverage in the territories. The only comments received for the 
territories concerned the design of the regions, and these have been 
addressed in separate guidance. As a result, we retained the broad 
waiver authority in Sec.  423.859(c) without modification, and will 
continue to conduct research to determine how best to facilitate Part D 
coverage in the territories. For risk-based applicants, we anticipate 
we would provide a table identifying requirements for waivers, and 
applicants would have to provide a

[[Page 4395]]

rationale for how a waiver would facilitate risk-based access in the 
territories. We would review each waiver, and if it is approved, it 
will apply to all similarly situated risk plans in the territories. 
Waivers of the bid requirements will not be entertained. Similarly for 
Fallback applicants, if there is a need for any of these, we would 
entertain waiver requests. Additionally, we will modify the payment 
incentive and performance guarantee arrangements as may be necessary to 
ensure fallback participation in the territories.
4. Submission and Approval of Bids (Sec.  423.863)
    In Sec.  423.863 we establish a separate bidding process for 
fallback plans distinct from the risk bidding process addressed in 
Sec.  423.265 of our regulations, and state that the solicitation, 
timing and format requirements for this process will be provided in 
separate guidance.
    Comment: A commenter asserts that neither the MMA nor the proposed 
rule address whether a PDP applicant approved by CMS may withdraw its 
application without any adverse consequences to the PDP applicant if a 
fallback plan is invoked in the same region. The commenter recommends 
that this option should be available if a plan does not wish to compete 
against a fallback plan.
    Response: We fundamentally do not think that risk plans need to be 
concerned about competing against a fallback plan. Risk plans will have 
the competitive advantages of corporate marketing and brand recognition 
and the ability to offer more varied benefit designs (including 
supplemental benefits), as well as being offered to all enrollees in a 
region--not just to those in fallback service areas. We are also 
anticipating that efficient risk plans may have the opportunity to earn 
higher levels of profit. While there is a possibility that a fallback 
plan could enter a region if there is only one PDP risk plan, our 
strategic approach to encourage the offering of risk plans should also 
make them attractive to beneficiaries relative to fallback plans. And 
while we do not believe we have the authority to prevent a risk bidder 
from withdrawing its bid prior to entering into a PDP contract, we 
expect risk-based applicants to participate in the solicitation process 
in good faith, with the full expectation of participating in the 
regions for which they apply regardless of the anticipated presence of 
a fallback in that region. Accordingly, we intend to scrutinize 
applications and bids.
    In Sec.  423.863(b) we state that, except as otherwise noted, the 
provisions of Sec.  423.272 apply for the negotiation and approval of 
fallback PDP contracts. We state that if access requirements have not 
been met after applying Sec.  423.272(c), we will contract for the 
offering of a fallback PDP in that area, and that all fallback service 
areas in any PDP region for a contract period must be served by the 
same fallback plan. Fallback plans must be prepared to provide Part D 
services at the same time as risk plans, and in the event of mid-year 
changes, we will approve a fallback PDP for any new fallback service 
areas in a PDP region in a manner so that the fallback plan is offered 
within 90 days of notice. Under no circumstances may we contract for 
only one fallback PDP for all fallback service areas in the 50 States, 
the District of Columbia, and the territories.
    Comment: One commenter pointed out that according to Sec.  
423.863(b)(5), in the event of mid-year changes we must approve a 
fallback prescription drug plan so that the fallback is offered within 
90 days of notice. The commenter is concerned that this leaves open the 
possibility that beneficiaries could be without a PDP for a period of 
up to 90 days, and urges us to clarify that fallback plans must enter 
into a mid-year market as soon as practicable.
    Response: We share the commenter's concern with ensuring access and 
continuity of care for beneficiaries in the unlikely event of either a 
risk plan or fallback prescription drug plan failure. We will make 
every effort to eliminate this possibility through our selection 
criteria that will involve scrutiny of financial and business 
stability, and will favor firms with national capacity. In addition, we 
will select fallback plans, in part, on their operational capability to 
be up and running quickly. We believe it would be a very rare 
occurrence to need a fallback plan in mid-year for a reason that could 
not be foreseen in time to have an alternate fallback plan in place, 
and thus we cannot foresee a circumstance in which there would be the 
possibility of a gap in access to a PDP. (Contract provisions in Sec.  
423.509 and Sec.  423.510 require a 90-day notice of intent to 
terminate a plan. In 423.508, if a contract is terminated by mutual 
consent, the sponsor and CMS will work out an appropriate time frame to 
ensure time to secure a fallback plan.) In cases where a new fallback 
would be invoked mid-year due to plan withdrawal, beneficiaries might 
face different cost sharing and different formularies, but they would 
be eligible for an SEP and would be allowed to choose the MA-PD or PDP 
in the area (if there is one) instead of the new fallback plan. In the 
unlikely event of this occurrence, our goals will be to explain any 
differences to affected beneficiaries, and to limit disruption as much 
as possible.
    Comment: One commenter stated that our suggestion in the proposed 
rule that we expected to award two fallback contracts for the entire 
country, assuming fallback contracts are needed, is arbitrary and does 
not serve the best interests of either beneficiaries or CMS.
    Response: Because we now believe that two may not be sufficient to 
competitively provide for fallback coverage should it be necessary, we 
plan to award as many contracts as needed to provide potential fallback 
services. However, we still plan to have only a very limited number. We 
anticipate awarding a sufficient number of fallback contracts to ensure 
that any designated fallback area(s) are provided for at the start of 
the program, as well as later in the event of plan closure or failure. 
However, we do not anticipate awarding so many as to dampen the 
incentive for potential fallback plans to offer excellent customer 
service and competitive drug prices. We also plan to pursue every 
opportunity to ensure the option of at least two risk plans in every 
area, and do not anticipate the need to activate fallback plans.
    In the preamble to the proposed rule we stated that 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. However, in regulation we more correctly stated that we would 
use competitive procedures (as defined in section 4(5) of the Office of 
Federal Procurement Policy Act (41 USC 403(5)) to enter into a contract 
under this paragraph, and that the provisions of section 1874A(d) of 
the Act with regard to limitation of liability for Medicare contractors 
for payments on behalf of Medicare would apply. Thus the fallback plans 
must be competed, and their terms and conditions may be negotiated. 
Because fallback plans will be subject to competitive procedures, we 
have clarified subpart N to make clear that those appeals procedures 
would not apply to fallback plans or fallback entities.
    Comment: We received comments asking that an alternative to the 
``indefinite delivery'' type contracting be considered, including the 
use of cost plus fixed fee contracts.
    Response: We do not believe the fallback contracts will be Federal 
Acquisition Regulations (FAR) contracts

[[Page 4396]]

per se, even though we plan to use the FAR competitive procedures to 
enter into fallback contracts. Section 1857(c)(5) of the Act, which is 
incorporated by section 1860D-12(b)(2)(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 law or regulations relating to 
the making, performance, amendment, or modification of contracts of the 
United States, as we determine is inconsistent with the furtherance of 
the purposes of Title XVIII.
    Based on this authority, we proposed that for risk contractors, the 
contracts would not be written or entered into in accordance with the 
FAR or the Departmental acquisition regulations set forth in title 48 
of the CFR. In addition, in the Medicare Advantage context, the MA 
contracts have not been considered to be FAR contracts and have not 
contained FAR provisions within them. We believe that it would be in 
furtherance of the purposes of Title XVIII to maintain consistency 
among the Medicare Advantage, risk, and fallback contracts to the 
extent possible. Therefore, as with both the risk and Medicare 
Advantage contracts, the fallback contracts will not contain many of 
the FAR or HHS-specific provisions automatically included in many 
government contracts.
    In addition, because the contracts would not be written under the 
FAR or 48 CFR provisions, we do not believe it is accurate to refer to 
the standby contracts as indefinite duration, indefinite quantity 
(IDIQ) contracts--which is a term used under the FAR. Nonetheless, we 
expect to have umbrella provisions, which provide the necessary 
flexibility to deploy a fallback plan during a contract year in the 
event of a risk plan failure. Although the fallback contracts will not 
be written in accordance with the provisions of the FAR or 48 CFR, and 
will not look like typical ``FAR contracts,'' as we stated in the 
proposed rule at 69 Fed. Reg.46734, unlike both risk and MA contracts, 
we will enter into fallback contracts using the Federal acquisition 
rules on a timetable to ensure that the contracts are in place on time 
(that is, at the same time as the risk plans would otherwise be 
offered).
    In anticipation of the approach discussed above, we intend to time 
the fallback solicitation process so that we can actively encourage 
participation in risk contracting and minimize the need for fallback 
plans while ensuring they are available if necessary. To this end, we 
intend to begin the fallback solicitation process after the risk plan 
solicitation process. We may also conduct a second risk plan 
solicitation (for applications) only for areas we determine to be 
likely fallback areas. Final fallback bids under this process would be 
due shortly after the risk bids are due with fallback contracts awarded 
in the fall. Further details on the fallback plan solicitation process 
will be provided in separate guidance.
    In the preamble to the proposed rule we referred to the non-
interference provision of the MMA and noted, for our negotiations with 
potential fallback plan sponsors, that we could not interfere with 
negotiations between drug manufacturers and pharmacies and PDP 
sponsors, and could not require a particular formulary or institute a 
price structure for the reimbursement of covered Part D drugs. However, 
we noted that at the same time the revenue requirements standard in 5 
USC 8902(i), discussed in subpart F of the preamble, require us to 
ascertain that the bid ``reasonably and accurately reflects the revenue 
requirements for benefits provided under that plan.'' Therefore, we 
concluded that while we may 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 take appropriate steps to evaluate 
whether the bid is reasonably justified. As specified in 5 USC 8902(i), 
we have the authority to take steps to ensure that benefits are 
``consistent with the group health benefit plans issued to large 
employers,'' in order 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 to ensure that there is 
no conflict of interest leading to higher bids. We also proposed to 
negotiate price-related performance targets with fallback plans, 
consistent with current market practices in which commercial plan 
sponsors negotiate price-related reference points with PBMs. We said we 
would also consider potential contractors based on their bids for 
administrative functions like claims processing.
    Comment: We received a few comments that did not support our 
analysis of our negotiating authority. One commenter specifically 
recommended that we clearly indicate in the final rule that we will not 
set price benchmarks, create incentive payments, or otherwise interfere 
with the price structures for Part D drugs, whether provided through 
fallback plans or not.
    Response: As stated in the proposed rule, 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 and the potential incentive payments will be defined in 
advance, the determination of actual incentive payments will be made at 
the end of the contract period, and thus does not represent 
interference in the bidding process.
    As is the case with risk bids, we continue to believe we have the 
authority to negotiate for fallback plans in four broad areas: 
administrative costs, aggregate costs, benefit structure, and plan 
management. We will evaluate administrative costs for reasonableness in 
comparison to other bidders. We will examine aggregate costs to 
determine whether the revenue requirements for the defined standard or 
actuarially equivalent standard prescription drug coverage as defined 
in Sec.  423.100 are reasonable and equitable. We will 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 will 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 will examine and discuss any proposed benefit 
structures or changes to benefits in later years, particularly with 
regard to any potentially discriminatory features. Finally, we will 
review performance metrics and discuss any identified issues with 
regard to plan management, such as customer service. No changes will be 
made to Sec.  423.871 in response to these comments.
    Comment: One commenter supported our position that we have the 
authority to negotiate with plans to ensure a good price for 
beneficiaries, and if the price reference points appear to be 
particularly high (or low), to request an explanation of the bidders' 
pricing structure, and the nature of their arrangements with 
manufacturers to ensure that there is no conflict of interest leading 
to higher bids. The commenter urged us to apply these same authorities 
to plans in non-fallback situations, as well as to fallback plans, and 
notes these ``pricing dangers'' may also occur in areas where there is 
no fallback plan, but just one MA-PD and one at-risk PDP.

[[Page 4397]]

    Response: We appreciate the support of our position and agree that 
similar, although not identical, controls are required for evaluation 
of risk plan bidding. Since risk plans are by definition at risk for 
ineffective cost management, there is less need for us to set targets 
in order to incentivize reasonable and appropriate cost controls. 
Please refer to our discussion of risk plan bid negotiation in subpart 
F, as well as to our guidelines on risk bid submission published 
separately.
    Comment: Numerous commenters wrote in about performance measures 
for fallback plans. Some expressed their approval of our intent to base 
incentives on various performance measures. Some commenters suggested 
specific measures such as: using cost per days supply instead of cost 
per prescription to ensure an apples-to-apples comparison, and 
including more specific measures of customer service such as: speed and 
efficiency in handling enrollee calls, timeliness and accuracy of 
communication materials to enrollees, comprehensiveness and accuracy of 
business support to pharmacies, prescribers and CMS, retail pharmacy 
network access, and mail service pharmacy performance.
    However, the majority of commenters had serious doubts about the 
number, and kinds of performance measures we proposed. Some were 
worried there were too many proposed performance plan measures, and 
several believed that we were suggesting that the final rule was going 
to allow negotiated discounts for prescription drugs to be the sole 
performance measure for a fallback plan. Other commenters said they 
believed that fallback plans should not be expected to put their 
management fees at risk due to factors beyond their control, or for 
measures that are not mutually agreed upon with CMS, and others said 
that drug price discounts should not be used as a performance measure 
at all.
    Response: We appreciate the supportive comments, and especially the 
suggestions for specific performance metrics we could utilize. We also 
agree that fallback plans should not have their management fees put at 
risk due to factors beyond their control. We have identified a number 
of performance measures that are used in the private sector as 
performance guarantees for which management fees are put at risk and we 
intend to adopt these practices to ensure best practices in benefit 
management.
    Despite the comments arguing against the use of performance 
incentives tied to price discounts, we will be placing performance 
clauses in the contracts with fallback entities that tie performance 
payments to the fallback plan's ability to secure lower drug prices for 
beneficiaries and lower costs for Medicare. We note that in the absence 
of performance guarantees or incentives, fallback plans are no-risk 
cost-based arrangements that are reimbursed by Medicare for costs 
(including administrative fees and negotiated profit) incurred. In 
future guidance we will provide a number of measures that would 
encourage an efficient entity to bid on a fallback plan contract 
(because it believes it can meet the performance metrics), and also 
give a successful bidder an incentive to provide quality services to 
its beneficiaries at the best possible price (because it would have the 
opportunity to earn greater profits). We note that this increased 
profit opportunity is the result of performance incentive payments and 
not the retention of any spread between negotiated prices with 
pharmacies and the target pricing proposed in the fallback contract 
bid.
    As stated in Sec.  423.871(d), as part of the payment process for 
fallback plans authorized by section 1860D-11(g)(5) of the Act, we will 
assess the performance of plans with regard to specific performance 
measures and tie this performance to an incentive payment. Incentive 
payments may be either performance guarantees (with downside risk to 
management fees) or performance incentives (with upside potential for 
additional profit). These measures will include, but are not limited 
to, 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 to the 
Medicare Prescription Drug Account and to enrollees are minimized 
through mechanisms such as generic substitution. The term ``quality 
programs'' refers to drug utilization review processes in place to 
avoid occurrences such as adverse drug reactions, drug over utilization 
and 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 will be 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.
    We believe the suggested performance standards are reasonable and 
largely consistent with private sector best practices. As the potential 
performance guarantees and incentives mentioned above illustrate, we 
will select (and will continue to refine) measures that focus on key 
indicators of the many aspects of prescription drug benefit management 
that are important to us and to beneficiaries. These measures will be 
updated and revised to reflect opportunities to ensure that best 
practice is reflected in each fallback PDP contract year.
    Comment: One commenter indicated support for the concept of paying 
for performance, but expressed concern that the proposed regulations 
would subject only fallback plans (and not at-risk PDPs or MA-PDs) to 
performance standards that would rate these plans on their success at 
cost containment. The commenter argued that under this approach the 
fallback plans would have a greater incentive to make formulary choices 
based on the amount of discount they receive from manufacturers, rather 
than on the most appropriate and cost-effective clinical treatments. If 
this were to occur, it could put beneficiaries enrolled in fallback 
plans--including those who have no other real options--at a significant 
disadvantage. The commenter recommended that performance standards for 
all Part D plans need to balance both cost containment and access to 
clinically appropriate medications.
    Response: The MMA was designed in large part to foster a 
competitive market place by making every effort to encourage at-risk 
plans to contract with us, thereby creating competition among plans and 
choice for beneficiaries. We believe that both cost containment and 
quality performance will be logical outgrowths of plans competing for 
beneficiaries in the same area. Contract provisions outlined under 
(subpart K) Sec.  423.505 and performance measures provided under Sec.  
423.871(d) are all designed to protect the beneficiary and are a 
condition of contracting with CMS. Nonetheless, we too believe that 
fallback PDPs, which are paid costs, may not always have the same 
incentives as at-risk plans to negotiate aggressive discounts and 
otherwise minimize net costs, as opposed to net reimbursement. 
Consequently, the point of the performance guarantees is to bolster the 
incentives to undertake those activities aggressively. We understand, 
for instance, that if we were to base performance incentives on rebates

[[Page 4398]]

obtained, this would create an incentive to steer patients toward drugs 
that receive higher rebates from manufacturers, rather than toward drug 
choices that optimize both therapeutic outcomes and cost effectiveness 
for the patient and the payer. Consequently, when evaluating costs, we 
will avoid metrics such as average rebate level or average rebate per 
script (as we suggested in the proposed rule) in favor of better 
measures of net cost to the program.
    Comment: We received several comments regarding fallback plan 
quality programs. One suggested we change the language from over- and 
under-utilization to ``appropriate use''. One commenter wanted us to 
include a statistically significant sample of MTMP enrollees to 
identify medication management. Another suggested that in addition to 
reducing medication errors and avoiding adverse drug events, fallback 
PDPs should offer quality programs on prescription drug therapy that 
include adherence and persistency programs.
    Response: We appreciate these comments and share the commenters' 
goals of ensuring comparable and appropriate quality assurance programs 
in fallback plans. As noted already, fallback plans are subject to all 
of the requirements for PDPs and other Part D plans (except as 
otherwise noted in this subpart or in separate guidance) and readers 
are referred to subpart D for discussion of related comments and 
responses on quality requirements and initiatives. We have modified 
Sec.  423.871(d)(1)(ii) to reflect the requirements to monitor for 
appropriate utilization.
    In the preamble to the proposed rule we stated that in contrast to 
plans that contract on a risk basis, fallback entities will be paid for 
covered Part D drugs 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 said we were considering tying the performance payments of 
fallback entities to the average discounts they are able to negotiate, 
including discounts from manufacturers. We noted that this type of 
incentive contracting is found in the commercial pharmacy benefit 
management market today. We requested comments on alternative reference 
points or alternative methodologies that could promote competitive 
pricing.
    Comment: We received a number of comments around using AWP as the 
price reference point for negotiated prices. Numerous commenters 
supported our use of a price benchmark and believe it represents due 
diligence on the part of the agency to ensure that beneficiaries and 
the Medicare program are not penalized with high prices in areas in 
which there are no choices among plans. Some recommended that we use 
AWP as a reference point to measure the cost containment by fallback 
plans. Others agreed with our expressed concern that the use of a 
fluctuating benchmark like AWP was in some ways problematic.
    Response: Despite its frequent fluctuations and inherent 
vulnerability to manipulation, the AWP remains the primary measuring 
stick for drug costs. We will therefore be incorporating it into our 
performance targets, but we will also be looking at other indicators or 
proxies for financial performance, such as rates of generic 
substitution, that will provide other perspectives on cost management.
    Comment: One commenter recommended that we clarify that ``actual 
costs'' incurred to provide the drug benefit include administrative 
costs, and not simply actual drug costs.
    Response: We appreciate the recommendation to clarify these terms 
in regulation. The actual costs referenced in Sec.  423.871(e)(1) refer 
to the actual costs incurred by the fallback plan for the acquisition 
of drugs, and are net of administrative expenses. Administrative costs, 
including return on investment, should be included in the computation 
and negotiation of management fees. We have added the definition of 
actual costs to Sec.  423.855 and modified Sec.  423.871(e)(1) to 
clarify these terms.
    Comment: Several commenters urged us to eliminate the requirement 
that fallback entities apply direct or indirect remuneration as an 
``offset'' to actual costs incurred by the fallback entity.
    Response: We do not believe that we have the authority to reimburse 
fallback contractors for costs at a rate above their actual acquisition 
costs. In Sec.  423.308 we state that ``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.'' In 
the proposed rule we also explained (for allowable costs for risk 
plans) that we understand that today a significant volume of price 
concessions are not applied in the context of point of sale claims 
data, but rather in periodic accounting adjustments, and that they 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 
less than market value in lieu of some or all of the price concessions. 
We are concerned that this practice may result in improper shifting of 
costs in order to inappropriately maximize cost reimbursements. We 
intend to monitor these arrangements closely to ensure that actual 
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 actual costs and we, therefore, are proposing to require 
that the true cost of all price concessions be segregated from 
administrative fees in all records. We require that all price 
concessions passed through to the plan sponsor or beneficiary in any 
form be subtracted when calculating actual costs. Again, we have added 
the definition of actual costs to Sec.  423.855 and modified Sec.  
423.871(e)(1) to clarify this policy.
    Comment: One commenter requested that we extend the confidentiality 
protections of the Medicaid rebate statute to all negotiated pricing 
information submitted to, or reviewed by, CMS under Part D, including 
information obtained under subparts F, G, K, Q, and R of the proposed 
rule.
    Response: We received several comments regarding extending the 
confidentiality provisions of the Medicaid rebate statute to Part D. As 
discussed in subpart F of this preamble, Part D bid information that 
determines payment is protected under section 1860D-15, since the bid 
information is used to actually pay the sponsors (if, for example, it 
is an estimate of reinsurance, or it supports the actuarial value of 
the bid). We believe this same protection applies to the information 
submitted in response to a fallback plan solicitation or as part of the 
cost reconciliation process. We also do not believe we have the 
authority to extend the confidentiality provisions of the Medicaid 
rebate statute where the Congress has not authorized us to do so. The 
Congress has been quite clear when it wishes the Medicaid rebate 
statute to apply. For example, in section 1860D-

[[Page 4399]]

2(d)(2) of the Act, the Congress specifically stated that certain 
aggregate negotiated price concessions described in that provision 
would be protected under section 1927(b)(3)(D)--the Medicaid rebate 
confidentiality provisions to which the commenter refers. Similarly, 
section 1860D-4(c)(2)(E) of the Act applies the Medicaid rebate 
confidentiality provisions to disclosures made under that provision. 
Finally, section 101(e)(4) of the MMA amended section 1927(b)(3)(D) to 
specifically add to that section the information disclosed under 
sections 1860D-2(d)(2) or 1860D-4(c)(2)(E). Therefore, we do not 
believe the Medicaid rebate confidentiality provisions would apply, 
except where the Congress specifically indicated they should. For 
further information regarding the Disclosure of Information provision, 
please refer to subpart G, Sec.  423.322. Please refer to subparts F 
and G for discussion of comments and responses related to 
confidentiality of pricing information submitted with the bid and upon 
reconciliation.
    Section 423.871(f) of the regulation implements section 1860D-15(d) 
and (f) of the Act. Under these provisions the Secretary is authorized 
to collect any information necessary to carry out section 1860D-15 of 
the Act, but information ``disclosed or obtained pursuant to the 
provisions of [section 1860D-15] may be used by 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 [section 
1860D-15 of the Act].'' We have clarified that information disclosed to 
determine Medicare payment or reimbursement to the fallback entity may 
be used by the officers, employees and contractors of HHS (including 
OIG) only for the purposes of, and to the extent necessary in, 
determining payment or reimbursement, and we have modified Sec.  
423.871(f) accordingly. We also note, however, that this restriction 
does not limit CMS or OIG authority to conduct audits and evaluations 
necessary to ensure accurate and correct payment and to otherwise 
oversee Medicare reimbursement to fallback entities, or to conduct 
other statutorily-authorized quality, research, and oversight 
functions. Nor does this restriction necessarily limit the ability of 
others with independent authority to collect data using their own 
authority. As we did in subpart D of this preamble, we interpret 
sections 1860D-15(d) and (f) of the Act as limiting the use of 
information collected under the authority of that section. If 
information is collected under some other authority, however, we do not 
believe that section 1860D-15 of the Act would limit its use--because 
the information would not be collected ``pursuant to the provisions'' 
of section 1860D-15 of the Act. QIOs have independent authority to 
collect data, and to fulfill their responsibilities. To the extent QIOs 
need access to data from the transactions between pharmacies and Part D 
sponsors, these data could be extracted from the claims data submitted 
to us. We refer readers to subpart D for a more extensive discussion of 
this issue.
5. Rules Regarding Premiums (Sec.  423.867)
    In Sec.  423.867 we proposed that the monthly beneficiary premium 
charged under a fallback prescription drug plan offered in all fallback 
service areas in a PDP region must be uniform (except as provided with 
regard to any enrollment penalty, low-income assistance, or employer 
group waivers under Sec.  423.458(c). It must equal 25.5 percent of an 
amount equal to our estimate of the average monthly per capita 
actuarial cost, including administrative expenses as calculated by the 
Chief Actuary, under the fallback prescription drug plan of providing 
coverage in the region. In calculating administrative expenses, we said 
we would use a factor based on similar expenses of prescription drug 
plans that are not fallback prescription drug plans. No comments were 
received on these statutorily determined provisions and they will be 
adopted as proposed.
    In Sec.  423.867(b) we proposed that fallback plans would not 
receive any applicable late enrollment penalties since they do not bear 
risk for increased expenses attributable to individuals to whom the 
penalty applies. We required that monthly beneficiary premiums for 
enrollees in fallback prescription drug plans 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. Both Sec.  422.262(f)(1) 
(as provided under sections 1854(d)(2)(A) and 1840 of the Act provide 
for the collection of monthly premium through the withholding of 
benefit payments. For those beneficiaries for whom Federally based 
monies are not available, section 1840(e) allows for premiums to be 
``paid to the Secretary at such times, and in such manner, as the 
Secretary shall by regulations prescribe''.
    In the proposed rule we interpreted the reference to section 
1840(e) as requiring direct payment to us when Federal benefit 
withholds were not available. We stated: ``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.'' We have clarified that we have the authority to require 
that premiums be collected by fallback plans, and to deduct such 
amounts from payments due to fallback plans in the case of any 
individual who does not receive such benefits or annuities, or who 
receives insufficient benefits or annuities to cover the monthly 
premium. We believe this procedure is more familiar to beneficiaries 
and to plans, and allows the plan to be in closer touch with the 
beneficiary's enrollment status. Therefore, we have modified Sec.  
423.867(b) to reflect this clarification.
6. Contract Terms and Conditions (Sec.  423.871)
    In Sec.  423.871 we state that the terms and conditions of 
contracts with eligible fallback entities offering fallback 
prescription drug plans will be the same as the terms and conditions of 
contracts for other Part D plan sponsors, with the following 
exceptions:
     The contract term for a fallback prescription drug plan 
will 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 rule. Section 423.50 includes in the definition 
of marketing materials: membership communication materials, such as 
membership rules, subscriber agreements, handbooks and wallet card 
instructions, letters about contractual changes, changes in premiums, 
benefits, plan procedures, and membership or claims processing 
activities. It also refers to required dissemination of information on 
approved plan characteristics to enrollees as required in Sec.  423.128 
of our proposed rule. The prohibition on marketing and branding means 
that in none of these required activities or materials may the fallback 
plan sponsor

[[Page 4400]]

use its corporate identity to brand the fallback plan; only references 
to the approved name of the fallback plan or Medicare may be used. 
Beneficiary education and outreach to employers potentially interested 
in providing supplemental coverage will remain solely our 
responsibility.
     Payment will be based on reimbursement 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 
including but not limited to those for cost containment, quality 
programs, customer service, and benefit administration (including 
claims adjudication).
     Each contract for a fallback prescription drug plan must 
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 can amend the contract at any time, as needed, to 
reflect the exact regions or counties to be included in the fallback 
service area(s).
     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.
     Other contract terms will be specified during the bid 
solicitation process.
    We note that like all Part D plans, fallback prescription drug 
plans must abide by all Federal and State laws regarding 
confidentiality and disclosure of beneficiary health information, 
including the obligation of fallback prescription drug plans as HIPAA 
covered entities to comply with the HIPAA Privacy Rule.
    Comment: One commenter asked us to clarify that the service area of 
a fallback plan will not be changed except by mutual agreement of the 
parties.
    Response: Under umbrella contracts, service area applies to two 
different aspects of the contract: one is where the fallback plan is 
actually operating a plan in any given year, and the other is the 
service area to which the umbrella provisions pertain, meaning the 
total potential service area. A fallback plan would be required to 
provide service as determined necessary by CMS in any additional area 
covered under the umbrella terms but not beyond that service area.
    Comment: One commenter recommended that we publish in advance of 
bidding any proposed performance standards that we intend to use under 
the proposed fallback contract. The commenter also recommended that 
provisions be included in Sec.  423.871 to ensure that any performance 
standards, as well as the requirements and process to establish that 
the standards have been met, cannot change during the term of a 
contract.
    Response: In accordance with Sec.  423.871, we may specify other 
contract terms during the bid solicitation process. The performance 
standards we intend to use under contracts will be provided in the 
fallback solicitation documentation prior to bidding. [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 and potential fallback plan sponsors will need to compete 
on these performance measures. Under Part D plan contract terms and 
conditions, as described in Sec.  423.516, we agree not to implement 
any significant regulatory requirements for a Part D plan other than at 
the beginning of the year.
7. Payment to Fallback Plans (Sec.  423.875)
    As provided in 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 under Sec.  
423.871(e). In the proposed rule we proposed some alternative payment 
mechanisms, including draw down accounts and prospective payments, as 
well prospective or retrospective rebate allocation methodologies.
    Comment: One commenter recommended that we use a prospective 
payment approach, and asked for more detail on how that system would 
work.
    Response: We published separately the proposed guidelines on 
payment methodologies to Part D plans. Further guidance will be 
included in the fallback plan solicitation documentation. Our goals are 
to avoid any undue burden to fallback plans and at the same time 
develop a method of payment that requires a limited amount of 
adjustment.

R. Payments to Sponsors of Retiree Prescription Drug Plans

1. Introduction
    Subpart R implements section 1860D-22 of the Act, which provides 
for subsidy payments to sponsors of qualified retiree prescription drug 
plans. Sponsors of qualified plans can receive an annual subsidy equal 
to 28 percent of specified retiree drug costs.
    We received 87 comments on subpart R in response to the August 2004 
proposed rule. Below we summarize the major proposed provisions in the 
subpart and respond to public comments. (For a detailed discussion of 
our proposals, please refer to the proposed rule (69 FR 46736).)
2. Options for Sponsors of Retiree Prescription Drug Programs
    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. In the preamble of the proposed rule, 
we reviewed the various options available to sponsors. We believe the 
availability of these various options will encourage sponsors to 
continue to assist their retirees in having access to prescription drug 
coverage. For the benefit of the sponsors, we again summarize the 
options below.
    Generally, employers and unions who offer drug benefits to their 
retirees (and their dependents) who are eligible for Medicare Part D 
can choose to:
    (1) Continue to provide prescription drug coverage through 
employment-based retiree health coverage. If such coverage is at least 
actuarially equivalent to the standard prescription drug coverage under 
Part D (as defined in Sec.  423.104 of the final rule), the sponsor is 
eligible for a special Federal subsidy for each individual enrolled in 
the sponsor's plan who is eligible for Part D but elects not to enroll 
in Part D;
    (2) Contract with a prescription drug plan (PDP) or Medicare 
Advantage-prescription drug (MA-PD) plan to offer prescription drug 
benefits to retirees who are eligible for Medicare. Alternatively, the 
retiree plan sponsor itself could apply to be a Part D plan for its 
retirees. Such plan may consist of ``enhanced alternative coverage'' 
(as defined under Sec.  423.104(f) of the final rule), offering drug 
coverage that is more generous than the standard prescription drug 
coverage under Part D (as defined under Sec.  423.104 of the final 
rule); or
    (3) Provide separate prescription drug coverage that supplements, 
or ``wraps around,'' the coverage offered under Part D plans in which 
the retirees (and their Medicare eligible dependents) enroll.
    The first option is the subject of this subpart R. The latter two 
options, which involve the employer or union's retirees (and their 
dependents) enrolling in Part

[[Page 4401]]

D, were discussed in the preamble of the proposed rule for subpart J, 
Sec.  423.454(b)
    We note that if employers or unions elect to sponsor enhanced 
alternative coverage under Part D or provide separate supplemental 
coverage that wraps around Part D, this will affect the point at which 
their retirees (and their dependents) are eligible for catastrophic 
drug coverage, which will have consequences for the participants, the 
sponsors, the plans, and the Medicare program. As specified in subpart 
C of the final rule, individuals enrolled in a Part D plan are eligible 
for catastrophic drug coverage after they incur out-of-pocket drug 
costs in the amount specified under Sec.  423.104(d)(5)(iii) of the 
final rule. Under the reinsurance provisions at Sec.  423.329(c), 
Medicare will reimburse Part D sponsors 80 percent of their gross costs 
for providing catastrophic coverage (excluding administrative costs and 
reduced by any 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 individual, a charitable organization or a qualified State 
Pharmacy Assistance Program but excluding insurers, government-funded 
health care programs, group health plans, and similar third party 
arrangements, would count toward the annual out-of-pocket threshold. We 
refer to those drug expenditures that count toward the out-of-pocket 
threshold as ``true out-of-pocket (TrOOP) expenditures.''
    Under these rules, sponsors who provide retirees (and their 
dependents) enhanced alternative coverage in effect delay the point at 
which an individual's total drug spending will trigger catastrophic 
coverage, since participants in the plan will have lower cost-sharing, 
and thus have lower out-of-pocket costs. Similarly, when employers or 
unions sponsor supplemental coverage that wraps around Part D coverage, 
there will be an increase in drug expense that must be incurred before 
catastrophic coverage is triggered, since drug costs paid for by such 
plans do not count toward the out-of-pocket annual limit. By delaying 
the provision of catastrophic coverage, these plans lower the cost of 
Part D to the Federal government by lowering our reinsurance payments.
    As discussed above, under MMA, sponsors of retiree prescription 
drug plans can provide coverage that supplements or ``wraps around'' 
the Part D standard benefit in two ways. First, plan sponsors can 
purchase integrated supplemental coverage directly from a specific 
Medicare prescription drug plan (PDP) or Medicare Advantage plan that 
includes prescription drugs (MA-PD). Second, plan sponsors can maintain 
a free-standing plan which is not tied to a specific PDP or MA-PD and 
is meant to supplement any of the Part D plans that Medicare-eligible 
retiree plan participants enroll in.
    We also note that the choice between integrated and separate 
supplemental coverage has operational implications for plan sponsors. 
If the sponsor purchases integrated coverage through a PDP or MA-PD, 
the enrollment of retirees in Medicare Part D will be handled by the 
PDP or MA-PD. Under this approach, the dispensing pharmacy will only 
need to undertake one transaction to the PDP or MA-PD; there would not 
be separate standard Part D and supplemental coverage transactions. In 
contrast, when sponsors provide coverage through a separate plan, they 
(or their plan administrator) will only handle enrollment for their 
free-standing coverage; retirees will be responsible for enrolling in 
Part D coverage of their choice. We are sensitive to the concerns of 
plan sponsors regarding the operational challenges of coordinating 
separate plans with Part D plans. Therefore, we are exploring 
approaches that stakeholders may be able to use to coordinate benefits 
at point-of-sale among these plans through the use of a single point of 
contact for coordination of benefits and facilitation of TrOOP 
calculation at the Part D plan..
    CMS has a program that can assist plan sponsors and administrators 
with identifying Medicare eligible individuals covered under their 
plans. This is a process called the Voluntary Data Sharing Agreement 
(VDSA) process. Plan sponsors that enter into VDSAs will be better 
prepared for enrolling their retirees into either integrated 
supplemental coverage through a Part D plan, establishing a separate 
plan to supplement or ``wrap around'' Part D coverage, or applying for 
the retiree drug subsidy. There is no requirement that any employer 
enter into a VDSA; it is strictly a voluntary process. (For more 
information on VDSAs, go to the website at http://www.cms.hhs.gov/medicare/cob/employers/emp_vdsa.asp). Other existing CMS programs 
permit group health plans and other secondary payers to sign agreements 
to receive Medicare paid claims data for the purpose of calculating 
their secondary payment liability.
    When an employer or union elects to sponsor retiree coverage 
through a Part D plan, the employer, union or entity seeking to offer 
or administer such coverage may submit written requests to us for 
permission to waive requirements under Part D that hinder the design 
of, offering of, or enrollment in an employer-sponsored group 
prescription drug plan (as defined under Sec.  423.454) or a MA-PD plan 
offered exclusively to the sponsor's retirees and their spouses and 
dependents. We believe these waivers will facilitate efficient 
administration and integration of sponsor-provided enhanced alternative 
coverage with other retiree health benefits offered by the sponsor. For 
example, the PDP or MA organization could request permission to 
restrict enrollment in its Part D plan to the retiree plan sponsor's 
retirees (and their dependents). Similarly, should the plan sponsor 
wish to enroll its retirees (and their dependents) in its own plan, 
with enrollment limited to such individuals, the sponsor could apply to 
be a Part D plan sponsor organization offering a PDP or MA-PD plan, and 
request such waivers as necessary. Further guidance on waivers will be 
provided to assist sponsors in evaluating this option.
    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.
3. Definitions (Sec.  423.882)
    The final subpart R rules provide definitions that are critical to 
understanding how the retiree drug subsidy functions. We received 
comments regarding only a few of the proposed definitions under subpart 
R: group Health Plan, qualifying covered retiree, allowable retiree 
costs, and sponsor. We also amended the definition of gross covered 
retiree plan-related prescription drug costs based upon comments 
received in response to the definition of a covered Part D drug in 
Sec.  423.100 in subpart C, and added a definition of sponsor agreement 
in response to comments received on the proposed rule.
    A. Group Health Plan: In general, the subsidy is paid for allowable 
retiree costs in a sponsor's group health plan. The statute and the 
proposed regulations incorporated the definition of Group Health Plan 
that appears in section 607(1) of the Employee Retirement Income 
Security Act (ERISA), 29 U.S.C. 1167(1). (This is also the definition 
used in the health care continuation of coverage provisions of ERISA, 
as added by the Consolidated Omnibus Budget Reconciliation Act of 1985 
(COBRA).) The statutory definition, incorporated in the proposed 
regulations, also specifically includes

[[Page 4402]]

plans maintained for their employees by the Federal Government, plans 
maintained by State or local governments, and church plans exempt from 
Federal taxes, even if they are not subject to ERISA or COBRA 
requirements.
    In the preamble to the proposed rule we said we intended to model 
our rules on the COBRA regulations (26 CFR Sec.  54.4980B-2, Q.6) that 
apply for determining the number of group health plans sponsored by an 
employer or a union, which is important for purposes of applying the 
actuarial equivalence test. Under the COBRA rules, all health benefits 
provided by a single employer constitute one group health plan, unless 
it is clear from the instruments governing an arrangement or 
arrangements that health care benefits are being provided under 
separate plans, and the arrangement or arrangements are operated 
pursuant to such instruments as separate plans. The COBRA rules also 
provide that if a principal purpose of establishing separate plans is 
to evade any requirement of law, then the separate plans will be 
considered a single plan to the extent necessary to prevent the 
evasion. To the extent that the COBRA rules require that an arrangement 
be considered a single group health plan, the sponsor must follow 
special rules for determining actuarial equivalence described in 
section 4(b)(3) of this subpart of the preamble below.
    Comments: Several plan sponsors, health plans, and employer 
advocacy groups suggested that we adopt the rules in the COBRA 
regulations for determining the number of plans sponsored by an 
employer or union, but remove the requirement that the arrangements be 
operated as separate plans. Some plan sponsors wanted the flexibility 
to differentiate between various groups of retirees within a single 
plan without compromising their plan's eligibility status. (For 
example, some sponsors separate their retirees according to years of 
service, family status, location, retirement date, coverage level, 
contribution structure, etc.) An actuarial association agreed that we 
should give employers and unions the flexibility to define plans and 
move away from a single plan definition to allow multiple benefit 
options to be included within a plan.
    An employer advocacy group discouraged us from requiring a separate 
filing, other than the attestation of actuarial equivalence, to satisfy 
any documentation requirement for plan definition purposes. A 
beneficiary advocacy group approved the use of the COBRA rules for 
determining the number of plans, but suggested limits on how actuarial 
valuation rules should be applied if there are multiple drug benefit 
options.
    Response: For the purposes of subpart R, the term group health plan 
will mean plans that meet the definition of group health plan in ERISA 
section 607(1), 29 U.S.C. 1167(1), including plans established or 
maintained for its employees by the Government of the United States, by 
the government of any State or political subdivision, or by an agency 
or instrumentality of the foregoing; plans established or maintained 
under or pursuant to one or more collective bargaining agreements; and 
plans established or maintained for its employees (or their 
beneficiaries) by a church or by a convention of churches which is 
exempt from tax under section 501 of the Internal Revenue Code. 
Provided they meet the definition of group health plan in ERISA section 
607(1), those arrangements are treated as group health plans even if 
the plans are not subject to ERISA or COBRA. Sponsors should use the 
rules in the COBRA regulations and other guidance issued by the 
Treasury Department and Internal Revenue Service for determining the 
number of group health plans offered by a plan sponsor. However, as 
discussed in Sec.  423.884, the final rule generally gives a sponsor 
with different benefit options (including different cost-sharing 
arrangements) within a single group health plan a significant degree of 
flexibility to choose whether to measure actuarial equivalence and 
receive subsidy payments for aggregated benefit options or to apply the 
rules separately for each benefit option.
    Comments: A business advocacy group recommended that defined 
contribution accounts such as Health Reimbursement Accounts (HRAs), 
Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs) 
and Flexible Spending Arrangements (FSAs) be considered group health 
plans for purposes of qualifying for the retiree subsidy. In addition, 
they recommended that sponsors establishing account-style plans that 
credit amounts during an individual's active service toward retiree 
benefits have the discretion to allocate payments between medical and 
drug costs for purposes of the actuarial equivalence test.
    Response: The final rule clarifies that Health Reimbursement 
Arrangements (HRAs) (as defined in Internal Revenue Service Notice 
2002-45, 2002-28 I.R.B. 93, and Internal Revenue Ruling 2002-41, 2002-
28 I.R.B. 75) and health Flexible Spending Arrangements (FSAs) (as 
defined in Internal Revenue Code (IRC) section 106(c)(2)) are treated 
as group health plans given the nature of these arrangements, including 
that they generally are treated as health plans by employers and unions 
subject to ERISA. The term group health plan generally will not include 
health savings accounts (HSAs) (as defined in IRC section 223) or 
Archer MSAs (as defined in IRC section 220), unless these accounts are 
treated as part of a group health plan under ERISA rules. While HSAs 
and Archer MSAs may not be group health plans, any high deductible 
plans that sponsors provide in connection with HSAs and Archer MSAs are 
group health plans.
    However, regardless of whether an account-type arrangement is a 
group health plan, the nature of such a plan raises certain challenging 
questions for purposes of the retiree drug subsidy program. For 
example, how should the value of the prescription drug coverage 
available through an account be determined if the account can be used 
to pay for prescription drug coverage and other benefits? Will 
beneficiaries be able to adequately compare that arrangement to 
benefits available through Part D, particularly if the account stands 
alone and is not offered in conjunction with other types of coverage 
(such as high-deductible plans)? How can it be determined whether these 
arrangements are creditable coverage for purposes of implementing the 
late enrollment penalty in Sec.  423.46?
    We intend to offer further guidance on these issues and on what 
types of account-based arrangements can be considered for the subsidy.
    Drug costs paid or reimbursed from funds in an HRA, which is 
generally funded solely by the employer, do not count as an incurred 
drug cost for purposes of the True Out-of-Pocket (TrOOP) rules, while 
drug costs paid or reimbursed from funds in other types of accounts, 
which can be funded by the employee, do count towards TrOOP. (See 
subparts C and J of this preamble (Coordination of Benefits), for a 
more detailed explanation of the rules for calculating TrOOP 
expenditures.)
    B. Qualifying Covered Retiree: The statute defines qualifying 
covered retirees as Part D eligible individuals, who are not enrolled 
in a Part D plan but who are covered under a qualified retiree 
prescription drug plan. The statute indicates that qualifying covered 
retirees include Part D eligible individuals who are spouses and 
dependents of covered retirees. The proposed rule used the statutory 
definition without further clarification.

[[Page 4403]]

    Comments: An association of actuaries requested that the final 
regulations clarify whether a qualifying covered retiree, under the 
retiree drug subsidy calculations, includes an employee who is 
receiving coverage following a disability and who is also entitled to 
Medicare Parts A or B on account of that disability (and therefore 
eligible for Part D). One employer advocacy group suggested that 
disabled Medicare-eligible individuals under age 65 be considered 
retirees for subsidy purposes, and that employers might drop coverage 
entirely if we decide not to allow it.
    An employer advocacy group encouraged us to deem persons with End 
Stage Renal Disease (ESRD) as qualified retirees for purposes of the 
subsidy, because these individuals might receive lower drug coverage 
without such designation.
    A government association sought clarification on the status of 
domestic partners who are Part D eligible individuals and their 
eligibility as qualifying covered retirees' dependents, for purposes of 
calculating the retiree drug subsidy.
    Response: For the purposes of subpart R, the term qualifying 
covered retiree means a Part D eligible individual who is: (1) a 
participant or the spouse or dependent of a participant; (2) covered 
under employment-based retiree health coverage that qualifies as a 
qualified retiree prescription drug plan; and (3) not enrolled in a 
Part D plan. In general, sponsors will have flexibility to determine 
whether an individual is a retiree, and to determine who are dependents 
of retirees based on the coverage rules under the plan. However, a 
participant is presumed to not be a retiree if the person is receiving 
health coverage based on current employment status as determined under 
the Medicare Secondary Payer (MSP) rule (Sec.  411.104 of this chapter) 
(regardless of whether such rules apply to the sponsor). We believe 
this approach gives reasonable flexibility to sponsors in terms of 
defining who is a retiree or dependent for purposes of the subsidy 
provisions. Under this definition, for example, sponsors generally can 
treat a person who is entitled to Medicare based on disability as a 
retiree for these purposes; sponsors can treat as a dependent any 
person to whom the sponsor is providing coverage in connection with a 
qualified covered retiree even if the person is not the retiree's 
dependent for Federal or State tax purposes; and they can treat as 
retirees self-employed persons and other individuals who previously 
provided services to the sponsor of the group health plan on a 
contractual, rather than employment, basis.
    End Stage Renal Disease (ESRD) beneficiaries who are not active 
workers meet the definition of a qualifying covered retiree if they do 
not enroll in Part D. Accordingly, sponsors can count for purposes of 
the retiree drug subsidy the allowable retiree costs of ESRD 
beneficiaries, including those costs incurred in the first 30 months of 
eligibility when the sponsor's plan is primary to Medicare.
    Comments: Comments from employers, employer advocates and 
government entities informed us that the retiree drug subsidy program 
not only affects retirees of the sponsors, but also the possible 
dependents of non-Medicare eligible workers or retirees who will be 
eligible for Medicare and therefore covered by the reporting 
requirements.
    Response: In response to the comments regarding non-Medicare 
eligible, active employees who have dependents who are Medicare Part D 
eligible individuals, the sponsor would not be eligible to claim the 
subsidy for the dependents because the covered worker is not in a 
retiree status. For covered retirees who are not themselves Part D 
eligible individuals, but who have dependents who are Part D eligible 
individuals, the sponsor would be able to claim the dependents' 
eligible prescription drug expenses under the subsidy.
    C. Gross covered retiree plan-related prescription drug costs: The 
proposed rules defined this term as ``non-administrative costs incurred 
under the plan for covered Part D drugs during the year ... including 
costs directly related to the dispensing of covered Part D drug''. 
Section 423.100 of the final rule now makes a distinction between a 
``covered Part D drug'' and a ``Part D drug.'' A ``Part D drug'' is a 
drug that may be covered under Part D pursuant to section 1860D-2(e) of 
the Act and a ``covered Part D drug'' is a Part D drug that is in a 
Part D plan formulary. For purposes of calculating the appropriate drug 
costs for the retiree drug subsidy, sponsors of retiree prescription 
drug plans may count costs incurred for any drug that can be covered 
under Part D. Accordingly, we have changed the definition of gross 
covered retiree plan-related prescription drug costs to mean non-
administrative costs incurred under the plan for Part D drugs during 
the year ... including costs directly related to the dispensing of Part 
D drugs.
    D. Allowable Retiree Costs: The proposed rule defined Allowable 
Retiree Costs as 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.
    Comments: Several beneficiary advocacy groups wanted us to adopt a 
definition of allowable retiree costs that included only the employer's 
financial contribution to retiree drug coverage, not any of the 
payments made by the retiree. They believe that including contributions 
from the retiree could result in ``improper cost shifting.''
    Response: There is no statutory authority to exclude retirees' 
payments in the definition of allowable retiree costs. The statute 
specifies that retiree drug subsidy payments are made for gross covered 
prescription drug costs paid by or on behalf of a qualified covered 
retiree. Thus, as long as coverage meets the actuarial equivalence 
standard, costs paid by the retiree will be included along with sponsor 
payments under the plan in determining retiree drug subsidy payment 
amounts.
    Comment: An association of actuaries found it difficult to 
understand what we are is defining as gross costs to be used in 
determining allowable retiree costs, but this might be due to a simple 
terminology difference, so they suggest we provide examples to clarify 
what costs should be used.
    Response: The statute indicates that gross covered retiree plan-
related prescription drug costs are costs incurred under the plan, not 
including administrative costs but including the costs directly related 
to the dispensing of Part D drugs. The final rule retains the basic 
statutory definition. We may (if needed) issue further guidance to 
clarify what costs constitute gross covered retiree plan-related 
prescription drug costs.
    Comment: A government entity found the term price concessions 
problematic because, as used in its contract with a pharmacy benefit 
manager (PBM), that term refers to confidential and proprietary 
information. Also, rebates are included in the pricing quoted to the 
PBM, and are not an identifiable line item that can be easily 
subtracted to determine allowable retiree costs.
    Employer groups requested that we distinguish what will be included 
in the definition of price concessions for the purpose of calculating 
allowable retiree costs.
    Specifically, the groups provided a number of comments on why price 
concessions relating to performance guarantees and point-of-sale 
discounts

[[Page 4404]]

should not be included in allowable retiree costs.
    They claim that including such price concessions when calculating 
allowable retiree costs would require a large, nearly impossible 
administrative burden. Performance guarantees or incentives, as well as 
point of sale discounts, lower the price of the prescription drug in a 
manner that would make it burdensome for the sponsor to determine the 
gross allowable costs. Thus, the employer groups argue that, in the 
instance where performance guarantees and point-of-sale discounts 
occur, reporting the actual cost to the sponsor as the gross cost 
should be sufficient.
    Response: The statutory provisions of the MMA specify that 
allowable retiree costs may include only costs actually paid by the 
sponsor or by or on behalf of a qualifying covered retiree, and that 
rebates, chargebacks and average percentage rebates must be subtracted 
from those costs. To comply with the statute, the final regulation 
retains the requirement that these and similar price concessions be 
taken into account in determining allowable retiree costs.
    We anticipate providing any additional clarification that is 
required for price concessions in further guidance. However, pending 
such guidance, performance guarantees that are not predicated on actual 
drug costs incurred, but rather on matters such as customer service 
performance standards or identification card delivery, are likely not 
the types of price concessions that need to be taken into account in 
determining allowable retiree costs. Moreover, to the extent point-of-
sale discounts and other price concessions are passed through to the 
beneficiary and plan at the point-of-sale for a given drug expense, the 
allowable retiree costs and gross covered retiree plan-related 
prescription drug costs for the expense would be equal, and the point-
of-sale discounts and other price concessions would not have to be 
further subtracted from these costs when a sponsor calculates allowable 
retiree costs as defined in Sec.  423.882.
    Comments: For sponsors with fully insured plans, a health industry 
association and insurers ask that we provide sponsors with the 
flexibility to have the retiree drug subsidy calculated based on the 
sponsor's premiums, using reasonable actuarial methods to determine 
what portion of the premium is allocated to gross covered prescription 
drug costs of qualifying covered retirees within the cost threshold and 
cost limits. Commenters support that position by arguing that employers 
and unions purchasing insurance do not pay actual incurred drug costs; 
they pay a premium based on expected costs, which may be pooled with a 
broader group of employers and unions. In a given year, an employer's 
or union's retirees may incur drug costs that are more than or less 
than the premium paid. They expressed concern that if drug costs 
actually paid by the insurer rather than premiums paid by the employer 
or union were the measure for subsidy payments, for any given retiree 
the employer or union would be getting a subsidy payment that is likely 
higher or lower than the allowable cost actually incurred by the 
employer or union (via the premium) for that retiree.
    As noted, the commenters propose using reasonable actuarial methods 
to determine a percentage of the premium that approximates what was 
paid for Part D-eligible retirees within the cost thresholds and cost 
limits. They also request being allowed to perform these calculations 
on an aggregate basis for all employers and unions with a specific 
retiree drug plan, since the experience for the employers and unions is 
pooled when determining premiums.
    Another fully insured plan sponsor recommended that if the plan 
sponsor contracts with an at-risk health plan, the retiree drug subsidy 
should be a flat payment based upon the amount paid instead of adjusted 
for actual experience and requested clarification as to how we 
anticipate the subsidy to be integrated with fully insured plans.
    Response: The statute specifically requires that a subsidy payment 
be based on allowable retiree costs attributable to gross covered 
retiree plan-related prescription drug costs, which are actual 
prescription drug costs incurred under the plan (not including 
administrative costs but including costs directly related to the 
dispensing of Part D drugs) for a qualifying covered retiree. In 
general, we believe the statute envisions that the incurred costs are 
costs actually paid by the insurer for each qualifying covered retiree. 
However, we also recognize the concerns that were raised in the 
comments. Therefore, in lieu of submission of the cost data under Sec.  
423.888(b)(2), the sponsor and insurer may choose instead to have data 
submitted in the following manner. If an sponsor chooses monthly, 
quarterly or interim annual payments as described in Sec.  
423.888(b)(5), the interim subsidy payments made during the year can be 
based on a determination by the insurer using reasonable actuarial 
principles that allocates a portion of the premium costs charged to the 
sponsor (excluding administrative costs, risk charges, etc., but 
including premium costs that the sponsor requires the retiree to pay) 
to the gross covered prescription drug costs incurred for a sponsor's 
qualifying covered retirees between the cost threshold and the cost 
limit. If the insurer determines premiums based on the pooling of a 
sponsor's experience in a given policy, the insurer will be permitted 
to make such determination based on the aggregate experience incurred 
under the policy for the sponsor's qualifying covered retirees. 
However, a revised cost determination must be submitted to us (within 
the same time frame that year-end data is required under Sec.  
423.888(b)(4)) that reflects the actual allowable retiree costs 
attributable to gross retiree plan-related prescription drug costs 
within the cost limit and cost threshold that were incurred under the 
plan for each of the sponsor's qualifying covered retirees. Thus, we 
must receive data described in Sec.  423.888 that indicates the extent 
to which actual gross costs and allowable costs for a sponsor's 
qualifying covered retirees were more or less than the sponsor's 
previously-allocated premium costs. We will accept data submitted 
directly by the insurer. Upon receiving this data, we will adjust the 
payments made for the plan year in question in a manner to be specified 
by us.
    Comment: Several plan sponsors wanted clarification that subsidy 
payments go to the plan sponsor, not the insurer.
    Response: The statutory language is clear that the retiree drug 
subsidy is paid to the plan sponsor.
    Comment: Commenters suggested that we provide guidance on whether 
the prices negotiated with sponsors of qualified retiree prescription 
drug plans are exempt from the Medicaid best price calculation.
    Response: In section 1927(c)(1)(C) of the Act, best price is 
defined as the lowest price available from the manufacturer during the 
rebate period to any wholesaler, retailer, provider, health maintenance 
organization, non-profit entity, or governmental entity within the 
United States. Among the exemptions listed in the statute are any 
prices charged which are negotiated by a qualified retiree prescription 
drug plan as defined in section 1860D-22(a)(2) of the Act. Therefore, 
prices negotiated between a qualified retiree prescription drug plan 
sponsor and a manufacturer will not go into the Medicaid best price 
calculation.

E. Sponsor:

    The proposed regulations state that sponsor means plan sponsor as 
defined in ERISA (29 U.S.C. 1002(16)(B)), which is an employer in the 
case of an

[[Page 4405]]

employee benefit plan established or maintained by a single employer or 
an employee organization (for example, trade union) in the case of a 
plan established or maintained by an employee organization. In the case 
of a plan established or maintained by two or more employers or jointly 
by one or more employers and one or more employee organizations, ERISA 
defines the sponsor as the association, committee, joint board of 
trustees or other similar group of representatives of the parties who 
establish or maintain the plan. The MMA modifies the definition when 
the plan is maintained jointly by one employer and one employee 
organization; if the employer is the primary financing source, sponsor 
means only the employer.
    Comments: A governmental organization indicated that plans such as 
its own are exempt from ERISA and therefore may not fall within the 
strict definition of an ERISA plan. This plan believes that 
Congressional intent was to include plans like it, and requests that we 
include a provision to allow governmental plans offering a qualified 
retiree prescription drug plan to receive the retiree drug subsidy.
    A State government entity expressed concern over the definition of 
sponsor and whether or not it would be included under the Part D final 
regulations even though it is not covered under ERISA. A national 
association of public employee retirement systems indicated its 
preference that the final regulations not contain a definition of plan 
sponsor, or if they must, that the definition of plan sponsor defer to 
applicable State and local laws and regulations. The association 
suggested this because they think that imposing a definition in the 
final regulations could have unintended impact on State and local laws.
    Response: As noted above, the definition of a group health plan 
includes plans sponsored by Federal and State government plans and 
their political subdivisions, agencies and instrumentalities. Thus, we 
agree that under the MMA, States and other governmental organizations 
can potentially qualify as sponsors. We believe the definitions for 
sponsor and for group health plan as stated in the proposed rule 
clearly indicated this. We believe a more specific definition of a 
sponsor in the final rule that takes into account the various types of 
sponsor arrangements that may exist would be problematic. We will 
consider issuing additional guidance to sponsors based on their 
particular facts and circumstances.

F. Benefit option:

    In response to comments we received on applying the actuarial 
equivalence test to individual plans (summarized in the discussion of 
actuarial equivalence in section 4(b)(3) of the preamble, below), we 
have added in the final rule a definition of benefit option, which we 
define as a particular benefit design, category of benefits, or cost-
sharing arrangement offered within a group health plan.
4. Requirements for qualified retiree prescription drug plans (Sec.  
423.884)
(a) Overview
(1) General Requirements
    In the proposed rule, we outlined the general requirements for 
applying for the retiree drug subsidy, including the submission of an 
attestation of actuarial equivalence and the disclosure notices to 
beneficiaries. We requested comments on the most effective methods of 
conducting outreach as well as prospective venues for conducting the 
outreach.
    Comments: Several commenters emphasized that it was critical that 
we provide guidance on the retiree drug subsidy process as soon as 
possible in light of the fact that enrollment is to begin in 2005. 
Several comments requested that we publish the final rule by December 
31, 2004 and issue guidance before that date.
    Response: We respect the prospective sponsors' need to have 
guidance on the retiree drug subsidy as soon as possible due to the 
complexity and timing of the process. In addition to promulgating this 
final rule and issuing other guidance as quickly as possible, we will 
continue to conduct outreach to various groups to educate the 
stakeholders on the requirements for applying for the retiree drug 
subsidy.
(2) Privacy and Confidentiality
    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. 
Sponsors typically do not perform administrative activities for their 
group health plans and therefore do not have access to the claims 
information or similar protected health information (PHI) we require in 
this regulation to support the retiree drug subsidy payment. Much of 
the data that we would need to support the retiree drug subsidy 
payments, as outlined above, would be PHI held by group health plans, 
health insurance issuers, or third party administrators on behalf of 
group health plans.
    As indicated in the proposed rule, we believe that we have the 
authority to mandate the disclosure of the PHI in accordance with our 
oversight authority under section 1860D-22(a)(2)(B) of the MMA, and 
covered entities on behalf of individuals eligible for benefits under 
Part A or Part B can comply with the mandate (without first obtaining 
specific authorization from individuals) pursuant to ``the required by 
law'' provisions of the Privacy Rule (45 CFR 164.512(a)). We have added 
a paragraph, Sec.  423.884(b) to clarify that a disclosure to us by a 
group health plan or health insurance issuer is required by law when 
necessary for the sponsor to comply with this subpart.
     As noted above, typically group health plans and issuers or third 
party administrators acting on behalf of group health plans, have PHI 
that CMS requires for the submission of cost and claims data for 
payment of the retiree drug subsidy pursuant to Sec.  423.888(b)(2) and 
other sections. In these situations, it may be unlawful, under the 
Privacy Rule, for PHI to be shared with the sponsors. Therefore, for 
purposes of this subpart, the sponsor must have a written agreement 
with the group health plan or health insurance issuer, as applicable, 
regarding disclosure of records, and the plan or issuer must disclose 
to us, on the sponsor's behalf, the information necessary for the 
sponsor to comply with this subpart. Sponsors of self-funded plans with 
access to such data will be able to either provide this data to us 
themselves or have a group health plan or insurer provide the data to 
us on their behalf. We asked for comments on the impact this transfer 
of data will have on the plan sponsors, group health plans, issuers and 
third party administrators.
    Comments: An business consulting firm indicated that employers do 
not collect Medicare information on their retirees because of HIPAA 
privacy concerns and that requiring employers to store this data will 
add a great deal of administrative complexity and cost. A 
pharmaceutical company recommended that we require that only total 
aggregate cost data (not broken out by individual retirees) be 
submitted to us for payment purposes in order to protect patient 
privacy. An employer advocacy group agreed that we have the authority 
to mandate disclosure of PHI for retiree drug subsidy purposes and 
requested that we clarify that individual authorization not be required 
for such disclosure. A human resource

[[Page 4406]]

management association also agreed that we have the authority to 
mandate disclosure of PHI and requested that we clarify that the 
disclosures will not violate State privacy statutes.
    Response: As noted above, employers will not be required to collect 
or maintain Medicare data on their retirees for purposes of collecting 
the retiree drug subsidy. They can direct their group health plans or 
health insurance issuers, as well as third party administrators (or 
other business associates), to submit the required protected data to us 
on their behalf. We agree that individual authorization will not be 
required for the disclosure of the data to us since the disclosure is 
required by this regulation for purposes of payment of the retiree drug 
subsidy.
    The HIPAA Privacy Rule preempts a contrary provision of State law 
except in specific circumstances, such as if the State law is more 
stringent-that is, more protective of privacy-than the Privacy Rule. 
(See 45 CFR Part 160, subpart B). Therefore a sponsor, or an issuer, 
plan or third party administrator on behalf of a sponsor, may need to 
comply with State privacy laws as well as the HIPAA Privacy Rule in 
disclosing information to us.
    Comments: Several pharmaceutical companies requested that we extend 
the confidentiality protections under the Medicaid rebate law to data 
submitted to us under Sec.  423.888.
    Response: We agree that the rebate information being disclosed to 
us is confidential. We believe that protections provided under other 
sections of the regulation will ensure this. We anticipate issuing 
further guidance regarding this issue.
(b) Actuarial Attestation
    In order to be eligible for a subsidy, the coverage of a sponsor's 
qualified retiree prescription drug plan must be at least actuarially 
equivalent to the standard Part D coverage. The sponsor will have to 
annually submit to us an attestation that its coverage meets this 
requirement. We discuss below the methodology and the standards for the 
sponsor submission of the actuarial attestation.
1. Timing, Who Can Submit, and Public Access to Data
    (a) We proposed to require that the attestation be submitted to us 
before September 30, 2005 for the calendar year 2006 and at least 90 
days before the beginning of the calendar year (or plan year, depending 
on whether the final rule used a plan year approach) for subsequent 
years. We also proposed to require that an attestation be submitted to 
us at least 90 days prior to the effective date of any material change 
to the drug coverage of the plan that impacts the actuarial value of 
the coverage.
    Comments: Among the comments that we received, a business 
consultant requested that we shorten the time period for submission of 
the actuarial attestation to 30 days prior to the start of the year 
because most employers and unions do not know their final plan design 
90 days in advance. An actuarial consultant, on the other hand, 
indicated that the 90 day timeframe was reasonable and sufficient to 
accomplish the objectives of the MMA. We received comments from several 
employer groups recommending that we not require subsequent annual 
attestations from sponsors that had not implemented any changes in 
their retiree drug coverage since the previous submission of the 
attestation for the plan.
    Response: In the final rule, we require that the attestation be 
submitted 90 days before the start of the plan year and by September 
30, 2005 for plan years ending in 2006 (see our discussion of plan year 
vs. calendar year under Sec.  423.888), unless an extension request has 
been filed by the date under rules specified by the Secretary. We also 
require the filing of attestations 90 days prior to the effective date 
of any material change. We believe this process provides us sufficient 
time to review the attestation and to notify the sponsor of any 
problems (for example, attestation not signed by a qualified actuary), 
yet is flexible enough to permit extensions in necessary cases.
    The final rule retains the requirement that sponsors submit a new 
actuarial attestation on an annual basis, even if a sponsor has not 
implemented any changes to its retiree coverage since the previous 
submission of the attestation for the plan. The thresholds for Part D 
coverage will change each year and this may impact whether the 
sponsor's plan is actuarially equivalent.
    Comment: A beneficiary advocacy group indicated that a requirement 
of 90 day advance notice to beneficiaries of any change that will 
render coverage no longer actuarially equivalent is an important 
protection.
    Response: To be consistent with the policy on creditable coverage 
and reflect statutory requirements, the final rule requires that 
sponsors provide notice to beneficiaries prior to any change that will 
render coverage no longer creditable. See the discussion in subpart B 
of the preamble for further guidance on creditable coverage notice 
requirements. Advance notice regarding changes in actuarial equivalence 
is not required by the MMA, and we decline to impose that requirement 
in the final rule. See also our response to the following comment.
    Comment: Several union and beneficiary advocacy groups recommended 
that we provide public access to the assumptions and methods used by 
sponsors for their attestations of actuarial equivalence. A union 
suggested that we develop a form, similar to the Department of Labor's 
5500 form (used for ERISA disclosures), for sponsors to file with their 
attestations, which would then be accessible for public inspection. The 
unions and beneficiary advocates indicated that public access to this 
data would increase public confidence in the retiree drug subsidy 
program and would permit the retirees to monitor the sponsors' filings 
for accuracy. Business advocacy groups indicated that the Congress 
neither required employers or unions to disclose their actuarial 
equivalency calculations to anyone but us for audit purposes, nor gave 
individuals the right to challenge an employer's or union's actuarial 
equivalency determination. An actuarial consultant recommended that the 
attestation of actuarial equivalence and the application for the 
subsidy should be submitted and therefore disclosed to CMS only. The 
consultant indicated that the data submission and the application may 
have proprietary information embedded in it, as well as beneficiary 
data subject to privacy concerns.
    Response: While we understand the rationale for requiring public 
disclosure of certain attestation data, we have concerns that requiring 
public disclosure of the assumptions and methods used for the actuarial 
attestation could inhibit the desire of sponsors and their service 
providers to file for the subsidy and to maintain their retiree drug 
benefits, for example, for fear of disclosure of proprietary data. We 
want to further study this issue to determine if there is a level of 
public disclosure of attestation data that will enhance beneficiary 
confidence in the retiree drug subsidy program but will not deter 
sponsors from filing for the subsidy and maintaining their retiree 
coverage.
    (b) In the proposed rule, we require that the attestation be 
certified by the attesting actuary. We also required that the attesting 
actuary be a member of the American Academy of Actuaries.
    Comments: We received several comments from small employers stating 
that we should accept attestations of actuaries with the insurance 
carriers or with third party administrators who can attest on behalf of 
the sponsor that the sponsor's retiree drug coverage is

[[Page 4407]]

actuarially equivalent to Part D. It was indicated that small employers 
may not have the resources to hire an actuary for the attestation.
    Response: We agree that sponsors can submit attestations of 
actuaries employed by insurance carriers, pharmacy benefit managers or 
the third party administrators of their retiree drug plans. The 
attestation will be submitted in a form or forms approved by us in 
additional guidance. We expect to require the attestation to solely 
address the sponsor's plan and meet all requirements for the 
attestation.
    Comment: One health care industry organization requested that due 
to the cost of an annual attestation, small employers should be allowed 
to submit an application, their eligibility list and plan benefit 
descriptions, provide us with two years of experience or premium data, 
and have our actuaries perform the attestation on behalf of their plan.
    Response: The statute states that, as a condition of receiving the 
retiree drug subsidy, the sponsor must provide the attestation to us. 
As indicated above, a sponsor can have an outside actuary do the 
attestation and the attestation may be submitted directly by such 
outside actuary or by the plan sponsor to us pursuant to the procedures 
outlined in this final rule.
2. Establishing Actuarial Equivalency
    In the proposed rule, we outlined three options for the actuarial 
equivalence standard. The first option was a single prong gross value 
test in which the plan design of the sponsor's retiree drug plan will 
be compared with the plan design of standard prescription drug coverage 
under Part D without taking into account the financing of the coverage. 
This test would generally require that the expected amount of paid 
claims (or plan payout) under the retiree prescription drug coverage be 
at least equal to the expected amount of paid claims under the standard 
Medicare Part D benefit. The second option involved using the ``gross 
value'' test as in option one but restricting the subsidy payment to no 
more than what the sponsor contributed towards the cost of the retiree 
drug coverage. The third option was a two-prong test in which the first 
prong is the gross value test as in option one, and the second prong is 
a net value test which takes into account the sponsor's contribution 
toward the financing of the retiree prescription drug coverage.
    The proposed rule also discusses several variants for determining 
the value of the second prong of option three, the net value test. The 
lowest variant proposed is the average per capita amount that Medicare 
will expect to pay for the retiree drug subsidy. A second variant was 
the after-tax value of the retiree drug subsidy, since the subsidy is 
not subject to Federal income tax. The highest variant stated in the 
proposed rule would compare the gross value of the plan design reduced 
to account for the level of benefits financed by the beneficiary (that 
is, by subtracting out the retiree premiums) to the expected value of 
paid claims under standard prescription drug coverage under Part D 
minus the retiree's expected monthly beneficiary premium for the 
coverage. As we indicated in the preamble to the proposed rule, 
adopting a higher variant for the net value could arguably provide 
greater protection for beneficiaries against cost-shifting but also 
make it more difficult for sponsors to qualify for the subsidy. 
Conversely, adopting a lower variant would allow more sponsors to 
qualify for the subsidy but may discourage some employers and unions 
from increasing their contributions to reach the higher threshold 
level.
    Comments: We received numerous comments on this standard. The vast 
majority of the comments, including those from both the business groups 
and beneficiary advocacy groups, supported the two-prong test (option 
three) as best serving our stated goals of maximizing the number of 
retirees that retain their employer and union retiree drug coverage and 
not creating windfalls to the sponsors. Several comments supported the 
single prong gross value test (option one) because they felt there was 
no legislative authority to require any other test. The comments were 
varied regarding the value of the second prong of option three, the net 
value test. The beneficiary advocacy and union groups generally 
supported the highest variant stated in the proposed rule, asserting 
that lower values would allow sponsors to shift additional costs to 
retirees while still qualifying for subsidy payments. They believe a 
higher variant would give sponsors a disincentive for such cost-
shifting. Employer and business groups supported the lowest variant, 
the expected per capita value of the retiree drug subsidy. They 
expressed concern that higher thresholds would make fewer employers and 
unions eligible for the subsidy, and thus conflict with the critical 
goal of giving as many employers and unions as possible an incentive to 
retain their retiree coverage.
    Several employer groups proposed an additional variant for the net 
value test. The subsidy provides an incentive to sponsors to continue 
providing retiree drug coverage rather than reduce coverage and provide 
benefits that supplement those provided under standard prescription 
drug coverage under Part D. Therefore, in determining whether the drug 
coverage provided under a sponsor's group health plan is of sufficient 
value to qualify for the subsidy, the employer groups argued that the 
sponsor's coverage should be compared to the value of the standard 
prescription drug coverage that a retiree would receive if the retiree 
had both the Part D coverage and the sponsor's supplemental coverage. 
This approach will have the effect of delaying the point at which the 
individual can qualify for catastrophic coverage under Part D, which is 
only available when an individual's true out-of-pocket (TrOOP) expenses 
exceed a specified threshold. Because beneficiary out-of-pocket drug 
costs reimbursed through group health plans are excluded from TrOOP, 
the existence of employer or union coverage that reimburses retirees 
for some of their out-of-pocket drug costs would mean it would take 
longer for the beneficiary to qualify for catastrophic coverage under 
his or her Part D plan, and the value of the Part D coverage to the 
retiree therefore would be less.
    These same groups also proposed that we allow sponsors to use the 
expected per capita value of the retiree drug subsidy as a proxy for 
this test since, by their calculation, both tests result in 
approximately the same value for Part D.
    Response: While the single prong gross value test will maximize the 
number of beneficiaries retaining their employer and union-based drug 
coverage, it will be the most likely of all the options to create 
windfalls to the sponsors. The second option raised in the proposed 
rule using the gross value test as in option one but restricting the 
subsidy payment to no more than what the sponsor paid into the retiree 
drug coverage has the advantages of eliminating windfalls and being 
simple to describe and operationalize. However, we had questions about 
the adequacy of the legal basis underpinning that policy, and we did 
not receive any comments that would help alleviate those legal 
questions.
    Accordingly, we agree with the majority of the comments that the 
two-prong test (option three) accomplishes our goals of maximizing the 
number of beneficiaries retaining employer and union-based retiree drug 
coverage while not creating windfalls to sponsors. Thus, our final 
regulations state that in order to qualify for the retiree drug 
subsidy, a sponsor's plan must meet the gross value test (which is 
equivalent to

[[Page 4408]]

the test used in determining whether coverage is creditable 
prescription drug coverage under Sec.  423.56), and an additional test 
that takes into account retiree premium payments.
    Balancing the various policy goals and statutory restrictions in 
determining the appropriate way of valuing standard prescription drug 
coverage (to which sponsors should be comparing their coverage under 
the net value test) is a difficult challenge. The more stringent we set 
the standard, the fewer the number of sponsors that will qualify for 
the subsidy, which will likely have an adverse impact on the future 
availability of retiree drug coverage. However, a higher value is less 
likely to create windfalls to sponsors. In addition, as noted above, we 
believe the applicable statutory provisions under section 1860D-
22(a)(2)(A) of the Act impose some constraints on the methods that can 
be used in determining actuarial values for this purpose.
    We believe the most appropriate way of balancing these competing 
issues is to establish in the final rule that employment-based retiree 
drug coverage satisfies the actuarial equivalence standard if its 
actuarial value (as determined after reducing the gross value of the 
benefit by expected retiree premiums) is at least equal to the net 
value of defined standard prescription drug coverage under Part D (as 
determined after reducing the gross value of the benefit by the 
expected monthly beneficiary premiums), with the net value of the 
defined standard prescription drug coverage reflecting the impact of 
employer or union-sponsored prescription drug coverage that would 
supplement the beneficiary's defined standard prescription drug 
coverage. As explained previously, the existence of coverage 
supplemental to the standard prescription drug coverage would postpone 
the point at which the retiree would receive catastrophic coverage 
under defined standard prescription drug coverage (as defined under 
Sec.  423.100). This would have the effect of decreasing the expected 
amount of paid claims under the defined standard prescription drug 
coverage, and thus would decrease the actuarial value of the coverage.
    We agree with commenters that it is reasonable to take this 
approach given that many employers and unions will be deciding between 
continuing to provide retiree drug coverage as a primary payer for 
retirees (and accept a subsidy), and coordinating their retiree drug 
coverage with Part D (with the sponsor becoming a secondary payer for 
Part D drugs). Sponsors are likely to consider the impact of their 
supplemental coverage on the value of the Part D benefit for their 
retirees (for example, reducing the value of the reinsurance subsidy 
for catastrophic coverage) in their calculations. We believe that using 
this approach will help maximize the number of Medicare beneficiaries 
that retain their employment-based retiree coverage.
    Because Sec.  423.100 defines the term ``standard prescription drug 
coverage'' under Part D to mean either defined standard prescription 
drug coverage or actuarially equivalent standard coverage, we clarify 
that sponsors must use defined standard coverage (and not actuarially 
equivalent standard coverage) as the fixed point of comparison for 
applying the actuarial equivalence standard.
    We disagree with commenters who suggested that we lack the legal 
authority to adopt a two-prong net actuarial equivalence. We believe 
our two-prong net actuarial equivalence best reflects Congressional 
intent. Under section 1860D-22(a)(2)(A) of the Act, the sponsor of 
employment-based retiree health coverage is entitled to the retiree 
subsidy only if the sponsor provides us with an attestation that the 
``actuarial value of the prescription drug coverage under the 
[sponsor's] plan ... is at least equal to the actuarial value of 
standard prescription drug coverage.'' As discussed above, were we to 
interpret this statutory provision as only allowing an actuarial 
equivalence standard that compares the gross value of the prescription 
drug benefits provided under the sponsor's plan to the gross value of 
the benefits provided under standard prescription drug coverage, 
sponsors who contribute little or nothing toward the cost of their 
retirees' prescription drug coverage would receive a windfall. We do 
not believe the Congress intended to provide subsidies to sponsors when 
the sponsor's retirees pay all or most of the plan premium for 
prescription drug coverage. The conference report to the MMA explains 
that the purpose of the retiree subsidy is to help employers retain and 
enhance their prescription drug coverage so that the current erosion in 
coverage would plateau or even improve. (See H.R. Conf. Rep. No. 108-
391, at 484 (2003)). This erosion in employer-sponsored prescription 
drug coverage reflects the rising financial burden for sponsors who 
finance, in substantial part or in whole, the cost of such coverage. 
(See ``Current Trends and Future Outlook for Retiree Health Benefits: 
Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health 
Benefits'') As suggested in the Conference report, providing a subsidy 
to these sponsors would lower their financial cost of providing retiree 
prescription drug coverage, thereby decreasing the likelihood a sponsor 
will terminate such coverage. However, providing a subsidy to sponsors 
that bear little or none of the cost of providing retiree prescription 
drug coverage but instead shift the cost of such coverage to retirees 
would do little to reverse this trend. We believe we have an obligation 
to interpret the statute in a manner that would avoid the absurd result 
of providing a windfall to sponsors that bear little or none of the 
cost of their retiree prescription drug coverage, thereby giving effect 
to the Congress' likely intent.
    We also believe our interpretation reflects a permissible reading 
of the statute. We believe the statute affords us significant 
discretion in adopting a methodology to determine actuarial equivalence 
under Part D, including for purposes of the retiree subsidy. First, we 
interpret section 1860D-11 of the Act as allowing us to establish more 
than one process for assessing the actuarial value of prescription drug 
coverage. Section 1860D-11(c)(1) of the Act states that the Secretary 
``shall establish processes and methods for determining the actuarial 
valuation of prescription drug coverage, including--(A) an actuarial 
valuation of standard prescription drug coverage under section 1860D-
2(b).'' We believe the use of the plural terms ``processes'' and 
``methods'' authorizes us to adopt a methodology for determining 
actuarial equivalence for purposes of the retiree subsidy that differs 
from the methodologies used to determine actuarial equivalence under 
other sections of this Part, such as the determination of whether 
alternative coverage is creditable prescription drug coverage under 
Sec.  423.56 of the final rule.
    Second, we believe our interpretation of the actuarial equivalence 
requirement under section 1860D-22(a)(2)(A) of the Act to take into 
account the sponsor's financial contribution finds support under 
section 1860D-2(c)(1) of the Act. Section 1860D-2(c)(1) of the Act 
establishes a multi-step test for comparing the actuarial value of 
alternative prescription drug coverage to standard prescription drug 
coverage. In the first step under section 1860D-2(c)(1)(A) of the Act, 
the Secretary looks only at plan design and ensures that the actuarial 
value of the total coverage provided under the alternative prescription 
drug coverage is at least equal to the actuarial value of standard 
prescription drug coverage.'' In the second step under section 1860D-
2(c)(1)(B) of the Act, however,

[[Page 4409]]

government financing is taken into account. Section 1860D-2(c)(1)(B) of 
the Act provides that the ``unsubsidized value of the [alternative] 
coverage must be at least equal to the ``unsubsidized value of standard 
prescription drug coverage.'' The unsubsidized value is determined by 
subtracting the government reinsurance and direct subsidies provided 
under section 1860D-15 of the Act from the total value of the 
alternative prescription drug coverage. While this is the inverse of 
how sponsors will determine the actuarial value of prescription drug 
coverage provided under their plans and standard prescription drug 
coverage for purposes of this subpart, it does demonstrate that the 
Congress believed that a determination of the actuarial value of 
prescription drug coverage could take into account the financing of the 
coverage.
    We also note that there is precedent for us taking into account 
financing in determining the value of coverage. For example, in 
accordance with section 1854(e) of the Act, currently premiums are 
included in the comparison of beneficiary liability for cost sharing 
under a MA plan to the cost-sharing required under original fee-for-
service Medicare, although we note that premiums will not be included 
in this comparison beginning in 2006.
    Comment: We received several comments from employer groups and 
actuarial consultants requesting that we not issue a fixed numerical 
value for the net value test and allow sponsors to calculate a value 
based upon their own claims experience. Some commenters had requested 
advance indication of safe harbors relating to minimum benefit designs 
that would meet the requirements for actuarial equivalence to ease the 
uncertainty associated with the various filing processes and increase 
the likelihood of filing success.
    Response: We agree with commenters requesting that we not issue a 
fixed numerical value for the net value test and instead will require 
sponsors to calculate the value of the prescription drug coverage 
provided under the sponsor's plan and defined standard prescription 
drug coverage under Part D based upon their own claims experience for 
plan participants or their spouses or dependents who are Part D 
eligible individuals. Section 1860D-22(a)(2) of the Act requires 
sponsors to provide an attestation of actuarial equivalence ``with 
respect to a Part D eligible individual who is a participant or 
beneficiary under'' the sponsor's plan. We believe requiring sponsors 
to base their actuarial valuation on these individuals' claims 
experience best reflects the true value of the prescription drug 
coverage under the plan, as compared to the defined standard 
prescription drug benefit, for those individuals. However, we recognize 
that not all sponsors will have sufficient claims data to support a 
reasonable calculation of the actuarial value of prescription drug 
coverage under the sponsor's plan and defined standard prescription 
drug data based on actual claims data. We will allow these sponsors to 
utilize alternative normative databases in accordance with CMS 
guidance.
    We will issue further guidelines on the appropriate methodology for 
the actuarial equivalence test in line with the standard outlined 
above. The guidelines will include simplified actuarial methods that 
could be used to qualify for the retiree drug subsidy. We believe these 
simplified methods will be particularly useful for sponsors that may 
have difficulty measuring the impact of their benefit design on the 
value of defined standard prescription drug coverage because the design 
differs significantly from the defined standard prescription drug 
coverage.
    For example, we anticipate that if there is an out-of-pocket 
maximum in the sponsor's plan (that is less than the out-of-pocket 
threshold under Sec.  423.104(d)(5)), sponsors will be able to 
disregard the value of Part D catastrophic coverage that would be 
provided if participants enroll in defined standard prescription drug 
coverage under Part D. We also anticipate developing and publishing 
simplified actuarial methods for comparing a sponsor's plan with the 
defined standard prescription drug benefit that includes the actuarial 
impact of any supplemental employer or union coverage.
    Comment: We received one comment from an association of church 
plans stating that we should allow sponsors to use the single prong 
gross value test to determine whether their coverage is actuarially 
equivalent to Part D if the sponsors will certify that the retiree drug 
subsidy payment will go into a trust for the benefit of the 
beneficiaries in the plan.
    Response: If we allowed certain sponsors to use the single prong 
gross value test for the actuarial equivalence standard in applying for 
the retiree drug subsidy, there would be no guarantees of prohibiting 
windfalls to those sponsors. Accordingly, the two prong standard, as 
defined in the final rule, shall apply to all sponsors who apply for 
the retiree drug subsidy.
3. Applying the Actuarial Equivalence Test to Plans with Multiple 
Benefit Designs and Cost Sharing
    As noted above, the proposed rule proposed to use the COBRA 
regulations as a model for determining how many group health plans a 
sponsor provides and which benefit options are included within a single 
health plan. Under those rules, all benefit options offered by a 
sponsor would be treated as a single group health plan unless through 
its documents and operations, the sponsor treats them as separate 
plans. Under the proposed rule, sponsors would then be required to 
determine actuarial equivalence for each plan as a whole. That is, a 
plan would be actuarially equivalent if, on average, the actuarial 
value of retiree drug coverage under the sponsor's employment-based 
retiree health plan were at least equal to the actuarial value of 
defined standard prescription drug coverage under the actuarial 
standards described above.
    Comments: While several employer groups agreed with our use of the 
COBRA definition of a plan as a model for determining what benefit 
options are included within an employer's group health plan, they 
indicated that sponsors need additional flexibility to distinguish 
among retirees with different arrangements within a single plan for the 
purpose of determining actuarial equivalency. They felt that sponsors 
should be given the discretion to aggregate all retirees in a single 
plan as a whole or to apply the test to each individual benefit option 
within a plan. An association of actuaries commented that, if we give 
employers and unions the flexibility to define plans, then employers 
and unions will presumably do so in a way that will maximize their 
subsidy payment. However, a beneficiary advocacy group questioned 
whether, if an aggregate average is allowed across multiple options for 
purposes of the test, payment could be made on the basis of incurred 
costs in a drug option that does not meet the actuarial equivalence 
standard on its own. The same group suggested using the enrollment 
numbers to determine a weighted average across multiple options in 
order to protect retiree's interest.
    Response: We believe section 1860D-22(a)(2)(A) of the Act is 
subject to two reasonable interpretations: under the first 
interpretation the actuarial equivalence standard would be applied to 
the group health plan as a whole, and under the second interpretation 
the actuarial equivalence standard would be applied for each benefit 
option (including separate cost-sharing

[[Page 4410]]

arrangement) within a single group health plan. At this point in time, 
we elect not to choose between these two reasonable interpretations of 
the statute. The final rule provides sponsors with flexibility by 
allowing them to choose whether to apply the net prong of the actuarial 
equivalence test for each benefit option, or to apply the net prong of 
the actuarial equivalence test on an aggregated basis for all benefit 
options within a group health plan that satisfy the gross test and 
creditable coverage standard of Sec.  423.56. This flexibility will 
accommodate sponsors that have a wide variety of benefit options for 
their retirees. However, each benefit option in the sponsor's plan must 
independently satisfy the gross prong of the actuarial equivalence 
test. The gross test is equivalent to the actuarial equivalent standard 
applied for purposes of determining whether a group health plan is 
creditable prescription drug coverage. As explained in subpart B, the 
actuarial equivalence standard for creditable prescription drug 
coverage is separately applied to each benefit option in the sponsor's 
group health plan. We do not believe it would be appropriate to provide 
sponsors a subsidy under this subpart for qualifying covered retirees 
enrolled in a benefit option that is not creditable prescription drug 
coverage. Therefore, the final rule provides that sponsors must apply 
the gross prong of the actuarial equivalence standard to each benefit 
option for which the employer seeks to receive a retiree drug subsidy.
4. Applying the net test to plans with integrated drug and non-drug 
premiums.
    Comments: One commenter noted that it was unlikely that retiree 
health plans would include a separate identifiable premium for drug 
benefits and that an estimate of the portion of the total premium 
relating to the drug benefits would have to be made prior to doing a 
net value calculation on actuarial equivalency. An employer consultant 
firm commented that employers and unions should have wide latitude to 
restructure, redesign, or otherwise limit or improve benefits and the 
employer's or union's contribution thereto. A human resource management 
association requested that the final rule clarify that employers and 
unions may determine how such amounts are to be allocated based on 
sound actuarial principles.
    Response: We agree that sponsors (both those with insured benefits 
and those with self-funded benefits) generally should have flexibility 
to design premium structures that are most appropriate for their 
employees and retirees. We also recognize that many employers and 
unions offer medical and drug benefits as an integrated package 
providing support to the beneficiaries and supplementing their current 
Medicare Parts A and B coverage, and in addition have included the drug 
benefit since Medicare has not previously provided coverage for 
outpatient prescription drugs. Accordingly, in many respects for those 
employers and unions that decide to take the retiree drug subsidy, this 
subsidy will help maintain retiree health coverage, including both 
medical and drug benefits.
    The final rule provides maximum flexibility to sponsors in 
allocating the premium between the medical and drug benefits for the 
purpose of determining the actuarial equivalence of the drug benefit. 
By doing so, we are not allowing for a windfall subsidy payment to the 
sponsors since, in order to meet the net test for actuarial equivalence 
test and qualify for the retiree drug subsidy, the sponsors will have 
to make a substantial financial contribution towards the retiree health 
coverage.
(c) Sponsor Application for Subsidy Payment and Required Information
    In the proposed rule, we proposed to require that a plan sponsor 
who wishes to be paid the retiree drug subsidy must annually submit to 
us a subsidy application, actuarial attestation, and a list of 
qualified covered retirees, no later than 90 days prior to the 
beginning of the plan year. For a subsidy to be paid for 2006, we 
proposed that the application be submitted no later than September 30, 
2005. Plans that begin coverage in the middle of a year would have to 
submit the application 90 days prior to the date the coverage begins. 
Sponsors that establish new plans after September 30, 2005 would have 
to submit the application no later than 150 days prior to the start of 
the new plan.
    Comments: Plan sponsors, actuarial consultants, business 
consultants and health care industry advocates indicated that there was 
a need for an extension beyond the September 30, 2005 due date for the 
submission of the retiree drug subsidy application, attestation and the 
list of qualifying covered retirees. Many felt that while they could 
provide the application prior to September 30, 2005, they might not be 
able to provide an attestation as they might not have made the final 
plan design determination and have the final list of qualified 
beneficiaries until 30 days prior to the start of the plan year. 
Another comment from an employer advocacy association recommended that 
we shorten the advance submission of an attestation for new plans from 
150 days prior to the effective date of coverage to 90 days prior to 
the effective date.
    Response: We reviewed public comments on the effect that the 
application data requirements and the impact that the timeframe of the 
application deadlines will have on plan sponsors. In order for plan 
sponsors to receive a subsidy payment for January 2006, the final rule 
generally retains the requirement that all plan sponsors (regardless of 
their plan year) apply for the subsidy payment no later than September 
30, 2005. We believe this is necessary to reduce confusion and 
uncertainty for retirees and for employers and unions that may be 
claiming a subsidy for a retiree enrolling in Part D coverage when the 
initial enrollment period for the new program opens in November 2005. 
However, to accommodate sponsors that are unable to obtain all 
necessary data in time, we will allow sponsors to obtain an extension 
under procedures and conditions we establish. In general, the 
procedures will include a requirement that sponsors file the extension 
request prior to September 30, 2005, and have the extension application 
include the names of retirees for whom the sponsor believes it may be 
claiming subsidy payments in 2006. For future years we will require 
that plan sponsors apply for the subsidy no later than 90 days prior to 
the start of their plan year, unless an extension has been filed with 
us and granted by us under procedures we establish. For sponsors that 
institute retiree prescription drug coverage after September 30, 2005, 
we will require that these sponsors submit an application, attestation, 
and all of the necessary data as outlined in Sec.  423.884(c)(2) at 
least 90 days prior to the start of the new plan for the first plan 
year. (We agree that the advance attestation submission for new plans 
need not be 150 days.)
    We feel that we need this 90 day period to review the retiree drug 
subsidy application and contact the sponsor if any further information 
is needed. However, we will accept updates to the application up to the 
beginning of the plan year. As provided for in Sec.  423.884(c)(6) and 
discussed subsequently, additional periodic updates relating to 
eligibility data are also required during the year.
    We also intend to build in safeguards in the Part D application 
process for beneficiaries to decrease the instances in which a sponsor 
attempts to claim a subsidy payment for an individual who (unknown to 
the sponsor) has enrolled in a Part D plan. We would expect such 
safeguards to include a process that could enable retiree plans to 
obtain

[[Page 4411]]

relevant information before the individual's Part D enrollment takes 
effect. For further discussion on enrollment protections, see Sec.  
423.36 of the subpart B preamble.
    Comments: Plan sponsors, health plan advocates, carriers, insurers 
and administrators raised numerous other issues regarding the retiree 
drug subsidy application. They asked for clarification on who is 
responsible for signing the subsidy application. Plan sponsors and an 
employer advocacy association requested confirmation that the plan 
sponsor may act with the assurance that the plan is qualified for the 
subsidy upon submission of its signed completed application and a 
signed attestation to us so that they may communicate plan information 
to its retirees and their dependents sooner. A taxpayer advocacy 
association felt that we need to enhance the certification requirements 
of Sec.  423.884 and Sec.  423.888 to reflect what is required in Sec.  
423.505(l). That provision requires certification by the CEO, CFO or an 
individual delegated the authority to sign on behalf of one of these 
officers, or who reports directly to the officer of the accuracy, 
completeness and truthfulness of all the information related to the 
enrollment data, claims data and payments.
    Response: The final rule requires that the application be signed by 
the sponsor or by an authorized representative of the sponsor. A 
sponsor or its authorized representative must certify that the 
information on the application is true and accurate to the best of its 
knowledge and belief. The final rule does not specifically require that 
certifications for subsidy payments meet the same standards as Sec.  
423.505(l). However, we will be providing further guidance on the terms 
and conditions of the application.
    Comment: The proposed rule indicated that the application would 
require the sponsor to comply with a number of specific requirements 
(including the terms and conditions for receiving retiree drug subsidy 
payments) and that the application would constitute an agreement 
between the sponsor and CMS (the sponsor agreement). Several employer 
advocacy groups requested clarification regarding whether, upon 
submission of a signed application, the sponsor may act with the 
assurance that the sponsor is qualified for the retiree drug subsidy.
    Response: Although we intend to streamline the application process 
as much as possible, the mere submission of a subsidy application does 
not qualify an entity to receive subsidy payments. The sponsor cannot 
assume it is eligible for a subsidy payment until we (or our subsidy 
contractor) review the sponsor's application and provide written 
notification regarding the sponsor's eligibility to receive a subsidy 
payment. (We have clarified this in the regulation text by adding a 
definition of ``sponsor agreement'' at Sec.  423.882.)
    Comments: We were asked to clarify the application process for 
those sponsors with multiple tax identification numbers.
    Response: For a sponsor that includes separate entities with 
multiple tax identification numbers, the final regulation allows them 
to determine the appropriate tax identification number and other 
appropriate information (such as contact data) to include as outlined 
in the data requirements for that application.
    Comments: Several plan sponsors, business consultants, insurers/
carriers and health care industry advocates indicated that they do not 
collect the health insurance claim (HIC) or Social Security numbers of 
their retirees and their dependents, which we proposed to require as 
part of the application process in the proposed rule, due to privacy 
issues and historical business practices. They said this requirement 
could create an administrative burden for them. They also raised 
concerns about the ability to identify qualifying covered retirees, 
given uncertainty about whether some people (particularly dependents) 
are entitled to Medicare Part A or B and not enrolled in Part D.
    Response: We believe that it is necessary to require the data as 
outlined in the proposed rule to establish the sponsor's eligibility 
for the retiree drug subsidy and to verify the qualified retirees and 
their dependents (as defined in Sec.  423.882) that are enrolled in the 
sponsor's plan. Further, based on discussions with stakeholders, we 
believe sponsors and their vendors should be able to track the data 
elements that we require in this section. However, we understand that 
some sponsors may not collect the HIC numbers of their Medicare 
retirees; thus the final rule requires that either the HIC number or 
the social security number of qualifying covered retirees be provided. 
We strongly urge, however, that sponsors provide both the HIC and 
social security numbers of their qualifying covered retirees if they 
collect both in order to reduce the potential for error and to increase 
the confidence range of the submitted data.
    We recognize that determining whether a person (particularly a 
dependent) is eligible for Part D may pose some difficulty for certain 
sponsors. However, sponsors are able to enroll in voluntary data 
sharing agreements (VDSAs) with us that would allow sponsors to submit 
a list of retirees and covered dependents prior to submitting an 
application for the retiree drug subsidy and have us determine which 
retirees and dependents are qualified covered retirees. 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. We may also explore other approaches that could be used to 
provide necessary information to sponsors.
    Comments: A health care industry association and outside vendors 
who provide eligibility and claims data to plan sponsors and who will 
be submitting data to us for enrollment and payment under the subsidy 
stated their concerns about the False Claims Act. They requested that 
we clarify their potential liability and possible relief from liability 
for data submitted that was provided by them.
    Response: The False Claims Act provides a remedy for false claims 
submitted to the Federal government if a person or entity ``knowingly'' 
submits a false claim, or knowingly causes another to submit a false 
claim. Section 901 of the MMA expressly states that nothing in the 
title dealing with Medicare contractor reform shall be construed to 
compromise or affect existing legal remedies for addressing fraud or 
abuse, and we believe it is clear that the law is intended to apply for 
the retiree drug subsidy program. However, innocent mistakes and errors 
do not result in liability under the Act. Rather, the False Claims Act 
imposes liability on a person or entity which acts with actual 
knowledge of the false claim; acts in deliberate ignorance of the truth 
or falsity of the information; or acts in reckless disregard of the 
truth or falsity of the information (31 U.S.C. Sec.  3729(b)(1-3)). 
Thus, the False Claims Act's liability provisions were not intended to 
apply to a merely inadvertent reporting error or an innocent mistake by 
a sponsor. We note that parties have a continuing obligation to 
disclose to the government any new information indicating the falsity 
of the original statement.
    A sponsor, or its authorized representative requesting the subsidy 
on behalf of the sponsor, must certify that the information on the 
application is true and accurate to the best of its knowledge and 
belief. Thus, as noted above, innocent mistakes in the application, as 
opposed to intentional misstatements or statements made with deliberate 
ignorance of or reckless

[[Page 4412]]

disregard for the truth, will not result in False Claims Act liability, 
unless the sponsor (or its authorized representative) subsequently 
fails to inform the government of information indicating the falsity of 
the original statements.
     Comments: Plan sponsors, business consultants, insurers/carriers 
and plan administrators asked us to clarify the frequency and manner in 
which updates will be required. They recommended that they provide 
periodic enrollment updates to us as they identify qualified retirees 
and their dependents that become eligible for Medicare. Additionally, 
comments suggested allowing sponsors to file updated information during 
the year following the September 30 deadline, and to allow sponsors to 
submit new census data only if there are no material changes to the 
plan.
    Response: The final rule requires periodic updates of beneficiary 
data as outlined in Sec.  423.884(c)(6) to keep our database accurate 
and reduce the possibility of overpayments or underpayments.
    To reduce the lag time between the occurrence of a change in the 
enrollment and the adjustment of the subsidy payment, and to minimize 
situations in which a sponsor is attempting to claim a subsidy payment 
for someone who has enrolled in Part D, the final rule requires a 
monthly update by all sponsors of the enrollment data, regardless of 
the subsidy payment frequency (unless we specify a different frequency 
in other guidance). Such data shall be provided in a manner we specify.
    In general, sponsors will be expected to provide to us on a 
periodic basis the changes, additions and deletions to their enrollment 
data. To ensure development of a procedure that is most 
administratively feasible for sponsors and CMS, we will consider the 
possibility of permitting the submission of entire enrollment files. We 
anticipate issuing further guidance on the frequency and the manner of 
the enrollment updates.
    Table R-1, containing the key dates involved in the sponsor retiree 
drug subsidy application process is included at the end of this 
section.

                                Table R-1
                                Key Dates
------------------------------------------------------------------------
     Publication of Final Rule                   January 2005
------------------------------------------------------------------------
Application for Retiree Drug         No later than September 30, 2005,
 Subsidy Due Date for All Sponsors    unless an extension request is
 seeking the Retiree Drug Subsidy     filed with CMS prior to the due
 for plan years which end in 2006,    date
 regardless of whether they operate
 on a calendar year
------------------------------------------------------------------------
Attestation of Actuarial             No later than September 30, 2005,
 Equivalence Due Date for all         unless an extension request is
 Sponsors seeking the Retiree Drug    filed with CMS prior to the due
 Subsidy for plan years which end     date and granted by CMS
 in 2006
------------------------------------------------------------------------
Retiree drug subsidy Program Begins  January 1, 2006
------------------------------------------------------------------------
For plans operating on a non-        90 days prior to beginning of each
 calendar year basis--Application     plan year (that is, for plan years
 for Retiree Drug Subsidy Due Date    which begin in 2006 and end in
 for Sponsors seeking the Retiree     2007 and for each plan year
 Drug Subsidy for all subsequent      thereafter), unless an extension
 years                                request is filed with CMS and
                                      granted by CMS.
------------------------------------------------------------------------
For plans operating on a calendar    September 30, 2006 (for 2007) and
 year basis--Application for          each September 30 thereafter for
 Retiree Drug Subsidy and             subsequent years, unless an
 Attestation of Actuarial Value Due   extension request is filed with
 Date for Sponsors seeking the        CMS and granted by CMS
 subsidy for all subsequent years
------------------------------------------------------------------------
Application for Sponsors that        90 days prior to the start of the
 institute coverage after September   new plan
 30, 2005
------------------------------------------------------------------------
Notice to CMS of mid-year plan       90 days prior to the plan change
 changes that materially affect
 actuarial valuation
------------------------------------------------------------------------
Notice to enrollees of plan changes  Prior to the plan change.
 that result in the plan no longer
 providing creditable coverage
------------------------------------------------------------------------

(d) Surety bond
    We sought 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.
    Comments: CMS received comments from private and governmental plan 
sponsors that this will be an unnecessary cost and burden to them and 
especially problematic for governmental entities.
    Response: After review of the comments we have determined that 
since all subsidy payments will be made by us after submission of cost 
data, the degree of risk to us in connection with the year-end 
reconciliation process is not significant enough to justify requiring a 
surety bond type of instrument or preferred creditor status 
certification, particularly given that many plan sponsors and 
administrators are subject to other laws and contractual obligations 
that should provide protections.
(e) 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 prescription drug coverage in accordance 
with the proposed requirements set forth under proposed Sec.  423.56 of 
the final rule. This includes, for example, providing advance notice to 
beneficiaries in the plan of any material change that causes their 
coverage to no longer be creditable prescription drug coverage. The 
rules for providing notices of whether coverage is creditable 
prescription drug coverage are described in subpart B, including the 
rules for coverage sponsored by an employer or union not claiming the 
subsidy.

[[Page 4413]]

5. Retiree drug subsidy amounts (Sec.  423.886)
    As outlined in the final regulations, Sec.  423.886 governs the 
subsidy amount a sponsor of a qualified retiree prescription drug plan 
receives for each qualifying covered retiree that is enrolled with the 
sponsor in a given year. The sponsor is eligible to receive a retiree 
drug subsidy payment for each qualifying covered retiree equal to 28 
percent of the allowable retiree costs that are attributable to the 
gross costs that exceed the cost threshold and do not exceed the cost 
limit. Section 1202 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.
    Debts owed to us that are generated by an overpayment of the 
subsidy to a sponsor, including collection of interest, administrative 
costs, and late payment penalties will be governed by regulations at 45 
CFR Part 30, subpart B.
    Comments: Many tax-exempt plan sponsors including governmental 
plans commented that the tax-exempt nature of the subsidy payments 
means that taxable plan sponsors can receive a subsidy that is 
approximately 35 percent higher in value than what the tax-exempt 
sponsors can receive. They requested that we address this disparity in 
the final rule for Part D to make sure all plan sponsors are treated 
equally. An employer advocacy group also asked for clarification on how 
the subsidy should be calculated for allowable costs that are 
attributable to gross retiree costs that exceed the cost threshold and 
do not exceed the cost limit.
    Response: The statute does not allow us to provide additional 
retiree drug subsidy payments based on tax-exempt status. As for the 
calculation of subsidy payments, the final rule clarifies that the 
statute requires the subsidy payment to be calculated by first 
determining gross retiree costs between the cost threshold and cost 
limit, and then determining allowable retiree costs attributable to 
such gross retiree costs. As noted elsewhere, allowable retiree costs 
are based on gross retiree costs actually paid under the plan (or by or 
on behalf of the retiree), with rebates and other price concessions 
subtracted from these gross retiree costs.
    Comments: Employers and beneficiary advocacy groups also commented 
on additional provisions regarding the plan sponsor's use of the 
subsidy once received. Beneficiary advocacy groups suggested that since 
employers and unions are allowed to shift costs of retiree plans to 
retirees by way of premium contributions and cost-sharing, 
beneficiaries should be entitled to a fair portion of the subsidy 
amount received by the plan sponsor. Employer groups and business 
consultants commented that once an employer or other plan sponsor 
qualifies for the retiree drug subsidy, we have no authority to 
regulate that employer's or union's or plan sponsor's utilization of 
the subsidy.
    Response: The statute does not impose restrictions on how the 
sponsors use the subsidy. However, beneficiaries may have rights 
provided under other laws or by contract.
6. Payment Methods, Including Provision of Necessary Information (Sec.  
423.888)
a. Plan Year Versus Part D 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, we have the interpretive authority to require that the 
subsidy determinations be made either on a calendar year or plan year 
basis. In the proposed rule, we proposed to have the rules apply on a 
calendar year basis because Medicare already operates on a calendar 
year basis.
    Comments: In considering whether sponsors will use plan year or 
calendar year in calculating the retiree drug subsidy amount, comments 
varied among private health care companies and health care industry 
associations. One such entity commented in favor of utilizing a 
calendar year schedule for simplicity. Others prefer having the 
flexibility to choose between a calendar year and a plan year that a 
sponsor may currently be operating in. Employer advocacy associations 
and actuarial consulting groups suggested giving sponsors flexibility, 
especially if it means allowing sponsors to choose between plan year 
and calendar year. A government entity commented in favor of plan year, 
and discussed utilizing a pro-rata method for determining the subsidy 
amount for the initial year of a plan using a non-calendar year.
    Response: In determining whether sponsors will be required to use 
plan year or calendar year, we took into consideration the large number 
of comments in favor of flexibility. We also recognized the costs that 
plan administrators and sponsors might face if they maintain records 
for plan purposes based on a period that differs from the calendar 
year, but are forced to establish a different system that maintains 
records on a calendar year basis solely for purposes or the retiree 
drug subsidy program. Finally, we considered costs associated with 
administering the program by CMS or a subsidy contractor. In response 
to these considerations, the final rule uses the plan year approach. 
Thus, if a plan's records are maintained on a calendar year basis, it 
enables sponsors to calculate retiree drug subsidy payments on that 
calendar year basis. If a plan's records are maintained based on a year 
that differs from the calendar year, sponsors can determine those 
calculations on the non-calendar year basis.
    Sponsors of non-calendar plans will use the cost threshold and cost 
limit for the calendar year in which the plan year ends for purposes of 
determining subsidy payments. Thus, for example, a sponsor claiming 
subsidy payments for the plan year running from July 1, 2007 through 
June 30, 2008 would use the cost thresholds and cost limit amounts 
published for 2008 in determining subsidy payments. If the sponsor 
requests payments on a monthly or quarterly basis, adjustments and 
reconciliations for prior payments will have to be made once the cost 
threshold and cost limitation for the relevant year have been 
published.
    Subsidy payments are determined based on the plan year that ends in 
a given calendar year, using the same rule in determining whether a 
sponsor's plan is actuarially equivalent to Part D raises a challenge. 
It might require that the sponsor submit an actuarial attestation for a 
given plan year before the deductible, initial coverage limit, and 
other elements of the defined standard prescription drug coverage have 
been determined for the corresponding calendar year. To address that 
concern, the final rule allow sponsors to use the actuarial value of 
the standard prescription drug coverage under Part D for the calendar 
year in which the sponsor's plan year begins, provided the attestation 
is submitted to us no later than 60 days after the publication of the 
coverage limits for defined standard prescription drug coverage for the 
upcoming calendar year. If the attestation is submitted beyond 60 days 
after the publication of the coverage limits for defined standard 
prescription drug coverage for the upcoming year,

[[Page 4414]]

then the new coverage limits should be used for the attestation.
    Note that our decision to allow sponsors to use non-calendar year 
plans as the basis for the retiree drug subsidy payment should not have 
an impact on, or impede, the timing of the beneficiaries' right to drop 
their employer or union coverage in favor of Part D if they choose. For 
example, beneficiaries should have the option to coordinate obtaining 
Part D coverage during open enrollment periods and dropping their 
retiree coverage in a way that avoids late enrollment penalties. 
Beneficiaries may also have special enrollment periods relating to the 
loss of creditable retiree coverage. (See Sec.  423.56.)
    The use of a plan year approach also requires a transition rule for 
plan years that begin in 2005 and end in calendar year 2006. The 
proposed rule outlined three transition options. The first is to start 
counting gross prescription drug costs for prescriptions filled after 
January 1, 2006, and pay the subsidy only for claims incurred in 2006. 
The second option is to determine the subsidy amount based on claims 
incurred for the entire plan year but prorate subsidy payments to 
reflect the number of months of the plan year that fall in 2006. The 
third option is to determine subsidy amounts monthly for the entire 
plan year and then pay the full subsidy payments, but only for claims 
that are incurred in 2006.
    Comments: Business advocacy groups recommended that the final rules 
allow employer and union flexibility to select among the three proposed 
transitions alternatives in determining the subsidy payment for 2006, 
based on their administrative capabilities and other considerations.
    Response: For administrative simplicity, and given the nature of 
this rule, we believe it is reasonable to specify the particular 
transition option to be used. Option 1 would require that sponsors meet 
the cost threshold twice in 2006, a strict test that we believe is not 
absolutely required under the statute. In comparing transition options 
2 and 3, we have concluded that option 3 provides the most equitable 
result that is consistent with the statute. Under Option 3, sponsors 
determine claims incurred in all the months of the plan year, including 
those that fall in 2005, for calculation of the cost threshold for a 
plan year that ends in 2006. However, subsidy payments are based solely 
on claims incurred on or after January 1, 2006.
b. Payment Methodology and Frequency
    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 applies to payments made to PDP 
sponsors and MA organizations under Part D. We proposed a preferred 
approach to calculating and paying the subsidy. For each month starting 
with January 2006, the plan sponsor would certify by the 15\th\ of the 
following month 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 30\th\ of that month. Not later than 45 days after 
the end of the plan year, the plan sponsor would submit a final 
reconciliation (except for outstanding rebates) to us for payment by 
or, if applicable, to us. In the month in which they are received (or 
recognized), the appropriate share of any discounts, rebates, 
chargebacks, 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, 
and 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.
    We proposed three possible alternatives to this option. The first 
alternative was for us to make a single payment after the close of the 
year. Sponsors would submit their cost data, including rebate data, by 
the start of the fourth month after the close of the plan year. A 
second alternative would be to make interim payments throughout the 
year based on the sponsor's estimate of claims, rebates and discounts 
(determined based on historical data), with a settlement after the end 
of the plan or calendar year. We would pay less than 100 percent of the 
subsidy payments that would be calculated from these estimates, given 
the uncertainties associated with these estimates. The third 
alternative would be to make lagged payments based on actual claims 
experience on a periodic basis throughout the year, with the subsidy 
payments being reduced by a specified percentage to reflect the 
sponsor's estimate of discounts, chargebacks and rebates. After the 
year ends there would be a settlement limited to reconciling estimated 
versus actual discounts, chargebacks and rebates. We also sought 
comment on the use of bi-annual, quarterly or monthly payment periods 
under these approaches.
    Comments: Generally, comments supported a method that allows 
flexibility to select the methodology and timing of retiree drug 
subsidy payments and rebates each year. A number of commenters, 
including employer consultants and government employers encouraged a 
monthly payment system. Entities that supported alternative option 1 
said that it would protect patient privacy, proprietary information 
between plans and manufacturers would be kept from potential exposure, 
and both administrative costs and data collection burdens would be 
reduced.
    One State commenter supported alternative option 2, stating this 
method takes into account programs that are fully insured and use a 
Health Maintenance Organization (HMO) that does not segregate actual 
cost data by plan and is community rated. Additionally, advocates claim 
that option 2 would be more reasonable for small business because of 
the lighter administrative burden. Comments critical of the preferred 
option stated that the 15 day turnaround time for submitting monthly 
payment requests and the 45-day deadline for year-end reconciliation 
seemed rather tight, even for employers and unions who have PBMs with 
excellent administrative abilities.
    A business consultant also commented that only the third 
alternative proposal actually accounts for drug costs of the group 
health plan on an accrual basis. The other methods appear to follow the 
cash flow of the plan but fail to recognize accrual accounting required 
for the plans. They felt that we neglected to consider more user-
friendly methods that are proposed for other cost based entities, for 
example, fallback plans, which we proposed to pay through a debit 
account system. They felt that the second approach is acceptable 
because it sets prospective payments and provides for reconciliation, 
even though it arbitrarily pays less than what the parties agree upon 
as the prospective rebate.
    Another employer advocacy association urged us to develop a point 
of sale subsidy payment system, and in the interim, provide the 
sponsors the flexibility to choose the payment methodology that is best 
for them.
    Response: Unless and until such time technology, resources and 
other considerations would enable us to develop a point-of-sale payment 
system for the retiree drug subsidy program, the final regulation will 
provide other methods and frequency options to address the multiple 
requests for payment flexibility.
    A sponsor may annually elect during the application process whether 
to receive payments monthly, quarterly, or

[[Page 4415]]

annually; that sponsor may change its election during the application 
process of a subsequent year. A sponsor choosing an annual payment 
method could avoid the need for interim data submissions, estimates and 
reconciliations, (discussed in more detail below), and may limit the 
administrative costs because data submissions are less frequent. 
However, sponsors that do not want to make multiple data submissions 
but also do not want to wait for subsidy payments until all rebate and 
other data is received will be able to make an interim annual payment 
request, with only one additional (final) reconciliation required at 
year-end.
    Sponsors who choose the periodic method of payment must submit 
periodic requests for payment to us on the same schedule as the 
payments are to be received, at a time and in a manner specified by us. 
Final detailed cost data must be submitted no later than 15 months 
following the end of the plan year. We will make payments to the 
sponsor at a time and in a manner to be specified by us in future 
guidance.
    In the final rule, we reserved the right to restrict the payment 
options available to sponsors in 2006 in case of any unforeseen 
operational impediments.
    Comments: Actuarial consultants suggested that we develop 
approximate methods of determining individual drug spending, because of 
the difficulty of determining the actual costs and assigning a rebate 
to a specific person. An employer advocacy group suggested allowing 
employers and unions to choose their own methodology for reflecting 
rebates, in order to accommodate their own administrative capabilities 
and restrictions. A health care industry consultant indicated that 
group health plans would need to separate rebates by their 
applicability (individual retirees or entire group). An employer was 
concerned because they have a fully insured plan which factors rebates 
into the premium; they suggested that we accept the insurance carrier's 
attestation that the claims used in the subsidy calculation are net of 
rebates and other discounts, rather than require them to provide 
information the sponsor does not have. Another employer encouraged us 
to allow sponsors and PBMs to freely contract regarding rebate terms, 
and not require them to file PBM agreements of documentation of those 
negotiations.
    A health care industry consultant recommended that we allow 
multiple methods for allocating rebates because a single method would 
unduly constrain health plans in future negotiations with manufacturers 
for price concessions. An employer suggested the most appropriate way 
to recognize rebates is to determine the average amount per rebatable 
prescription and apply it to the actual retiree drug utilization of the 
plan sponsor. Actuarial consultants and a health care industry 
association agreed with the suggestion to estimate rebates on a 
periodic basis to be included in subsidy payments, and then reconcile 
both rebates and subsidies at the end of the year. One industry 
association suggested an ongoing accounting of rebates to eliminate the 
need for reconciliation at the end of the year. They also asserted that 
the proposed 4 month period after the end of the year was not enough 
time to count the rebates.
    An employer advocacy association proposed a two-phase settlement 
process for rebates, which would include a preliminary estimate at the 
end of the year and a final adjustment up to twelve months later; the 
association states that such a system would provide maximum flexibility 
and minimum administrative burden on the sponsor.
    Response: If the sponsor chooses the monthly, quarterly or an 
interim annual method of payment, then in addition to the data 
requirements described below, the plan sponsor must provide an estimate 
of rebates (based on historical data) upon submission of data for 
payment. We believe the sponsor's submission of estimated rebates 
limits the amount of reconciliation at year end; is consistent with 
data capabilities of the sponsors; limits the extent to which we would 
be making overpayments during the year; and allows for monthly and 
quarterly subsidy payments in order to enhance cash flow of sponsors.
    Sponsors choosing the monthly, quarterly or an interim annual 
method of payment will be required to provide an annual reconciliation 
to us that includes cost data segregated per qualifying covered retiree 
and actual rebates, discounts, or other price concessions received for 
the costs, unless we provide for different data requirements in future 
guidance. If rebates and other price concessions for a plan are not 
specifically allocated by a manufacturer to the drug spending of a 
particular qualifying covered retiree, a sponsor (or its designee) will 
be permitted to assign the price concessions to qualifying covered 
retirees using reasonable actuarial principles or other methods we may 
specify.
    The reconciliation must take place within 15 months following the 
end of the plan year. If gross covered retiree plan-related 
prescription drug costs in a given plan year are reduced at the point-
of-sale to reflect rebates, discounts or other price concessions and no 
additional price concessions for the costs are received for the year, 
then allowable retiree costs will equal such gross costs for the year. 
However, any rebates that are received retrospectively would have to be 
subtracted when a sponsor calculates retiree costs. As a result of the 
reconciliation, sponsors will, as applicable, repay any subsidy 
overpayments or be paid any subsidy underpayments in a manner to be 
specified by us.
    If a sponsor chooses the annual payment method, the sponsor will be 
required to submit cost data per individual retiree, including rebate 
adjustment within 15 months following the end of the plan year. 
However, as noted in Sec.  423.884 (c)(6), a sponsor who chooses the 
annual payment option must still provide updates of enrollment 
information to us on a monthly basis.
c. Data Collection
    The plan sponsor will be required to submit cost data for each 
qualifying covered retiree. Regardless of what payment methodology is 
ultimately chosen for the retiree drug subsidy, we would need certain 
data from the sponsors in order to accurately calculate the amount of 
the subsidy to which the sponsor is entitled.
     In the proposed rule, we requested comments on the level of detail 
of the cost data that would be submitted to us in order to receive the 
retiree drug subsidy payment. Option 1 would require that 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 aggregate cost would not be broken down to each 
qualifying covered retiree. Option 2 would require the sponsor to 
submit the aggregate allowable costs for each qualifying covered 
retiree for the time period in question. Option 3 would be to combine 
various elements of the first two options. The sponsor 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, the sponsor would submit 
its cost data in accordance with the first option. Option 4 would have 
been for the sponsor to submit the actual claims data for each 
qualifying covered retiree, though the proposed rule specifically 
rejected that option given privacy concerns.
    Comments: Comments from employers, the healthcare industry, 
employer advocates and government entities request that we make data

[[Page 4416]]

collection and reporting requirements reasonable for plan sponsors. 
Commenters also stated that we must account for the fact that employers 
and unions do not customarily record some of the data requested, and 
third party administrators, insurers, PBMs and like entities also do 
not maintain all of the data elements required under the proposed rule. 
Further, comments suggested that we concentrate on attaining aggregate 
claims data.
    Response: We agree that the requirements for submission of cost 
data should be reasonable and the least burdensome possible. At the 
same time, we have an obligation to create rules aimed at providing 
only the subsidy payments authorized by statute. As noted above, in 
balancing these objectives, the final rule provides that unless we 
imposes other data requirements in future guidance, when a sponsor 
chooses either the monthly, quarterly, or interim annual payment 
option, it must submit to us, at a time and in a manner specified by 
us, the aggregate gross covered retiree plan-related prescription drug 
cost data (as defined in Sec.  423.882), as outlined in option 1, along 
with an estimate of the extent to which its expected aggregate 
allowable retiree costs will differ from the aggregate gross cost data 
(based upon expected rebates and other price concessions) for interim 
payments. However, the aggregate data must be reconciled within 15 
months after the end of the plan year, and the sponsor would have to 
resubmit the total gross cost data segregated by individual retiree and 
actual rebate/discount/other price concession data and repay any 
subsidy overpayments (or be paid subsidy underpayments). (Specific 
detail about each claim would not be required.) Likewise, all sponsors 
who choose the annual payment option would have to submit the total 
gross cost data segregated by individual retiree and actual rebate/
discount/other price concession data within 15 months after the end of 
the plan year for payment. We believe that these requirements are 
reasonable and least burdensome for the sponsors, yet provide the 
additional information needed by us in assessing the accuracy of 
payments. As outlined in our earlier discussion on allowable retiree 
costs, in section 3(C) of this subpart of the preamble, we will provide 
flexibility to sponsors of insured plans in the submission of interim 
cost data.
d. Record Retention for Audits
    In the proposed rule, we stated that a plan sponsor will be 
required to maintain and provide access to sufficient records for our 
audits or audits of the Office of Inspector General (OIG) to ensure the 
accuracy of the attestation regarding actuarial value and the accuracy 
of subsidy payments made under this subpart. All records must be 
maintained for at least 6 years after the end of the plan year in which 
the costs were incurred.
    Comments: Employers, employer advocacy associations and an employer 
business consultant commented that the data retention period should 
match the IRS/SSA/CMS data match program period of 3 years to ease the 
administrative burden on employers, unions, carriers and plan 
administrators. Employers indicated that if they switched carriers or 
administrators, it would be difficult to force them to retain records 
for at least 6 years. A taxpayer advocacy association recommended a 10-
year time period, coinciding with the statute of limitations in False 
Claims Act cases. A governmental employer wanted us to mandate that 
carriers retain and provide the necessary data to the sponsor for the 
required period of time. In discussions with sponsors and employer 
advocacy groups, they indicated that they are required to retain 6 
years of certain types of data for the Department of Labor (DOL) audits 
under ERISA.
    Response: The final rule retains the 6-year record retention rule. 
We believe that 6 years is a reasonable because it is consistent with 
the period for retaining certain ERISA records and certain information 
related to the Health Insurance Portability and Accountability Act 
(HIPAA) administrative simplification rules. However, consistent with 
the commenters' concern that records would not be retained long enough, 
we are modifying the regulation text to specify that a sponsor (or its 
designee) must retain records longer than 6 years if they know that the 
records are the subject of an ongoing investigation, litigation, or 
negotiation regarding criminal or civil liability. In such cases, the 
obligation to retain records need not arise solely through a formal 
communication from CMS or OIG.
6. Appeals (Sec.  423.890)
    Although the statute does not contain provisions for administrative 
appeals of the retiree drug subsidy amount, 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.
    Comments: Beneficiaries, beneficiary advocacy organizations and 
labor organizations requested that they have the opportunity for review 
and appeal of the retiree drug subsidy application and the payment 
determination so that they could assist us in verifying that the 
benefits provided and the payments made under the retiree drug subsidy 
program were proper and fiscally responsible. Plan sponsors, business 
advocates and health care industry vendors felt that only they should 
be allowed appeal rights because the application to receive retiree 
drug subsidy payments, the actuarial attestation and payment under the 
retiree drug subsidy program would not affect the benefits provided to 
beneficiaries under the plan. Plan sponsors and business advocates 
indicated that third parties, including beneficiaries, should not have 
standing to appeal our decisions. One employer advocacy association 
requested that we consider an appeals process that provides plan 
sponsors an opportunity to develop a detailed record concerning 
disputes for which they request reconsideration. The employer 
association also requested that if we determine that no such 
opportunity needs to be provided, require that its factual 
determinations relating to such disputes be decided on a de novo basis 
upon judicial review. They also requested that if an employer or union 
seeks to reopen a determination on its own, such a right should be 
unfettered as long as it is made within one year of final 
determination.
    Response: We do not believe that the MMA gives participants or 
other third parties standing to appeal to us regarding retiree drug 
subsidy payment determinations. The MMA provides that the subsidy is to 
be paid to the sponsors if the sponsors meet certain conditions imposed 
on them. We recognize that participants and beneficiaries in a 
sponsor's plan have an interest in knowing whether their retiree drug 
coverage qualifies for the subsidy, and that we have audit 
responsibilities to ensure the accuracy of payments. But given the 
absence of any administrative appeals provisions in the statute and our 
need to also consider the potential burdens that could be posed on 
retiree health plan sponsors, we do not believe it would be prudent 
policy to provide administrative appeal rights to individual 
participants or third parties.

[[Page 4417]]

    We believe that the appeals process that is outlined in the 
preamble to the proposed rule provides sufficient due process to 
protect the interests of the sponsors. To require that a detailed 
record be developed on appeal or to require de novo judicial review of 
the administrator's decision would create administrative costs for the 
retiree drug subsidy program and would be burdensome for us. As we 
indicated in the preamble of the proposed rule, there is no 
constitutional property right to the retiree drug subsidy. Because the 
subsidy payment is not an entitlement, there is no need to provide for 
an extensive appellate process that includes judicial review.
    We also have not accepted one commenter's request that an employer 
receive an unfettered right to reopen a determination as long as it is 
made within a year of the final determination. As we stated in the 
proposed rule, at 69 FR 46750, the Supreme Court has ruled on reopening 
in the context of cost reports. In that case, the Court stated that the 
``right ... to seek reopening exists only by grace of the Secretary,'' 
Your Home Visiting Nurse Services, Inc. v. Shalala 525 U.S. 449, 454 
(1999), and that a reopening by the Secretary is not a ``clear 
nondiscretionary duty.'' Id. at 456-7. For these reasons we have 
decided to retain the rule that while a reopening may be requested by a 
sponsor, there is no right to reopening under the regulations. We have 
also amended the regulations to reflect the policy announced in the 
preamble of the proposed rule that a decision not to reopen is not 
subject to further review.
7. Change of Ownership (Sec.  423.892)
    Sponsors who apply for a retiree drug subsidy payment would be 
required to comply with change of ownership requirements.
    Comments: We received no public comments in this area that disputed 
the proposed provisions of change in ownership.
    Response: In Sec.  423.892, we would carry over the three 
situations that constitute change of ownership (CHOW) in Sec.  423.551 
of the final rule.
8. Construction (Sec.  423.894)
    Sections 423.894(a) through Sec.  423.894(d) are based on section 
1860D-22(a)(6) of the Act, which outlines the employer and union 
options for providing retiree drug coverage and coordinating with 
Medicare under the MMA.
    Comments: Beneficiary advocacy organizations were concerned that 
employers and unions will drop employer and union-based coverage if 
beneficiaries enroll in Part D coverage. Plan sponsors want 
clarification that if they file for the subsidy, they can tell 
beneficiaries not to enroll in Part D coverage.
    Response: The final rule adopts the provisions as outlined in the 
proposed rule. Plan sponsors are not permitted to tell qualified 
retirees and their eligible dependents that they cannot enroll in Part 
D coverage. The MMA mandates that beneficiaries must be allowed to 
freely choose whether or not to enroll in Part D.
    However, plan sponsors claiming the retiree drug subsidy must offer 
a prescription drug program that is actuarially equivalent to or better 
than defined standard prescription drug coverage. If a sponsor elects 
to apply for the retiree drug subsidy, it is also able to design its 
eligibility rules under its employer or union-based plan so that 
qualifying covered retirees and their dependents lose eligibility in 
the sponsor's plan if they enroll in a Part D plan. The sponsor shall 
give advance notice of this type of material change to plan 
participants as required by other notification regulations that govern 
their plan (that is, ERISA, State or local law).

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) required 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.
    As proposed 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. In Sec.  
423.904(d), we proposed requiring States to begin accepting application 
forms for the low-income subsidy no later than July 1, 2005. In Sec.  
423.904(d), we also proposed requiring 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.
    We also proposed requiring that States ensure that applicants or 
personal representatives attest to the accuracy of the information 
provided. In verifying application information, we specified 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.
    In addition, Sec.  423.904(d) directed States to provide us with 
necessary information to carry out implementation of the Part D 
program. This includes information such as income levels for other low-
income subsidy eligible individuals under Sec.  423.773 needed to 
permit Part D plans to determine the amount of sliding scale premium 
subsidy that a person will receive under Sec.  423.780(b).
    We developed uniform criteria for determining resources, income, 
and family size under the subsidy, which were reflected in the proposed 
definitions at Sec.  423.772, and the proposed eligibility requirements 
at Sec.  423.773.
    We also stated that we were 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 invited 
comments from States on this issue.
    Comment: Several commenters suggested that Sec.  423.904(a) be 
cross-referred to the entire subpart P rules.
    Response: We agree with the commenters and have done so in this 
final rule.
    Comment: Many commenters expressed concern that both SSA and States 
would be making subsidy eligibility determinations and stressed the 
need for coordinated policies and processes so that identical treatment 
is ensured, no matter where the applicant goes to apply for the 
subsidy. It was further suggested that CMS allow States to choose 
whether to make the subsidy eligibility determinations themselves or 
forward applications to SSA.
    Response: As stated in our response to comments on Sec.  423.774, 
the statute sets forth the requirement that eligibility for the low-
income subsidy program will be determined by either the State Medicaid 
agencies or by SSA. Therefore, States

[[Page 4418]]

must have the ability to determine eligibility if someone requests a 
``State'' subsidy determination.
    While this obligation is imposed on States, States may encourage 
applicants to use the SSA low-income subsidy application process in 
order to reduce the administrative burden associated with sending 
notices and processing appeals and redeterminations. In other words, 
States may provide applicants with the SSA application which they will 
forward to SSA or provide access to a terminal for accessing the SSA 
application on line and SSA will perform the eligibility-processing 
role for these applications. However, as we noted in responses to 
comments in subpart P, States must have the ability to determine 
eligibility if someone requests a ``State'' subsidy determination. As 
part of this obligation, if the applicant files a ``State'' 
application, States are required to send notices of subsidy 
determinations, process redeterminations, and handle appeals. We are 
working on a process whereby States and SSA will be able to access 
timely information on the status of a beneficiary's application filed 
at either SSA or State offices. We expect to provide further 
information on this process through operational guidance. We also note 
that we have clarified the final rule in subpart P, based on similar 
comments made in subpart P in response to the proposed rule. Section 
423.774 now requires that multiple applications not be permitted in 
cases where an individual has received a positive determination from 
either SSA or the State. In other words, an individual may not file a 
second application for the remainder of the eligibility period with the 
alternate agency if he or she has received a positive determination 
from the State or SSA. As stated in the response to comments in subpart 
P, this requirement is not intended to preclude an individual from 
reporting subsidy changing events in accordance with the determining 
agency's rules, but rather to prevent confusion that could arise if a 
State and SSA process duplicate determinations for the individual.
    Comment: Some commenters stated that we should impose a time limit 
on how long States have to notify CMS of eligibility or redetermined 
eligibility determinations. Several commenters suggested we require 
States to notify CMS within 24 hours of making such determinations.
    Response: We have decided not to impose a specified period on 
States to notify CMS of eligibility or redetermined eligibility 
determinations through regulation. Instead we intend to provide 
operational guidance to States, monitor the time period for determining 
subsidy eligibility, and take action as appropriate. In general, we 
expect that States will determine subsidy eligibility within time 
periods that are at least consistent with the processing of State 
Medicaid applications.
    Comment: One commenter was concerned that States did not have the 
opportunity to comment on the model application.
    Response: SSA published notice of the model application in the 
Federal Register on November 17, 2004 for public comment.
    Comment: One commenter states that both SSA and the States should 
be required to use the same application for the low-income subsidy. 
Another commenter asked what form of application a State would be 
required to accept.
    Response: We cannot mandate use of the same application form by 
States and SSA. Where a State finds that it can use the SSA application 
for the State's low-income subsidy eligibility determination process, 
we would encourage it to do so. However, as States might need to 
implement different verification strategies when they actually make the 
low-income subsidy determinations, they may have to design application 
forms specific to their determination process. States have expertise in 
the area of administering means-tested programs and will be developing 
their application forms based on that expertise. In addition, we will 
be working with States and SSA to assist States as they design and 
develop the optimum eligibility process for making low-income subsidy 
determinations.
    Comment: One commenter was concerned about CMS' requirement for 
States to begin taking low-income subsidy applications by July 1, 2005 
due to State concerns about staffing needs and necessary support 
systems.
    Response: We continue to believe that allowing individuals to apply 
by July 1, 2005, will allow a more seamless transition of prescription 
drug coverage for individuals eligible for the low-income subsidy. If 
an individual needs to consider coverage of specific drugs by a 
particular Part D plan in making an enrollment decision, the greater 
time in advance of the new plan's coverage effective date allows 
individuals, doctors and other payers to assure a smooth transition of 
drug coverage.
    In addition, we have clarified in this final rule that CMS will 
send notices of eligibility to all deemed subsidy eligible individuals. 
This should relieve States of the financial burden of sending notices 
to deemed subsidy eligible individuals. We will also educate Medicare 
beneficiaries, including dual eligibles, through a variety of methods 
about prescription drug coverage under the new Part D benefit.
    Comment: One commenter also asked about the timeframe in which the 
State is to make the low-income subsidy eligibility determination. This 
same commenter also asked about the timeframe required for applications 
taken as early as July 1, 2005, in which eligibility determinations 
made after July 1\st\ and prior to November 15, 2005, may need to be 
redone if there is a change in the applicant's circumstances.
    Response: We expect that States will determine subsidy eligibility 
within time periods that are at least consistent with the processing of 
State Medicaid applications. Initial determinations of subsidy 
eligibility shall remain in effect for a period of up to a year and can 
be effective no earlier than January 1, 2006. As discussed in the 
response to comments in subpart P, changes in financial circumstances 
that could impact subsidy eligibility should be reported to the agency 
that processed the subsidy application, according to that agency's 
rules.
    Comment: One commenter requested more detail on the process CMS 
will use to collect data from State Medicaid agencies.
    Response: We will provide the data collection process to State 
agencies through operational guidance.
    Comment: One commenter indicated its desire to avoid the need for 
beneficiaries receiving assistance from a SPAP to submit the same 
information on two different application forms: the SPAP eligibility 
application and the low-income subsidy application. The commenter would 
prefer to use only the low-income subsidy application for both the 
subsidy and SPAP eligibility.
    Response: SPAPs will be free to use the application designed for 
the low-income subsidy, or a variation on the application, to determine 
SPAP eligibility.
    Comment: A number of commenters suggested that States should not be 
permitted to impose additional documentation requirements on 
beneficiaries over and above what SSA requires, and asked that the 
language in Sec.  423.904(d)(3) be revised to indicate that statements 
from financial institutions would be required ``only if the applicant 
or personal representative is unwilling to authorize the agency to 
contact the financial institution directly to obtain necessary 
information.''

[[Page 4419]]

    Response: The simplified application developed by SSA, in 
consultation with CMS, is based on the principle of self-attestation. 
While we expect some information may be requested from applicants on an 
exception basis, based on responses to certain questions or based on 
inconsistencies from electronic data matches, we believe the majority 
of applicants who use the SSA form will not need to provide additional 
information beyond what is submitted and attested to in the application 
form.
    We acknowledge that States may employ different verification 
strategies than SSA, if States actually determine the eligibility for 
the low-income subsidy. SSA has access to a variety of data sources to 
enable it to verify within acceptable tolerances the majority of income 
and resource information using electronic data matches. Again, we 
encourage States to utilize the SSA application process to the greatest 
extent possible. However, we cannot limit States' authority to require 
statements from financial institutions by providing that they may do so 
only if the applicant or personal representative is unwilling to 
provide authorization to contact the institution. States have the 
expertise necessary to determine what the best process is for obtaining 
necessary information.
    Comment: A number of commenters suggest that individuals who apply 
at SSA offices for the low-income subsidy be screened and enrolled in 
Medicare Savings Programs. They argue that the obligation to screen and 
enroll should not be imposed solely on States. They also suggest that 
joint applications be developed for both programs to avoid requesting 
duplicate information and to streamline verification of income and 
assets for eligibility purposes.
    Response: We received similar comments in reference to Sec.  
423.773 and Sec.  423.774. As we indicate in the responses to those 
comments, we are working with SSA to design a process to provide 
subsidy eligibility determination to States for purposes of identifying 
individuals who apply at SSA and who may also qualify for Medicare 
Savings Programs under the State's Medicaid program. With this process, 
we hope to avoid situations in which an individual applies for a low-
income subsidy at an SSA office, finds out that he or she has excess 
income or resources to qualify, and remains unaware that he or she may 
automatically qualify for a subsidy if the individual chooses to enroll 
in a State's Medicare Savings Program.
    In addition, we also noted in response to other comments in Sec.  
423.773 and Sec.  423.774 that the application for the low-income 
subsidy program must reflect the definition of income and resources 
outlined in this final rule. However, section 1935 (a)(3) of the Act 
obligates States to make a determination of a subsidy applicant's 
eligibility for Medicare Savings Programs and to offer them enrollment. 
States may develop a special addendum to the low-income subsidy 
application to address questions specific to Medicaid or Medicare 
Savings Programs eligibility in order to streamline the application 
process for these programs.
    Comment: One commenter suggested that income and resources will not 
be verified as rigidly for the subsidy programs as for Medicare Savings 
Programs. The commenter indicated that the subsidy could be approved 
and the State could later, due to verification requirements for QMB, 
SLMB, or QIs, find that the subsidy was approved in error. The 
commenter suggests that there are no provisions for resolving this 
occurrence and argue for one standard to be used nationwide.
    Response: Medicare Savings Programs represent a Medicaid benefit 
designed to offer low-income Medicare beneficiaries assistance with 
Medicare premiums and in some cases cost sharing. The low-income 
subsidy program is a Medicare benefit under part D. While eligibility 
for the two benefits may be based on similar methodologies for counting 
income and resources, they are not identical. Moreover, eligibility for 
the subsidy can be determined by SSA or States. While uniformity may be 
a desirable goal, verification methods may differ between the two 
programs. Verification for the low-income subsidy, for example, is 
based on the principal of self-attestation. Automation will be utilized 
by SSA, and we hope by States, to the greatest degree possible, with 
additional information requested on an exception basis.
    Comment: Some commenters suggest the proposed regulations regarding 
State obligations to screen and offer enrollment in Medicare Savings 
Programs is inadequate. The commenters suggest that CMS specify what 
``offer enrollment'' means. They argue that it should not be 
interpreted to imply that someone who presents himself at a State 
office to apply for the subsidy is informed that he can return at a 
later time to apply for a Medicare Savings Program.
    A few commenters assert that the applicant must be offered the 
opportunity to enroll in a Medicare Savings Program during the same 
visit or contacted via phone or mail without having to provide further 
documentation or compelling the completion of additional forms. The 
commenters also suggest that it would be confusing if individuals first 
receive notices that they are ineligible for the subsidy and later 
receive notices from the State that they are eligible for a Medicare 
Savings Program. Again, commenters suggest that CMS align the income 
and resource rules for both programs under a single application.
    Finally, a few commenters also suggest that CMS automatically 
enroll individuals in Medicare Savings Programs, with an opt-out 
provision.
    Response: Section 1935(a)(3) of the Act specifically requires 
States to screen individuals applying for the low-income subsidy for 
eligibility for Medicaid Savings Programs and to ``offer enrollment'' 
to such individuals under the State plan. Under this provision, we 
expect that States will perform an initial assessment of whether an 
individual is likely to qualify for the State's Medicare Savings 
Programs, either based on the individual's application for the low-
income subsidy taken at the State office or based on subsidy 
eligibility information provided to the State by SSA. The State should 
encourage the individual to complete the application and assist the 
individual in doing so. Given the fact that States administer the 
Medicaid program, and the fact that enrollment in Medicare Savings 
Programs could trigger estate recovery implications, we are not 
considering the commenters' suggestions for CMS to automatically enroll 
individuals in Medicare Savings Programs with an opt-out provision.
    Comment: Some commenters suggested that in order to align the 
enrollment requirements between Medicare Savings Programs and the low-
income subsidy, States should not be permitted to pursue estate 
recoveries against Medicare Savings Program beneficiaries.
    Response: We do not have authority under the MMA to implement the 
commenters' recommendation to prevent States from pursuing estate 
recoveries against Medicare Savings Program beneficiaries.
    Comment: Several commenters suggested that the low-income subsidy 
application process represents an opportunity to connect Medicare 
beneficiaries to food stamps and other programs that might provide 
assistance to them. The commenters suggest that CMS set up an 
eligibility process in the final regulation that allows low-income 
Medicare beneficiaries to be enrolled as seamlessly as possible in food 
stamps, as well as other State administered benefits for which they may 
qualify. The commenters also remarked that setting

[[Page 4420]]

up such a system would likely entail that CMS work collaboratively with 
SSA, USDA, and State agencies. A few commenters detail specific 
opportunities such as providing information about food stamps and other 
major benefit programs in any outreach materials that CMS, SSA and 
State Medicaid programs distribute; designing procedures that allow 
applicant information to be shared between SSA, State agencies, and 
CMS; collaborating with other Federal agencies, primarily USDA and SSA, 
on ways to enroll eligible applicants in all benefit programs; 
developing coordinated redetermination processes that are simple as 
possible for Medicare beneficiaries; and reimbursing SSA for the food 
stamps program's share of any costs associated with efforts to inform 
Social Security recipients of the availability of food stamps and other 
programs.
    A few other commenters suggested that CMS ensure that applicants be 
given the choice of opting out of the other programs, noting that the 
complex income calculations under the different programs such as food 
stamps or Section 8 Housing could endanger an individual's ability to 
enroll in other assistance programs.
    Response: We agree that the application process for the low-income 
subsidy represents an opportunity to improve coordination and awareness 
of other programs designed to assist low-income individuals. As part of 
outreach efforts for the low-income subsidy, we will consider 
encouraging awareness of other programs. However, we do not have the 
authority to align the eligibility systems of other programs in order 
to design a single application process for benefits beyond the low-
income subsidy under Medicare Part D.
    If SSA is the agency that determines subsidy eligibility, SSA's 
response may include a paragraph regarding the individual's potential 
eligibility for other programs like food stamps, SSI, and Medicaid, 
based upon the information SSA received when determining the low-income 
subsidy.
    Comment: One commenter recommended CMS conduct a dynamic enrollment 
campaign targeted toward beneficiaries who have been determined 
eligible for subsidies during the pre-qualification process. CMS should 
also develop a one-step application/enrollment process that requires 
all prescription drug plans to include information about the 
availability of subsidies in their marketing materials and requires 
plans to include specific eligibility questions on enrollment forms.
    Response: We will be working on a detailed education and outreach 
strategy over the next few months. We note, as explained in detail in 
subpart B, that while we encourage individuals to choose a plan that 
best meets their needs, full- benefit dual eligible individuals who 
apply and are found eligible for the low-income subsidy will be 
enrolled automatically in Part D plans if they fail to choose one. We 
will also facilitate enrollment in Part D plans of other subsidy-
eligible individuals.
    Comment: A few commenters asked whether a person screened and found 
eligible is required to enroll in a Medicare Savings Program as a QMB, 
SLMB, or QIl. Additionally, the commenter asked whether such enrollment 
is a condition of eligibility for the low-income subsidy program.
    Response: Enrollment for those who qualify for a Medicare Savings 
Program is optional. The State cannot condition eligibility for the 
Part D low-income subsidy on the individual applying for the Medicare 
Savings Program.
2. General Payment Provisions (Sec.  423.906)
    Section 1935(d) of the Act contains provisions on Medicaid 
coordination with Medicare prescription drug benefits. Specifically, in 
the case of a person who is eligible for Part D and also eligible for 
full Medicaid benefits, Federal Financial Participation (FFP) in State 
Medicaid expenditures is not available for Medicaid covered drugs that 
could be covered under Part D or for cost sharing related to such 
drugs. As a result, no Federal payment should be made under Medicaid 
for covered Part D prescription drugs for full-benefit dual eligible 
individuals.
    We proposed in Sec.  423.906(a) that States could receive the 
regular Federal match for administrative costs in determining subsidy 
eligibility. We also proposed, at Sec.  423.906(c), that States may 
elect to provide coverage for outpatient drugs, other than Part D 
covered drugs, in the same manner as provided for full-benefit dual 
eligible individuals or through arrangements with the PDP sponsor or 
MA-PD.
    Comment: One commenter asked that Medicaid coverage not expire for 
full-benefit dual eligible individuals until they voluntarily enroll in 
a Part D plan or until CMS or the State has automatically enrolled them 
in a plan. By changing the date on which Medicaid coverage ends, SPAPs 
would not be obligated to provide drug coverage during such a period 
without coverage.
    Response: In accordance with section 1935(d) of the Act, in the 
case of a person who is eligible for Part D and also eligible for full 
Medicaid benefits, FFP 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. We do not have the 
authority to delay the end date of Medicaid prescription drug coverage 
for such individuals. However, we will deem full-benefit dual eligible 
individuals as eligible for Part D low-income subsidies, and assign 
these individuals to a PDP, with the option to disenroll, so that there 
will be no breaks in coverage between Medicaid and the implementation 
of Medicare Part D in January 2006 for this population.
    Comment: One commenter asked for clarification that FFP would also 
be available to State Medicaid programs to conduct the periodic 
eligibility redeterminations. The commenter also asked if work done by 
States and SPAPs to enroll beneficiaries in the Part D program would be 
claimable as Federal reimbursable services at the administrative FFP 
rate under Medicaid program costs just as low-income subsidy 
eligibility determinations costs are claimed. Finally, the commenter 
asked about claiming FFP for all administrative expenses associated 
with State Medicaid agencies or SPAPs administering a ``wrap around'' 
benefit.
    Response: FFP is available to States at the normal Federal match 
rate to conduct redeterminations. However, because neither States nor 
SPAPs enroll beneficiaries in Part D plans no FFP is available in that 
regard. In addition, the statute does not allow for reimbursement for 
administering a State benefit that supplements, or ``wraps around'' 
Part D.
    Comment: One commenter asked if a State could pay for and receive 
FFP for non-covered Part D drugs when a Part D plan's enhanced 
alternative coverage includes supplemental benefits such as coverage of 
non-covered Part D drugs. In such a case, the commenter asked whether 
the State Medicaid program wrap around coverage for dual eligible 
beneficiaries in such plans could continue and whether the State could 
receive FFP for these non-covered Part D drugs.
    Response: In the scenario described, the plan's supplemental 
coverage of non-covered Part D drugs does not preclude Medicaid from 
wrapping around these non-covered drugs and receiving FFP for such 
coverage. However, to the extent that the Part D plan provides coverage 
for the non-covered Part D drugs, Medicaid could only wrap-around (pay 
for amounts not covered by the plan for those non-

[[Page 4421]]

covered drugs) the plan's coverage. FFP would not be available for 
amounts which the plan covers as supplemental coverage.
    Comment: One commenter strongly recommends that CMS provide States 
with a template to take into account changes to the State plan that 
will result from implementation of Part D.
    Response: We do not plan to create a template to take into account 
changes to the Medicaid program because of the implementation of Part 
D. However, States should be aware that any changes it makes to 
Medicaid payment, eligibility, or coverage because of the impact of the 
new benefit must be reflected in the State's plan. A State that does 
not amend its Medicaid State plan to reflect changes to its Medicaid 
program risks losing FFP.
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 section 1935 (e)(3) 
of the Act. Proposed Sec.  423.907 contained the provisions explaining 
the territories' submittal of plans and the grant funding.
    Comment: One commenter expressed concern that low-income Medicare 
beneficiaries in Puerto Rico will have no incentive (due to the rich 
prescription drug benefit through the Health Reform program), and no 
means, to enroll in a PDP because the low-income subsidy program is not 
available to the territories.
    Response: While residents of the territories are not eligible for 
the low-income subsidy, the MMA provides that the territories receive 
an increase in the grants paid under section 1108 of the Act if the 
territory has a plan approved by the Secretary for providing medical 
assistance for Part D drugs. The territories may choose to use these 
funds to pay Part D premiums and cost sharing for low-income residents. 
The territories may also design their programs to wrap around the Part 
D benefit, thus providing an incentive for Medicare beneficiaries to 
enroll in the Part D program
    Comment: One commenter asked that CMS not require the same 
financial and statistical reporting for the funds provided to the 
territories added to the grant under section 1108 of the Act so as not 
to make the grant administratively burdensome.
    Response: Reporting requirements are administrative in nature and 
are not addressed in this regulation. We will work with the territories 
to design reports that provide CMS with sufficient information to 
establish accountability without creating overly burdensome reports.
    Comment: One commenter believed that a multi-state PDP region 
including Puerto Rico will compromise the viability of the Medicare 
Part D program in that territory because of differences in language, 
culture, income, and cost structure between Puerto Rico and States.
    Response: We appreciate the commenter's concerns. The actual 
designation of the regions has been announced by CMS and is listed on 
our website.
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 percentage of State contributions to Medicare Part D 
funding is reduced over a ten-year period.
    The statute directs, and we specified, in Sec.  423.910(b)(2) that 
State payments will 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 proposed 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 comprehensive Medicaid 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 comprehensive 
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 
comprehensive 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 proposed 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 will 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 will 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 will 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 (NHE) projections). 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 as described in 
423.104(d)(5)(iv). We will provide

[[Page 4422]]

further detail regarding the sources of data to be used and how the 
annual percentage increase will be determined via operational guidance 
to States.
    The monthly State contributions for each year, beginning in January 
of 2006, will 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 will 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 proposed 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 
specified 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 specified 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 will make contributions only on behalf of Medicare 
beneficiaries who would otherwise be eligible for outpatient 
prescription drug benefits under Medicaid. States will 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 
individual for purposes of the baseline calculation, we needed to 
define it in a manner that would permit the baseline calculation to 
operate. Therefore, we proposed that Medicaid eligible individuals who 
receive comprehensive benefits including drug coverage under Medicaid 
and are also covered under Medicare Part A or Part B are to be full-
benefit dual eligible individuals for purposes of calculating the 
baseline. The proposed definition of full-benefit dual eligible 
individuals excluded Medicare beneficiaries who receive Medicaid drug 
coverage under a section 1115 Pharmacy Plus demonstration.
    As we specified 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 (PDSC) factors are 
identified below in Table S-1.

                                Table S-1
 Annual Phased--Down Percentages of State Contributions to Medicare Part
                          D Drug Benefit Costs
------------------------------------------------------------------------
                Year                           State 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
------------------------------------------------------------------------

    Comment: A few commenters expressed concern that the 2003 baseline 
per full-benefit dual eligible drug cost would fail to reflect cost 
containment measures by States. The commenters believed that the 
legislative reference to the use of ``other available data'' provides 
for a more expansive view of adjustments. Proposed changes included 
allowing States to submit documentation of the effects of cost 
containment measures to periodically re-base the cost, and the use of 
2004 as a base year.
    Response: The legislation specifies that we inflate the 2003 base 
year full-benefit dual eligible per capita drug costs for use in 2006 
using the NHE projections for the years involved. This inflation factor 
should take into account changes in the rate of growth of per capita 
drug costs. Any effort to measure the differential effect of State cost 
containment against the specified inflation factor could be imprecise 
and would introduce new reporting requirements. We do not support the 
use of optional ad hoc State-reported data, which will be 
inconsistently defined, and would be applied unevenly to States. The 
use of a later base year, such as 2004, is precluded by the legislative 
language.
    Comment: One commenter recommends that the regulations allow State-
specific methods for the estimated actuarial value of capitated 
prescription drug benefits, allowing States to use their data for the 
dual eligible population.
    Response: Since we believe the data available on managed care drug 
costs will vary by State, the final rule provides for use of a range of 
sources of managed care drug cost data.
    Comment: One State commenter believes it may pay a disproportionate 
share in its phase-down contribution for less comprehensive coverage 
for its full-benefit dual eligible individuals.
    Response: We believe that the Medicare drug benefit will pay, on 
average, more than 96 percent of full-benefit dual eligible 
individuals' drug costs. Additionally, about 1.5 million of these full-
benefit dual eligible individuals are institutionalized, meaning they 
will not pay any premiums, deductibles or co-payments. While the 
nominal cost sharing of the Medicare prescription program is slightly 
higher than the cost-sharing under Medicaid, Medicare provides 
catastrophic drug coverage, offering additional protection to this 
vulnerable population. We further believe that Medicare Part D is 
likely to result in more stable and consistent prescription drug 
coverage for low-income Medicare beneficiaries since Medicaid is not a 
secure source of drug coverage, as eligibility is subject to meeting 
certain income and resource requirements. As a result of these 
requirements, Medicaid may only provide intermittent drug coverage to 
the full-benefit dual eligible individual.
    Comment: One State commenter asked how member months are being 
counted, how people in MA plans will be counted for the phased-down 
payment, and whether individuals from their family planning waiver are 
included.
    Response: For the phase-down baseline, we expect to count every 
MSIS reported enrollment for each month for individuals who are coded 
as full-benefit dual eligible individuals. MA plans have no effect on 
the baseline calculations, although we will distinguish between 
Medicaid individuals in comprehensive plans and those not in 
comprehensive plans. This distinction is necessary to establish the 
weighting between the fee-for-service and capitated populations in the 
baseline calculations. The only full-benefit dual eligible enrolled 
individuals who are excluded are those in Pharmacy Plus demonstrations 
and drug-only 1115 demonstrations. Those

[[Page 4423]]

in family planning demonstrations would not be excluded if they 
received benefits beyond drug coverage.
    Comment: One commenter requested clarification on the process to 
inflate the baseline per-capita drug cost after 2006. The legislation 
specifies the use of the actual Part D costs for the 12 months prior to 
July of each year. For 2007 there will not be a 12-month history from 
2006 available.
    Response: We will provide further detail regarding the sources of 
data to be used and how the annual percentage increase will be 
determined via operational guidance to States.
    Comment: A few commenters expressed concern about the use of the 
NHE factor to inflate the baseline to 2003, and suggested that we use 
either State-specific numbers, or the total public sector number.
    Another commenter asked clarification as to which specific NHE 
projection will be used for the phase-down calculation.
    Response: The legislation is clear in directing the use of the NHE 
estimate for the whole country as the basis for this inflation factor. 
That source provides very limited options for use. We believe the 
overall per capita drug cost numbers are the most consistent with the 
intent of the law. The specific NHE projection factor to be used will 
be discussed in operational guidance.
    Comment: One commenter expressed concern that the 2003 base year 
data may not be representative of drug utilization experience. The 
commenter proposes using pooled data from 2001, 2002, and 2003 to 
obtain a utilization estimate. The commenter also expressed concern 
over the use of quarterly MSIS dual eligibility codes to establish 
monthly spending and enrollment base numbers.
    Response: We believe that this proposal would introduce significant 
additional problems associated with the trending forward of that 
significantly older base data. This proposal also conflicts with the 
legislative language, which clearly specifies the use of the calendar 
year 2003 data. We will address the use of quarterly dual eligibility 
indicators in MSIS by applying an algorithm that incorporates both 
prior and current quarter values.
    Comment: A few commenters proposed that States be allowed to submit 
drug rebate dollar amounts that reflect only the full-benefit dual 
eligible population. They propose that these numbers be used instead of 
the aggregate rebate and drug payment amounts reported on the CMS-64 
report.
    Response: While this proposal would allow the rebate adjustment to 
correspond more closely to the population affected by the PDSC, this is 
inconsistent with the legislative language, and would require that we 
impose new and complex reporting requirements on the States. We do not 
support the use of optional ad hoc State-reported data, which will be 
inconsistently defined, and would be applied unevenly to States.
    Comment: A few commenters proposed that we allow States to submit, 
at their option, rebate collections after 2003 for rebate amounts 
identified in 2003. These additional rebate amounts would be used to 
reduce the base year drug costs in the baseline calculations.
    Response: This comment presumes that the legislation intended that 
we use base year data for rebates on an incurred, rather than paid, 
basis. This is inconsistent with the definition of the CMS-64 
referenced by the legislative language. Simply adding incremental 
collections of 2003 incurred rebates would inappropriately inflate the 
rebate totals, since the law does not provide for removal of 2003 
rebate collections incurred in 2002. There is no standardized reported 
data that would allow creation of an incurred rebate amount, and no 
indication in the legislation that this was intended. We believe use of 
optional State-reported post-2003 rebate collections would introduce 
inconsistent treatment of States.
    Comment: One commenter recommended that States that provide 
pharmacy-only benefits under an 1115 demonstration to a subset of its 
population be excluded from the definition of full- benefit dual 
eligible individual, since these programs generally provide the same 
benefits as offered by Pharmacy Plus Programs.
    Response: We agree with this commenter and have clarified the 
definition of full-benefit dual eligible individual at Sec.  423.902 to 
specifically exclude those individuals enrolled in 1115 demonstration 
programs that provide pharmacy-only benefits to a portion of its 
demonstration population.
    Comment: One State commenter did not object to including its 
Medicare beneficiaries who are enrolled in its pharmacy assistance 1115 
program in the baseline expenditures, but believes it is inappropriate 
to count them as part of the future Medicaid enrolled population that 
is multiplied by the trended per person cost as part of the formula.
    Response: As indicated above, we will not be including these 
populations in the baseline expenditures. In order to remain consistent 
with the definition of the baseline and monthly billing counts, we 
would also exclude this population from the future Medicaid enrolled 
population.
    Comment: One State commenter recommends CMS use the First Data Bank 
generic sequence number in lieu of the NDC when determining the 
excluded list of drugs used in establishing the State's phase-down 
contribution.
    Response: We are using the NDC because it is the only available 
identifier on the MSIS drug claim record.
    Comment: One commenter proposed that we allow States to submit 
auditable reports of reductions in base year drug payments due to 
judicial settlements with drug manufacturers and other accounting 
adjustments to base year cost.
    Response: This comment presumes that the legislation intended that 
we use base year data on an incurred, rather than paid, basis. This is 
inconsistent with the definition of the MSIS and CMS-64 data sources 
referenced by the legislative language. Simply adding incremental 
collections of 2003 settlements would improperly reduce the total 
payments, since it does not provide for removal of 2003 settlements 
incurred during 2002. There is no standardized reported data that would 
allow creation of an incurred settlement amount, and no indication in 
the legislation that this was intended. The legislation directs that we 
derive the base year costs from the reported MSIS drug claims data, and 
there is no viable way to associate these settlement amounts with those 
individual drug claims; nor can these settlements be accurately 
associated with the target population on an aggregate basis. We believe 
use of optional State-reported post-2003 settlements would introduce 
inconsistent treatment of States.
    Comment: One commenter proposed that full-benefit dual eligible 
individuals be enrolled in plans providing a formulary comparable to 
the existing Medicaid coverage, and several commenters proposed that 
that the PDSC payment exclude any payments for drugs outside the Part D 
formulary.
    Response: There is no provision in the legislative language to 
ensure equivalency of drug formularies under Medicaid dual eligible and 
Part D coverage. The PDSC payments are based on actual Medicaid program 
payment levels, and are not linked to the Part D formularies.
    Comment: One commenter proposed that 100 percent State funded drug 
benefits for drugs not in the Part D

[[Page 4424]]

formulary be excluded from the PDSC payment.
    Response: The baseline is specified to be the actual Medicaid drug 
payment experience for each State based on MSIS data which does not 
include State-only programs. The legislation does not provide for 
adjustments based on subsequent State choices to offer drug coverage 
that wraps around the Part D coverage. There is no provision for 
Medicaid or other State programs to receive Federal matching or an 
exclusion from PDSC payment for drugs provided beyond those excluded 
drugs. The PDSC payments are based on the savings from historic State 
utilization levels, and do not guarantee equivalence in coverage 
formularies.
    Comment: One commenter expressed concern about drugs to be excluded 
from the baseline.
    Response: We have developed a list of drug codes for drugs to be 
excluded from the baseline based on the Part D exclusions in the 
legislation.
    Comment: A few commenters asked that we clarify the start date and 
ongoing due dates for the PDSC payments.
    Response: The final regulatory language includes this information. 
The ongoing due dates will parallel those for the Medicare Part B 
premium buy-in process.
    Comment: One commenter requested that we move the due date for 
State notification of baseline amounts from October 15 to August 15 
prior to the payment year. This would allow States more budgetary lead 
time.
    Response: The legislation requires that the first year's baseline 
data be provided to States no later than October 15, 2005 for the 2006 
payment year. In order to help support State budgeting needs, it is our 
intent to provide this information to States as soon as it can be 
developed. However, the timing to produce preliminary numbers will be 
contingent on timely State reporting of needed MSIS data.
    In regard to years subsequent to 2006, the only changes to the base 
number will be the inflation factor and the Federal matching rate. 
States should be able to develop reasonably accurate estimates for 
later years based on the prior year's base.
    Comment: One commenter expressed concern that if we require State 
payment by check or electronic funds transfer, payment could conflict 
with State-legislated caps. The commenter proposed that we allow a 
range of payment options comparable to the Medicare buy-in process.
    Response: It is our intent, as evidenced by our clarification of 
the final regulatory language, to mirror the payment process for the 
buy-in process set forth in a Federal Register notice published on 
September 30, 1985 at FR 39784. This process includes funds transfers, 
with a provision that any late payments will be offset against the 
Medicaid grant with appropriate interest accrual. In this case, the 
Medicaid offset would be transferred to the Medicare Prescription Drug 
Account to complete the transaction. Since failure to pay is covered in 
this notice, we have removed text at Sec.  423.910(b)(3) that was 
included in the proposed rule.
    Comment: A few commenters requested that we include a process for 
State appeal of the PDSC payment amount.
    Response: The legislation does not contain a specific provision for 
an appeal process. However, it requires CMS to disallow from the 
Federal financial participation in the State's Medicaid expenditures 
any amounts which the State should have paid under section 1935 of the 
act. Because this is a disallowance of Medicaid funds, any State 
disagreements with the phased-down billing would have to be handled 
through the existing disallowance process under Sec.  430.42.
    Comment: A few commenters expressed concerns about the need for 
more specific instructions for reporting monthly enrollment to CMS, and 
proposed the use of the MSIS.
    Response: The final regulation includes more specific information 
on this reporting process. CMS has evaluated this option and has 
determined that the change of MSIS from quarterly to monthly reporting 
would represent an undue hardship to States. The enrollment reporting 
file would also require the addition of fields to address other program 
needs, such as subsidy determinations.
    Comment: One commenter requested more detail on the process to be 
used to establish the actuarial value of the capitated prescription 
drug benefits for full-benefit dual eligible individuals in 
comprehensive managed care plans.
    Response: We have provided clarification in the final regulation at 
Sec.  423.902, based on feedback obtained from State workgroups 
addressing this issue.

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

    In the August 2004 proposed rule, subpart T discussed several other 
regulatory areas affected by the provisions implementing the Medicare 
prescription drug benefit. This section discussed the revised 
requirements for physician self-referral prohibition, cost-based HMOs, 
PACE organizations, and Medigap policies.
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 of the physician) has a 
financial relationship (ownership, investment, 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 DHS under section 1877 of the 
Act. As a result of the Medicare prescription drug benefit provisions, 
we proposed 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. In 
other words, under the proposed definition, physician referrals for 
outpatient prescription drugs covered under Part D would be subject to 
the physician self-referral prohibition. We have finalized this 
proposal without substantive change because we believe that referrals 
for Part D drugs are subject to the same risk of over-utilization 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.
    Comment: We received a number of comments, which supported our 
proposal. Some of the commenters cited analyses, which supported our 
proposed action.
    Response: We appreciate the support given to our proposal. We 
believe that applying the physician self-referral provision to 
referrals for either Part B or Part D drugs will reduce the potential 
for over-utilization and other program abuse.
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 
individuals in the same manner as such rules apply to the offering of

[[Page 4425]]

qualified prescription drug coverage under MA-PD local plans. As a 
result, we proposed revising Sec.  417.440(b) of this chapter to 
specify that a cost-based HMO or CMP may offer qualified prescription 
drug coverage. We also proposed adding new Sec.  417.534(b)(4), 
specifying 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. After 
reviewing comments and responding (below), we are adopting the proposed 
policy as final.
    In the proposed rule, we incorrectly stated at 69 FR 46753 that 
cost-based HMOs and CMPs would offer qualified prescription drug 
coverage to Part D eligible enrollees under Sec.  417.440(b)(1)(iii) as 
a basic benefit. We clarify in this final rule our belief that such a 
reading would not comply with the clear language of section 
1876(c)(2)(A)(ii)(I) of the Act which provides that cost-based HMOs and 
CMPs may only offer non-Part A/B Medicare benefits as optional 
supplemental benefits. In this final rule, we therefore amend Sec.  
417.440(b)(2) to make the requirement clear that cost-based HMOs and 
CMPs may offer qualified prescription drug coverage to Part D eligible 
enrollees only as an optional supplemental benefit.
    Section 1860D-21(e)(2) of the Act stipulates that section 1876 
reasonable cost contractors offering qualified prescription drug 
coverage may only offer such coverage to individuals enrolled in its 
reasonable cost contract, or individuals who receive services covered 
under Medicare Parts A and B through its reasonable cost contract. 
After reviewing comments and responding (below), we are adopting the 
proposed policy as final. However, it is important to note that the HMO 
or CMP offering the cost plan is free to also apply to be a PDP sponsor 
and may, if approved, then offer a separate Part D plan to Part D 
eligible individuals enrolled in original Medicare who are not 
enrollees of its cost plan.
    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.
    We proposed that 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 local 
plans, namely that we will waive any requirement otherwise applicable 
under this part for section 1876 reasonable cost HMOs and CMPs to the 
extent such requirement conflicts with or is duplicative of a 
requirement under part 417, or such waiver is necessary to promote 
coordination of the Part D benefits with the benefits offered under 
part 417. We discuss section 1860D-21(c) of the Act and this waiver 
authority in subpart J of the preamble. We invited comment on whether 
there are any Part D requirements otherwise applicable to the offering 
of qualified prescription drug coverage under MA-PD local plans that 
would be uniquely problematic to implement for section 1876 reasonable 
cost HMOs and CMPs. After reviewing and responding to comments (below), 
we have not identified any additional Part D requirements that will be 
uniquely problematic for section 1876 reasonable cost HMOs and CMPs to 
implement. Nevertheless, in Sec.  423.458(d) of the final rule, we 
provide for a process that will allow for waiver of Part D provisions 
for cost HMOs and CMPs that offer qualified prescription drug coverage 
under Part D to the extent that the provision duplicates, or is in 
conflict with provisions otherwise applicable to the section 1876 cost 
HMO/CMP under section 1876 of the Act, or when a waiver is necessary to 
promote coordination of the Part D benefits with the benefits offered 
under part 417.
    Comment: Some commenters suggested that we make clear that once a 
cost plan offers Part D that it becomes an MA-PD plan and that some (or 
all) Part C provisions then supersede or replace section 1876 (and part 
417 of title 42 CFR) provisions as controlling on such a cost plan. For 
instance, some commenters suggested that the State preemption authority 
in section 1856(b)(3) of the Act related to MA plans, and incorporated 
by reference in section 1860D-12(g) of the Act, should be interpreted 
to apply to the entire benefit package that a cost HMO/CMP offers and 
not just the prescription drug coverage portion of the package.
    Response: We do not agree. We interpret section 1860D-21(e)(1) of 
the Act as providing that only those provisions of Part D and related 
provisions of Part C pertaining to the offering of qualified 
prescription drug coverage by a MA-PD local plan would apply to the 
offering of such coverage by a cost HMO or CMP. Consequently, the 
provisions of Parts C and D, including the preemption provisions under 
sections 1860D-12(g) and 1856(b)(3) of the Act, would not apply to 
benefits offered under a reasonable cost contract other than any 
qualified prescription drug coverage. In other words, the section 1876 
cost-based HMO/CMP does not gain preemption protection related to the 
``entire benefit package'' it offers. Accordingly, the preemption 
authority at section 1860D-12(g) of the Act does not, in and of itself, 
``immunize'' the cost HMO/CMP from State laws with respect to the 
benefits the cost HMO/CMP offers under the authority in section 1876 of 
the Act.
    Comment: One commenter said that section 1860D-21(e) of the Act 
says that a cost HMO/CMP that offers qualified prescription drug 
coverage to its members is deemed to be an MA-PD local plan. This 
commenter suggested that CMS should allow a cost plan that elects to 
offer qualified prescription drug coverage to its Part D eligible cost 
enrollees to apply related Part C provisions to those members.
    Response: We do not necessarily agree. Section 1860D-21(e) of the 
Act extends to cost plans provisions of Part C applicable to MA-PD 
local plans to the extent they relate to the offering of qualified 
prescription drug coverage. Section 1860D-21(e) of the Act, however, 
does not deem a reasonable cost contract offering qualified 
prescription drug coverage a MA-PD local plan for all purposes. 
Consequently, those provisions applicable to MA-PD local plans that are 
unrelated to the offering of qualified prescription drug coverage would 
not apply to reasonable cost contracts. In other words, it is only in 
this limited way that a cost plan offering qualified Part D coverage is 
deemed to be an MA-PD.
    Comment: One commenter suggested modifying Sec.  417.436 to provide 
that that the requirement at Sec.  417.436(a)(5) that a cost HMO or CMP 
disclose to its enrollees that they may receive services through any 
Medicare provider or supplier has no effect with respect to the 
offering of qualified prescription drug coverage under the reasonable 
cost contract.
    Response: We believe that Sec.  423.458 is clear in providing that 
rules related to Part D coverage, whether offered by a PDP or an MA-PD, 
are provided in the part 423 regulations. Therefore, it is not 
necessary to specifically say in the part 417 regulations that a 
specific part 423 regulation applies. Section 423.128(b) describes the 
specific information that PDPs and MA-PDs must disclose related to 
their Part D benefit offerings, which includes ``a disclosure of out-
of-network

[[Page 4426]]

coverage consistent with Sec.  423.124(a)''--see Sec.  423.128(b)(6).
    Comment: One commenter asked that we clarify that a legal entity 
that operates a Medicare cost plan may operate as a PDP sponsor as long 
as it meets all the relevant licensure and other requirements.
    Response: We concur and have clarified this point in our preamble 
discussion in this subpart.
    Comment: One commenter asked us to clarify that the definition of 
service area for cost HMOs/CMPs is found at Sec.  417.1, while the 
definition for MA plans is found at Sec.  422.2. The commenter asked us 
to clarify that the reference to service areas for MA-PD plans in Sec.  
423.120(a) had no applicability to cost plans.
    Response: We agree with the commenter that the reference to service 
area of an MA-PD plan in Sec.  423.120(a) does not apply to cost HMOs/
CMPs that offer Part D coverage. The effect of section 1860D-21(e)(2) 
of the Act is not to ``deem'' that a cost plan offering qualified Part 
D coverage actually becomes an MA-PD local plan. Rather, it is that the 
rule applicable to the provision of Part D coverage by the cost plan to 
enrollees of the cost plan is similar to the provision of Part D 
coverage by MA-PD local plans. As we provide in subpart J of this rule 
at Sec.  423.458(d), we will waive provisions in Sec.  423.120(a) to 
the extent they duplicate or conflict with section 1876 provisions 
applicable to cost plans under section 1876 of the Act or part 417 of 
title 42 CFR, or to the extent waiver is necessary to improve 
coordination of Part D benefits offered under the plan with the other 
benefits offered by the cost plan. Although we do not specifically 
mention such a waiver at Sec.  423.120(a) for a cost HMO/CMP offering 
qualified prescription drug coverage, such a waiver is available, to 
the extent it would meet the conditions for waiver in Sec.  423.458(d).
    Comment: One commenter asked if the disclosure requirements in 
Sec.  423.128, to the extent they were more stringent than the 
disclosure requirements under section 1876 of the Act and Sec.  417.436 
of the title 42 CFR, would only apply to the Part D portion of a cost 
plan's benefit offerings.
    Response: To the extent that a ``coordination'' waiver has not been 
granted under Sec.  423.458(d), the disclosure requirements in Sec.  
423.128 would apply to the Part D portion of a cost plan's benefit 
offering.
    Comment: One commenter suggested that section 1860D-21(e) of the 
Act provides to us clear authority to allow us to apply ``deeming'' 
authority in Sec.  423.165 to cost HMOs/CMPs offering qualified Part D 
coverage to cost enrollees, which allows us to deem an entity as 
meeting certain requirements under this part if the entity is fully 
accredited (and periodically reaccredited) by a private national 
accreditation organization approved by us.
    Response: We agree that section 1860D-21(e) of the Act extends the 
deeming authority under Sec.  423.165 to section 1876 cost HMOs/CMPs, 
provided the provisions of Sec.  423.165 are not otherwise waived under 
Sec.  423.458(d) with respect to section 1876 cost HMOs/CMPs.
    Comment: One commenter asked us to clarify that the waiver 
authority in Sec.  423.458(c), which permits us to waive or modify any 
requirement under this part that hinders the design of, the offering 
of, or the enrollment in an employer- or labor-sponsored group 
prescription drug plan, would also apply to section 1876 cost HMOs/
CMPs.
    Response: We responded to a similar comment in the subpart J 
preamble. In short, we do not interpret the statute as permitting us to 
apply our waiver authority related to employer- or labor-sponsored 
group coverage as extending to the Medicare Part A and B benefits 
offered by a Medicare cost plan.
    Comment: A few commenters asked if section 1876 cost plans that did 
not offer qualified prescription drug coverage would be permitted to 
offer non-qualified prescription drug coverage. One commenter also 
asked if such coverage would be creditable coverage under Part D 
fearing that such cost members would be penalized for electing Part D 
late.
    Response: Section 1876 reasonable cost plans that do not offer 
their members qualified prescription drug coverage may offer non-
qualified prescription drug coverage to their members, but only as an 
optional supplemental benefit and in accordance with Sec.  
417.440(b)(2). Such coverage will be considered creditable prescription 
drug coverage only if it meets the standards set forth in Sec.  
423.56(a) of the final rule.
    Comment: One commenter asked if we would permit cost plans to waive 
Part A/B and to apply this waiver to the Part D premium that would 
otherwise be imposed on cost plan members.
    Response: Such a waiver will not be permitted. A cost plan must 
claim its reasonable costs for services provided under the plan that 
are covered under Parts A and B in accordance with the applicable 
requirements of part 417 of this chapter. If the cost plan elects to 
provide its enrollees qualified prescription drug coverage under Part 
D, payment for such benefits will be governed by the payment rules 
under this part. In other words, the financing of services provided 
under the cost plan that are covered under Parts A and B is separate 
from the financing of any qualified prescription drug coverage provided 
under the plan. Please see Sec.  417.534(c) where we clearly state that 
``no costs related to the offering or provision of Part D benefits will 
be reimbursed under this Part [417].'' To the extent that we permitted 
waiver of A/B to apply to reduction in Part D premiums, dollars 
applicable to part 417 would flow to Part D, and therefore such a 
proposal cannot be allowed. If a cost plan wants to reduce cost-sharing 
values for A/B services as currently permitted, it may continue to do 
so. However, the revenue thus forgone related to benefits offered under 
part 417 cannot be passed over to reduce premiums required under part 
423.
    Comment: One commenter asked if the waiver of State premium taxes 
and the preemption authority granted under section 1860D-12(g) of the 
Act to PDP sponsors and prescription drug plans would also apply to 
cost plans offering qualified Part D. The commenter suggested that such 
a waiver and such authority should also be extended to the cost plan's 
A/B benefit offerings under part 417.
    Response: We have previously provided guidance to cost plans 
related to State premium taxes. As we have previously indicated, we do 
not believe that States can impose a premium tax on the reasonable 
costs that we reimburse cost plans for covered Medicare Part A and B 
services. Such payments by us do not technically represent a premium so 
much as they represent reimbursement, under the Medicare program, for 
benefits to which Medicare enrollees are entitled. On the other hand, 
we have also said that premiums changed to cost plan members for the 
actuarial value of fee-for-service deductibles and coinsurance are 
properly construed as premiums and would be correctly subject to State 
taxes. On the other hand, for premiums related to the Part D offering 
of a cost plan, there is specific preemption and waiver of State taxes. 
See the subpart J preamble for an additional discussion on this issue.
3. PACE Organizations Offering Part D Coverage
a. Overview
    Section 1860D-21(f)(1) of the Act provides that a PACE program may 
elect to provide qualified prescription drug

[[Page 4427]]

coverage to its enrollees who are Part D eligible individuals.
    Currently, sections 1894 and 1934 of the Act require PACE 
organizations to provide enrollees with all medically necessary 
services including prescription drugs, without any limitation or 
condition as to amount, duration, or scope and without application of 
deductibles, co-payments, coinsurance, or other cost sharing that would 
otherwise apply under Medicare or Medicaid. Up until January 1, 2006, 
payment for drugs covered under Medicare Parts A and B is included in 
the monthly Medicare capitation rate paid to PACE organizations for 
Medicare beneficiaries, while payment for outpatient prescription drugs 
is included as either a portion of the monthly Medicaid capitation rate 
paid to PACE organizations for Medicaid recipients, or as a portion of 
the amount equal to the Medicaid premium paid by non-Medicaid 
recipients.
    The MMA alters the payment structure for Part D drugs for PACE 
organizations by shifting the payer source for PACE enrollees who are 
full-benefit dual eligible individuals (as defined under section 
1935(c)(6) of the Act) from Medicaid to Medicare, and in part from the 
beneficiary to Medicare in the case of non-full-benefit dual eligible 
individuals who elect to enroll in Part D.
    Consequently, in order for PACE organizations to continue to meet 
the statutory requirement to provide prescription drug coverage to 
their enrollees, and to ensure that they receive adequate payment for 
the provision of Part D drugs, from January 1, 2006 forward, we 
explained in the proposed rule that PACE organizations would need to 
offer qualified prescription drug coverage to their enrollees who are 
Part D eligible individuals. We also indicated that prescription drug 
coverage for PACE enrollees who are ineligible for Part D (Medicaid-
only enrollees) would continue to be funded by the State in which each 
PACE organization is located through its monthly capitation payment to 
the PACE organization.
    Section 1860D-21(f)(1) of the Act provides that in the case of a 
PACE program that elects to provide qualified prescription drug 
coverage to its enrollees who are Part D eligible individuals, the 
requirements under this Part apply to the provision of the coverage in 
a manner that is similar to the manner in which the requirements apply 
to the provision of such coverage under MA-PD local plans. Furthermore, 
the PACE organization may be deemed to be MA-PD local plan.
    We believe that the Congress did not intend to alter the way in 
which PACE services, including outpatient prescription drugs, are 
currently being provided to enrollees. Therefore, we proposed that PACE 
organizations not be deemed to be MA-PD local plans. Rather, we 
proposed that PACE organizations would be treated in a manner that is 
similar to an MA-PD local plan for purposes of payment under Part D for 
qualified prescription drug coverage provided under their PACE plans. 
We stated that we believed this approach was consistent with section 
1894(d)(1) of the Act, which provides that payments will be made to 
PACE organizations in the same manner and from the same sources as 
payments are made to a MA organization.
    PACE organizations have a longstanding history of providing 
prescription drug coverage under the authority of sections 1894 and 
1934 of the Act and 42 CFR part 460. Therefore, many of the new Part D 
requirements are duplicative of, conflict with, or do not promote 
coordination with, the PACE benefit. For these reasons, many of the 
Part D requirements will be waived for PACE organizations. A background 
of the PACE model is provided below, followed by a discussion of Part D 
administrative and payment related requirements as they relate to PACE 
organizations.
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 currently includes all Medicare benefits under Parts A 
and B, all services covered under the Medicaid State plan, and any 
other service(s) deemed necessary by the PACE interdisciplinary team.
    The PACE benefit also currently includes all outpatient 
prescription drugs, as well as over-the-counter medications that are 
indicated by the participant's care plan. Thus, all PACE organizations 
currently provide at least the equivalent of qualified prescription 
drug coverage as described under subpart C.
    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. Currently, 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 the source of payment. 
Sections 1894(b)(1)(A)(i) and 1934(b)(1)(A)(i) further clarify that 
PACE programs cannot charge deductibles, co-payments, coinsurance, or 
other cost-sharing responsibilities to PACE participants. Consequently, 
a PACE organization may not charge its participants any cost sharing.
    The PACE Medicare and Medicaid regulations are located in 42 CFR 
part 460. As directed by sections 1894 and 1934 of the Act, these 
regulatory requirements are a blend of MA and Medicaid managed care 
requirements, as well as requirements from the PACE Protocol that was 
created by On Lok, Inc. under a demonstration waiver program with the 
Secretary. Thus, although certain PACE requirements are the same or 
similar to MA and Medicaid managed care requirements, many are unique 
to PACE.
    We received 11 formal letters of comment from industry 
representatives, PACE organizations, States, and contractors. Most 
commenters identified multiple concerns, regarding the Part D 
administrative and payment related provisions in relation to PACE. Many 
commenters also expressed support for the waivers we proposed, as well 
as recommended that we waive additional Part D rules because they 
conflict with, duplicate, or do not promote coordination with, the PACE 
statute and regulations. We thank the commenters who submitted comments 
on waiver issues, and we have summarized all of the comments below. 
However, as explained below, we have chosen to finalize only our 
proposed waiver of section 423.265(b), which would have required PACE 
organizations planning to offer Part D prescription drug plans to 
submit bids and supplemental information no later than the first Monday 
in June of each year. We will issue further guidance that will list 
additional Part D provisions that we will waive for PACE organizations. 
In issuing such guidance, we will take into consideration all of the 
comments we received regarding waivers.
c. Application of Payment Related Part D Requirements to PACE 
Organizations
    In using the term, payment related requirements, we are referring 
to

[[Page 4428]]

subparts F, G, and P of this regulation concerning submission of bids 
and monthly beneficiary premiums, plan approval, payments to PACE 
organizations for qualified prescription drug coverage, and premium and 
cost-sharing subsidies for low-income individuals.
    In accordance with subpart F, we proposed that each 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 have occurred in a similar manner as for traditional Part 
D plans. In accordance with Sec.  423.265(c)(3) of this regulation, 
Part D bids were to be prepared according to CMS guidelines on 
actuarial valuation and actuarially certified.
    We also proposed that plans would use qualified actuaries to 
prepare their bids in accordance with these principles. However, we 
were concerned that requiring small PACE organizations to independently 
contract with actuaries would be costly and burdensome. In order to 
minimize their cost, we suggested that PACE organizations collectively 
contract with an actuary to develop the methodology for establishing a 
bid, but stated that each bid would need to be actuarially certified.
    Finally, we indicated that since PACE organizations are required to 
enroll Medicare-only individuals who meet PACE eligibility 
requirements, all PACE organization bids would be required to include 
the portion of the bid attributable to the cost of providing the 
enhanced alternative prescription drug coverage.
    In the proposed rule, we proposed policies addressing each of the 
three primary categories of PACE enrollees: individuals enrolled in 
Medicaid, but not Medicare (Medicaid-only); individuals enrolled in 
Medicare and Medicaid (Dual eligible individuals); and individuals 
enrolled in Medicare, but not Medicaid (Medicare-only).
    First, we indicated that prescription drug coverage for Medicaid-
only enrollees would continue to be funded by Medicaid through a 
portion of the monthly capitation rate paid to the PACE organization 
because these enrollees are ineligible to receive Part D prescription 
drug coverage.
    For dual eligible and Medicare-only PACE enrollees, we proposed 
that PACE organizations would offer enhanced alternative prescription 
drug packages with no enrollee cost sharing.
    For both dual eligible individuals and Medicare-only enrollees, we 
proposed that we would pay PACE organizations the direct subsidy, 
calculated under Sec.  423.329(a)(1). In addition, the PACE 
organization would receive low-income premium and subsidy payments or 
partial subsidy payments for those enrollees who qualify for the low-
income subsidy. We noted that dual eligible beneficiaries would be 
deemed eligible for the full low-income subsidy under Sec.  423.773(c), 
which included a premium subsidy not to exceed the basic premium for 
coverage under the Part D plan selected by the beneficiary, but no more 
than the greater of the low-income benchmark premium amount or the 
lowest beneficiary premium amount for a PDP offering basic prescription 
drug coverage in the PDP region where the beneficiary resides. To the 
extent a discrepancy occurred between the low-income premium amount and 
PDP or MA-PD plan's bid, Sec.  423.286(d)(1) of the proposed rule 
required beneficiaries to pay this amount as a premium which would have 
been established by the PDP or MA-PD plan during the bidding process. 
The PACE regulations, however, conflict with this Part D provision 
since they preclude a PACE organization from charging premiums to dual-
eligibles.
    In addition, Medicare-only enrollees would have been required to 
account for the additional cost of providing a prescription drug 
package to enrollees without the application of cost sharing. This 
amount would have represented the ``enhanced'' portion of the Part D 
premium. Because PACE organizations are not precluded from charging 
premiums to Medicare-only enrollees, it would have been permissible for 
them to pass on the responsibility for any payment discrepancy and 
enhanced alternative coverage to their Medicare-only enrollees in order 
to comply with Part D requirements. The premium amounts actually paid 
by enrollees would have varied depending on whether the enrollee was 
eligible for both Medicare and Medicaid or only eligible for Medicare 
and according to whether the enrollee qualified for the low-income 
premium subsidy.
    We were concerned about the impact on low-income dual eligible and 
Medicare-only PACE enrollees and requested public comment on other 
approaches to handling this premium differential.
    We also indicated in the proposed rule that reinsurance and risk 
corridor costs as defined in Sec.  423.308 would be applicable to PACE 
organizations and that PACE organizations would be required to track 
allowable costs for all Part D eligible PACE enrollees pertaining to 
reinsurance payments and under Sec.  423.336(c) pertaining to risk 
corridor amounts. Specifically, low-income subsidy amounts received by 
the PACE organizations would count towards the annual out-of-pocket 
threshold applicable to reinsurance.
    Comment: We received many bidding related comments. Some commenters 
requested that PACE organizations not be required to bid, others 
requested that PACE organizations be permitted to delay their bid 
submission until after the average benchmark premium and low income 
subsidy amounts are set, and others requested that we grant a waiver of 
the bidding requirements under subpart F of the proposed rule on behalf 
of PACE organizations. Commenters viewed the bidding process as 
administratively burdensome and costly to small scale PACE 
organizations that are currently able to effectively provide 
prescription drug coverage to enrollees under the authority of the PACE 
statutes and regulations.
    Commenters did not view the bidding approach outlined in the 
proposed rule to be consistent with the unique attributes of PACE, 
including existing PACE statutory and regulatory guidance for the 
provision of prescription drugs which precludes cost sharing and small 
PACE organization enrollment as compared with traditional Part D plans.
    Some commenters proposed a transition period during which PACE 
organizations would base their Part D bid on the amounts currently paid 
to them by Medicaid for drug coverage. These commenters recommend that 
we utilize the same data gathered under section 1935(c) of the Act as a 
basis for paying PACE organizations for the prescription drug costs of 
dually eligible individuals enrolled in PACE. Each State currently 
providing PACE as an option under its State plan would be required to 
reduce its capitation payment for dual eligible PACE enrollees by the 
amount of Medicaid expenditures for Part D covered drugs beginning 
January 2006. The difference between the old and new State payment 
amounts would be the basis for the PACE organizations' bids. 
Specifically, in States with more than one PACE organization, the bids 
of all PACE organizations located in the same State would be equal.
    These commenters indicate that this proposed bidding approach would 
not only be consistent with the current cost of providing prescription 
drug coverage to the PACE population, but it would be less 
administratively burdensome to small organizations. In addition, a 
transition approach would also allow

[[Page 4429]]

us, States, and the industry additional time to evaluate the impact of 
Part D on PACE and develop a payment approach consistent with the PACE 
model. The commenters proposed that the transition period continue 
until an evaluation of the impact of the Part D program on PACE could 
be completed or appropriate legislative or regulatory changes could be 
made to reconcile the conflicting provisions of the PACE and Part D 
requirements.
    Response: Because the MMA shifts responsibility for prescription 
drugs from Medicaid to Medicare for the full-benefit dual eligible 
beneficiaries, it will no longer be possible for PACE organizations to 
receive prescription drug payment on behalf of these beneficiaries from 
Medicaid. In addition, 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. As stated previously, PACE organizations will be 
treated in a manner that is similar to that of MA-PD local plans, 
including the bidding provisions of subpart F. We do not view the 
proposed transition period as ``similar to'' the requirements under 
which MA-PD plans will operate. In addition, section 1860D-21(f)(3) of 
the Act implies that PACE organizations will submit bids by indicating 
that PACE organizations bids will not be included in national average 
benchmark amounts. We do not have the statutory authority to waive the 
Part D bidding requirement. Thus, PACE organizations will be required 
to submit bids in accordance with subpart F.
    Comment: Many commenters expressed concern that requiring PACE 
plans to bid, and basing premium and subsidies on MA-PD bids rather 
than PACE bids will create an unlevel playing field for PACE.
    Commenters were concerned that the small size of PACE organizations 
will hinder their ability to achieve volume related price breaks from 
drug manufacturers that may be available to the larger Part D plans. 
Thus, PACE organization Part D bids will be higher than those of 
traditional Part D plans. Because PACE organizations primarily serve 
dual eligible individuals with the exception of a few low-income 
Medicare-only enrollees, subsidy payments that accurately capture the 
cost of providing prescription drugs will be critical to the continued 
financial stability of PACE organizations. This importance is magnified 
by existing PACE statutory and regulatory provisions that preclude PACE 
organizations from imposing enrollee cost sharing upon any enrollee and 
from imposing premiums upon any Medicaid eligible enrollee. Thus, 
commenters believed that it was essential that the low-income premium 
and subsidy payments paid by us to PACE organizations on behalf of low-
income enrollees be comparable to the cost of providing the benefit.
    Response: We agree that PACE organizations differ from traditional 
Part D plans in terms of the number of enrollees. Thus, we do not view 
PACE organizations as closely comparable to traditional Part D plans 
for purposes of competition.
    We believe that the small size of PACE organizations will hinder 
their ability to achieve volume related price breaks from drug 
manufacturers that may be available to the larger Part D plans. Thus, 
PACE organizations' Part D bids will be higher than those of 
traditional Part D plans. The MMA addresses this key difference, 
specifically as it relates to payment in section 1860D-21(f)(3) of the 
Act by indicating that the bids of PACE organizations are not to be 
included in determining the standardized bid amount. Ironically, 
however, bids included in the computation of the standardized bid 
amount are directly related to subsidy payments made to all plans, 
including PACE organizations. Because PACE organizations primarily 
serve dual eligible individuals, with the exception of a few low-income 
Medicare-only enrollees, subsidy payments that accurately capture the 
cost of providing prescription drugs will be critical to the continued 
financial stability of PACE organizations. This importance is magnified 
by existing PACE statutory and regulatory provisions that preclude PACE 
organizations from imposing enrollee cost sharing upon any enrollee and 
PACE regulatory provisions that preclude PACE organizations from 
imposing premiums upon any Medicaid eligible enrollee. Thus, it is 
essential that the direct subsidy, as well as the low-income premium 
and subsidy payments paid by us to PACE organizations on behalf of low-
income, enrollees be comparable to the cost of providing the benefit.
    The MMA did not amend sections 1894 and 1934 of the Act and it is 
clear that Part D applies to PACE. We have determined that the 
conflicting PACE and Part D requirements related to beneficiary cost 
sharing and the PACE preclusion of charging any Medicaid eligible 
enrollee a premium would result in a significant Part D payment 
discrepancy to PACE organizations absent our intervention. As a result, 
we are considering the application of section 1894(d)(2) of the Act and 
Sec.  460.180(b)(5) of the PACE regulation authority which authorize 
the Secretary to adjust payment to PACE organizations based on ``other 
factors'' as appropriate. These adjustments will take into account the 
PACE preclusion of and the preclusion of charging any Medicaid eligible 
enrollee a premium. Additional CMS guidelines will be issued to PACE 
organizations following publication of this rule. These guidelines will 
outline the PACE/Part D payment methodology, including an appropriate 
payment adjustment applicable to PACE organizations. We believe that 
this guidance will minimize disruption to PACE organizations and their 
enrollees.
    Comment: We received public comment in support of our proposed 
waiver on behalf of PACE organizations of the bid submission deadline 
of no later than the first Monday in June for each Part D plan 
intending to offer a Part D prescription drug plan in the subsequent 
calendar year under Sec.  423.265(b).
    Response: As indicated in the proposed rule, a new PACE 
organization may take from 2.5 to 3 years to develop the capacity to 
offer PACE services, including capital expenditures associated with 
construction 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 our 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. Although 
we originally proposed that the bid submission deadline be broadly 
waived for all PACE organizations, we would like to clarify that we 
expect PACE organizations that are operational prior to the first 
Monday in June of each year to meet the bid submission deadline. 
However to the extent they are unable, we will waive the bid submission 
deadline for those organizations since PACE bids are not included in 
the computation of any average benchmark amount or low-income benchmark 
premium amount. In addition, we do not believe that it would be 
appropriate for a potential PACE organization that contracts with us 
after the June deadline to be unable to receive payment under Part D 
until the following year's June deadline is met and the bid has been 
approved. Therefore, the requirement of

[[Page 4430]]

Sec.  423.265(b) of this regulation will also be waived on behalf of 
potential PACE organizations which are not operational by the first 
Monday in June in order to promote coordination of benefits between 
Part D and PACE. As a result, new PACE organizations will be permitted 
to submit their Part D bids beyond the June deadline.
    Further discussion of Part D waivers on behalf of PACE 
organizations is included below.
d. Application of Administrative Related Part D Requirements to PACE 
Organizations
    In using the term, administrative related requirements, we are 
referring to requirements that pertain to subparts A, B, C, D, I, J, K, 
L, M, N, and O, of this regulation concerning general Part D 
provisions, eligibility and enrollment, benefits and beneficiary 
protections, cost control and quality improvement, compliance with 
State law and preemption by Federal law, coordination under Part D with 
other prescription drug coverage, application of procedures and 
contracts, the effect of a change of ownership or the leasing of 
facilities, grievances and appeals, coverage determinations, Medicare 
contract determinations, and sanctions.
    In the proposed rule we identified several administrative related 
Part D provisions that we intended to waive on behalf of PACE 
organizations.
    (1) Sections 423.48 and 423.128 of the proposed rule specified 
requirements for providing information about Part D and for the 
dissemination of plan information. These sections also indicated that 
plans would be required to provide information to CMS regarding 
benefits, formularies, premiums, , 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 indicated 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 indicated that including PACE information in the 
comparative brochure would be misleading. As a result, we proposed that 
the requirements for providing information about Part D and for the 
dissemination of plan information be waived on behalf of PACE 
organizations in order to promote the coordination of benefits between 
Part D and PACE.
    (2) 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 applied, 
the negotiated price requirement is already accounted for under part 
460. Therefore, we proposed a waiver of Sec.  423.104(g) in order to 
promote better coordination of benefits between Part D and PACE.
    (3) 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 proposed to 
waive this requirement in order to promote better coordination of 
benefits between PACE and Part D.
    (4) 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 funds away from patient care. Therefore, we proposed to 
waive proposed Sec.  423.120(c) under the authority of section 1860D-
21(c)(2) of the Act for PACE organizations to promote better 
coordination of benefits between Part D and PACE.
    (5) Section 423.124 of the proposed rule specified 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 applicable under network pharmacies.
    Under the current PACE regulations in Sec.  460.90(a) and Sec.  
460.100, PACE organizations are responsible for all prescription drugs, 
including those provided to any participants residing in long term care 
facilities, AI/AN participants, 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 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 proposed to waive Sec.  423.124 of the proposed 
rule for the reasons noted above.
    (6) Section 423.104(g)(2) of the 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 . It would be impractical to offer basic 
prescription drug coverage to PACE enrollees because stand-alone basic 
prescription drug coverage assumes beneficiary. Thus, we proposed to 
waive Sec.  423.104(g)(2) of the proposed rule to promote coordination 
of benefits between Part D and PACE.
    (7) 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 proposed 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.
    (8) Requirements associated with privacy, confidentiality, and 
accuracy of enrollees' records under Part D are included in Sec.  
423.136 of the proposed rule. 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

[[Page 4431]]

proposed Sec.  423.136. For the reasons noted above, we proposed to 
waive Sec.  423.136. We note that we also believe the requirements of 
Sec.  423.136 are duplicative of Sec.  460.210 of the PACE regulation.
    (9) 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 
proposed to waive Sec.  423.150 for PACE organizations in order to 
promote the coordination of benefits between Part D and PACE.
    (10) 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 
proposed to waive Sec.  423.401 for PACE because we believe this 
section is duplicative of PACE requirements.
    (11) Subpart M proposed process requirements for grievances, 
coverage determinations, reconsiderations, and appeals under Part D. We 
believe the PACE grievance and appeals processes under Sec.  460.120 
and Sec.  460.122 meet the intent of the MMA since they would 
accommodate complaints regarding prescription drug coverage. Therefore, 
we proposed to waive Sec.  423.560 through Sec.  423.638 for PACE 
organizations because we believe they are duplicative of PACE 
requirements.
    (12) Subpart K 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 proposed to waive the sections in subpart K that 
address the application process and contract requirements.
    We concluded by requesting comment on these proposed waivers 
including any additional waivers that may be needed to integrate the 
Medicare prescription drug benefit and the PACE benefit.
    Commenters expressed support for all the administrative related 
waivers on behalf of PACE organizations that were identified in the 
proposed rule, requested clarification as to the breadth of specific 
waivers, and identified additional waivers that would be necessary to 
minimize disruptions to the PACE program in implementing Part D.
    We proposed in Sec.  423.458(d) of the proposed rule to codify 
section 1860D-21(c)(2) of the Act (as extended to PACE organizations 
under section 1860D-21(f)(1) of the Act), which establishes authority 
for us to waive Part D provisions for PACE organizations that: (1) 
duplicate PACE requirements; (2) conflict with PACE provisions; or, (3) 
as may be necessary to improve the coordination of benefits provided 
under Part D and the PACE program. Thus, we begin with a discussion of 
the administrative related Part D requirements.
    Comment: One commenter requested confirmation as to whether PACE 
organizations will be required to provide Part D coverage to its 
enrollees who are Part D eligible individuals because section 1860D-
21(f)(1) of the Act indicates that PACE organizations have a degree of 
discretion in whether or not to provide Part D coverage. Another 
commenter stated that to require a PACE eligible individual to obtain 
prescription drug coverage from a plan other than PACE (a PDP for 
example) would fragment care coordination associated with PACE.
    Response: Section 1860D-21(f)(1) of the Act provides that PACE 
programs may elect to provide qualified prescription drug coverage to 
Part D eligible individuals enrolled in the program. However, section 
1935(c)(6) of the Act prohibits Medicaid from paying for Part D drugs 
provided to full-benefit dual eligible individuals and requires that 
these drugs be paid for under Medicare Part D. Due to this statutorily 
mandated shift in payer from Medicaid to Medicare for full-benefit dual 
eligible individuals, we believe that PACE organizations will elect to 
provide Part D coverage to full-benefit Part D eligible individuals in 
order to receive adequate payment for providing Part D drugs.
    In addition, section 1894(a)(1)(B)(i) of the Act requires that PACE 
enrollees receive Medicare benefits solely through the PACE program, 
and, therefore, prohibits them from simultaneously enrolling in both a 
PACE program and a separate Part D plan. As discussed elsewhere in this 
preamble under subpart B, Part D eligible individuals who enroll in a 
PACE plan offering qualified prescription drug coverage under Part D 
will be deemed to have elected to receive their Part D benefits through 
such PACE plan, and will be ineligible to enroll in another Part D 
plan, including a PDP. In addition, Sec.  423.32(f) specifies that 
enrollees of PACE organizations offering qualified prescription drug 
coverage shall remain enrolled in that plan as of January 1, 2006 and 
receive benefits offered by that plan until one of the conditions of 
Sec.  423.32(e) is met.
    Effective January 1, 2006, States will continue to include the cost 
of prescription drugs in their monthly capitation payments to PACE 
organizations on behalf of those individuals ineligible for Part D 
coverage (Medicaid-only enrollees).
    Comment: We received a comment indicating that there are cost 
benefits of the PACE model as an alternative to nursing home care. The 
commenter indicated that implementation of Part D should not place 
excessive burdens on PACE organizations and recommended that we develop 
a workgroup with the National PACE Association (NPA) and States in 
order to work through the administrative related issues with 
implementing Part D into PACE so as to minimize the administrative 
burden on PACE organizations.
    Response: We appreciate the potential burden associated with 
implementing the Part D benefit into the existing PACE model. As a 
result, we proposed to

[[Page 4432]]

utilize waiver authority under Sec.  423.458(d) of this rule: (1) in 
instances where Part D requirements are duplicative of PACE 
requirements; (2) in instances where Part D requirements conflict with 
PACE requirements; or, (3) in order to promote coordination between 
Part D and PACE. Under this authority, we are waiving section 
423.265(b), which would have required PACE organizations planning to 
offer a Part D prescription drug plan to submit bids and supplemental 
information no later than the first Monday in June of each year. We 
will also use this authority to issue further guidance regarding 
additional Part D provisions that will be waived for PACE 
organizations. We believe that these waivers will minimize the 
administrative burden on PACE organizations that elect to provide Part 
D coverage.
    Comment: We received many comments supporting our proposal to 
identify Part D provisions that we will waive on behalf of PACE 
organizations without requiring individual waiver applications. One 
commenter also requested that we outline a waiver application process 
that could be followed by organizations to the extent additional 
waivers are identified after publication of this final rule. As waivers 
are granted through this process, the commenter requested that we apply 
the waivers to other similarly situated organizations offering or 
seeking to offer qualified prescription drug coverage as a PACE 
organization that otherwise meets conditions of the waiver.
    Other commenters requested that PACE waivers apply to other similar 
health plans such as social HMOs, Massachusetts Senior Care Options 
programs, or other plans that also serve significant numbers of full-
benefit dual-eligible individuals.
    Response: We believe that the application of Sec.  423.458(d) 
waivers will minimize disruption of the positive aspects of the 
structure of PACE. However, to the extent a PACE organization 
identifies a specific need for additional Part D waivers, the 
organization may request such waivers from us under the authority of 
Sec.  423.458(d) of this regulation. We will determine on a case-by-
case basis whether to grant the waiver. If we grant it, the waiver will 
apply to all similarly situated PACE organizations, but will not apply 
to non-PACE organizations.
    The waiver submission and review process for PACE organizations 
will be issued as additional CMS guidance. We will issue additional 
guidance to these programs following publication of this rule.
    The following list summarizes comments we received on waiver 
issues. As stated previously, the only waiver we are finalizing at this 
time is a waiver of the June bid submission deadline in section 
423.265(b). We will take into consideration comments regarding other 
waivers and issue further guidance on the Part D provisions that will 
be waived for PACE organizations.
    (1) Several commenters indicated that due to the differences 
between traditional Part D plans and PACE, inclusion of PACE in a 
comparison brochure would confuse beneficiaries. These commenters 
supported our proposal to waive Sec.  423.48 and Sec.  423.128 
concerning plan information. However, one commenter expressed concern 
that those eligible for special programs such as PACE, should be 
informed of all choices available under Part D. This information should 
include differences between obtaining services from a traditional Part 
D plan or PACE. The commenter believed that beneficiaries should also 
be informed of what would occur if they disenrolled from PACE to obtain 
benefits from a PDP. This commenter would like to work with us in 
developing appropriate materials and distribution mechanisms.
    (2) One commenter asked for clarification that PACE organizations 
will not be required to share in the cost of enrollment related costs 
under Sec.  423.6, reasoning that PACE organizations are neither 
subject to MA requirements related to dissemination of annual 
enrollment information, nor do PACE organizations contribute towards 
their costs.
    (3) Commenters indicated that to the extent requirements under 
Sec.  423.44 are duplicative of requirements under Sec.  460.164 
through Sec.  460.172 of the PACE regulation or impede coordination of 
PACE and Part D benefits, these requirements should be waived, allowing 
for continued coordination of the prescription drug benefit with all 
other benefits provided by PACE organizations. One commenter 
recommended that existing requirements governing disenrollment from 
PACE organizations should apply in lieu of Sec.  423.44.
    (4) We received a comment in support of our proposed waiver of 
Sec.  423.104(g)(2) of the proposed rule (now identified as Sec.  
423.104(f)(2) in the final rule) that indicates that a plan may not 
offer enhanced coverage for purposes of reducing co-payments and 
deductibles unless it also offers a plan with basic coverage. The 
commenter agreed with our rationale indicating that it would be 
impractical for a PACE organization to offer basic prescription drug 
coverage to PACE enrollees because stand-alone basic prescription drug 
coverage assumes beneficiary which is a PACE statutory preclusion.
    (5) Commenters supported our proposal to waive the negotiated price 
requirements of Sec.  423.104(h) of the proposed rule (now identified 
as Sec.  423.104(g) in this final rule). One commenter pointed out that 
we had incorrectly referred to this section as Sec.  423.104(g) on page 
46756 of the proposed rule.
    (6) Commenters concurred with our proposal to waive the pharmacy 
access requirements under Sec.  423.120(a)(1). In addition, a commenter 
recommended a waiver of Sec.  423.120(a)(4) of the proposed rule (now 
identified as Sec.  423.120(a)(8) in the final rule) related to 
pharmacy network contracting. PACE organizations generally have close 
working relationships with a very limited number of pharmacies that can 
respond to the specialized requirements of PACE enrollees, for example, 
24/7 access and specialized dispensing requirements. Requiring PACE 
organizations to contract with any willing pharmacy provider is not 
consistent with the PACE model and could compromise the PACE 
organizations' ability to negotiate favorable contract terms based on 
volume with one or two suppliers.
    (7) One commenter indicated that PACE organizations typically 
provide an open formulary to the primary care physicians that allow 
immediate access to a wide variety of covered Part D prescription drugs 
in many different dosages and delivery forms. These open formularies do 
not restrict access or result in co-payment amounts charged to 
enrollees. Thus, the commenter does not believe the formularies used by 
PACE organizations should be subject to the requirements of Sec.  
423.120(b). This commenter also asked for clarification as to whether 
``preferred drug lists'' utilized by PACE organizations would be 
subject to the requirements of Sec.  423.120(b). These lists provide 
prescribing physicians with current data on the relative costs of 
various medications, such as name brand vs. generic alternatives. 
Physicians are not restricted from prescribing alternatives that do not 
appear on the preferred drug list, and the list does not result in co-
payment amounts charged to enrollees. The commenter recommended that 
these preferred drug lists not be subject to the requirements of Sec.  
423.120(b).
    (8) Several commenters concurred with our proposal to waive the 
standardized technology requirements of Sec.  423.120(c). One commenter 
suggested that such technology be

[[Page 4433]]

limited to one card in order to avoid data sharing and coordination 
requirements.
    (9) Several commenters concurred with our proposal to waive the 
out-of-network pharmacy requirements of Sec.  423.124.
    (10) Several commenters concurred with our proposal to waive the 
disclosure of price differences between the Part D drug and generic 
equivalent requirement of Sec.  423.132.
    (11) Several commenters concurred with our proposal to waive the 
privacy, confidentiality, and accuracy of records requirements of Sec.  
423.136.
    (12) One commenter requested clarification regarding our proposal 
to waive the MTMP requirements of Sec.  423.150 and whether we had 
intended to list the additional provisions of this section including 
cost and utilization management programs, quality assurance programs, 
programs to control fraud, abuse, and waste, CMS consumer satisfaction 
surveys, an electronic prescription program, and accreditation. The 
commenter believes that the existing PACE requirements satisfy or 
exceed each of these requirements.
    (13) We received a comment requesting that consumer satisfaction 
surveys administered to PACE enrollees under Sec.  423.156 take into 
account the differences between PACE enrollees and traditional Part D 
plan enrollees.
    (14) We received a comment requesting that quality improvement 
organization activities performed under Sec.  423.162 take into account 
the differences between PACE enrollees and traditional Part D plan 
enrollees.
    (15) We received public comments concurring with our proposal to 
waive the licensure requirements of Sec.  423.401 to reflect that PACE 
organizations' fiscal soundness is governed by requirements under 
sections 1894(e)(2)(iv) and 1934(e)(2)(iv) of the Act and Sec.  460.80 
of the PACE regulation.
    (16) We received public comments of concurrence of our proposal to 
waive the application requirements of subpart K of this rule, agreeing 
that these requirements are addressed under subparts B and C of Sec.  
460. This commenter also requested that we utilize information already 
available in PACE organizations provider applications and program 
agreements to the greatest extent possible.
    (17) One commenter requested clarification as to whether the 
requirements of the following sections would be waived on behalf of 
PACE organizations; Sec.  423.502, Sec.  423.503, Sec.  423.504, Sec.  
423.505, Sec.  423.506, Sec.  423.507, Sec.  423.508, Sec.  423.509, 
Sec.  423.510, and Sec.  423.514. The commenter indicated that these 
requirements duplicate current PACE requirements.
    (18) Commenters also indicated that the requirements of subpart K 
would be burdensome for plans, providers, and pharmacies in terms of 
tracking coverage issues. Adherence to these requirements would result 
in significant new expenditures for plans, advocates, clinics, 
pharmacies, long term care providers, and other providers in terms of 
care coordination and advocacy for beneficiaries to access the correct 
coverage. It will also be necessary to coordinate with other Part D 
plans concerning low-income enrollees at risk for institutionalization. 
The commenter suggests that we hire an outside facilitation contractor 
to review and match data with mechanisms similar to sharing of 
information on crossover claims. Yet, the commenter has concerns about 
the ability of States, plans, providers, and others to gear up quickly 
to handle the tracking and interface that working with these 
contractors would require.
    (19) In addition, one commenter indicated that the minimum 
enrollment requirements of Sec.  423.512 of the proposed rule should be 
waived on behalf of PACE organizations as such requirements do not 
currently apply to PACE organizations.
    (20) Several commenters concurred with our proposal to waive the 
determinations and appeals processes of subpart M on behalf of PACE 
organizations. Commenters agreed that these requirements are being met 
by PACE organizations under Sec.  460.120 and Sec.  460.122 of the PACE 
regulation.
    The MMA did not amend sections 1894 and 1934 of the Act and it is 
clear that Part D applies to PACE. As a result, we have determined that 
in order to merge the PACE and the Part D statutory requirements, 
waivers we identified in the proposed rule, as well as waivers beyond 
those identified in the proposed rule and via public comments will be 
necessary. Therefore, we are considering the application of Sec.  
423.458(d) waiver authority for all administrative related Part D 
requirements that duplicate or conflict with PACE requirements or do 
not promote coordination between Part D and PACE. Additional CMS 
guidelines will be issued to PACE organizations following publication 
of this rule to include the waiver submission process and a 
comprehensive listing of all Part D waivers applicable to PACE 
organizations. We believe that this guidance will minimize disruption 
to PACE organizations and their enrollees.
    In accordance with Sec.  423.458(d) of this regulation, PACE 
organizations will also be permitted to submit Part D waiver requests 
beyond those identified in CMS guidelines on an individualized basis.
    We received several comments regarding the application of subpart 
S, which pertains to State eligibility determinations for subsidies and 
general payment provisions.
    Comment: One commenter recommended that we develop a workgroup with 
the NPA and States to further discuss impacts related to the phased-
down State contribution and PACE capitation rates. The phased-down 
State contribution is a percentage based on drug costs in the year 
2003. Subpart T of the proposed rule indicates that States must 
continue to include drug costs in the Medicaid monthly capitation 
payment to PACE organizations on behalf of Medicaid-only PACE 
enrollees. Thus, 2 commenters believe that States will be required to 
develop two different PACE capitation rates; one for dual eligible 
beneficiaries and one for Medicaid only enrollees. Given the small 
percentage of Medicaid only PACE enrollees, the complexities in 
developing a separate Medicaid-only PACE capitation rate may be 
administratively cumbersome.
    Response: The MMA shifts payment responsibility for prescription 
drugs from Medicaid to Medicare for full-benefit dual eligible 
beneficiaries. As a result, States will need to take into account the 
Part D premium payments when calculating the PACE capitation rate for 
full-benefit dual eligibles. The MMA does not change the prescription 
drug payment scheme for Medicaid-only eligible beneficiaries. Thus, we 
agree with the commenter that the States will need to establish 
separate capitation rates for Medicaid eligible PACE enrollees, 
including one for dual-eligible beneficiaries for whom the PACE 
organization elects to provide Part D coverage, and one for non-dual 
eligible (Medicaid-only) beneficiaries. In the case of full-benefit 
dual eligible PACE enrollees for whom the PACE organization elects to 
provide Part D coverage, the State in which the PACE organization is 
located will pay a phased-down contribution to Medicare that defrays a 
portion of the drug expenditures for these individuals assumed by 
Medicare Part D. State Medicaid agencies will be required to 
participate in this phased-down State contribution scheme under Sec.  
423.910 of this regulation. This amount will capture the full extent of 
a State Medicaid agency's responsibility for Part D prescription drug 
expenditures

[[Page 4434]]

on behalf of full benefit dual-eligible beneficiaries for whom the PACE 
organization elects to provide Part D coverage. In the case of Medicaid 
eligible PACE enrollees whose drug costs continue to be funded by 
Medicaid, States will continue to include a prescription drug cost 
amount in their monthly capitation payment to PACE organizations.
4. Medicare Supplemental Policies
a. Overview and Background
    In the proposed rule, we included two provisions related to 
Medicare supplemental (Medigap) policies. As required under section 
1882(v) of the Act, as added by section 104 of MMA, we set forth 
standards for the written disclosure notice that Medigap issuers must 
provide to their policyholders who have drug coverage. In addition, in 
order to reflect the addition of the Medicare drug benefit by MMA, we 
proposed to revise the definition of a Medigap policy.
 Medicare Supplemental Policies
    A 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 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 NAIC. Three States (Massachusetts, Minnesota, 
and Wisconsin) are permitted by the statute to 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.
 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 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) of the Act 
specifies that this is to be called a ``Medigap Rx policy.'') The MMA 
also requires that the Secretary establish standards for this 
disclosure notice in consultation with the 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 goes into effect on 
January 1, 2006. Specifically, effective on that date, section 1882(v) 
of the Act 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 
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 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 defined standard prescription drug coverage under Medicare 
Part D. Subparts B and F of this 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 proposed to revise and clarify the 
definition of a Medicare supplement (Medigap) policy currently codified 
at Sec.  403.205, to reflect the addition of the Medicare drug benefit 
by MMA.
    We proposed 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 
also proposed 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 
issuer offers an optional prescription drug rider that can be added to 
any other policies, addition of the rider to a Medigap policy 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, we proposed that 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, if the policy is primarily designed for or 
primarily marketed and sold to Medicare beneficiaries. New sales of 
these policies would be prohibited after December 31, 2005.
c. Standards for the disclosure notice that Medicare Supplemental 
(Medigap) issuers are required to provide to individuals who currently 
hold policies with drug coverage
 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 proposed to establish standards for the disclosure notice 
in the form of a required notice that sets forth those choices.
 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 proceeding 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 4435]]

    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 PDP during 
the 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 have been designated Plans 
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 proposed 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.
    As discussed in subpart B of this preamble, section 101 of 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.
 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 subpart B of this final rule. We cannot offer guidance 
for the likelihood that any particular pre-standardized policy, or 
policy in a waiver State, will meet this test. However, for 
standardized plans, the CMS actuaries determined that drug coverage in 
standardized Medigap Plans H and I cannot meet this 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 will be unlikely to meet the definition of 
creditable prescription drug coverage based on this rule.
 Required Disclosure Notice
    Section 1882(v) of the Act requires us to establish standards for 
the disclosure notice that issuers must provide to policyholders of 
Medigap Rx policies. In the proposed rule, we proposed a model 
disclosure notice with basic language that would be required to be 
included in all disclosure notices sent by Medigap issuers for policies 
that do not provide creditable coverage. We respond below to comments 
we received on the proposed model disclosure notice. However, because 
we have determined that the format and content of the notice could be 
improved based on information gathered through consumer testing, we now 
plan to publish the final model disclosure notice separately from this 
final regulation. We also plan to publish a model disclosure notice for 
policies that do provide creditable coverage.
    Comment: We received numerous comments related to our proposed 
clarifications to the definition of a Medigap policy. Many commenters 
believe the proposed clarifications are too far-reaching and that all 
limited health benefit plans would be considered Medigap policies under 
the proposed clarifications to the definition. Many of these commenters 
added that they do not believe that we have the authority to make the 
proposed modifications to the definition of a Medigap policy.
    One commenter supports our clarification that a rider to a Medigap 
policy becomes an integral part of the policy. The commenter stated 
that it is black-letter insurance law that a rider attached to an 
insurance policy becomes a part of the policy.
    Response: We believe that the addition of the Part D drug benefit 
to Medicare makes it essential to clarify the definition of a Medigap 
policy. There has 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 such as guaranteed renewability.
    Similarly, there was 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 
Medicare supplement policy. The ambiguity was created by the fact that 
there was no Medicare drug benefit to supplement, and it has been 
resolved with the enactment of the Medicare drug benefit. With respect 
to both of these situations, we believe that it is extremely important 
to make clear which Medicare beneficiaries are entitled to receive a 
notice about their rights under the MMA.
    First, it is necessary to clarify that a rider to a Medigap policy 
is not a separate insurance product, but rather is incorporated into, 
and becomes an integral part of, the policy. In order to carry out the 
intent of the MMA provisions, we believe that Medigap policies with 
drug riders must be treated the same as Medigap plans H, I, and J; 
prestandardized Medigap Rx plans; and Medigap plans with drug coverage 
in the waiver States. Accordingly, if a beneficiary has an outpatient 
prescription drug rider attached to his or her Medigap policy, that 
beneficiary should receive the disclosure notice that MMA requires 
Medigap issuers to send to their policyholders who have Medigap drug 
coverage. In addition, because new sales of Medigap policies with drug 
coverage are prohibited after December 31, 2005, the drug coverage 
offered through a rider to a Medigap policy should be eliminated from 
the policy (that is, the drug rider should be cancelled) as of the date 
of the

[[Page 4436]]

individual's enrollment in Medicare Part D.
    We also believe it is necessary to clarify that stand-alone, 
limited benefit drug policies will be considered Medigap policies once 
the Part D drug benefit is implemented, but only if the coverage 
provided by the policy is primarily designed to supplement Medicare, or 
if the policy is primarily marketed and sold to, Medicare 
beneficiaries. Because these limited benefit drug polices will not be 
considered Medigap policies until the Part D prescription drug benefit 
is implemented on January 1, 2006, these plans are not subject to the 
requirement in section 104 of MMA that Medigap issuers send a 
disclosure notice to policyholders with drug coverage before that date. 
However, we encourage issuers of these policies to send the notice 
voluntarily, during the 60-day period immediately preceding the initial 
Part D enrollment that begins in November 2005.
    We reject the argument that we lack the statutory authority to 
revise the regulation's definition of a Medigap policy. We are simply 
clarifying the scope of the definition. The statutory definition of a 
Medicare supplemental policy, set out in section 1882(g)(1) the Act 
states, in part, that a Medicare Supplemental policy ``provides 
reimbursement for expenses incurred for services and items for which 
payment may be made [by Medicare] but which are not reimbursable by 
reason of the applicability of deductibles, coinsurance amounts, or 
other limitations imposed pursuant to [title XVIII].'' Section 
1882(g)(1) of the Act specifically excludes a MA plan, or any policy or 
plan sponsored by an employer or labor organization, from the 
definition. However, the language quoted above could be read to include 
any other policy that is not specifically excluded, if the policy pays 
anything toward the cost of an item or service that is generally 
covered under Medicare, but is not specifically reimbursable because of 
the application of deductibles, coinsurance, or other limitations. As 
of January 1, 2006, prescription drugs will be covered by Medicare, and 
we are simply clarifying that stand-alone policies will meet the 
definition.
    As noted above, some commenters claim that the proposed 
clarifications are so far-reaching that all limited benefit plans will 
be considered Medigap policies. However, the definition also states 
that a Medicare Supplemental policy is a health insurance policy or 
other health benefit plan ``offered by a private entity to individuals 
who are entitled to have payment made under [title XVIII].'' The 
definition currently in the regulations essentially interprets this 
language to mean that a Medicare supplement policy is a policy that is 
offered to Medicare beneficiaries because they are Medicare 
beneficiaries. In other words, it does not encompass policies that are 
offered to a broader population, and happen to be purchased by a 
Medicare beneficiary.
    Accordingly, since 1982, the regulatory language at Sec.  
403.205(a)(2) has specified that a Medigap policy means a policy or 
plan that 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 Medicare because of 
deductibles, coinsurance or other limitations under Medicare. Any 
policy that is not primarily designed to supplement Medicare 
reimbursements and that is not offered and sold primarily to Medicare 
beneficiaries would not be considered a Medigap policy. Therefore, we 
disagree that the proposed clarification of the definition in the 
regulation could be interpreted to apply to any limited benefit policy 
purchased by a Medicare eligible individual, regardless of how it is 
marketed and designed.
    Many commenters believed that the language in proposed Sec.  
403.205(c) could be interpreted to mean that any individual or group 
health insurance policy or rider could be considered a Medigap policy. 
We have changed the regulatory language at Sec.  403.205(c) to clarify 
that the individual or group health insurance policy or rider is a 
Medigap policy if the policy otherwise meets the definition in Sec.  
403.205.
    Comment: One commenter asked that we clarify that the 
antiduplication disclosure statements applicable to limited benefit 
plans that are appended to the NAIC Model Regulation for Medicare 
supplemental insurance do not apply to stand-alone limited health 
benefit plans that are considered Medigap policies.
    Response: The antiduplication statements that the commenter refers 
to do not apply to Medigap policies. We believe it is necessary to 
clarify that if a limited health benefit plan is considered a Medigap 
policy because of the way it is designed, marketed and sold, the sale 
of such a plan would be prohibited because it does not meet the 
requirements for standardization of Medigap policies.
    Comment: We received numerous comments related to the proposed 
model disclosure notice that was published as part of the preamble to 
the Title I regulation. Commenters expressed concern about the model 
disclosure notice containing statements about the value of the Part D 
drug benefit being greater than the value of outpatient prescription 
drug coverage under a Medigap policy. Many commenters believe that the 
concept of ``value'' is subjective and goes beyond the concept of 
actuarial equivalence. Commenters stated that beneficiaries might 
consider their Medigap drug coverage to be of greater overall value 
than the Part D benefit for a number of reasons, including the fact 
that the Medigap drug coverage is guaranteed renewable and does not use 
drug formularies.
    Commenters also stated that the proposed disclosure notice was too 
long and complicated and contained unnecessary information related to 
Part D benefit options. Commenters expressed concern about having any 
statements in the disclosure notice that may be viewed as requiring 
Medigap issuers to promote or advocate the competing alternative 
coverage under the Part D benefit. These commenters believe that 
information about the new Medicare drug benefit will be readily 
available from a variety of other sources and that including such 
information in the disclosure notice is confusing and is not required 
by MMA. They believe that statements about the value of Part D benefits 
and information concerning Part D enrollment are irrelevant for 
purposes of this disclosure notice.
    Many commenters believe that we should adopt NAIC's version of the 
model disclosure notice as the disclosure notice that Medigap Rx 
issuers must send to policyholders. The NAIC version of the model 
disclosure notice was developed by a work group comprised of State 
insurance regulators, consumer representatives and Medigap issuers.
    Response: We disagree that information concerning Part D enrollment 
options is irrelevant for purposes of this disclosure notice. The 
statute requires that the disclosure notice provide information to 
Medigap Rx policyholders explaining options in the event the individual 
does or does not enroll in Part D during the IEP. Therefore, we believe 
it is important to have some discussion about the Part D enrollment 
process in order to provide meaningful context for the Medigap options. 
For individuals who do not enroll in Part D during the IEP the statute 
requires the disclosure notice to explain, among other things, that the 
individual will be subject to a late enrollment penalty if his or her 
current

[[Page 4437]]

coverage does not provide creditable drug coverage and he or she later 
chooses to enroll in Part D. The test for creditable coverage is based 
on whether the economic value of the coverage is actuarially equivalent 
to the value of Part D coverage. Therefore, we believe it is 
appropriate to address how the actuarial value of Part D compares to 
the individual's current Medigap drug coverage.
    As noted previously, we will publish the final standards for the 
disclosure notices separately from this final rule. We will give due 
consideration to the comments we received on the model disclosure 
notice set forth in the proposed rule. In addition, we have conducted a 
series of interviews with beneficiaries about the format and content of 
the model disclosure notice. Once we have completed our evaluation, the 
results of this consumer testing will also inform any changes we may 
make to the disclosure notice. We appreciate the efforts of the NAIC in 
developing a model disclosure notice and we intend to have further 
consultations with the NAIC.
    Comment: Commenters expressed concern that the period for 
transition to Part D was too short and requested that we consider 
options to provide beneficiaries with additional time to adjust to the 
new changes. One commenter suggested that the Secretary use the 
``exceptional circumstances'' authority to establish a special Part D 
enrollment period lasting at least through 2007 for beneficiaries who 
have Medigap drug coverage, thereby allowing for a longer period of 
transition to Part D. The commenter stated that Medicare beneficiaries 
may be reluctant to give up their Medigap drug coverage for a benefit 
that is new and untested and that an SEP would permit a longer period 
to enroll in Part D without a premium penalty. In the alternative, the 
commenter suggested that Medigap Plan J be deemed actuarially 
equivalent to Part D so that beneficiaries with Plan J who have the 
most drug coverage could enroll in Part D without penalty after the 
initial enrollment period.
    Another commenter expressed concern about the possibility of a 
beneficiary being initially notified of creditable coverage when the 
coverage is no longer creditable or never was creditable. The commenter 
suggested that, in these cases, an SEP into Part D be established, 
along with a guaranteed issue right to a Medigap policy without drug 
coverage.
    Response: The statute establishes the IEP for Part D as November 
15, 2005 through May 15, 2006. Beneficiaries with Medigap drug coverage 
who enroll in Part D during the IEP have a guaranteed issue right to 
buy a Medigap policy without drug coverage. We are sympathetic to the 
complexity of the choices that beneficiaries must make during this time 
period, but we believe there is a strong public policy value in 
creating an incentive for immediate, widespread enrollment in this new, 
heavily subsidized benefit in order to ensure the affordability of the 
Part D benefit and the stability of the associated premium. It is our 
goal to provide beneficiaries with information that will help them make 
informed decisions about their health care options.
    Since the statute clearly defines the IEP and provides a Medigap 
guaranteed issue right for beneficiaries who have Medigap drug coverage 
and who enroll in Part D during the IEP, we do not believe that it is 
an appropriate use of the Secretary's authority to create a blanket SEP 
for exceptional circumstances for these beneficiaries. We believe that 
the Secretary's authority to establish SEPs for exceptional 
circumstances should be reserved for situations that are not 
specifically contemplated in the statute and that this authority should 
be exercised on a case-by-case basis depending on the circumstances of 
a particular situation.
    Even in a case where we would create an SEP for exceptional 
circumstances, there is no corresponding statutory authority to create 
a Medigap guaranteed issue right. The classes of beneficiaries who have 
Medigap guaranteed issue rights are clearly set out in section 
1882(s)(3)(B) and section 1882(v)(3)(B) of the Act. We do not have 
statutory authority to establish additional classes of beneficiaries 
who would be entitled to buy a Medigap policy on a guarantee issue 
basis.
    We do not believe that the statute permits us to deem all Medigap 
Plan J coverage as creditable coverage. Whether or not Plan J drug 
coverage will be considered creditable coverage must be based on 
whether 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). 
Moreover, as noted above, it is unlikely that Plan J policies could 
meet this standard. Finally, for the concern about the possibility of a 
beneficiary being initially notified of creditable coverage when the 
coverage is no longer creditable or never was creditable, the 
regulations at Sec.  423.38(c) permit the establishment of an SEP for 
Part D in cases where an individual was never informed that the 
coverage that he or she had was not creditable, or if current coverage 
is reduced so that it is no longer creditable 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 the late enrollment 
penalty provisions at Sec.  423.46.
    Comment: One commenter urged us to establish Medigap guaranteed 
issue rights for individuals who lose partial benefits under a retiree 
plan and for individuals who lose Medicaid eligibility.
    Response: The classes of beneficiaries who have Medigap guaranteed 
issue rights are clearly set out in section 1882(s)(3)(B) and section 
1882(v)(3)(B) of the Act. We do not have statutory authority to 
establish additional classes of beneficiaries who would be entitled to 
buy a Medigap policy on a guaranteed issue basis. In limited cases, we 
have the authority under section 1851(e)(4)(D) of the Act to establish 
SEPs for MA enrollees that may trigger Medigap guaranteed issue rights 
for MA enrollees. This authority applies if we determine that there are 
exceptional circumstances that warrant an SEP, but it does not permit 
us to establish new classes of beneficiaries who would have Medigap 
guaranteed issue rights.
    Comment: Comments were received suggesting that if a Medigap issuer 
becomes a Part D sponsor that the sponsor be allowed to limit 
enrollment in the Part D coverage to its Medigap policyholders.
    Response: While the statute prohibits a Medigap issuer from 
providing drug coverage that supplements the Part D benefit, a Medigap 
issuer can choose to become a PDP or an MA-PD if the issuer wishes to 
offer the Part D benefit. However, a PDP sponsor or MA-PD plan must 
offer prescription drug coverage to all Part D eligible beneficiaries 
residing in the plan's service area, unless a specific statutory waiver 
authority applies. Examples include capacity or special needs waivers 
under Part C of Medicare, or an employer waiver under section 1860D-
22(b) of the Act.
    Comment: Comments were received requesting regulatory guidance on 
the MMA provision that provides for the application of the 
antiduplication penalties set out in section 1882(d)(3)(A)(ii) of the 
Act in cases where a Medigap policy with drug coverage is renewed for a 
Part D enrollee. The commenters expressed concern that a Medigap issuer 
may be

[[Page 4438]]

subject to penalties whether or not the issuer knows about the 
individual's decision to enroll in Medicare Part D. The commenter's 
request that the antiduplication provisions be enforced consistently 
using a standard whereby only ``knowing'' violations would be subject 
to penalty.
    Response: Section 1882(v)(4)(A) of the Act, added by section 104 of 
the MMA, states that the penalties described in section 
1882(d)(3)(A)(ii) of the Act shall apply for a violation of the 
prohibition on the sale, issuance, and renewal of a Medigap policy that 
provides drug coverage in the case of an individual who is enrolled in 
Medicare Part D. We are not incorporating the guidance suggested by the 
commenter into these regulations because these provisions are under the 
jurisdiction of the OIG of HHS. We recommend that Medigap issuers take 
reasonable steps to determine the policyholder's Part D status at the 
time the Medigap policy with drug coverage is due for renewal.
    Comment: One commenter questioned whether HMO Medicare supplemental 
plans offered to its members are considered to be Medigap plans and, if 
so, whether these plans would be prohibited from offering prescription 
drug benefits to retirees.
    Response: Medicare managed care plans that offer supplemental 
benefits are not Medicare supplemental (Medigap) policies. The 
statutory definition of Medicare supplemental (Medigap) policies 
contained in section 1882(g)(1) of the Act specifically excludes MA 
plans. While Medigap plans are prohibited from supplementing Part D 
drug coverage, MA plans will be permitted to offer coverage that 
supplements Part D drug coverage.
    Comment: One commenter suggested that a process be defined for 
validating and approving a Medigap issuer's assessment whether the drug 
coverage under its policies is creditable in accordance with the final 
rule implementing the Part D drug benefit. This commenter also 
suggested that the determination of creditable coverage should consider 
the possibility that changes in Part D over time could cause a plan to 
become creditable coverage over time. The commenter recommends that 
proper advance notice of Part D changes be scheduled to allow time for 
creditable coverage determinations, disclosure to beneficiaries and 
decision-making time for beneficiaries. The commenter also suggested 
that aggregation of data (combining all ages, gender, locations, 
formularies) for a particular benefit design be allowed as reasonable 
in determining creditable coverage.
    Response: The issues raised by the commenter are applicable to all 
forms of creditable coverage and are addressed at Sec.  423.56.

III. Provisions of the Final Rule

    For the convenience of the reader, in this section, we briefly 
summarize major provisions of the proposed rule on which we requested 
public comments, and our final decisions. It is important to note that 
this section is not intended as a comprehensive list of all changes to 
the final rule. For a detailed discussion of a specific issue, see the 
relevant portion of the preamble to this final rule.
Auto-enrollment
    We requested comments on:
     Responsibility for auto-enrollment: Should CMS or the 
State perform the auto-enrollment function (or a contracted entity or 
entities on their behalf)?
     Timing of auto-enrollment.
     Auto-enrollment of MA-onlys: How to provide Part D 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?
     How to provide Part D to a full-benefit dual eligible 
individual enrolled in an MA-only plan when the premium for the MA-PD 
plan(s) offered by the same MA organization exceeds the low-income 
premium subsidy amount?
    Final Decision: Our response seeks to balance the twin goals of 
ensuring prescription drug coverage and respecting beneficiary choice. 
We will:
     Stipulate that CMS-not the States-will perform auto-
enrollment;
     Perform the auto-enrollment in the fall of 2005 as soon as 
eligible Part D plans are known, and auto-enrollment will be effective 
January 1, 2006. After 2006, full-benefit dual eligible individuals 
will be auto-enrolled into plans as soon as their Medicare Part D 
eligibility is determined;
     Auto-enroll on a random basis among available PDPs with 
monthly beneficiary premiums at or below the low-income subsidy amount;
     Reserve the ability to conduct re-auto-enrollment if we 
find such action necessary to ensure adequate coverage for this 
population;
     Facilitate full-benefit dual eligible individuals who are 
MA enrollees into the MA-PD with the lowest Part D premium offered by 
their MA organization, and who are cost plan enrollees into their cost 
plans Part D benefit (if any) with the lowest Part D premium, even if 
the premium is not covered by the low-income premium subsidy amount.
     May facilitate enrollment for all others deemed or 
determined eligible for the low-income subsidy, that is, Qualified 
Medicare Beneficiaries (QMBs), Specified Low-Income Medicare 
Beneficiaries (SLMBs), Qualifying Individuals (QI-1s), and others who 
qualify for low income subsidies.
Optional Involuntary Disenrollment for Disruptive Behavior
    We solicited comments on the applicability of MA rules to PDPs for 
involuntary disenrollment for disruptive behavior.
    Final Decision: We developed policy to permit PDP sponsors to 
disenroll individuals for disruptive behavior consistent with statutory 
intent, while creating the necessary due process safeguards for 
individuals who are subject to our disenrollment rules and may, as a 
result, lose Part D coverage. In the final rule, we--
     Removed the expedited process;
     Required PDP sponsors to provide a reasonable 
accommodation as determined by CMS and in exceptional circumstances we 
deem necessary; and
     Reserved the right to deny a request from a fallback 
prescription drug plan to disenroll an individual for disruptive 
behavior.
Enrollment and Disenrollment Processes
    We envisioned a paper enrollment form process and requested 
comments on other possible enrollment mechanisms that address data 
security and integrity, privacy and confidentiality, authentication, 
and other pertinent issues. We also asked if we should require PDPs to 
disenroll individuals if they no longer reside in the service area.
    Final Decision: We will maintain the flexibility to allow PDPs to 
develop alternative mechanisms other than paper enrollment forms. We 
will look to our recent experience with the drug card for other 
mechanisms we may consider, such as enrollment over the telephone and 
through the Internet. We will require plans to disenroll individuals 
upon receipt of notification that they have moved outside of the plan 
service area.
Release of Beneficiary Information for Marketing
    Should we provide individual beneficiary information to Part D 
sponsors for marketing purposes because Part D is an entirely new, 
voluntary benefit that would not otherwise be available to 
beneficiaries absent positive enrollment?
    Final Decision: We will consider provision of such information 
pending

[[Page 4439]]

further research of the needs and capabilities of both organizations 
and CMS. If/when we do provide such information to PDPs and MA 
organizations, we will work with industry and advocates to develop 
appropriate guidance.
Creditable Coverage
    We asked for comment on the format, placement, and timing of 
creditable coverage notices. We also asked whether there are more forms 
of coverage that we should consider creditable coverage?
    Final Decision: We support linking the notice of creditable status 
to other required documents that sponsors must provided to plan 
participants as an acceptable vehicle provided it is conspicuous and 
includes standard information elements. We have revised Sec.  423.56(c) 
and (d) to allow notices of creditable and non-creditable status to be 
provided in the same manner other required documents.
    To ensure beneficiaries are making informed choices, we require 
that notice must be provided to all Part D eligible individuals prior 
to the commencement of the Annual Coordinated Election Period (AEP), 
which begins on November 15, 2005, and also prior to the AEP each year. 
We also believe there are three other key times when notice must be 
provided--(1) prior to the commencement of the individual's initial 
enrollment period for Medicare Part D; (2) prior to the effective date 
of enrollment in such coverage or any change in creditable status of 
that coverage; and (3) upon request by the beneficiary. We revised 
Sec.  423.56(f) to require that notice be provided, at minimum, at 
these 4 times.
    We revised Sec.  423.56(b) to include section 1876 cost plans and 
coverage offered by State high risk pools as well as a provision 
permitting us to recognize other types of coverage as potentially 
creditable in guidance following publication of the final rule.
Marketing Multiple Products
    Since companies frequently offer additional products that could 
provide additional tools to help beneficiaries manage expenses and 
financial security, we asked for comments on allowing such products to 
be provided in conjunction with PDP services and the appropriate 
limitations on such activities.
    Final Decision: We will allow only additional health-related 
products to be marketed to Medicare beneficiaries in compliance with 
HIPAA. Additional non-health related marketing of products would need 
written authorization by the beneficiary.
Incurred Costs (TrOOP)
    We asked a number of questions on how to treat certain costs for 
purposed of TrOOP accounting: How should we define group health plan 
(GHP), insurance or otherwise, and other third party arrangements for 
purposes of TrOOP? How should we treat HSAs (FSA, HRA, MSA) under 
TrOOP: Can we treat HSAs, FSAs, and MSAs as beneficiary money, and 
HRAs, as GHP? Should the price differential between the cost of an 
extended supply of a drug purchased at a retail pharmacy versus a mail-
order pharmacy be counted as an incurred cost against the annual out-
of-pocket threshold? What is the status of financial assistance and 
free goods and services from pharmaceutical manufacturers under the 
anti-kickback provisions? (Sections 1128A(a)(5), 1128A(i)(6) of the 
Act).
    Final Decision: We included definitions in Sec.  423.100 that are 
consistent with our goals of defining ``payments made by a beneficiary 
or another person on their behalf'' as broadly as possible, while 
maintaining the integrity of the exclusions of ``group health plan, 
insurance or otherwise, and other third party arrangements'' intended 
in the statute. These include:
     treating HSAs, FSAs, and MSAs as beneficiary money, but 
HRAs as a Group Health Plan for purposes of TrOOP accounting.
     allowing beneficiary payment differentials to count toward 
TrOOP in cases in which a beneficiary accesses a covered Part D drug 
consistent with the out-of-network policy in Sec.  423.124(a) of this 
final rule, and when a beneficiary purchases an extended supply of 
covered Part D drugs at a retail rather than a mail-order pharmacy.
     allowing appropriate waivers or reductions of Part D cost-
sharing by pharmacies to count toward TrOOP.
     allowing financial assistance from pharmaceutical 
manufacturers to count toward TrOOP.
Dispensing Fee
    We invited comments on three definitions of ``dispensing fees''.
    Final Decision: We will 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 (Option 1).
Covered Part Drug Definition
    Part B/D Issues: We solicited 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.
    Final Decision: We identify issues and discuss coverage of the 
following with respect to the definition of Part D drug:
     Vaccines.
     Compounded Drugs.
     Parenteral Nutrition.
     Insulin Supplies.
     Exclusion of A/B Drugs if individual could have enrolled 
in A or B.
     Tying Arrangements.
Long Term Care Facility Pharmacies
    We requested comments regarding our definition of the term long-
term care facility in Sec.  422.100. We also solicited comments 
regarding how we should guarantee ``convenient access'' to the pharmacy 
benefit for Part D enrollees who reside in LTC facilities? We welcomed 
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.
    Final Decision: We have expanded the definition of the term ``long-
term care facility'' in Sec.  423.100 of our final rule to encompass 
not only skilled nursing facilities, as defined in section 1819(a) of 
the Act, but also any medical institution or nursing facility for which 
payment is made for institutionalized individuals under Medicaid, as 
defined in section 1902(q)(1)(B) of the Act.
    In addition, we are adopting an approach requiring Part D plans to 
demonstrate ``convenient access'' to network long-term care pharmacies 
that will inject competition into the long-term care pharmacy market, 
but also allow the option of maintaining the relationships and levels 
of service that long-term care facilities now enjoy vis-[agrave]-vis 
their contracted long-term care pharmacies. We will require plans to 
demonstrate (in their applications) ``convenient in-network access'' to 
long-term care pharmacies and use of specialized any-willing-pharmacy 
(AWP) contracts for long-term care pharmacies to inject competition 
into the long-term care pharmacy market.
Network Access Standards--Home Infusion
    In the proposed rule preamble, we stated that we were considering 
using the authority in section 1860D-4(b)(1)(C) of the Act (which 
establishes requirements regarding convenient access to network 
pharmacies) to require that plans contract with a sufficient number of 
home infusion pharmacies in their service areas to provide reasonable 
access for Part D enrollees, as stand-alone drug plans may not have an 
incentive to include home infusion pharmacies in their networks. We 
solicited comments on whether we should use the authority in section

[[Page 4440]]

1860D-4(b)(1)(C) of the Act to require that both MA-PD plans and PDPs 
contract with a sufficient number of home infusion pharmacies in their 
service area to provide reasonable access for Part D enrollees? How 
could such a requirement be structured?
    Final Decision: We will require plans to provide adequate access to 
home infusion pharmacies but do not specify requirements in the final 
rule. Plans will be required to tell us how they will provide such 
access in their service area.
Network Access Standards--Tricare Standards (Retail)
    We proposed to apply these access standards such that a PDP 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 in its local service area.
    Final Decision: We will require plans to meet the TRICARE access 
standards at the State level.
Network Access Standards--Non-Retail
    We requested comments on whether we should allow plans to count 
certain non-retail pharmacies, such as I/T/U pharmacies, toward the 
pharmacy access standards in some (or all) cases. We also solicited 
comments on permissible ways to ensure Part D enrollees' access to FQHC 
and rural pharmacies.
    Final Decision: We will allow plans to count I/T/U pharmacies and 
other rural institutional pharmacies (for example, FQHCs, RHCs) toward 
the pharmacy access requirements in all cases, provided such pharmacies 
are under contract with the plan and do not substitute for available 
retail access in their network.
Network Access--I/T/U Pharmacies
    We asked: How will I/T/U pharmacies and IHS beneficiaries achieve 
maximum participation in Part D benefits? What are the advantages and 
disadvantages for AI/AN enrollees who are eligible to enroll in Part D?
    Final Decision: We will require Part D plan sponsors to include I/
T/U pharmacies in their networks to the extent that those pharmacies 
are present in their service areas. We will require that plans offer 
any willing pharmacy (AWP) contracts to I/T/U pharmacies that include 
an addendum addressing certain minimum terms and conditions specified 
by us in separate guidance. We will require Part D plans to demonstrate 
that they have contracts with a sufficient number of I/T/U pharmacies 
to ensure ``convenient access'' to prescription drugs for AI/AN 
enrollees within the service area.
Any Willing Pharmacy
    We asked: Should we 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? Should ``any 
willing pharmacy'' provisions apply to non-retail--in particular mail 
order--pharmacies, as well as to retail?
    Final Decision: We will require plans to offer standard terms and 
conditions to all pharmacies for purposes of ensuring that any 
pharmacy, and any type of pharmacy, willing to accept the standard 
contact terms and conditions can join the pharmacy network.
Out-of-Network (OON) Access
    We requested comments on how emergency access standards should 
work. In the proposed rule, we required plans to ensure that their 
enrollees have adequate access to drugs dispensed at OON pharmacies 
when they cannot reasonably be expected to obtain covered Part D drugs 
at a network pharmacy. We requested comments on our proposed out-of-
network access requirements.
    In the preamble to our proposed regulations, we specified that the 
case of a Part D enrollee who is residing in a long-term care facility 
whose long-term care pharmacy does not contract with that enrollee's 
MA-PD plan or prescription drug plan is one in which we would expect 
plans to provide out-of-network access to drugs as provided under Sec.  
423.124 of our regulations.
    Final Decision: We adopt the out-of-network access policy set forth 
in the proposed rule and clarify that Sec.  423.124(c) of our final 
rules requires plans to establish reasonable rules to ensure that 
enrollees use out-of-network pharmacies in an appropriate manner. Plans 
must ensure adequate access to out-of-network pharmacies on a non-
routine basis when enrollees cannot reasonably access network 
pharmacies.
    We have defined the beneficiary cost sharing in relation to the 
total cost of the drug to the plan and the beneficiary. Therefore, in 
cases where the total payment is not limited by the plan allowable due 
to out-of-network status, the cost sharing should be defined as the 
total paid by the beneficiary, or in the case of a low-income 
individual, as the total cost sharing paid by both the beneficiary and 
CMS. However, we changed our proposed policy of allowing out-of-network 
access for long-term care pharmacies and now require Part D plans to 
provide network access.
Formularies
    We requested comments on many aspects of formulary management, such 
as:
     Does requiring a formulary to be ``developed and 
reviewed'' by a P&T committee mean that a P&T committee's decisions 
regarding the plan's formulary must be binding on the plan?
     Should we strengthen the statutory requirement in section 
1860D-4(b)(3)(A)(ii) of the Act by requiring that more than just one 
pharmacist and one physician on the P&T committee be independent and 
free of conflict?
     Should we require the direct involvement of a Pharmacy and 
Therapeutics Committee with cost containment measures, as well as with 
other areas of quality assurance and medication therapy management?
     What standards and criteria could we use to determine that 
a PDP sponsor or MA organization's formulary that is not based on the 
model classification system does not in fact discriminate against 
certain classes of Part D eligible beneficiaries?
     How can we balance plans' flexibility to maximize covered 
Part D drug discounts and lower enrollee premiums with the needs of 
certain special populations of Part D enrollees?
     What should be the minimum timeframes for periodic 
evaluation and analysis of protocols and procedures related to a plan's 
formulary by PDP plans and MA-PD plans (for example, quarterly, 
annually)?
    Final Decision: We made changes to the regulatory formulary 
requirements to balance: (1) building specific requirements into 
regulatory language to ensure plans offer adequate coverage of the 
types of drugs most commonly needed by Part D enrollees; with (2) 
maintaining flexibility to fine-tune formulary review requirements via 
separate guidance consistent with our final formulary review standards 
and processes developed based on public comment. The regulatory text 
revisions:
     Clarify that P&T committee members must be independent and 
free of conflict with respect not just to plans, but also 
pharmaceutical manufacturers.
     Specify a role for P&T committees in the approval of 
policies that guide medical exceptions and other utilization management 
processes, as well as treatment protocols and procedures related to a 
plan's formulary.
     Require the provision of adequate coverage of the types of 
drugs most commonly needed by Part D enrollees, as recognized in 
national treatment guidelines--above and beyond the 2-drugs-per-
category-and-class requirement.
     Provide us with the flexibility to specify additional 
requirements regarding plans' P&T committees and formularies via 
separate guidance.

[[Page 4441]]

     Specify that we will review plan formularies consistent 
with the non-discrimination provisions at Sec.  423.272(b)(2). We 
intend to conduct a comprehensive review of the plan design consistent 
with explicit formulary review standards and criteria-driven processes.
Quality Standards
    We asked: Are there industry standards for cost effective drug 
utilization management, and should we adopt any of these standards for 
PDPs and MA-PD plans? Among the issues we raised in the preamble is 
whether or not we should use the OBRA `90 Medicaid standards for these 
programs. OBRA `90 requires pharmacy programs to use proDUR and 
retroDUR and to offer counseling services.
    Final Decision: We require plans to demonstrate that their network 
providers are required to comply with pharmacy practice standards 
established by the States, to establish concurrent and retrospective 
DUR policies and systems, and to establish internal medication error 
identification and reduction systems.
Medication Therapy Management Programs(MTMP)
    We sought comments on what requirements or guidelines for MTMPs 
should be formulated in our regulations.
    Final Decision: We received a significant volume of comments on 
MTMP. Almost all the comments agreed that MTMP can make a significant 
difference in improving therapeutic outcomes. Despite some best 
practice examples, however, no widely accepted MTMP standards of 
practice were identified. We will not specify further service and 
service level requirements at this time. We also will not specify 
multiple chronic diseases and multiple drug requirements.
Anti-Fraud Programs
    We stated that we would be interested in comments on possible 
requirements in the area of fraud, waste and abuse over and above the 
incentives operating in at-risk plans.
    Final Decision: In an effort to consolidate requirements on plans 
we moved the fraud and abuse provision to subpart K at Sec.  
423.504(b)(4)(vi)(H) as a component of a Part D sponsor's overall 
compliance plan. Plans will be required to add a program to combat 
fraud, waste and abuse in their prescription drug benefits to their 
compliance plans. In addition, we eliminated the mandatory self-
reporting requirements that were proposed, but we expect all Part D 
sponsors to comply with the requirement for a comprehensive fraud and 
abuse plan.
E-Prescribing
    We solicited comments on many aspects of developing and 
implementing e-prescribing standards.
    Final Decision: While we included a fairly lengthy discussion of e-
prescribing in the August 2004 proposed rule, we intend to issue a 
separate proposed rule devoted to the standards that will be used for 
e-prescribing and have reserved Sec.  423.159(a) and Sec.  423.159(b) 
of this final rule for such e-prescribing standards. Therefore, most of 
the proposals we made with respect to such standards are not being 
addressed in this final rule. One standard we are finalizing is the 
requirement that Part D plans support e-prescribing. We received no 
comments on this proposal and are adopting it at Sec.  423.159(c).
Evaluating Bids
    We asked for comments on whether we should we adopt the standards 
used by OPM in 48 CFR Chapter 16.
    Final Decision: We have adopted most of the proposed rule 
provisions in the area of bid review, negotiation and approval, with 
the following clarifications: We-
     Clarify that the OPM-like authority (section 1860D-
11(d)(2)(B) of the Act) is in addition to our general authority to 
negotiate (section 1860D-11(d)(2)(A) of the Act).
     Clarify that we will not be proposing additional 
regulations based on 48 CFR Chapter 16.
     Clarify that we intend to examine profit using this 
authority.
     Clarify that we do not intend to require detailed 
information on acquisition costs from each and every plan. We would 
request additional information only when necessary.
     Reiterate our interpretation that the bid review authority 
does not violate the non-interference directive.
Calculations
    We solicited comment on the appropriateness of all of our proposed 
calculations.
    Final Decision: We will adopt all of the proposed calculations with 
the exception of our interpretation of the ``negative premium.'' We 
will allow for a ``negative premium'' for plans with bids below the 
benchmark by an amount in excess of the base beneficiary premium.
Data Submission
    We asked: What should be the content, format and frequency of data 
submissions?
    Final Decision: Because of the complexity of the MMA payment 
provisions, collecting 100 percent events data is necessary. While the 
volume is large, the minimal number of data elements we expect to 
collect (<25) and the simplicity of our own data processing system 
should minimize the burden of this approach. Our goal will be to 
collect the minimum amount of data we need to perform our payment 
functions.
Payment Adjustments
    We solicited comment on many operational aspects of payment of 
reinsurance and low-income subsidies, as well as for risk corridors and 
reconciliations.
    Final Decision: Reinsurance will be paid on a monthly basis during 
the year based on estimated reinsurance costs; however, we may move to 
payment on an as-incurred basis in later years. Low income cost-sharing 
subsidies will be made on an interim basis. Final reconciliation on 
reinsurance and low income subsidies will occur after the close of the 
year.

    We solicited comments on the nature of waivers that might be 
required for MA plans and employer-sponsored plans, among others.
    Final Decision: Information on specific waivers we will or will not 
grant is not addressed in this regulation, but will be described in 
separate guidance.
    Coordination with Other Plans
    We requested comment on what basis Part D COB user fees should be 
imposed on Part D plans.
    Final Decision: We intend to issue requirements for coordination 
with other prescription drug coverage by Part D plans as soon as 
possible in advance of the statutory deadline of July 1, 2005.
Part B/D Coordination of Benefits
    We asked: Should Part D cover Part B drugs denied under Part B 
because the pharmacy does not have a Medicare supplier number? Are 
there any other circumstances under which a Part B drug denied coverage 
under Part B should be covered under Part D? Are automatic claims 
cross-over procedures feasible between Part B and Part D payers?
    Final Decision: Based on the comments received regarding the 
various B/D coordination issues we described, we do not believe 
commenters identified any circumstances under which a drug denied 
coverage under Part B should automatically be covered under Part D, and 
we will not provide for automatic cross-over procedures.
Tracking TrOOP
    We requested comment on the following issues:
    Should CMS or the Part D plans be responsible for determining 
whether claims costs have been reimbursed by alternative coverage?

[[Page 4442]]

    What are the operational capabilities of plans to manage COB at the 
point of sale, particularly with respect to alternative wrap around 
coverage?
    Should reporting of third-party claims costs be mandatory or 
voluntary?
    Should we require beneficiaries to give consent for release of data 
held by third parties as part of their enrollment application?
    Are there any temporary or phased-in approaches to tracking TrOOP 
that may be necessary or advisable given the short timeframe between 
the final rule and program implementation?
    How can Part D plans receive information from beneficiaries or 
others regarding payment made by entities that do not participate in a 
centralized coordination of benefits system?
    Final Decision: In the proposed rule, we considered two options for 
operationalizing the data exchange related to the Part D coordination 
of benefits system and TROOP accounting:
     Option 1: The Part D plan s and MA-PD plans will be solely 
responsible for tracking TrOOP costs.
     Option 2: We will procure a TrOOP facilitation contractor 
to establish a single point of contact between payers, primary or 
secondary.
    While this is not a regulatory issue, we will work toward some 
variation on Option 2, since we believe this is the most efficient and 
effective way to implement the TrOOP. Further information will be 
issued with our requirements for coordination with other plans by Part 
D plans as soon as possible in advance of the statutory deadline of 
July 1, 2005.
Appeals
    We solicited comments on coverage determinations and notices and 
exceptions procedures.
    We proposed a limited number of elements that must be included in a 
sponsor's formulary exceptions criteria. We also considered including a 
number of other exceptions criteria and adding criteria for the review 
process that is used to evaluate formularies and tier structures. We 
asked for comment on whether we should specify the decision criteria 
for beneficiary appeals, or whether Part D plans should be held 
accountable to follow their own decision criteria.
    Final Decision: Consistent with the August 2004 proposed rule, we 
specify that a coverage determination is made by the Part D plan, not 
at the pharmacy, and we address notice and timing issues. We have 
shortened the coverage determination timeframes for making expedited 
and standard coverage determinations, redeterminations and 
reconsiderations. We limit tiering exceptions to obtaining a non-
preferred drug at the price of a preferred drug, and specify that 
tiering exceptions need not be granted in cases where a Part D sponsor 
has a formulary tier in which it places very high cost and unique 
items, such as genomic and biotech products. We require that plans 
grant exceptions to tiering when the physician certifies that the 
preferred drug would not be as effective as the non-preferred on-
formulary drug or would have an adverse effect on the individual and 
the plan agrees with such certification. Similarly, for off-formulary 
exceptions, if the physician certifies that the on-formulary drug would 
not be as effective as the prescribed drug or would have adverse 
effects and the plan agrees with such certification, a formulary 
exception must be granted. Grievance procedures also are revised to 
accordance with changes to the Medicare Advantage final rule.
Employer Sponsored Prescription Drug Programs and Appeals
    We solicited comments on whether, and to what extent, the 
application of parallel procedures between employer sponsored 
prescription drug plans governed by ERISA and plans offered under part 
423 of our proposed regulations might be a problem for plans, 
employers, or eligible individuals. We also solicited suggestions for 
addressing problems, if any, that result from the application of 
parallel procedures.
    Final Decision: We have added Sec.  423.562(d), which is intended 
to give ERISA plans the option, according to regulations of the 
Secretary of Labor, of electing the Part D process rather than the 
procedures under 29 CFR 2560.503-1 for claims involving supplemental 
benefits provided by contract with a Part D plan. The provision in 
Sec.  423.562(d) would not take effect in the absence of regulations by 
the Secretary of Labor.
Low-Income Subsidy Determinations and Notification
    We invited general comments on how we could ensure consistent 
eligibility determination, redetermination and appeal processes for 
low-income subsidies. We requested comments on how we should calculate 
the sliding scale premium subsidy for individuals with income from 135 
percent up to 150 percent of the FPL. We offered an example to set a 
scale in a stepped fashion, for example, a set decrease in the subsidy 
amount for every 5 percent increase in income level.
    Final Decision: We require that the Part D plan be responsible for 
direct reimbursement to beneficiaries for out-of-pocket costs incurred 
after the effective date of subsidy eligibility. We also require the 
Part D plan to have processes for reimbursing a charity or program for 
any premium and cost sharing amounts paid on behalf of an individual 
subsequent to the effective date of the subsidy. We adopted the 
proposed sliding scale premium methodology in this rule.
Fallback Plan Requirements
    We invited comment on whether we should define ``offering a 
fallback plan'' as agreeing to potentially offer a plan in a region, or 
as actually providing a fallback plan in fallback service areas. We 
also solicited comment on whether we should use the Indefinite Delivery 
type of contract.
    Final Decision: We adopted the interpretation that offering a 
fallback plan means actually providing a fallback plan in fallback 
service areas. We have also determined that fallback contracts will not 
be written under the FAR or 48 CFR provisions; therefore, it is no 
longer accurate to refer to the standby contracts as indefinite 
duration, indefinite quantity (IDIQ) contracts--which is a term used 
under the FAR.
Fallback Payment
    We requested comment on fallback payment methodologies, 
particularly in regard to prospective or retrospective rebate 
allocation. We also requested comments on alternative reference points 
to the Average Wholesale Price (AWP) or alternative methodologies that 
could promote competitive pricing.
    Final Decision: Information on the fallback payment process is not 
addressed in this final regulation, but will be described in separate 
guidance. The AWP remains the primary measuring stick for drug costs. 
We will therefore be incorporating it into our performance targets. 
However, we will be looking at other indicators or proxies for 
financial performance, such as rates of generic substitution, that will 
provide other perspectives on cost management.
Access Standards in the Territories
    We asked whether the waivers proposed for the territories were 
appropriate, and were any others warranted to ensure access to 
individuals residing in the territories?
    Final Decision: The only comments received with respect to the 
territories concerned the design of the regions, and these have been 
addressed in separate guidance. As a result, we have retained the broad 
waiver authority in Sec.  423.859(c), and will continue to conduct 
research to determine how best to facilitate Part D coverage in the 
territories. Specific waivers will be addressed in separate guidance.
Subsidy Process

[[Page 4443]]

    We solicited comments on many aspects of the proposed retiree drug 
subsidy process.
    Final Decision: After reviewing the comments, we made many policy 
decisions in the final rule, including:
     Announcing that we would allow retiree drug plans the 
flexibility to receive subsidy payments on a monthly, quarterly or 
annual basis at their discretion;
     Providing insured plan sponsors the flexibility to use 
premiums as the cost basis for interim subsidy payments;
     Clarifying what information must be submitted with 
enrollment data;
     Providing sponsors the flexibility to use either the 
calendar year or their plan year (if different from the calendar year) 
for calculating the subsidy and for determining actuarial equivalence; 
and
     Allowing sponsors broad discretion in determining who 
meets the definition of a qualifying covered retiree for purposes of 
the subsidy.
    Further details on the implementation of the subsidy program will 
be provided in separate guidance.
Actuarial Equivalence for Subsidy
    We asked for comments on the likely responses of plan sponsors to 
the different approaches we proposed. In addition, we solicited 
comments not only on the desirability of the different options, but 
also on the legal bases for possible options.
    Final Decision: The final regulation includes a two-part test for 
plan sponsors to determine whether ``actuarial equivalence,'' has been 
met.
Change in Definition of Outpatient Prescription Drugs
    We solicited comments on the new definition for purposes of the 
physician self-referral prohibition.
    Final Decision: We finalized this proposal without substantive 
change.
Waivers Needed for Cost Plans or CMPs
    We invited 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.
    Final Decision: We have clarified that Part D will be offered 
somewhat differently by cost plans:
    (1) Cost plans that choose to offer qualified Part D coverage under 
Sec.  417.440(b)(2) may do so only by offering qualified Part D 
coverage as an optional supplemental benefit.
    (2) Cost plans that offer qualified Part D coverage must offer 
basic prescription drug coverage. A cost plan that offers basic 
prescription drug coverage may offer additional qualified Part D 
coverage choices.
    (3) A cost plan that does not offer qualified Part D coverage under 
Sec.  417.440(b)(1)(iii) may offer non-qualified drug coverage that is 
not reimbursed under this part or title.
Creditable Coverage Notice for Medigap Policies
    The proposed rule set forth a draft disclosure notice for Medigap 
issuers to use for policies that do not have creditable coverage. We 
solicited comments on how the draft disclosure notice could be adapted 
for the types of Medigap policies that do provide creditable coverage.
    Final Decision: We have determined that the format and content of 
the notice could be improved based on information gathered through 
consumer testing, so we now plan to publish the final model disclosure 
notice separately from this final regulation. We also plan to publish a 
model disclosure notice for policies that do provide creditable 
coverage.
PACE Waivers
    We invited comments on the MMA requirements we proposed to be 
waived for PACE organizations and asked for comment on additional 
waivers that may be needed to integrate the Medicare prescription drug 
benefit and the PACE benefit.
    Final Decision: We have finalized our proposed waiver of section 
423.265(b) and will allow PACE plans to submit Part D bids after the 
first Monday in June each year. However, we clarified that we expect 
PACE plans that are operational as of the first Monday in June each 
year to meet the bid submission deadline. Information on additional 
waivers will not be addressed in this regulation, but will be described 
in separate guidance.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether 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 information collection requirements in 
this regulation.
Subpart A--General Provisions
    Subpart A does not contain any requirements subject to the PRA.
Subpart B--Eligibility and Enrollment.
     Sec.  423.32 Enrollment process.
    (a) A Part D eligible who wishes to enroll in a Part D may enroll 
during the enrollment periods specified in Sec.  423.38, by filing the 
appropriate enrollment form with the Part D plan or through other 
mechanisms CMS determines are appropriate.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit the required enrollment 
application to a Part D plan sponsor. We estimate that it will take 30 
minutes to complete and submit the required application to the Part D 
plan. 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 Part D plans in 2006. In 2007, 
and beyond, the number of enrollments will be substantially less, since 
an individual will generally be limited to changing Part D plans during 
the annual coordinated election period. Therefore, it is estimated 6 
million individuals may change their Part D plans annually and that 2 
million new beneficiaries will be making first time enrollments into 
Part D plans.
    (b) Enrollment form or CMS-approved mechanism. The enrollment must 
be completed by the individual and include an acknowledgement by the 
beneficiary for disclosure and exchange of necessary information 
between the U.S. Department of Health and Human Services (or its 
designees) and the Part D plan sponsor. Persons who assist 
beneficiaries in completing the enrollment, including authorized 
representatives, must indicate they have provided assistance and their 
relationship to the beneficiary.
    The burden associated with this requirement is reflected above 
under section 423.32(a).
    A Part D plan sponsor may require Part D eligible individuals 
enrolling or enrolled in its Part D plan to provide information 
regarding reimbursement for Part D costs through other insurance, group 
health plan or other third-party payment arrangement, in a form and 
manner approved by CMS.
    The burden associated with the requirement for individuals to 
provide information regarding reimbursement

[[Page 4444]]

for Part D costs through other insurance, group health plan or other 
third-party payment arrangement enrolled or enrolling in a Part D plan 
is total annual burden of 43,333 hours. We estimate that 2.6 million 
beneficiaries will need 1 minute to disclose reimbursement for Part D 
costs to the appropriate entity on an annual basis, for a total annual 
burden of 43,333 hours.
    (d) Notice requirement. The Part D plan 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.
    The burden associated with this requirement is the time and effort 
necessary for a Part D plan sponsor to disclose to an individual notice 
of acceptance or denial of the individual's enrollment request. We 
estimate that during the first Part D initial enrollment period a total 
of 24 million notices will be disclosed, affecting approximately 64 
Part D plans (based upon an estimate of 2 Part D plans per 34 regions). 
Given that each Part D plan will be creating disclosure notices for 
mass mailings, we are proposing the following burden estimates. We 
estimate that it will take each Part D plan 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 Part D 
plan sponsor 1 minute to assemble and disseminate each notice. We 
further estimate that on average, it will take each sponsor 5,860 hours 
to disclose 375,000 notices during this first year. In 2007, and 
beyond, we estimate that 93,750 notices will be disclosed annually at 
1,465 hours per sponsor. This assumption is based on the premise that 
once the notices have been standardized, a Part D plan sponsor will 
mass-produce and mail the required notices.
     Sec.  423.36 Disenrollment process.
    (b) The Part D plan sponsor must submit a disenrollment notice to 
CMS within timeframes CMS specifies; provide the enrollee with a notice 
of disenrollment as CMS determines and approves; and file and retain 
disenrollment requests for the period specified in CMS instructions.
    The burden associated with this requirement is the time and effort 
necessary for a Part D plan 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 Part D plan sponsors to some 
degree, as described below. Given that each Part D plan sponsor will be 
creating disclosure notices for mass mailings, we are proposing the 
following burden estimates. We estimate that it will take each Part D 
plan sponsor approximately 8 hours to produce the standardized notice. 
We further estimate that on average, it will take each Part D plan 1 
minute to disclose each notice.
     Sec.  423.38 Enrollment periods.
    (c) Under the special enrollment period provisions, an individual 
is eligible to enroll in a Part D plan or disenroll from a Part D plan 
and enroll in another Part D plan, if the individual demonstrates to 
CMS, in accordance with guidelines CMS issues, that the Part D plan 
sponsor offering the Part D plan 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 Part D plan 
substantially violated a material provision of its contract. Based on 
our experience with the current Medicare Advantage 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.
     Sec.  423.44 Involuntary disenrollment by the Part D plan.
    (c) If the disenrollment is for any of the reasons specified in 
paragraphs (b)(1), and (b)(2) of this section (that is, other than 
death Part D eligibility), the Part D plan sponsor must give the 
individual timely notice of the disenrollment with an explanation of 
why the Part D plan is planning to disenroll the individual. Notices 
for reasons specified in paragraphs (b)(1) through (b)(2) of this 
section must be provided to the individual before submission of the 
disenrollment notice to CMS; and include an explanation of the 
individual's right to a hearing under the Part D plan's grievance 
procedures.
    (d) A Part D plan sponsor may disenroll an individual from the Part 
D plan for failure to pay any monthly premium if the Part D plan 
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 Part D plan sponsor to submit the required materials to 
CMS demonstrating that the Part D plan sponsor made reasonable efforts 
to collect the unpaid premium amount and the time and effort necessary 
for a Part D plan sponsor to disclose to an individual the notice of 
disenrollment. We estimate that it will take a Part D plan 5 minutes to 
submit the required transaction to CMS for each occurrence and that 
each of the Part D plan 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 Part D plan 1 minute 
to disclose each notice and that each Part D plan will be required to 
disclose 960 notices on an annual basis for a annual burden of 16 
hours.
    A Part D plan may disenroll an individual whose behavior is 
disruptive, only after it meets the requirements described in this 
section and after CMS has reviewed and approved the request.
    To disenroll an individual from its Part D plan, based on an 
individual's behavior, the Part D plan sponsor must document the 
enrollee's behavior, its own efforts to resolve any problems and any 
extenuating circumstances. The Part D plan must submit this information 
and any documentation received by the beneficiary to CMS. The Part D 
plan sponsor may request from CMS the ability to decline future 
enrollment by the individual.
    The burden associated with this requirement is the time and effort 
necessary for a Part D plan to document and retain the documentation 
that meets the requirements set forth in this section. We estimate that 
it will take a Part D plan 3 hours to capture and retain the required 
documentation for each occurrence and that each Part D plan will have 1 
occurrence on an annual basis.
    In addition, the Part D plan must inform the individual of the 
right to use the Part D plan 's grievance procedures.
    The burden associated with this requirement is captured under 
section Sec.  423.128.
    When a Part D plan contract terminates as stipulated under 423.507 
and 423.510 the Part D plan sponsor must send a notice to the enrollee 
before the effective date of the plan termination or area reduction. 
The notice must give provide an effective date of the plan termination 
and a description of alternatives for obtaining benefits under Part D.
    The burden associated with these requirements is discussed below 
under sections 423.507 and 423.510.
     Sec.  423.48 Information about Part D.
    Each Part D plan and MA-PD plan must provide, on an annual basis, 
and

[[Page 4445]]

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 Part D plan to submit the required materials to CMS. We 
estimate that on an annual basis it will take 68 Part D plan sponsors 2 
hours to submit the required documentation to CMS.
     Sec.  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 Part D plan sponsor must submit 
the its marketing materials and forms to CMS for review.
    The burden associated with this requirement is the time and effort 
necessary for a Part D plan to submit the required materials to CMS. We 
estimate that on an annual basis it will take 68 Part D plan sponsors 2 
hours to submit the required documentation to CMS.
     Sec.  423.56 Procedures to determine and document 
creditable status of prescription drug coverage.
    (c) Each entity that offers prescription drug coverage under any of 
the types described in Sec.  423.56(b) must disclose, to all Part D 
eligible individuals whether such coverage meets the actuarial 
requirements specified in guidelines provided by CMS. These notices 
must be provided to Part D eligible individuals, at minimum, at the 
following times: (1) prior to an individual's initial enrollment period 
for Part D, as described under Sec.  423.38(a); (2) prior to the 
effective date of enrollment in the coverage, and upon any change in 
creditable status; (3) prior to the commencement of the Annual 
Coordinated Election Period (ACEP) that begins on November 15 of each 
year, as defined in 423.38(b); or (4) upon request by the individual. 
In an effort to reduce the burden associated with providing these 
notices, we have revised our final regulations to allow most entities 
(with the exception of Medigap insurers) to provide notices of 
creditable and non-creditable status with other information materials 
that these entities distribute to beneficiaries (rather than 
separately) and, as discussed in the preamble, we anticipate providing 
model language for both types of notices.
    The burden associated with this requirement is the time and effort 
necessary for each of these entities to disclose to an individual 
notice of coverage. We estimate that it will require slightly over 
400,000 entities to provide notices in existing plan materials 
(including 400,000 employer and union-sponsored group health plans with 
Medicare-eligible workers, and fewer than 50 other entities including 
State Pharmaceutical Assistance Programs, a handful of State Pharmacy 
Plus programs), and over 100 Medigap insurers to provide 1,900,000 
separate initial notices in 2005. In addition to these initial notices, 
we estimate that in each subsequent year these same entities will be 
required to distribute notices in plan materials (including initial 
notices to new beneficiaries, annual notices prior to the ACEP, and 
notices of changes in creditable coverage status), as well as 447,789 
additional separate notices to individuals upon request. [Note: A 
discussion of the costs and burden associated with the disclosure 
notices for public and private employers and unions sponsoring retiree 
coverage can be found in the impact analysis section on administrative 
costs associated with disclosure notice requirements and the PRA 
section on requirements for qualified retiree prescription drug plans, 
respectively.]
    Given that each entity (with the exception of Medigap insurers) 
will be creating most of these disclosure notices for inclusion in 
existing plan materials, we make the following burden estimates. For 
initial notices of creditable coverage, subsequent notices prior to the 
commencement of the ACEP, and notices of changes in creditable 
coverage, we estimate that it will take each entity approximately 8 
hours to produce the standardized notice. We further estimate that on 
average, it will take each entity (with the exception of Medigap 
insurers) a negligible amount of time to disclose each notice, since 
they will be incorporating notices into existing plan materials that 
are provided to beneficiaries (which are already being disseminated to 
their participants). In the case of Medigap insurers, we estimate that 
they will spend 1 hour per 60 notices for mass-mailing separate notices 
to beneficiaries. We further estimate that each entity will spend 
approximately 5 minutes per notice for providing separate additional 
copies of the notices to individual beneficiaries upon request. It is 
estimated that the burden per entity will be as follows:
     On average, the 4 State Pharmacy Plus programs will 
provide initial notices in existing beneficiary plan materials in 2005 
for an annual burden of 8 hours (these notices are required 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 400,000 group health plans will 
provide initial notices in existing beneficiary plan materials in 2005 
for an annual burden of 2 hours. Additionally, in subsequent years, on 
average, we estimate that these 400,000 group health plans will provide 
100,000 additional separate notices to individuals upon request for an 
annual burden of 1.25 minutes. We also estimate that in subsequent 
years, on average, 4,000 of these group health plans will experience 
changes in creditable coverage status and provide notice of their new 
creditable coverage status in their plan materials, for an annual 
burden of 2 hours. We estimate that the annual burden associated with 
providing notices prior to the ACEP in subsequent years will be 
negligible, since they will be able to include these notices in their 
existing plan materials with minimal modifications.
     On average each of the 20 State Pharmaceutical Assistance 
Programs will provide initial notices in existing beneficiary plan 
materials in 2005 for an annual burden of 8 hours per State. We 
estimate that the annual burden associated with providing notices prior 
to the ACEP in subsequent years will be negligible, since they will be 
able to include these notices in their existing plan materials with 
minimal modifications.
     On average each of an estimated 120 Medigap issuers will 
provide 15,833 separate initial notices in 2005 for an annual burden of 
264 hours. Additionally, in subsequent years, on average, we estimate 
that these 120 Medigap issuers will provide 40 additional separate 
notices to individuals upon request for an annual burden of 3.3 hours. 
We estimate that the annual burden associated with providing notices 
prior to the ACEP in subsequent years will be negligible, since the 
regulatory impact analysis assumes that the vast majority of 
beneficiaries with Medigap drug coverage will enroll in Part D.
    (e) Each entity must disclose their creditable coverage status to 
CMS in a form and manner described by CMS. Each entity must disclose 
their initial creditable coverage status to CMS in 2005, as well as any 
subsequent change in creditable coverage status.
    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 it

[[Page 4446]]

will take each entity 1 hour to submit the required documentation to 
CMS.
Subpart C--Benefits and Beneficiary Protections.
     Sec.  423.104 Requirements related to qualified 
prescription drug coverage.
    (g) A Part D plan sponsor is required to disclose to CMS data on 
aggregate negotiated price concessions obtained from pharmaceutical 
manufacturers, as well as data on aggregate negotiated price 
concessions obtained from pharmaceutical manufacturers that are passed 
through to beneficiaries, via pharmacies and other dispensers, in the 
form of lower subsidies paid by CMS on behalf of low-income individuals 
or the form of lower monthly beneficiary premiums or lower covered Part 
D drug prices at the point of sale.
    The burden associated with this requirement is the time and effort 
necessary for a Part D plan sponsor to disclose to CMS the aggregate 
negotiated price data on concessions. We estimate that on an annual 
basis it will take 100 Part D plan sponsors and 350 MA organizations 10 
hours to submit the required documentation to CMS for total annual 
burden of 4,500 hours.
     Sec.  423.120 Access to covered Part D drugs.
    (b) A Part D plan sponsor's formulary must be reviewed by a 
pharmacy and therapeutic committee that 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 Part D sponsor's pharmacy and therapeutic committee to 
document and retain the documentation that meets the requirements set 
forth in this section.
    We estimate that it will take 100 Part D plan sponsors and 350 MA 
organizations 1 hour each to capture and retain the required 
documentation on an annual basis for total annual burden of 450 hours.
    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, a Part D plan sponsor must provide at least 60 
days notice to CMS, State Pharmaceutical Assistance Programs, entities 
providing other prescription drug coverage (as described in Sec.  
423.464(f)(1)), authorized prescribers, network pharmacies, and 
pharmacists.
    The burden associated with this requirement is the time and effort 
necessary for a Part D sponsor to provide notice of at least 60 days to 
CMS, State Pharmaceutical Assistance Programs, entities providing other 
prescription drug coverage, authorized prescribers, network 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 Part D plan sponsors and 350 MA organizations 
40 hours to disclose the required notice for a total annual burden of 
18,450 hours.
    (c) A Part D sponsor 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.
     Sec.  423.128 Dissemination of Part D plan information.
    (a) A part D sponsor must disclose information about its Part D 
plan(s) as required by this section to each enrollee of a Part D plan 
offered by the Part D sponsor under this part and to Part D eligible 
individuals.
    The burden associated with this requirement is the time and effort 
necessary for a Part D sponsor to disclose information and materials 
about its Part D plan(s). We estimate that it will require 100 Part D 
plan 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 Part D sponsor must furnish directly to enrollees an 
explanation of benefits when prescription drug benefits are provided 
under qualified prescription drug coverage that meets the requirements 
set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for 100 Part D plan sponsors and 350 MA organizations to 
provide an explanation of benefits when prescription drug benefits are 
provided 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.
     Sec.  423.132 Public disclosure of pharmaceutical prices 
for equivalent drugs.
    (a) Except as provided under paragraph (c) of this section, a Part 
D sponsor 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 covered 
Part D drug that is therapeutically equivalent and bioequivalent and 
available at that pharmacy, unless the particular covered Part D drug 
being purchased is the lowest-priced therapeutically equivalent and 
bioequivalent version of that drug available at that pharmacy.
    Subject to paragraph (d) of this section, the information under 
paragraph (a) of this section must be provided after the drug is 
dispensed at the point of sale or, in the case of dispensing by mail 
order, at the time of delivery of the drug.
    The burden associated with this requirement is the time and effort 
necessary for the Part D sponsor to notify the pharmacy of the 
disclosure requirement referenced in this section and the burden on a 
pharmacy to provide the necessary disclosure to the enrollee. While 
these requirements are subject to the PRA, the burden associated with 
the requirements is exempt from the PRA as stipulated under 5 CFR 
1320.3(b)(2) and (b)(3). These paragraphs of the PRA regulation state 
that a usual and customary business activity incurred by persons in the 
normal course of business, or a requirement sponsored by the Federal 
government that is also sponsored by a unit of a State or local 
government does not impose additional burden.
     Sec.  423.136 Privacy, confidentiality, and accuracy of 
enrollee records
    (c) and (d) For any medical records or other health and enrollment 
information it maintains with respect to enrollees, a Part D plan 
sponsor must maintain the records and information in an accurate and 
timely manner and provide timely access by enrollees to the records and 
information that pertain to them.
    While these requirements properly maintain and disclose enrollee 
records are subject to the PRA, the burden associated with the 
requirements is exempt from the PRA as stipulated under 5 CFR 
1320.3(b)(2) and (b)(3).
    These paragraphs of the PRA regulation state that a usual and 
customary business activity incurred by persons in the normal course of 
business, or a requirement sponsored by the Federal government that is 
also sponsored by a unit of a State or local

[[Page 4447]]

government does not impose additional burden.
Subpart D--Cost Control and Quality Improvement Requirements for Part D 
Plans
     Sec.  423.153 Drug utilization management, quality 
assurance, and medication therapy management prgrams (MTMPs).
    (b) A Part D sponsor must provide CMS with information concerning 
the procedures and performance of its drug utilization management 
program, according to guidelines specified by CMS.
    The burden associated with this requirement is the time and effort 
necessary for the Part D sponsor to provide CMS with information 
concerning its drug utilization management program, according to 
guidelines specified by CMS.
    We estimate that is will require 100 Part D sponsors, 30 minutes 
each to provide the required material to CMS for consideration for a 
total annual burden of 50 hours.
    (c) A Part D sponsor must provide CMS with information concerning 
its quality assurance measures and systems, according to guidelines 
specified by CMS.
    The burden associated with this requirement is the time and effort 
necessary for the Part D plan sponsor to provide CMS with information 
concerning its quality assurance measures and systems, according to 
guidelines specified by CMS.
    We estimate that is will require 100 Part D plan sponsors 30 
minutes each to provide the required material to CMS for consideration 
for a total annual burden of 50 hours.
    (d) A Part D sponsor must provide drug claims data to CCIPs for 
those beneficiaries that are enrolled in CCIPs in a manner specified by 
CMS and a Part D sponsor must provide CMS with information regarding 
the procedures and performance of its MTM program, according to 
guidelines specified by CMS.
    The burden associated with this requirement is the time and effort 
necessary for each Part D sponsor to provide drug claims data to CCIPs 
for those beneficiaries that are enrolled in CCIPs and to provide CMS 
information regarding the procedures and performance of its MTM 
program, according to guidelines specified by CMS.
    We estimate that is will require 100 Part D sponsors 60 minutes 
each to provide the required material to CCIPs and 100 Part D plan 
sponsors and 30 minutes each to provide the required material to CMS 
for consideration for a total annual burden of 150 hours.
    An applicant to become a Part D plan sponsor must describe in its 
application how it will take into account the resources used and time 
required to implement the MTM program it chooses to adopt in 
establishing fees for pharmacists or others providing MTM services for 
covered Part D drugs under a prescription drug plan and disclose to CMS 
upon request the amount of the management and dispensing fees and the 
portion paid for MTM 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.
    The burden associated with this requirement is captured under Sec.  
423.265.
     Sec.  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 information 
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.
     Sec.  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
     Sec.  423.265 Submission of bids and related information.
    (a) An applicant may submit a bid that meets the requirements set 
forth in this section and related sections of this regulation, to 
become a Part D sponsor.
    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 Part D sponsor 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 8,000 hours.
Subpart G--Payments to Part D plan sponsors and MA-PD Plans For All 
Medicare Beneficiaries For Qualified Prescription Drug Coverage
     Sec.  423.329 Determination of payment.
    (b) Part D plan 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 Part D plan sponsors submit the required claims data to 
CMS. We estimate that on an annual basis it will take 100 Part D plan 
sponsors 52 hours to submit the required documentation to CMS for total 
annual burden of 5,200 hours.
    (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.
    The burden associated with this requirement is the time and effort 
necessary for MA organizations submit the required claims data to CMS. 
We estimate that on an annual basis it will take 350 MA organizations 
15 hours to submit the required documentation to CMS for total annual 
burden of 5,250 hours.
     Sec.  423.336 Risk-sharing arrangements.
    (a) A Part D plan 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 Part D plan sponsors submit the required bid materials to 
CMS. We estimate that on an annual basis it will take 10 Part D plan 
sponsors 20 hours to submit the required documentation to CMS for total 
annual burden of 200 hours.
    (c) Within 6 months of the end of a coverage year, the Part D plan 
plan must provide the information that CMS requires.
    The burden associated with this requirement is the time and effort 
necessary for Part D plan sponsors submit the required cost data to 
CMS. We estimate that on an annual basis it will take 100 Part D only 
sponsors and 350 MA organizations 10 hours to submit the required 
documentation to CMS for total annual burden of 45,000 hours.
     Sec.  423.343 Retroactive adjustments and reconciliations.
    (c) Within 6 months of the end of a coverage year, the Part D plan 
plan must provide the information that CMS requires.

[[Page 4448]]

    The burden associated with this requirement is the time and effort 
necessary for Part D only sponsors to submit the required data to CMS. 
We estimate that on an annual basis it will take 100 Part D Only 
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 of the end of a coverage year, the Part D plan 
plan must provide the information that CMS requires.
    The burden associated with this requirement is the time and effort 
necessary for Part only sponsors to submit the required cost data to 
CMS. We estimate that on an annual basis it will take 100 Part D only 
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
     Sec.  423.410 Waiver of certain requirements to expand 
choice.
    (e) Under this section a Part D plan sponsor 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 Part D plan sponsor applicant to submit a waiver 
application that meets the requirements of this section. We estimate 
that on an annual basis it will take 15 applicants 10 hours to submit 
the required waiver documentation to CMS for total annual burden of 150 
hours.
Subpart J--Coordination of Part D Plans with Other Prescription Drug 
Coverage
     Sec.  423.458 Application of Part D rules to Certain Part 
D Plans on and after January 1, 2006.
    (b) Organizations offering or seeking to offer a MA-PD plan may 
request from CMS in writing waiver or modification of those 
requirements under this part that are duplicative of, or that are in 
conflict with provisions otherwise applicable to the plan under Part C.
    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 on average that 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.
    (c) Any entity seeking to offer, sponsor, or administer an 
employer-sponsored group prescription drug plan may request, in 
writing, a waiver or modification of additional requirements under this 
Part that hinder its design of, the offering of, or the enrollment in, 
such employer-sponsored group prescription drug plan.
    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 on average that we will receive 500 waiver applicants, 
20 hours to provide the required material to CMS for consideration for 
a total annual burden of 10,000 hours. However, it should be noted that 
the number of respondents is an average for over the initial five year 
period and over time we expect an increase in the number of applicants.
    (d) A cost plan (as defined in 42 CFR 417.401) or PACE organization 
(as defined in 42 CFR 460.6) that offers qualified prescription drug 
coverage under Part D may request, in writing, a waiver or modification 
of those requirements under this part otherwise applicable to cost 
plans or PACE organizations that are duplicative of, or that are in 
conflict with, provisions otherwise applicable to cost plans under 
section 1876 of the Act or PACE organizations or 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 cost plans or 
PACE organizations.
    The burden associated with this requirement is the time and effort 
necessary for a cost plan or PACE 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.
     Sec.  423.464 Coordination of benefits with other 
providers of prescription drug coverage
    (f) A Part D plan must exclude expenditures for covered Part D 
drugs made by insurance or otherwise, a group health plan, or other 
third party payment arrangements, including expenditures by plans 
offering other prescription drug coverage for purposes of determining 
whether a Part D plan enrollee has satisfied the out-of-pocket 
threshold provided under Sec.  423.104(d)(5)(iii). To ensure that this 
requirement is met, A Part D enrollee must disclose all these 
expenditures to a Part D plan in accordance with requirements under 
Sec.  423.32(b)(ii).
    The burden associated with this requirement is the time and effort 
necessary for a Part D enrollee to disclose all these expenditures to a 
Part D plan in accordance with requirements under Sec.  423.32(b)(ii). 
The burden associated with this requirement is captures and discussed 
above under Sec.  423.32(b).
Subpart K--Application Procedures and Contracts With Part D Plan 
Sponsors
     Sec.  423.502 Application requirements.
    (b) In order to become a Part D sponsor, an entity, or an 
individual authorized to act for the entity (the applicant), must 
complete, comply with, 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 Part D sponsors and MA organizations to submit the 
required application materials to CMS. We estimate that on an annual 
basis it will take 100 Part D sponsors and 350 MA organizations 10 
hours to submit the required documentation to CMS for total annual 
burden of 4,500 hours.
     Sec.  423.505 Contract provisions
    (d) The Part D sponsor agrees must maintain for 10 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 Part D sponsors and MA organizations to maintain the 
required documentation outlined in this section. We estimate that on an 
annual basis it will take 100 Part D 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 Part D 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 Part D sponsors and MA organizations to submit the 
required certified data to CMS. We estimate that on an annual basis it 
will take 100 Part D plan sponsors and 350 MA organizations 8 hours to 
submit the required documentation to CMS for total annual burden of 
3,600 hours.
     Sec.  423.507 Nonrenewal of Contract.
    (a) If a Part D 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

[[Page 4449]]

before the date on which the nonrenewal is effective.
    The burden associated with this requirement is the time and effort 
necessary for a Part D sponsor to submit a notice of nonrenewal to CMS. 
Since this requirement affects less than 9 entities per year, it is 
exempt from the PRA in accordance with 5 CFR 1320.3(c).
     Sec.  423.508 Modification or termination of contract by 
mutual consent.
    (b) If the contract is terminated by mutual consent, the Part D 
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.
     Sec.  423.509 Termination of Contract by CMS.
    (b) If CMS notifies the Part D sponsor in writing 90 days before 
the intended date of their termination the Part D plan sponsor must 
notify its Medicare enrollees of the termination by mail at least 30 
days before the effective date of the termination.
    The Part D 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 Part D sponsor's 
service area.
    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.
     Sec.  423.510 Termination of contract by the Part D 
sponsor.
    (b) If a Part D sponsor terminates its contract because CMS fails 
to substantially carry out the terms of the contract the Part D 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 then 9 of these terminations will occur on an 
annual basis.
     Sec.  423.514 Reporting requirements.
    (b) Each Part D 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 Part D 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 Part D plan sponsors 40 hours to submit the required 
documentation, for total annual burden of 4,000 hours.
    (d) For an employees' health benefits plan that includes a Part D 
sponsor in its offerings, the Part D plan sponsor must furnish, upon 
request, the information the plan needs to fulfill its reporting and 
disclosure obligations (for the particular Part D plan sponsor) under 
the Employee Retirement Income Security Act of 1974 (ERISA). The Part D 
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.
    The burden associated with this requirement is the time and effort 
necessary for 100 Part D plan sponsors to submit the required document 
that meets all of the requirements referenced in this section. We 
estimate that on an annual basis it will take 100 Part D plan sponsors 
40 hours to submit the required documentation, for total annual burden 
of 4,000 hours.
    (e) Each Part D plan sponsor must notify CMS of any loans or other 
special financial arrangements it makes with contractors, 
subcontractors and related entities.
    The burden associated with this requirement is the time and effort 
necessary for 100 Part D plan sponsors to notify CMS of any loans or 
other special financial arrangements it makes with contractors, 
subcontractors and related entities. We estimate that on an annual 
basis it will take 100 Part D plan sponsors 1 hour to notify the 
required entities, for total annual burden of 100 hours.
    (f) Each Part D plan 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 Part D plan 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 Part D plan 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
     Sec.  423.551 General provisions
    (c) states that a Part D plan 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 Part D plan 
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 Part D plan 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.
     Sec.  423.552 Novation agreement requirements
    (a) Discusses the conditions for CMS approval of a novation 
agreement. This paragraph requires the Part D plan 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 Part D plan 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 Part D plan 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 1320.3(c).
Subpart M--Grievances, Coverage Determinations, and Appeals
     Sec.  423.562 General Provisions
    (a) A Part D plan sponsor must ensure that all enrollees receive 
written information about the grievance, coverage determination, and 
appeals procedures that are available to them through the Part D plan 
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 Part D plan sponsors to disclose the 
necessary information to an enrollee. We estimate that it will require 
each of the 100 Part D plan sponsors 8 hours on an annual

[[Page 4450]]

basis to disclose the information for a total annual burden of 800 
hours.
     Sec.  423.564 Grievance procedures.
    (e) The Part D plan sponsor must notify the enrollee of its 
decision as expeditiously as the case requires, based on the enrollee's 
health status, but no later than 30 days after the date the plan 
sponsor receives the oral or written grievance.
    The burden associated with this requirement is the time and effort 
necessary for Part D plan sponsors to notify enrollee of its decision 
as expeditiously as the case requires, based on the enrollee's health 
status, but no later than 30 days after the date the plan sponsor 
receives the oral or written grievance. We estimate that on an annual 
basis it will take 100 Part D plan sponsors 52 hours to meet the 
notification requirements of this section an annual basis, for total 
annual burden of 5200 hours.
    (g) The Part D plan 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 
Part D plan sponsor notified the enrollee of the disposition.
    The burden associated with this requirement is the time and effort 
necessary for Part D plan sponsors to maintain the required 
documentation outlined in this section. We estimate that on an annual 
basis it will take 100 Part D plan sponsors 52 hours to maintain the 
required documentation on an annual basis, for total annual burden of 
5,200 hours.
     Sec.  423.568 Standard timeframe and notice requirements 
for coverage determinations.
    (a) When a party makes a request for a drug benefit, the Part D 
plan sponsor must notify the enrollee of its determination as 
expeditiously as the enrollee's health condition requires, but no later 
than 72 hours after receipt of the request, or, for an exceptions 
request, the physician's supporting statement.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 Part D plan sponsors to disclose the 
necessary information to an enrollee whenever a coverage determination 
is unfavorable. We estimate the universe of such determinations to be 
140,000 (approximately 80 percent of which will be ``exceptions 
requests'' under Sec.  423.578). We estimate that it will take 30 
minutes to prepare a notice of unfavorable decision. The total 
estimated annual burden is 56,000 hours.
    (b) When a party makes a request for payment, the Part D plan 
sponsor must notify the enrollee of its determination no later than 72 
hours after receipt of the request.
    The burden associated with this requirement is the time and effort 
necessary for the 100 Part D plan sponsors to disclose the necessary 
information to an enrollee. We estimate that approximately 10 percent 
of coverage determinations will involve payment disputes. Thus, the 
annual associated burden will be 7000 hours.
    (c) The burden associated with requirement is discussed above in 
Sec.  423.568(a).
     Sec.  423.570 Expediting certain coverage determinations.
    (c) The Part D plan sponsor must document all oral requests in 
writing and maintain written and oral request documentation in the case 
file.
    The burden associated with this requirement is the time and effort 
necessary for Part D plan sponsors to maintain the required 
documentation outlined in this section. We estimate that on an annual 
basis 10 percent of all coverage determinations will be expedited 
requests. Of the 12,600 requests, we estimate that approximately 90 
percent will be oral requests. Thus, it will take 100 Part D plan 
sponsors 57 hours to maintain the required documentation on an annual 
basis, for total annual burden of 5700 hours.
    (d) If a Part D plan 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 Part D plan sponsors to disclose the 
necessary information to an enrollee. We estimate that 1 percent of the 
expedited requests will be transferred to the standard process. We 
estimate that it will take each of the 100 Part D plan sponsors 15 
minutes to process each of the 126 cases. Thus, it will take Part D 
plan sponsors 32 hours an annual basis to disclose the information.
     Sec.  423.572 Timeframes and notice requirements for 
expedited coverage determinations.
    (a) Except as provided in paragraph (b) of this section, a Part D 
plan 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 24 hours after receiving the request, or, 
for an exceptions request, the physician's supporting statement.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 Part D plan sponsors to disclose the 
necessary information to an enrollee and prescribing physician involved 
in 11,340. We estimate that it will require each of the 100 Part D plan 
sponsors 30 minutes to disclose adverse coverage determinations. We 
estimate that approximately 15 percent of the cases (1700) will involve 
adverse coverage determinations, for a total annual burden of 850 
hours. We estimate that it will take 5 minutes for the Part D plan 
sponsors to disclose favorable decisions for the remaining 9640 cases 
for a total annual burden of 803 hours.
    (b) The burden associated with this requirement is discussed above 
in Sec.  423.572(a).
     Sec.  423.578 Exceptions process.
    (a) An enrollee, the enrollee's representative, or the enrollee's 
prescribing physician (on behalf of the enrollee) may file a request 
for an exception that meets the requirements of this section.
    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 the 100 Part D plans sponsors will receive 112,000 
requests on an annual basis. Therefore, we estimate a total annual 
burden of 56,000 hours.
    (b) An enrollee, the enrollee's representative, or the prescribing 
physician (on behalf of the enrollee) may file an exception request 
that meets the requirements of this section.
    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 the 100 Part D plan sponsors will receive 112,000 
requests on an annual basis. Therefore, we estimate a total annual 
burden of 56,000 hours.
    A Part D plan sponsor may require a written supporting statement 
from the enrollee's prescribing physician that the requested 
prescription drug is medically necessary to treat the enrollee's 
disease or medical condition. The Part D plan sponsor may require the 
prescribing physician to provide additional supporting medical 
documentation as part of the written follow-up.

[[Page 4451]]

    The burden associated with this requirement is the time and effort 
necessary for a prescribing physician to submit the required 
documentation to the Part D plan sponsor. We estimate it will require a 
prescribing physician 15 minutes to provide the supporting 
documentation and that that the 100 Part D plan sponsors will make 
5,600 requests on an annual basis. Therefore, we estimate a total 
annual burden of 1400 hours.
     Sec.  423.582 Request for a standard redetermination.
    (a) An enrollee must ask for a redetermination by making a written 
request with a Part D plan sponsor that made the coverage 
determination. The Part D plan sponsor may adopt a policy for accepting 
oral requests.
    The burden associated with this requirement is the time and effort 
necessary for an individual to submit a request for redetermination. We 
estimate that approximately 15 percent of the 140,000 coverage 
determinations will be adverse. Of those 21,000 cases, we estimate that 
approximately 50 percent will be appealed. We further estimate it will 
require an individual 30 minutes to provide the request and that the 
100 Part D plan sponsors will receive 9,450 standard requests on an 
annual basis. Therefore, we estimate a total annual burden of 4,725 
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 Part D plan 
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 Part D plan sponsors 
will receive 100 requests on an annual basis. Therefore, we estimate a 
total annual burden of 2500 hours.
    (d) The person who files a request for redetermination may withdraw 
it by filing a written request for withdrawal at the location 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 withdrawal request. We estimate 
it will require an individual 15 minutes to provide the request and 
that each of the 100 Part D plan sponsors will receive 5 requests on an 
annual basis. Therefore, we estimate a total annual burden of 125 
hours.
     Sec.  423.584 Expediting certain redeterminations.
    (c) The Part D plan 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 Part D plan sponsors to maintain the required 
documentation outlined in this section. We estimate that on an annual 
basis, 10 percent of the 10,500 redeterminations will be expedited 
requests. Of the 1,050 expedited requests, we estimate that 
approximately 90 percent will be oral requests. Thus, it will take the 
100 Part D plan sponsors approximately 5 hours to maintain the required 
documentation on an annual basis, for total annual burden of 500 hours.
    (d) If a Part D plan 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 Part D plan sponsors to disclose the 
necessary information to an enrollee. We estimate that 10 percent of 
the expedited requests will be transferred to the standard process. We 
further estimate that it take each of the 100 Part D plan sponsors 15 
minutes to process each of the 105 cases to disclose the information 
for a total annual burden of 26 hours.
     Sec.  423.590 Timeframes and responsibility for making 
redeterminations.
    (a) When a party makes a request for a drug benefit, the Part D 
plan sponsor must notify the enrollee in writing of its redetermination 
as expeditiously as the enrollee's health condition requires, but no 
later than 7 calendar days from the date it receives the request for a 
standard redetermination.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 Part D plan sponsors to disclose the 
necessary information to an enrollee. We estimate that it will require 
each of the 100 Part D plan sponsors 30 minutes to disclose the 
information for a total annual burden of 4,725 hours.
    (b) When a party makes a request for payment, the Part D plan 
sponsor must issue its redetermination no later than 7 calendar days 
from the date it receives the request for a standard redetermination. 
We estimate that 10 percent of the 9,450 standard redetermination 
requests will involve payment disputes.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 Part D plan sponsors to disclose the 
necessary information to an enrollee. We estimate that it will require 
each of the 100 Part D plan sponsors 30 minutes on an annual basis to 
disclose the information for a total annual burden of 473 hours.
    (d) A Part D plan 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 for an expedited 
redetermination.
    The burden associated with this requirement is the time and effort 
necessary for each of the 100 Part D plan sponsors to disclose the 
necessary information to 895 enrollees (and the prescribing physicians 
involved, as appropriate). We estimate that it will require each of the 
100 Part D plan sponsors 30 minutes on an annual basis to disclose the 
information for a total annual burden of 448 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, or 
audit.
Subpart O--Intermediate Sanctions
     Sec.  423.756 Procedures for imposing sanctions.
    (a) Before imposing the intermediate sanctions specified in this 
section, CMS will allow the Part D plan 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 Part D plan sponsor to provide the evidence if the Part D plan 
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, or audit.
    Subpart P--Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals
     Sec.  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

[[Page 4452]]

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 million new enrollees for a total additional burden of 
750,000 hours annually (4.5M X 10 minutes).
     Sec.  423.800 Administration of subsidy program.
    Paragraph (b) of this section requires the Part D plan sponsor 
offering the Part D plan plan, 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 Part D plan sponsor offering the Part D plan 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 Part D plan sponsor offering the Part D plan to provide 
information to CMS and to maintain documentation. We estimate that it 
will take each of the 450 Part D plan or MA-PD sponsors offering the 
Part D plans or MA-PD approximately 52 hours on an annual basis to 
provide the information to CMS. We also estimate that it will take 
approximately 26 hours for each of the 450 entities 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
     Sec.  423.859 Assuring access to a choice of coverage.
    (c) states that CMS may waive or modify the requirements of this 
part if an entity seeking to become a prescription drug plan in an area 
such, as a territory, other than the 50 States or the District of 
Columbia requirement Part D in order to provide qualified prescription 
drug.
    The burden associated with this requirement is the time and effort 
for the Part D plan to make a request of waiver or modification to CMS. 
We estimate that approximately 2 Part D plan s 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(c).
     Sec.  423.863 Submission and approval of bids.
    (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 Part D plan 
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 that meets the 
requirements of the section and related sections.
    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 
(20 * 80) /3 = 533.33 hours on an annual basis to comply with this 
requirement.
    (b) Negotiation and Acceptance of Bids 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 that meets 
the requirements of this section and related sections.
    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 1320.3(c).
     Sec.  423.871 Contract terms and conditions.
    (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 1320.3(c).
Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans
     Sec.  423.884 Requirements for qualified retiree 
prescription drug plans.
    (a),(b), (c),and (d) In order to qualify for the retiree drug 
subsidy, the employer or union sponsor shall file an annual application 
with CMS that meets the requirements of this section and related 
sections, for each qualified retiree prescription drug plan maintained, 
including an attestation as to actuarial value.
    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 
retiree prescription drug coverage in each plan (benefit option) 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 
and submit this information with their application, along with a signed 
sponsor agreement. If we determine that a sponsor of a retiree 
prescription drug program meets all of the requirements of this 
section, we will send to the sponsor a written notification regarding 
the sponsor's eligibility to receive a subsidy payment along with a 
list of qualified retirees that has been verified with the Medicare 
Beneficiary Database (MBD).
    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, about 7 
hours for preparation of the actuarial attestations, and about 30 
minutes to sign the required sponsor

[[Page 4453]]

agreement, for a total of approximately 40.5 hours, for each 
prescription drug plan (benefit option). The 7-hour estimate for 
preparation of actuarial attestations represents an average and varies 
substantially across firm size (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 2,025,000 hours. We also estimate 
that 5 percent of the initial applications may have to be re-filed due 
to mid-year changes to drug coverage that materially affect actuarial 
value. We estimate 101,250 hours for this activity.
    (e) 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. Additionally, in future years, each entity 
must notify CMS of any changes in creditable coverage status for an 
average annual burden of 1 hour.
    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 each to produce a 
standardized notice for a total of 400,000 burden hours.
    Since each entity can include initial disclosure notices in 
existing beneficiary plan materials, which are already being 
disseminated to their participants, we estimate that this will involve 
a negligible amount of time. Additionally, in subsequent years, on 
average, we estimate that each entity will provide 13 additional 
separate notices to individuals upon request for an annual burden of 
about 1 hour. We also estimate that in subsequent years some of these 
sponsors of retiree coverage will provide notices of a change in 
creditable coverage for an average annual burden of 8 hours. We 
estimate that the annual burden associated with providing notices prior 
to the ACEP in subsequent years will be negligible, since they will be 
able to include these notices in their existing plan materials with 
minimal modifications.
    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.
    (f) 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 in total to retain the required documentation prescribed in 
this section and in Sec.  423.888(d), for a total of 1,000,000 burden 
hours. We believe that for a small firm the total number of hours 
required for record retention will be less than 20 hours, but for 
purposes of the PRA we assume 20 hours for firms of all sizes.
     Sec.  423.888 Payment methods, including provision of 
necessary information.
    (b) and (c) To receive payment under this section, each qualified 
entity must submit information in a form and manner and at such times 
provided in this paragraph and under other guidance specified by CMS, 
by the sponsor or any party designated the sponsor.
    If a sponsor elects to receive monthly or quarterly retiree subsidy 
payments or an interim annual retiree subsidy payment, the plan sponsor 
must submit aggregated gross cost data, an estimate of the difference 
between these gross costs and allowable costs (based on expected 
rebates and other price concessions), and any other data CMS may 
require upon submission of data for payment at each of the time 
intervals elected by the sponsor, with a final reconciliation within 15 
months after the end of the plan year. For final reconciliation 
purposes, sponsors must submit total gross cost data segregated per 
qualifying covered retiree; actual rebates, discounts or other price 
concessions received with respect to such costs; and any other data CMS 
may require, within 15 months after the end of the plan year. In 
addition, plan sponsors are required to provide on a monthly basis an 
update to their enrollment file, (for example, accretes and deletes).
    The burden associated with this requirement is the time and effort 
necessary for an entity to submit the required data and information 
that meets the requirements of this section. We estimate that on an 
annual basis it will take 50,000 entities 17 hours to provide the 
required documentation, for a total of 850,000 burden hours. The 17-
hour estimate reflects an average across firms of various sizes and 
reflects our expectation that the time involved in the data submission 
process will be lessened by the development of automated systems to 
calculate this information. (See the regulatory impact analysis for 
more detailed discussion of these estimates.)
    (d) Participating entities must maintain the records outlined in 
this section for 6 years after the expiration of the plan year in which 
the costs were incurred and fully meets the requirements of this 
section.
    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 prescribed in this 
section and in Sec.  423.884(e), for a total of 1,000,000 burden hours.
     Sec.  423.890 Appeals
    The information collection requirements set forth in this section 
are exempt from the PRA as stipulated in 5 CFR 1320.4.
     Sec.  423.892 Change in Ownership.
    (c) A sponsor who is contemplating or negotiating a change of 
ownership must notify CMS at least 60 days before the anticipated 
effective date of the change. 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

[[Page 4454]]

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 Low-
Income Subsidies and General Payment Provisions.
     Sec.  423.904 Eligibility determinations.
    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.
     Sec.  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 1320.3(c).
     Sec.  423.910 Requirements.
    (c) This subpart sets forth the requirements for State 
contributions for Part D drug benefits based on dual eligible drug 
expenditures. It requires States to submit MSIS data 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.
    (d) The subpart also 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.
Subpart T--Financial Relationships Between Physicians and Entities 
Furnishing Designated Health Services.
    Subpart T does not contain any requirements subject to the PRA.
    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-F)
    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-F), 
[email protected]. Fax (202) 395-6974

V. Regulatory Impact Statement

A. Overall Impact

    We have examined the impacts of this 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 USC 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

[[Page 4455]]

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 includes provisions to help employers and unions 
continue to provide drug coverage to their Medicare eligible retirees 
that is at least as generous as the new Medicare coverage. The MMA 
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 retiree drug 
subsidy provides special tax-favored payments to the sponsors of 
qualified retiree health plans. The retiree drug subsidy program has 
highly flexible rules that permit employers and unions to retain their 
current plan designs that are at least equivalent to the standard Part 
D benefit while 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 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 and unions a variety of other 
options for continuing to assist their Medicare retirees, and our final 
regulation reflects comments on how Medicare can best implement all of 
these approaches to achieve the maximum support for retiree coverage. 
In addition to having the opportunity to obtain the Medicare retiree 
drug subsidy, employers and unions can choose to provide additional 
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 or supplemental 
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 Part D plan (PDP) or Medicare Advantage Prescription Drug 
Plan (MA-PD)) to provide enhanced benefits to their retirees, or 
choosing through waivers to become a Part D plan that offers enhanced 
benefits to their retirees. In all of these cases, financial support 
from the new Medicare benefit and retiree drug subsidy can augment 
contributions by employers and unions to provide a more generous and 
less costly drug benefit for retirees than is possible through 
employer/union support alone.
    We described this range of employer/union options in our proposed 
rule and in a subsequent white paper and public meetings, and we 
received extensive public comments on the key issue of how this 
combination of employer/union options can be used to achieve maximum 
support for retiree drug coverage. Based on the public comments and 
further analysis, we believe that the mechanism for implementing 
options for strengthening employer and union coverage with Medicare 
Part D, including the Medicare retiree drug subsidy and the other 
opportunities it affords employers and unions for providing continued 
prescription drug assistance to their Medicare retirees, will result in 
combined aggregate payments by employers/unions and Medicare for drug 
coverage on behalf of retirees that are 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 employment-based retiree coverage 
for future Medicare beneficiaries that has already been taking place, 
as is discussed in further detail subsequently in this impact analysis.
    We have updated our impact analysis from what was presented in our 
August 3, 2004 proposed rule. Our update reflects responses to public 
comments, changes due to final policy and implementation decisions, 
improvements to the analysis based on additional information and new 
research studies (see, for example, our discussion of the financial 
value of the Part D benefit to beneficiaries), and updated data and 
actuarial and economic assumptions. A discussion of our updated 
assumptions and the effects of these various changes is presented 
subsequently in the impact analysis.
    We estimate that in calendar year (CY) 2006 about 39 million 
Medicare beneficiaries will receive creditable drug coverage either 
through a Medicare Part D plan (including beneficiaries who receive 
additional drug coverage or premium assistance from other sources such 
as a former employer or union), or through an employer/union sponsored 
retiree plan that is eligible for the Medicare retiree drug subsidy. By 
CY 2010, with growth in the overall Medicare population, we estimate 
that about 42 million Medicare beneficiaries will receive 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 about $49 billion 
in CY 2006 and about $68 billion in CY 2010, with the total effect 
estimated to be roughly $293 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 affordable for 
employers and unions to continue to provide and support high quality 
retiree drug coverage. We also anticipate that some of the Federal 
spending will generate savings for States, 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 more eligible low-income beneficiaries 
will enroll in 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 together the various State savings and costs related 
to Medicare Part D, we estimate that the Medicare drug benefit will 
lead to net State budgetary savings of about $1.0 billion in CY 2006 
and $2.2 billion in CY 2010, with total net savings of about $7.9 
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

[[Page 4456]]

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 effectively.

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 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. We have determined that this rule would not impose 
costs on the private sector exceeding $110 million. We note that the 
provisions of the Act related to electronic prescribing are dealt with 
in a separate rule.
1. Private Sector
    The provision of this rule related to disclosure notices of 
creditable coverage represents a mandate on the private sector. 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. 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 and unions 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 and unions 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 
supplementing the Medicare prescription drug benefit and/or paying 
Medicare Part D premiums.
    For those private entities that will not achieve savings--Medigap 
insurers and employer/union group health plans that offer coverage only 
to beneficiaries who are active workers, not retirees--as discussed in 
greater detail later in this analysis, the cost of providing disclosure 
notices is estimated to be approximately $62 million in 2005 (which 
translates into an average of roughly $151 per employer/union 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.
    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. 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 rule, as 
discussed in greater detail in section H on State impacts, States will 
achieve net savings under this 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 beginning in January 2006. 
These payments are estimated to be $9.0 billion in CY 2006, reaching 
$13.0 billion by CY 2010. These payments represent the largest direct 
cost to States.
    States will also incur administrative costs associated with 
Medicare Part D. The statute gives States, as well as the Social 
Security Administration, responsibility for eligibility determinations 
for the Medicare Part D low-income subsidy. States are also responsible 
for screening and enrolling low-income subsidy applicants in the 
Medicare Savings Program. While we anticipate that the Social Security 
Administration will play a substantial role in Part D low-income 
subsidy eligibility determinations, we anticipate that States will 
incur some administrative costs related to these activities, including 
costs associated with refining their data on dual eligibles; developing 
eligibility determinations systems; training staff; performing 
eligibility determinations, re-determinations, and appeals; and 
screening and enrolling for the Medicare Savings program. To the extent 
allowable under Title XIX, Federal matching payments will be available 
to assist in paying for these administrative costs. We estimate that 
the State share of Medicaid administrative costs associated with 
Medicare Part D will be $39 million in FY 2004, $73 million in FY 2005, 
and average about $90 million per year over the period 2006 to 2010. We 
are undertaking collaborations with the Social Security Administration 
(SSA), the State Health Insurance Assistance Programs (SHIPs), and 
other groups to assist in outreach and enrollment, and to help minimize 
administrative burdens for States as much as possible. Furthermore, as 
discussed in more detail in the State section of the impact analysis, 
we anticipate that SSA will play a substantial role in the eligibility 
determinations process for the low-income subsidy, lessening the 
administrative burden on States.
    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 $62 million in CY 2006, and $145 million by CY 2010, 
totaling about $504 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

[[Page 4457]]

group health plans, State governments that offer retiree health 
insurance benefits with drug coverage will need to provide disclosure 
notices to Medicare beneficiaries enrolled in those plans. States will 
also need to provide disclosure notices to Medicare beneficiaries who 
receive drug coverage through 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 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 
elsewhere in the preamble we will be deeming beneficiaries who are 
full-benefit duals as eligible for the full low-income subsidy. As part 
of the notices to these beneficiaries regarding their eligibility for 
the low-income subsidy we will also inform them of the change to 
receiving their drug coverage through Medicare and that Medicaid will 
no longer provide creditable coverage to Medicare beneficiaries. Our 
notices to beneficiaries will relieve State Medicaid programs of the 
burden of providing disclosure notices to full-benefit dual eligibles.
    As discussed in the State section of the impact analysis, the 
direct and indirect costs and revenue losses to States are offset by 
savings States will achieve as a result of the implementation of the 
Medicare prescription drug benefit and retiree drug subsidy. 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. States do, 
however, begin incurring administrative costs prior to implementation 
of Medicare Part D. We estimate that States will incur net 
administrative costs in FY 2005 of $73 million. These costs do not 
exceed the UMRA threshold. Furthermore, we estimate that State costs in 
2005 will be more than offset by State savings related to Medicare Part 
D beginning in 2006.
    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 group 
health plans related to that coverage. As noted previously, the costs 
of providing such notices are small, and are 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 rule does not mandate any requirements 
for Tribal governments.
    Comment: We received comments from a number of States that asserted 
that Medicare Part D represents an unfunded mandate on States. Several 
States asserted that it is an unfunded mandate because the Federal 
government provides matching payment for State administrative expenses 
related to Medicare Part D, rather than providing 100 percent 
reimbursement. A few States asserted that they should not be 
responsible for auto-enrollment of dual eligibles and asserted that it 
would represent an unfunded mandate. One State asserted that 
eligibility determination costs in the initial start-up period would 
exceed the UMRA threshold.
    Response: The statute gives States certain administrative 
responsibilities related to Medicare Part D enrollment. To the extent 
allowable under Title XIX, the Federal government will provide Federal 
matching payments for those activities, which cover at least 50 percent 
of State costs related to those activities. Within the context of the 
Unfunded Mandates Reform Act, we are obligated to determine whether 
this regulation imposes costs on States (as well as local and tribal 
governments and the private sector) in excess of $110 million in any 
one year.
    As discussed previously, in 2005 prior to implementation of 
Medicare Part D, we anticipate that States will incur administrative 
expenses related to Medicare Part D, including refining their data on 
dual eligibles; developing eligibility determinations systems; training 
staff; performing eligibility determinations, re-determinations, and 
appeals; and screening and enrolling for the Medicare Savings program. 
We estimate that those costs are approximately $73 million in FY 2005, 
and consequently, do not exceed the UMRA threshold. Furthermore, 
savings that States achieve in future years once Medicare Part D is 
implemented will substantially outweigh the administrative costs they 
incur in 2005. Finally, with respect to the auto-enrollment 
responsibilities that a few States were concerned would be an unfunded 
mandate, the final rule indicates that these responsibilities will be 
handled by CMS.

C. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct costs on State and local governments, preempts State 
law, or otherwise has Federalism implications. Specifically, an agency 
must act in strict accordance with the governing law, consult with 
State officials, and address their concerns.
    As discussed previously, the MMA and this 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 
have consulted 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. In addition, because 
of the national nature of the Medicare Part D benefit, the statute 
prohibits States from limiting the amount that a PDP sponsor can 
recover from liable third parties under Medicare Secondary Payer 
provisions. Also, as discussed in the preamble, the statute preempts 
State any willing pharmacist laws with respect to a plan's Part D 
business. Finally, the statute permits Federal grievance procedures to 
preempt State grievance requirements for PDPs and MA-PDs. As discussed 
in subpart M of the preamble, we have established Federal grievance 
procedures that preempt State requirements because we believe that one 
set of grievance standards protects beneficiaries, promotes consistency 
among plans, and reduces confusion and burden for enrollees and plans. 
However, enrollees would still have access to various State remedies in 
cases in which an issue is unrelated to the plan's status as a PDP or 
MA-PD. We note that State law has been preempted in an identical way 
for the Medicare Advantage program, through MMA changes expanding a 
preemption law that had previously applied to that program. The impact 
analysis for the final Medicare Advantage rule (CMS 4069-F) contains a 
discussion of the preemption issue as it applies to these Federal 
programs.
    As discussed earlier in this preamble, especially in subpart I, we 
received a number of comments on preemption issues. Our responses to 
these comments are included in subpart I and other relevant preamble 
sections. Although most of these comments

[[Page 4458]]

opposed the broad scope of the MMA's preemption clauses, the Congress 
intended to provide that scope and it is necessary to the operation of 
the prescription drug program. Should any issues of interpretation 
arise in any particular State, we would work with that State to resolve 
these issues.
    In addition, we have also consulted extensively with States 
regarding the numerous provisions related to the Medicare prescription 
drug benefit that have implications for States. Among these, our 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 the MMA. For example, in March 
2004, we 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, we 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. We have also organized a group of interested States to 
work collaboratively on proposals for addressing the managed care 
adjustment component of the phase-down calculation. We have set up 
special email addresses for phase-down issues so that States may send 
questions and communicate specific concerns to the appropriate experts.
    We are 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 are building 
on those efforts for the implementation of the Medicare Part D 
prescription drug benefit. In August of 2004, we convened the State 
Issues Workgroup, which includes State Medicaid Directors (including 
members of the Executive Council of the National Association of State 
Medicaid Directors), SSA, and CMS. The purpose of this group is to 
identify all significant issues and concerns related to Medicare Part D 
(and other MMA changes) that affect States and to identify potential 
solutions, including providing recommendations for data exchanges and 
systems processes and developing a protocol for working with SSA on 
training and outreach associated with the low-income subsidy. Numerous 
meetings and conference calls of the full workgroup and its five 
subgroups have already taken place. The efforts of this workgroup are 
continuing and have been extremely valuable in identifying State issues 
and concerns and potential solutions. We have also been working with 
the State Pharmaceutical Assistance Transition Commission, which was 
established by the statute, to provide support and technical assistance 
as it develops recommendations for addressing the unique transitional 
issues facing SPAPs. In addition, we have consulted with the NAIC on 
Medigap issues.
    The Medicare retiree drug subsidy is an optional program that 
public or private sector employers or unions may choose to participate 
in if they offer qualified retiree prescription drug coverage. Like 
other plan sponsors, 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 rule, such as attestation of actuarial equivalence 
and certain data reporting necessary for calculating the retiree drug 
subsidy payments. However, these are not requirements because no public 
or private employer or union need apply for Medicare retiree drug 
subsidy payments. Thus, we have determined that the retiree drug 
subsidy provisions of this rule would not impose direct costs on State 
and local governments. In addition, we have been conducting outreach to 
prospective applicants for Medicare retiree drug subsidy payments, 
including public sector employers, for example through open door forums 
and an educational web cast, 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 its implementation. 
We have also had discussions with representatives of individual State 
retiree benefit systems, as well as the National Conference on Public 
Employee Retirement Systems, to hear their concerns about the retiree 
subsidy program.

D. Limitations of the Analysis

    The following analyses present projected effects of this rule on 
Medicare beneficiaries, the Federal budget, States, private sector 
organizations that provide drug coverage to Medicare beneficiaries, and 
small entities. Unless otherwise noted, all estimates in this impact 
analysis are net budgetary spending based on calendar year data.
    We have updated our impact estimates from what was presented in our 
August 3, 2004 proposed rule. Since publication of the proposed rule, 
we have continued to refine our assumptions and estimates of Medicare 
Part D impacts to take into account policy decisions made in the final 
rule and to incorporate more up-to-date data, additional research, 
information from industry experts, and public comments on the expected 
impact of Medicare Part D. The estimates presented in this rule are a 
result of those efforts and represent our best estimate of the likely 
effects of Medicare Part D. Discussion of the public comments and the 
updates made to our estimates is included in the relevant sections of 
the impact analysis.
    While we believe the estimates in this final rule represent our 
best estimate of the likely impact of Medicare Part D, we emphasize 
that there is considerable uncertainty in these estimates and the 
discussion throughout the impact analysis reflects this. 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 considerably greater uncertainty than would 
be the case with modifications to existing programs. Furthermore, we 
note that analyses in the 2004 Medicare Trustees Report (currently 
available) and in future annual Trustees Reports, including the 2005 
Medicare Trustees Report (forthcoming in spring 2005), can provide a 
sense of the range of uncertainty inherent in these types of estimates. 
(The Trustees Report is available on the CMS website at http://www.cms.hhs.gov/publications/trusteesreport/).

E. Enrollment Estimates

1. Summary
    Table IV-1A shows for CY 2006-2010 our estimates of the number of 
beneficiaries projected to receive creditable drug coverage through a 
Medicare Part D plan (that is, by enrolling in a PDP or MA-PD), or 
through an employer/union sponsored retiree plan that is eligible for 
the Medicare retiree drug subsidy. We estimate that in CY 2006 about 39 
million Medicare beneficiaries will receive drug coverage either 
through a Medicare Part D plan or through an employer/union sponsored 
retiree plan that is eligible for the Medicare retiree drug subsidy. By 
CY 2010, due to growth in the overall Medicare

[[Page 4459]]

population, we estimate that about 42 million Medicare beneficiaries 
will be receiving such coverage.
    Tables IV-1B and 1C provide further details on these estimates. 
Table IV-1B shows for CY 2006-2010 our estimates of the number of 
beneficiaries projected to receive drug coverage through a Medicare 
Part D PDP or MA-PD, and the number of individuals receiving the low-
income subsidy. In 2006, we estimate that about 29 million 
beneficiaries will receive their drug coverage through a Part D plan. 
We estimate that this number will grow to about 35 million in 2010.
    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 will enroll in the 
Medicare Part D low-income subsidy program in CY 2006. Among low-income 
subsidy participants, we estimate that in 2006 about 6.3 million would 
be full-benefit dual eligibles, about 3.0 million would be other 
beneficiaries with income less than 135 percent of FPL and meeting the 
lower assets test (including newly enrolled beneficiaries in the 
Medicare Savings Program), and 1.6 million would be other beneficiaries 
with income less than 150 percent of FPL and meeting the higher assets 
test. By 2010, we estimate that 11.8 million beneficiaries will be 
receiving the low-income subsidy.
    Table IV-1C presents estimates related to employment based retiree 
drug coverage. The table includes an estimate of the number of Medicare 
beneficiaries who would have employment-based retiree drug coverage 
absent the law change, including those with access-only coverage where 
the beneficiary pays the entire premium. For the population with 
retiree coverage, the table presents estimates of their anticipated 
sources of drug coverage following implementation of Medicare Part D. 
Our estimates of drug coverage for these beneficiaries reflect the 
various options that are available to employers and unions through the 
Medicare prescription drug benefit and the Medicare retiree drug 
subsidy for continuing to provide prescription drug assistance to their 
retirees.
    In 2006, we estimate that 11.4 million beneficiaries would have had 
retiree drug coverage absent the law change.\5\ We estimate that 9.8 
million of these Medicare beneficiaries will receive creditable drug 
coverage through an employer/union sponsored retiree plan that is 
eligible for the Medicare retiree drug subsidy, and that 0.4 million 
will receive drug coverage through a PDP or MA-PD plan, with their 
previous employers/unions offering enhanced benefits or providing 
wraparound or coordinated coverage. We also estimate that 1.3 million 
beneficiaries will enroll in the standard Part D drug benefit through a 
PDP or MA-PD, including those who receive additional employer/union 
premium assistance or other financial assistance and those who will 
benefit from the more generously subsidized coverage of Medicare Part D 
(for example, those who would otherwise have had unsubsidized ``access-
only'' employer plans that are becoming increasingly common). We note 
that recent employer surveys suggest significant interest in providing 
comprehensive drug benefits through additional supplemental or 
wraparound coverage. Depending upon the amount of time it may take 
employers/unions to adopt such approaches, it is possible that the 
provision of wraparound coverage might be more prevalent in the earlier 
years of Medicare Part D.
---------------------------------------------------------------------------

    \5\ This figure includes Federal retirees.
---------------------------------------------------------------------------

    In 2010, we estimate that 11.8 million beneficiaries would have had 
retiree drug coverage absent the law change. By 2010, we estimate that 
7.2 million beneficiaries will be receiving creditable drug coverage 
through an employer/union sponsored plan that is eligible for the 
Medicare retiree drug subsidy, and 2.4 million will have drug coverage 
through a PDP or MA-PD plan while also receiving enhanced benefits or 
wraparound coverage through their former employers or unions, including 
Part D plans that employers or unions are sponsoring under waivers. We 
note, however, that there is a great deal of uncertainty in estimating 
employers' and unions' responses to the various options available under 
Medicare Part D and the retiree subsidy. As discussed in greater detail 
subsequently, these estimates do reflect our expectation that, over 
time, some employers and unions will choose to take advantage of the 
other opportunities for continuing to provide high quality retiree drug 
coverage that are available to them under Medicare Part D--by 
transitioning from providing drug coverage that qualifies for the 
retiree subsidy to providing their own enhanced Part D plan (through 
waivers), purchasing enhanced Part D coverage, or providing 
supplemental drug coverage that wraps around Medicare Part D.
    Given the trends in decreasing generosity of employment-based 
retiree coverage and the increasing provision of ``access-only'' 
coverage, we also estimate that by 2010 approximately 2.3 million 
beneficiaries will receive drug coverage through standard Medicare Part 
D plans, including those receiving additional premium assistance or 
other financial assistance from their former employers or unions, and 
those who may benefit from the more generously subsidized coverage of 
Medicare Part D. For example, recent employer surveys have shown that 
more new retirees are paying a larger share of the cost of their 
retirement benefits, with new retirees in about 20 percent of large 
private-sector firms (1,000 or more employees) having ``access-only'' 
benefits in which they receive no employer premium subsidy. Assuming 
this trend continues, increasingly more of the retirees with employer/
union coverage would be paying for much or all of the cost of their 
retiree drug coverage in the absence of the law change. With the 
availability of Medicare Part D drug coverage these beneficiaries will 
gain access to a generous subsidized benefit.
    These enrollment estimates above have been updated from those that 
were presented in the August 3, 2004 proposed rule. A discussion of how 
these estimates have been updated to incorporate policy decisions made 
in the final rule and to take into account additional information and 
data is included in the following section on projection assumptions.

[[Page 4460]]



 Table IV-1A. Total Beneficiaries Estimated to Receive Creditable Drug Coverage, Either Through Medicare Part D
  Plans (PDPs or MA-PDs), or Through Employer/Union Sponsored Retiree Plans That Are Eligible For the Medicare
                                       Retiree Drug Subsidy, CY 2006-2010
----------------------------------------------------------------------------------------------------------------
                                                         2006        2007        2008        2009        2010
----------------------------------------------------------------------------------------------------------------
Total Beneficiaries Receiving Creditable Drug              39.1        39.8        40.5        41.4        42.2
 Coverage Through a Medicare Part D Plan or Through
 an Employer/Union Sponsored Retiree Plan That Is
 Eligible For the Medicare Retiree Drug Subsidy
----------------------------------------------------------------------------------------------------------------


 Table IV-1B. Beneficiaries Estimated to Receive Prescription Drug Coverage Through Medicare Part D Plans (PDPs
                                            or MA-PDs), CY 2006-2010
----------------------------------------------------------------------------------------------------------------
                                                         2006        2007        2008        2009        2010
----------------------------------------------------------------------------------------------------------------
Total Beneficiaries Enrolling in Medicare Part D           29.3        30.6        32.0        33.5        35.1
 Plans (including those receiving additional
 assistance from employers/unions, see Table IV-1C)
----------------------------------------------------------------------------------------------------------------
Subtotal Medicare Part D Enrollees Receiving Low-          10.9        11.1        11.3        11.6        11.8
 Income Subsidy
----------------------------------------------------------------------------------------------------------------
 --Full-Benefit Dual Eligibles                              6.3         6.4         6.6         6.7         6.8
----------------------------------------------------------------------------------------------------------------
 --Other beneficiaries with income less than 135%           3.0         3.1         3.2         3.2         3.3
 FPL and meeting the lower assets test\*,**\
----------------------------------------------------------------------------------------------------------------
 --Other beneficiaries with income less than 150%           1.6         1.6         1.6         1.7         1.7
 FPL and meeting the higher assets test\*\
----------------------------------------------------------------------------------------------------------------
Subtotal Medicare Part D Enrollees Not Receiving Low-      18.4        19.5        20.7        21.9        23.2
 Income Subsidy
----------------------------------------------------------------------------------------------------------------
\*\ In CY 2006, an individual beneficiary must have assets not in excess of $6,000 ($9,000 per couple) for the
  lower assets test and $10,000 per individual ($20,000 per couple) for the higher assets test. In years after
  2006, these dollar amounts will be indexed to the Consumer Price Index.
\**\ This group includes beneficiaries deemed eligible for the full low-income subsidy based on their status as
  QMB, SLMB, or QI individuals, or as recipients of SSI benefits, including those beneficiaries who we estimate
  will newly enroll in the Medicare Savings Program. In 2006, this is estimated to be approximately 2 million
  individuals.
Note: Numbers may not sum to total due to rounding.


        Table IV-1C. Estimates Related to Employer/Union Sponsored Retiree Drug Coverage, CY 2006-2010\1\
----------------------------------------------------------------------------------------------------------------
     Estimated beneficiary counts (in millions)          2006        2007        2008        2009        2010
----------------------------------------------------------------------------------------------------------------
Total beneficiaries with employment-based retiree          11.4        11.5        11.6        11.7        11.8
 drug coverage absent the law change\*\
----------------------------------------------------------------------------------------------------------------
Beneficiaries receiving creditable drug coverage            9.8         9.1         8.5         7.8         7.2
 through an employer/union sponsored retiree plan
 that is eligible for the Medicare retiree drug
 subsidy
----------------------------------------------------------------------------------------------------------------
Beneficiaries enrolling in Medicare Part D through          0.4         0.9         1.4         1.9         2.4
 PDP or MA-PD plans and receiving enhanced benefits
 or wraparound coverage through their former
 employer or union
----------------------------------------------------------------------------------------------------------------
Beneficiaries enrolling in the standard Medicare            1.3         1.5         1.8         2.0         2.3
 Part D benefit through PDP or MA-PD plans
 (including, for example, those receiving additional
 premium or other financial assistance from their
 former employer or union, and those previously
 enrolled in ``access only'' retiree plans)
----------------------------------------------------------------------------------------------------------------
Note: Numbers may not sum to total due to rounding.
\*\ Includes Federal retirees.

2. Projection assumptions
    We project that there will be nearly 43 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 
about 91 percent of these beneficiaries, about 39 million, will receive 
creditable 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.
    First, we assume that Medicare beneficiaries who are active workers 
(or spouses and dependents of active workers) and who have employment-
based 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 receive coverage that is related to active 
worker employment, and they are not retirees (or spouses/dependents of 
retirees), their plan sponsors would not be able to claim the Medicare 
retiree drug subsidy on their behalf. 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 have creditable 
drug coverage and that coverage would be the primary payer (if their 
employer is subject to MSP requirements by virtue of having 20 or more 
employees, or 100 or more employees in the case of disabled

[[Page 4461]]

workers) regardless of enrollment in the Medicare drug benefit. In the 
future, when these beneficiaries retire, they will have an opportunity 
to enroll in Medicare Part D without being subject to a late enrollment 
penalty as long as they had creditable drug coverage through their 
previous primary group health plan.
    Second, we assume that all full-benefit dual eligibles and other 
beneficiaries who are deemed to be full subsidy eligibles (that is, 
QMBs, SLMBs, QIs, and beneficiaries with Supplemental Security Income 
(SSI)) will enroll in the Medicare drug benefit. As discussed in the 
preamble for subpart B, there will be automatic processes put in place 
to ensure that full-benefit dual eligibles will be automatically 
enrolled in a Medicare Part D plan. In addition, we will establish a 
facilitated enrollment process for non-full-benefit dual eligible 
individuals who are deemed or determined eligible for the low-income 
subsidy.
    Third, among all other Part D eligible beneficiaries, except those 
beneficiaries estimated to have retiree drug coverage absent the law 
change who are discussed later, we assume 95 percent uptake among these 
beneficiaries, with the exception of beneficiaries who have very low 
drug spending (that is, beneficiaries with spending in the lowest 
quintile) for whom we assume about 71 percent uptake. We anticipate 
somewhat lower uptake among beneficiaries with very low drug spending 
because some may decide to forgo enrollment in Part D, since there is 
the possibility that they may pay more in premiums than they realize in 
savings in a particular year. However, we assume that the majority of 
beneficiaries with very low drug spending will choose to enroll in 
Medicare Part D to gain protection against higher drug costs, including 
catastrophic costs, that they could experience in the future. In 
addition, given the presence of the late enrollment penalty, we expect 
that many beneficiaries with low drug spending will enroll in Medicare 
Part D at the outset of the program, recognizing that they will very 
likely achieve savings in subsequent years as they age and have 
increasing drug costs.
    Our uptake assumptions for this group of beneficiaries are slightly 
lower than those used in the proposed rule. In the proposed rule, we 
assumed that 99 percent of these beneficiaries would enroll in Medicare 
Part D. While we have lowered our uptake assumptions slightly based on 
additional research and technical discussions, as well as input from 
public comments, we continue to believe that there will be very high 
uptake of Medicare Part D for a number of reasons. This expectation 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 think that beneficiaries' concern 
about current prescription drug costs and the likelihood that an 
elderly or disabled individual will have even greater need for 
prescription drugs as they age, in combination with the late enrollment 
penalty, will promote high initial enrollment in the Medicare drug 
benefit.
    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 
along with the Social Security Administration will be conducting 
aggressive outreach efforts to individuals eligible for the low-income 
subsidy. In addition, we expect that States will also be doing outreach 
particularly related to the lower income population. For example, many 
States have been working with us to facilitate enrollment of 
beneficiaries participating in State Pharmaceutical Assistance Programs 
into the Medicare drug discount card program (including auto-enrollment 
arrangements for some States). 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 as discussed elsewhere in the preamble, to facilitate the 
enrollment process for low-income beneficiaries our final regulation 
includes auto-enrollment for the full-benefit dual eligibles and we 
will also implement steps to facilitate enrollment for other 
individuals who are determined or deemed eligible for the low-income 
subsidy. In addition, any beneficiary currently enrolled in an MA plan 
that offers any prescription drug coverage (as of December 31, 2005) 
would be deemed to be enrolled in an MA-PD plan offered by that same 
organization as of January 1, 2006.
    Also, in the months preceding the implementation of the Part D 
benefit, beneficiaries who have drug coverage (other than full-benefit 
duals, who will be deemed) should receive disclosure notice information 
from the entities from which they receive 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.
    Fourth, for those beneficiaries who we anticipate would have 
employer or union sponsored retiree drug coverage (including 
unsubsidized coverage) absent the law change, we made assumptions about 
their anticipated sources of drug coverage following implementation of 
Medicare Part D. We begin by making assumptions about the percent of 
beneficiaries (excluding those with MSP) that would have employer or 
union sponsored retiree drug coverage absent the law change. In 2006, 
we assume that 28 percent of beneficiaries--11.4 million--would have 
retiree drug coverage from a former employer or union absent the law 
change. By 2010, we assume that about 27 percent of beneficiaries--11.8 
million--would have employer or union sponsored drug coverage absent 
the law change. Since the availability and generosity of retiree drug 
coverage has been declining over the last decade, we assume that absent 
the law change there would be a continuation of this baseline trend. 
However, the number of beneficiaries that we estimate would receive 
employer or union sponsored retiree drug coverage absent the law change 
actually increases due to growth in the Medicare population.
    We next make assumptions about sources of future drug coverage for 
these beneficiaries after the implementation of the Medicare 
prescription drug benefit and the retiree drug subsidy. In making these 
assumptions, we took into account that Medicare Part D offers employers 
and unions a variety of options for continuing to provide high quality 
retiree drug coverage at a lower cost for both retirees and employers 
and unions. Employers and unions that offer retiree drug coverage that 
is at least actuarially

[[Page 4462]]

equivalent to Medicare Part D can apply for the tax-free 28 percent 
Medicare retiree drug subsidy (which is equal to 28 percent of 
allowable prescription drug costs attributable to the portion of gross 
prescription drug costs between $250 and $5,000 in 2006). The Medicare 
retiree drug subsidy lowers the cost of providing drug benefits for 
employers and unions that sponsor qualified retiree plans, making it 
more affordable for employers and unions to provide this comprehensive 
subsidized coverage than it would otherwise be.
    In addition to the retiree drug subsidy, Medicare Part D also 
offers employers and unions other opportunities to continue to provide 
comprehensive prescription drug coverage at a lower cost. Employers and 
unions can choose to provide supplemental 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 paying 
for supplemental coverage over and above the standard Part D benefit. 
This can be achieved by either: 1) arranging for a PDP or MA-PD Part D 
plan to provide enhanced benefits to their retirees; 2) arranging for a 
PDP or an MA-PD under a waiver to offer a customized plan that is 
exclusive to the employer's retirees; 3) choosing through a waiver to 
become a Part D plan for their retirees that offers enhanced benefits 
(this is equivalent to offering a self-insured benefit); or 4) 
providing separate supplemental drug coverage that wraps around a Part 
D plan. The various options available for providing supplemental drug 
coverage make it possible for employers/unions to provide coverage that 
mimics their current benefits package, while achieving cost savings due 
to the Federal government subsidizing a significant portion of the cost 
of standard Part D coverage (a subsidy which, not taking into account 
the value of the reinsurance,\6\ is estimated to average about $900 per 
beneficiary). In other words, employers/unions can offer comprehensive 
drug coverage by wrapping around standard Medicare Part D coverage for, 
on average, at least $900 less than it would cost the employer/union to 
do so absent the new law. This supplementation by employers/unions also 
results in lower Medicare costs. The supplemental employer coverage 
results in lower out-pocket-costs for beneficiaries, and thus fewer 
individuals reaching the catastrophic out-of-pocket threshold, and 
those that do, having lower catastrophic costs for which the government 
would provide reinsurance payments to Part D plans.
---------------------------------------------------------------------------

    \6\ The relative value of the reinsurance subsidy for 
catastrophic coverage would be lower for retirees whose employers/
unions provide supplemental drug coverage that wraps around the 
standard Part D benefit. Catastrophic coverage is only available 
when an individual's true out-of-pocket (TrOOP) expenses exceed a 
specified threshold, and employers/unions' contributions for 
supplemental drug coverage would not count toward the TrOOP 
threshold (thus increasing the total drug spending level at which 
the retiree would receive catastrophic Part D benefits).
---------------------------------------------------------------------------

    As discussed in more detail later in this impact analysis, 
employers' and unions' evaluations of the relative advantages and 
disadvantages of choosing among the options that are available under 
the MMA for assisting their retirees with prescription drug coverage 
(for example, taking the Medicare retiree drug subsidy versus offering 
enhanced prescription drug benefits through a Part D plan) will be 
influenced by a number of factors. For example, these include current 
benefit design, employer/union and retiree contributions and other 
financial considerations, tax status, labor relations, and contractual 
agreements. Regardless of whether employers and unions seek to obtain 
the Medicare retiree drug subsidy or provide drug coverage to their 
retirees by encouraging them to participate directly in the Medicare 
prescription drug benefit while providing enhanced benefits or 
wraparound coverage, Medicare Part D is estimated to significantly 
lower their cost of providing retiree drug coverage. Thus, the Medicare 
prescription drug benefit and retiree drug subsidy make the provision 
of employer/union sponsored retiree benefits much more affordable. The 
amount of financial support available under each option will vary 
depending in part on the characteristics of each sponsor and their 
retiree population. As discussed in more detail subsequently in section 
F.4 of the impact analysis, we estimate that retiree drug subsidy 
payments will average about $668 per retiree in 2006. While the tax-
free nature of the retiree drug subsidy does not alter the value of the 
subsidy to firms without taxable income, for plan sponsors with tax 
liabilities, the tax-free nature of the retiree subsidy increases its 
value. For example, a tax free subsidy of $668 would be equivalent to a 
taxable payment of $891 for an employer with a 25 percent marginal tax 
rate and $1,028 for an employer with a 35 percent marginal tax rate. In 
comparison, if an employer or union chooses to provide supplemental 
drug coverage to standard Part D, the indirect subsidy to the employer 
or union excluding the value of reinsurance is estimated to average 
about $900 per retiree in 2006. Thus, for plan sponsors that do not 
have taxable income, the indirect Federal support associated with 
providing supplemental drug coverage to standard Medicare Part D could 
be larger than the support they would receive through the Medicare 
retiree drug subsidy. For plan sponsors that have taxable income, the 
level of support under the two options may be more comparable, and, 
depending on a plan sponsor's marginal tax rate and retiree population, 
could possibly be larger under the Medicare retiree drug subsidy.
    In making our assumptions about employer and union sponsored 
retiree drug coverage, we also took into account that some sponsors 
currently do not provide drug coverage that has the same or greater 
actuarial value as Medicare Part D, and many employers provide coverage 
that (in contrast to Part D) is not subsidized at all. For example, in 
the Kaiser/Hewitt 2004 survey of large firms with at least 1,000 
employees offering retiree health benefits, 5 percent of these firms 
reported that they believed the actuarial value of their current 
retiree drug benefit was less than the value of the standard Medicare 
Part D drug benefit, 4 percent reported that they believed their 
benefits were equal to Medicare Part D, and 22 percent reported that 
they did not know how their benefit compared to the standard Part D 
benefit, while 69 percent reported that they believed their benefits 
were greater than the standard Part D drug benefit. However, it is 
important to note that employers responding to the survey could not 
have been aware of our final approach for comparing the actuarial value 
of retiree drug coverage with the value of the standard Part D benefit, 
since the survey was conducted in 2004 before publication of this final 
rule (``Current Trends and Future Outlook For Retiree Health Benefits: 
Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health 
Benefits,'' The Henry J. Kaiser Family Foundation and Hewitt 
Associates, December 2004, available at http://www.kff.org). 
Furthermore, many employers with coverage that has a high actuarial 
gross value do not make contributions equal to the Medicare 
contributions to Part D coverage, so that the employer-based retiree 
coverage would potentially cost more to the retiree than Part D. For 
example, the survey found that 19 percent of large firms require new 
Medicare-age retirees to pay 100 percent of the premium for retiree 
health insurance and another 11

[[Page 4463]]

percent require these retirees to pay 61-99 percent--a level of 
contribution that may not satisfy the ``no windfall'' net test for the 
retiree subsidy, and thus may be less than the new government subsidy 
on the Part D benefit. In certain cases, where employers are currently 
making no premium contribution or a very limited premium contribution 
for retiree drug coverage, beneficiaries are likely to be better off 
financially if they enroll in Medicare Part D, since it includes a 75 
percent government subsidy of the cost of the insurance coverage. To 
the extent that beneficiaries without substantial employer/union 
subsidies enroll in Medicare Part D and to the extent that employers/
unions provide additional premium or other financial assistance, the 
significant financial gain that such retirees would receive by 
enrolling in the subsidized Medicare Part D benefit would be further 
increased. Thus, the significant increase in total support (from 
employers/unions and Medicare) for retiree coverage as a result of the 
MMA's retiree options in part reflects the fact that many retirees who 
enroll in Part D plans are likely to obtain significant savings in 
their drug costs, particularly in future years.
    In developing specific numeric assumptions about how employers and 
unions are likely to respond to the various options Medicare Part D 
offers for providing prescription drug assistance to retirees, we 
considered information from a number of experts in the employee 
benefits consulting industry, as well as recent surveys and studies 
that have been conducted. Among the 11.4 million beneficiaries we 
estimate would have retiree drug coverage in 2006 absent the law 
change, we assume that 86 percent would receive creditable drug 
coverage from an employer or union plan that is eligible for the 
Medicare retiree drug subsidy, 3 percent would enroll in a Medicare 
Part D plan and receive employer or union sponsored enhanced or 
supplemental drug coverage, and 11 percent would enroll in a standard 
Part D plan (including those who receive additional premium or other 
financial assistance from their former employer or union). We note that 
these assumptions reflect the percentage of beneficiaries whom we 
estimate will receive drug coverage through the various sources. The 
percentage of firms choosing the various options will likely be 
different from the above percentages, as the distribution of 
beneficiaries across firms that offer retiree drug coverage tends to be 
concentrated among the largest firms.
    Over time, we assume that some employers and unions will transition 
from providing retiree drug coverage for which they receive the 
Medicare retiree drug subsidy to providing their own enhanced Part D 
plan (through waivers), or purchasing enhanced Part D coverage, or 
offering supplemental drug coverage that wraps around Medicare Part D. 
Recent surveys suggest significant interest among employers in 
providing enhanced or supplemental drug coverage that wraps around 
standard Part D. Employers and unions commonly provide wraparound 
coverage for Medicare Part A and Part B, either through separate 
supplemental policies or through arrangements with Medicare Advantage 
plans, and we anticipate that some employers/unions may prefer using a 
similar approach with Medicare Part D. In addition, as discussed 
previously, for some plan sponsors, the indirect subsidy plan sponsors 
receive by providing enhanced coverage or supplemental drug coverage 
that wraps around Medicare Part D may be greater in value than the 
Medicare retiree drug subsidy. While we expect that some employers and 
unions may want to provide enhanced or supplemental benefits, we 
anticipate that it may take some time for employers/unions who are 
interested in doing so to restructure their drug benefits to complement 
Medicare Part D, and thus these employers and unions may initially 
elect to obtain the retiree drug subsidy. As discussed in more detail 
previously, employers and unions that wish to restructure their drug 
coverage to supplement Medicare Part D have a number of options to 
consider for providing enhanced or supplemental drug coverage, 
including the option for an employer or union to obtain a waiver to 
provide its own enhanced Part D plan. It may take some time for these 
employers/unions to choose which supplemental coverage option they wish 
to pursue and make the requisite changes. Consequently, we assume that 
over time an increasing number of employers/unions would transition 
from receiving the Medicare retiree drug subsidy to providing their own 
enhanced Part D plan, purchasing enhanced Part D coverage, or providing 
separate supplemental drug coverage that wraps around Medicare Part D. 
Depending upon the amount of time it may take employers/unions to adopt 
such approaches, it is possible that the provision of wraparound 
coverage may also be more prevalent in the earlier years of Medicare 
Part D.
    In addition, because some employers have placed caps on their 
contribution to retiree health benefits, we expect that the number of 
retiree plans that qualify for the Medicare retiree drug subsidy will 
decline somewhat over time. Once these plans hit the existing caps that 
employers have placed on their contributions, the net value of the 
plans' benefits relative to total drug costs will decline over time and 
eventually fall below the net value test required to qualify for the 
Medicare retiree drug subsidy. When this occurs, we anticipate that 
these employers and unions will likely encourage their retirees to 
enroll in Medicare Part D and provide either enhanced or supplemental 
coverage that wraps around Medicare Part D, or additional premium or 
other financial assistance or some combination of these steps. By doing 
this, beneficiaries would gain financially since they would receive the 
more generous Medicare Part D benefit, plus any additional support that 
the employer or union might offer in terms of wrap around coverage or 
premium assistance.
    Also, due to steps some employers have taken to reduce retiree 
health benefits for future retirees, such as increasing retiree premium 
contributions, we anticipate that in future years as new retirees age 
into the Medicare program, there would be more retirees enrolling in 
standard Part D (including those with employer or union assistance with 
the Part D premium). As noted previously, the 2004 Kaiser/Hewitt survey 
of large employers offering retiree drug coverage found that roughly 20 
percent of firms provide new retirees with access only coverage (that 
is coverage, where the employer makes no financial contribution to the 
cost of the premium). In situations where employers or unions make no 
or only a minimal contribution to the cost of retiree drug benefits, 
beneficiaries would be better off financially if they enrolled in 
Medicare Part D, since Medicare Part D includes a significant 
government subsidy. Furthermore, if employers or unions that provide 
only a very minimal contribution to retiree drug coverage instead 
offered to put that contribution toward the standard Medicare Part D 
premium, those retirees would benefit financially from both the 
subsidized Medicare Part D benefit and their employers/ unions' 
assistance with premiums. In addition, there has also been a trend 
toward declining generosity of retiree benefits for current retirees 
(for example, through increased premiums or cost-sharing), and we 
expect that this may also result in a slight increase in the number of 
retirees enrolled in standard Part D.
    Due to the various considerations discussed above, among the 11.8 
million

[[Page 4464]]

beneficiaries that we estimate would have employer or union sponsored 
retiree drug coverage in 2010 absent the law change, we assume that 61 
percent would receive creditable drug coverage from an employer or 
union plan that is eligible for the Medicare retiree drug subsidy, 20 
percent would enroll in Medicare Part D and receive employer or union 
sponsored enhanced or supplemental drug coverage, and 19 percent would 
enroll in standard Part D including those who would receive additional 
premium or other financial assistance from their former employer or 
union.
    Depending on the circumstances of the retiree, all of these types 
of drug coverage have the potential to reduce retiree lifetime drug 
costs significantly compared to retiree costs in the absence of the 
law. Because of the substantial new subsidies and the range of 
subsidized options available to employers and unions for continuing 
coverage and enhancing total support for retiree coverage, we conclude 
that combined payments by employers/unions and Medicare for drug 
coverage on behalf of retirees will generally be greater--and 
frequently significantly greater--than they otherwise would have been 
without the enactment of the MMA. That is, lifetime drugs costs for 
retirees will generally be lower, and frequently substantially lower, 
than they otherwise would have been, as a result of strengthened 
retiree coverage and new assistance with drug costs.
    A fifth participation assumption concerns enrollment in the low-
income subsidy portion of the program. We estimate that approximately 
14.4 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. We assume 100 
percent uptake among full-benefit dual eligibles and 57 percent uptake 
among all other low-income subsidy eligibles. Among this latter group, 
we assume 100 percent uptake among those beneficiaries who will be 
deemed full low-income subsidy eligible and have facilitated enrollment 
(that is, QMBs, SLMBs, QIs, and beneficiaries with SSI). As noted in 
the proposed rule, we assume less than full uptake of the low-income 
subsidy among the remaining low-income 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 for 
predicting the specific impacts of a major new program like the 
Medicare drug benefit. For example, it is difficult to project 
enrollment rates in this entirely new program, and there is uncertainty 
about how employers and unions will respond to the retiree drug subsidy 
or the other approaches available to augment Medicare Part D 
prescription drug coverage. 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.
    Comment: One commenter asserted that our assumption in the proposed 
rule that 99 percent of non-low-income and non-actively working 
beneficiaries would receive drug coverage through a Medicare Part D 
plan or through an employer or union sponsored health plan that is 
eligible for the Medicare retiree subsidy was unrealistic, claiming 
that the late enrollment penalty for Medicare Part D was not sufficient 
to generate that level of participation. This commenter also asserted 
that our assumptions did not reflect the potential for selection bias 
in enrollment in Medicare Part D.
    Response: In addition to receiving this comment on our Part D 
program uptake assumptions, in our efforts to refine our model of 
Medicare Part D impacts, we also obtained information from industry 
experts on their expectations of the likely response to Medicare Part 
D. While we continue to believe that there will be high participation 
in Medicare Part D, we have revised our uptake assumption downward 
slightly to reflect what we think is the current best estimate of 
likely participation in Medicare Part D and we have accounted for 
selection by assuming graduated uptake rates based on beneficiaries' 
drug spending levels, as discussed previously.

F. Anticipated Effect of Medicare Part D on Beneficiaries

    The Medicare prescription drug benefit is designed 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. We believe that giving Medicare beneficiaries access to 
affordable drug coverage that helps them to pay for their outpatient 
prescription drugs (which have become an increasingly important 
component of health care service delivery), and helps beneficiaries to 
use prescription drugs more effectively, will assist beneficiaries in 
leading healthier, more productive lives, while improving the 
effectiveness of the Medicare program. Additionally, we believe that 
the substantial additional resources that Medicare Part D provides 
through the retiree drug subsidy and the various opportunities 
employers and unions have for providing additional coverage that 
complements the standard Part D drug benefit will make it more 
affordable for employers and unions to continue providing high quality 
retiree drug coverage to Medicare-eligible retirees.
    The following section contains discussions of: 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, the anticipated positive effects that the 
Medicare prescription drug benefit will have on beneficiaries, and a 
discussion of the anticipated positive effects that the Medicare 
retiree drug subsidy and other options that are available to employers 
and unions under Medicare Part D will have on the availability and 
generosity of retiree drug coverage.
1. Recap of the Structure of the Medicare Part D Drug Benefit 
    As discussed in more detail in subpart C 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 beneficiary 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 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 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

[[Page 4465]]

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-
income 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.
2. Estimated total drug spending, spending paid by the Medicare drug 
benefit, and premiums
a. Summary
    Table IV-2 presents estimates for Medicare Part D enrollees of (1) 
average per capita total drug spending (including spending paid for by 
the Medicare drug benefit, by the beneficiary, and by any sources of 
supplemental coverage), (2) average drug spending paid for by the 
standard Medicare Part D benefit, and (3) the average premium 
associated with standard 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. A discussion of how these estimates were developed 
is included in the next section, ``b. Methodology and Assumptions 
Underlying Estimates.''
    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 $2,260. 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 $1,138 of prescription drug costs, 
or on average half of total beneficiary drug spending in CY 2006.\7\ 
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 $440 per year in CY 
2006. Thus, we estimate that the average monthly premiums would be less 
than $37. A beneficiary may pay a higher or lower amount depending upon 
which PDP or MA-PD the beneficiary selects. In CY 2010, drug spending 
for Part D enrollees who do not receive the low-income subsidy is 
projected to be $2,945 on average, with the Medicare drug benefit 
paying for on average $1,490 of prescription drug costs. The average 
premium in CY 2010 for these beneficiaries is projected to be $580 per 
year or roughly $48 per month for defined standard coverage.
---------------------------------------------------------------------------

    \7\ We note that $1,138 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 $2260. 
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 $4,359.\8\ We 
estimate that on average the Medicare drug benefit would be expected to 
pay for about $4,189 of prescription drug costs, or approximately 96 
percent of total drug spending. In 2010, these beneficiaries would be 
expected to spend on average $5,684 per capita on prescription drugs, 
with the Medicare drug benefit paying for on average about $5,439 of 
beneficiaries' 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

[[Page 4466]]

per individual (or $20,000 per couple) in CY 2006) to 98 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 subsidy for 
this category of beneficiaries.
---------------------------------------------------------------------------

    \8\ 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 $220 per year or roughly $18 per month in 
2006, and $290 per year or roughly $24 per month in 2010.
    Overall, the government is estimated to contribute $1355 to the 
$1795 cost of standard Part D insurance coverage. In addition, the 
government will provide further financial assistance for low-income 
subsidy enrollees--an average of $1863 in low-income cost-sharing 
subsidies and $420 in premium subsidies.
    We note that our total per capita drug spending estimates for the 
two groups of Part D enrollees--those receiving and those not receiving 
the low-income subsidy--differ from those presented in the proposed 
rule. Our current estimate of total per capita drug spending is lower 
for Part D enrollees not receiving the low-income subsidy and is higher 
for Part D enrollees receiving the low-income subsidy than our prior 
proposed rule estimates. The reasons for these changes include use of 
more recent (2001) Medicare Current Beneficiary Survey (MCBS) data in 
which spending for non-low-income beneficiaries did not grow as rapidly 
as predicted using earlier baseline data and benchmarking spending 
estimates for low-income beneficiaries to Medicaid data.
b. Methodology and Assumptions Underlying Estimates
    To estimate beneficiary drug spending for the period CY 2006-2010, 
we use drug spending data from the 2001 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, retail discounts, and other price concessions, and promotion 
of generic substitution together with other utilization management 
efforts. 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, retail 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.
    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 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 7.2 percent greater in CY 2006 than it otherwise 
would be, due to reduced out-of-pocket costs resulting from the 
Medicare drug benefit. Our estimate of the increase in drug spending 
that results in response to reduced out-of-pocket costs is somewhat 
lower than our previous proposed rule estimate because we have refined 
our methodology. For the final rule estimates, we have developed a 
regression model, where we estimate the demand for prescription drugs 
as a function of the share of drug costs that are out-of-pocket 
controlling for the number of physician visits, age, and gender.
    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 assuming the defined standard 
benefit design, 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

[[Page 4467]]

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.
    Using the drug spending estimates, we also estimate the statutorily 
specified share of spending financed through beneficiary premiums for 
defined standard Part D coverage. For the purpose 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. To estimate the average 
sliding scale premium, where low-income subsidy enrollees receive a 75 
percent premium subsidy (if income is greater than 135 percent of FPL 
but does not exceed 140 percent of FPL), a 50 percent subsidy (if 
income is greater than 140 percent of FPL but does not exceed 145 
percent of FPL), or a 25 percent subsidy (if income is greater than 145 
percent of FPL but less than 150 percent of FPL), we assume a uniform 
income distribution 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.
    We received several comments related to the methodology and 
estimates in this section.
    Comment: One commenter raised concern about the use of Medicare 
Current Beneficiary Survey data and National Health Expenditure 
projections to estimate beneficiary drug spending in future years. The 
commenter questioned the reliability and completeness of self-reported 
survey data like the MCBS and questioned the use of the NHE projections 
of per capita prescription drug expenditure growth because these 
projections are not Medicare specific. The commenter maintained that 
data from the Federal Employee Health Benefits Program and other public 
programs that reflect a large number of geographically diverse Medicare 
beneficiaries should be used for the estimates instead.
    Response: We agree with the commenter that there are limitations to 
the data used to project beneficiary drug spending in future years. We 
also recognize that data from the Federal Employee Health Benefits 
Program and other public programs can provide important information 
about prescription drug spending among Medicare beneficiaries and we 
have used those data in our other research efforts. However, for the 
purpose of developing nationally representative costs estimates for 
Medicare Part D, both CMS and the Congressional Budget Office have 
relied on the MCBS data. CMS has chosen to use the MCBS because it is 
the largest nationally representative survey of prescription drug 
expenditures for Medicare beneficiaries and it has the advantage of 
being a single data source that provides information on all types of 
beneficiaries--for example, both beneficiaries with and without 
prescription drug coverage, beneficiaries with varied income levels, 
and beneficiaries of different ages and health acuities. The 
administrators of the survey undertake a number of measures to reduce 
inaccuracies associated with self-reported data, including supplying 
respondents with calendars to record drug purchases, requesting that 
beneficiaries save their drug containers for their next interview, and 
providing the interviewer with a roster of drugs previously mentioned 
by the respondent to ensure we are capturing refills. Moreover, we 
recently completed and published a pharmacy follow-back analysis in 
which we compared beneficiary-reported drug data to pharmacist-
reporting data (``Reporting of Drug Expenditures in the MCBS,'' John A. 
Poisal, Health Care Financing Review, Winter 2003-2004, pp. 23-36). 
This allowed those who oversee the survey to adjust their estimates to 
account for survey drug mis-reporting. All of our drug estimates 
reflect the results from the follow-back study.
    With respect to the National Health Expenditures projections, we 
acknowledge that these projections are national and not specific to the 
Medicare population. These projections are based on data obtained by 
our Office of the Actuary (OACT) from a variety of sources, including 
the National Prescription Audit conducted by IMS Health. OACT adjusts 
the data from the National Prescription Audit to take into account a 
number of factors, including benchmarking to the Economic Census and 
adjusting the data to subtract an estimate of manufacturer rebates 
provided to health insurers related to insurance coverage for 
prescription drugs. Since no such projections that take these various 
factors into account exist specifically for the Medicare population, we 
believe it is appropriate to use the NHE projections.
    Comment: We received a comment from a retiree advocacy group in 
which they provided independently generated data on the cost of 
prescription drugs for a group of beneficiaries who currently receive 
generous drug coverage through large employers and unions. The data 
were generated by having retirees use the website of an Internet 
pharmacy to determine the cost of a 90-day supply of the drugs they 
use. Based on this, the commenter estimated average total drug 
spending, average drug spending paid for by Medicare Part D, and the 
average beneficiary premium. The commenter's estimate of average drug 
spending for its group of retirees was higher than the proposed rule 
estimate while its estimate of average drug spending paid for by 
Medicare Part D was lower than in the proposed rule. The commenter's 
estimate of the beneficiary premium was fairly similar to the proposed 
rule although the commenter's estimate was slightly lower.
    Response: It would not be unexpected that average drug spending for 
a specific group of beneficiaries may differ from our projections of 
average drug spending for all Medicare Part D enrollees. However, if on 
average a specific subgroup of enrollees has higher drug spending, then 
the average amount of drug spending paid for by the Medicare drug 
benefit would also be higher for that subgroup of beneficiaries.
    As discussed elsewhere, we have based our estimates for Medicare 
Part D on the MCBS, which is the largest nationally representative 
survey of prescription drug expenditures for Medicare beneficiaries and 
which has the advantage of being a single data source that provides 
information on all types of beneficiaries. The projections based on 
this data reflect our best estimate of the average impact of Medicare 
Part D on beneficiaries.
    Comment: One commenter took issue with the application of the cost 
management savings equally to all segments of the Medicare Part D 
population. The commenter asserted that it is not realistic to expect 
the same level of savings for low-income subsidy enrollees because 
their cost-sharing is extremely limited and plans have little ability 
to incentivize the use of cost effective drugs.
    Response: While it is true that low income subsidy enrollees will 
have minimal cost-sharing, we believe that cost management savings are 
possible for this population because Part D plans still have other cost 
management tools available--for example, notably, price concessions for 
drugs on a plan's formulary, as well as such tools as mandatory generic 
substitution, step

[[Page 4468]]

therapy, and prior authorization. Cost-sharing is only one of many 
tools available to Part D plans that influence cost management savings.
    Comments: Some commenters asserted that they did not believe 
private price negotiations between Part D plans and drug manufacturers 
would yield as large savings for beneficiaries as direct government 
price negotiation (which is prohibited by statute). Some commenters 
claimed that Medicare Part D plans or PBMs, rather than beneficiaries, 
would benefit from price concessions negotiated with manufacturers.
    Response: We disagree with the commenters. 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.'' In addition, the 
provision of relevant price and quality information on each Part D plan 
through a price comparison website will further promote low prices to 
beneficiaries.

    Table IV-2. 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
 Estimated Average    Annual Drug
    Annual Drug      Spending Paid    Estimated    Average Annual  Premium
    Spending\*\        For By the
                     Medicare Drug
                      Benefit\**\
----------------------------------------------------------------- ---------
2006                 .............  .............  ..............
-------------------------------------------------------------------
Enrollees Not            $2,260         $1,138      $440
 Receiving Low-
 Income Subsidy
-------------------------------------------------------------------
Enrollees Receiving      $4,359         $4,189      $0 or
 Low-Income Subsidy                                 $220\***\
-------------------------------------------------------------------
2010                 .............  .............  ..............
-------------------------------------------------------------------
Enrollees Not            $2,945         $1,490      $580
 Receiving Low-
 Income Subsidy
-------------------------------------------------------------------
Enrollees Receiving      $5,684         $5,439      $0 or
 Low-Income Subsidy                                 $290\***\
------------------------------------------------------------------------
\*\ Estimated average total drug spending includes spending paid for by
  the Medicare drug benefit, by the beneficiary, and by any other
  sources of coverage.
\**\ 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.
\***\ These numbers reflect separate premium estimates for two groups of
  low-income subsidy enrollees. (1) Those low-income subsidy enrollees
  with income under 135 percent of FPL have a $0 beneficiary premium, 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. (2) 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 $220 per year in 2006 ($290 in
  2010).

2. 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 to 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 service 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),

[[Page 4469]]

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 www.healthaffairs.org). Many other 
significant diseases have also seen improvements in treatment and 
management, and thus in patient health, as a result of the availability 
of new medications, including: HIV/AIDS, 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's 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
    For the first time in the history of the Medicare program, the 
Medicare prescription drug benefit will make subsidized prescription 
drug coverage available to all Medicare beneficiaries. Historically, 
many Medicare beneficiaries have received prescription drug coverage 
through a variety of sources, including: employment-based retiree 
health coverage, Medigap policies with drug coverage, Medicare 
Advantage plans, Medicaid, and State Pharmaceutical Assistance 
Programs. These various types of drug coverage have traditionally 
varied widely in comprehensiveness and cost (for example, many of these 
policies may not include catastrophic coverage), leaving some 
beneficiaries at risk for high out-of-pocket costs and related 
financial access issues even though they have drug coverage. Meanwhile, 
an estimated 24 percent of Medicare beneficiaries currently do not have 
any prescription drug coverage at all (based on 2001 Medicare Current 
Beneficiary Survey data).
    In the proposed rule, we stated that by providing substantial 
additional resources to defray the cost of Medicare drug coverage--
including direct subsidy and government reinsurance payments to PDPs 
and MA-PDs that will cover roughly 75 percent of the total cost of the 
Medicare drug benefit for all beneficiaries, additional assistance with 
cost-sharing and premiums for low-income beneficiaries, and 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 beneficiaries. Since we issued the proposed rule, 
several new independent studies have been published that have examined 
the financial benefits that are available to beneficiaries through 
Medicare Part D. In the remainder of this section, we highlight some of 
the ways that having access to subsidized Part D drug coverage will be 
helpful to Medicare beneficiaries as a whole, and for specific 
subgroups within the beneficiary population.
    The Medicare prescription drug benefit will provide access to basic 
subsidized prescription drug coverage for all Medicare beneficiaries, 
regardless of income, and additional targeted assistance for low-income 
beneficiaries. We anticipate that beneficiaries who choose to take 
advantage of the subsidized drug coverage that is available through 
Medicare Part D by enrolling in a PDP or MA-PD will experience 
reductions in their out-of-pocket spending for prescription drugs, both 
in the short-term and over their lifetime, and will also gain generous 
insurance protection against catastrophic drug costs. Ultimately, we 
believe that the Medicare prescription drug benefit will significantly 
reduce the financial burden that beneficiaries may face in obtaining 
needed outpatient prescription drugs.
    Medicare beneficiaries' out-of-pocket spending for prescription 
drugs has been increasing during the past decade. However, several 
independent analyses confirm our belief that beneficiaries enrolling in 
the Medicare drug benefit are likely to receive substantial help 
through lower out-of-pocket spending. These savings will be associated 
with Medicare's direct subsidy, low-income subsidy and reinsurance 
payments (``Estimates of Medicare Beneficiaries' Out-of-Pocket Drug 
Spending in 2006,'' Jim Mays et. al., Actuarial Research Corporation, 
and Tricia Neuman et al., The Henry J. Kaiser Family Foundation, 
November 2004, available at http://www.kff.org). Beneficiaries will 
also achieve savings from the additional price discounts that will be 
available through the Part D plans (``The Medicare Prescription Drug 
Benefit: Potential Impact on Beneficiaries,'' Jack Rodgers and John 
Stell, PricewaterhouseCoopers, prepared for the AARP Public Policy 
Institute, November 2004, available at http://research.aarp.org/health/2004_13_rx.pdf).
    These independent analyses suggest that although the level of 
savings that beneficiaries receive will vary by income and total drug 
costs, the Medicare drug benefit will enable beneficiaries to achieve 
savings across all age and health status cohorts. For example, one 
study consistently found lower out-of-pocket spending for all of the 
major beneficiary sub-groups analyzed, including age, sex, race, 
income, place of residence (rural/urban) and health status (Mays, et. 
al., November 2004).
    Although most beneficiaries will experience lower out-of-pocket 
costs during the first year of the Medicare drug benefit, the available 
studies suggest that some healthier beneficiaries with low utilization 
could potentially pay more in premiums than they collect in benefits in 
2006 (Mays, et. al., November 2004; King et. al., November 2004; 
Rodgers et. al., August 2004). However, it is important to note that 
insurance coverage is purchased to protect against high or unexpected 
costs. Thus, the value of the Part D benefit should not be measured 
solely based on savings during any given year; rather, it is more 
appropriate to compare beneficiaries' out-of-pocket costs with their 
total lifetime prescription drug expenditures to determine the net 
savings that beneficiaries will receive through Medicare Part D over 
their lifetime (King et. al., November 2004). To further illustrate 
this point, we note that like the existing Medicare Part B benefit, 
which covers physician care and other outpatient services, the new 
Medicare drug benefit is voluntary. Under current Medicare Part B 
coverage, an estimated 30 percent of beneficiaries pay more in premiums 
than they collect in benefits during any given year; nevertheless, most 
beneficiaries choose to enroll in Part B when they first become 
eligible because they know that they will do better over time if they 
have insurance coverage than if they remain uninsured. The same is true 
for the new Medicare Part D prescription drug benefit. Younger and 
healthier beneficiaries who currently have low drug utilization will 
still be substantially better off over time by enrolling in Medicare 
Part D. Most beneficiaries who currently have low drug spending will 
need more costly medicines in the future, as drug utilization and 
spending tend to increase with age. Moreover, many illnesses can strike 
unforeseeably, so

[[Page 4470]]

that a beneficiary that is healthy during a given year may need an 
expensive drug the following year. Thus, even if they expect to have no 
drug spending or modest drug spending in 2006, these beneficiaries will 
want to join Part D in anticipation of the benefits they will need in 
the future. This is particularly important because there is a late 
enrollment penalty for people who do not sign up for Part D, and who do 
not maintain creditable coverage elsewhere.
    Indeed, one study concluded that ``since annual net benefits even 
for beneficiaries in the youngest age group and in good health exceed 
the premiums paid, it is readily apparent that over the lifetime of all 
but the healthiest beneficiaries, benefits will exceed premiums paid 
for the coverage'' (King et. al., November 2004).
    Additionally, millions of beneficiaries who choose to enroll in 
Medicare Part D will benefit from the availability of catastrophic drug 
coverage that was lacking in Medigap drug plans, as well as in most 
Medicare Advantage plans and many employer/union-sponsored plans. A 
portion of the beneficiary's Part D premium, as well as a portion of 
the government subsidy, is for this catastrophic protection. In 
addition to its financial value, this catastrophic coverage also has a 
psychological value in that even if a given beneficiary's drug spending 
does not reach the catastrophic coverage threshold during a given year, 
the beneficiary can still have greater peace of mind in knowing that 
this valuable catastrophic protection is available to them, should they 
need it (Mays, et. al., November 2004; Rodgers et. al., August 2004; 
King et. al., November 2004).
    In addition to the Medicare prescription drug benefit, Medicare 
Part D also provides additional resources to support the continuation 
of high quality employer and union-sponsored retiree drug coverage. We 
discuss the anticipated effects of the Medicare retiree drug subsidy 
and the various other ways that Medicare Part D offers assistance with 
retiree prescription drug costs to employers and unions in a subsequent 
section of this impact analysis.
    The remainder of this section provides a more detailed description 
of how different types of Medicare beneficiaries will be helped by the 
new Medicare prescription drug benefit.
    Low-income beneficiaries--As discussed earlier, Medicare Part D 
makes substantial assistance available to beneficiaries with lower 
incomes. Altogether, we estimate that more than a third of the Medicare 
beneficiaries that are expected to enroll in Part D plans in 2006 will 
receive the low-income subsidy. These 11 million beneficiaries with 
limited incomes and assets (which includes the full-benefit dual 
eligibles) will receive substantial additional help from Medicare, with 
no gaps in coverage and limited or no premiums, deductibles, or co-
payments. As discussed elsewhere in this impact analysis, Medicare Part 
D is estimated to cover on average 96 percent of prescription drug 
costs for these low-income beneficiaries.
    There are three major groups of low-income beneficiaries that will 
receive additional assistance through the low-income subsidy. About 6.3 
million ``dual eligible'' low-income beneficiaries will pay no premium, 
or a limited premium, no deductible and nominal co-pays of as little as 
$1 or $3 per prescription. As discussed elsewhere in greater detail, 
the Medicare drug benefit will pay, on average, 98 percent of dual 
eligible beneficiaries' drug costs. Additionally, about 1.5 million of 
these dual eligible beneficiaries are institutionalized, and will be 
totally exempt from Part D cost sharing, which means that they will not 
pay any premiums, deductibles, or co-payments. While the nominal cost 
sharing of the Medicare prescription drug benefit may in some cases be 
slightly higher than the cost-sharing under a State's Medicaid program, 
Medicare Part D provides catastrophic drug coverage protection with no 
cost sharing for all dual eligibles, a benefit that is not currently 
available in all States. Since this population on average experiences 
higher drug costs, the catastrophic coverage provided by Part D offers 
important additional protection to this vulnerable population. We also 
believe that Medicare Part D is likely to result in more stable 
prescription drug coverage for low-income Medicare beneficiaries. For 
many dual eligibles, Medicaid is not a secure source of drug coverage, 
as eligibility is subject to meeting certain income and resource 
requirements; as a result, for some dual eligibles, Medicaid only 
provides intermittent drug coverage. The broader income eligibility 
criteria for the Medicare Part D low-income subsidy are such that, when 
compared to Medicaid full-benefit dual eligibility standards, Medicare 
Part D is likely to result in more stable prescription drug coverage 
for this population because small income fluctuations will be less 
likely to jeopardize beneficiaries' eligibility for the subsidized Part 
D coverage. In addition the duration of eligibility for the low-income 
subsidy is for one year.
    About 3 million Medicare beneficiaries who are not full-benefit 
dual eligibles, but whose incomes are less than 135 percent of the 
Federal poverty level ($12,568 for an individual and $16,861 for a 
couple in 2004) and who have limited assets will also pay only a few 
dollars per prescription, with no premium, and no deductible under the 
Part D low-income subsidy. Medicare will also cover 96 percent of these 
beneficiaries' drug costs, on average.
    About 1.6 million beneficiaries with incomes less than 150 percent 
of the Federal poverty level and assets up to $10,000 (or $20,000 if 
married) in 2006 will pay 15 percent co-pays with a sliding-scale 
premium under Medicare Part D, which will cover 85 percent of their 
drug costs, on average.
    Beneficiaries with help from State Pharmaceutical Assistance 
Programs--States that operate State Pharmaceutical Assistance Programs 
(SPAPs) have shown a historical commitment to provide the elderly with 
assistance with prescription drug costs, and are generally showing an 
interest (for example, through their comments on the proposed rule) in 
continuing to provide some assistance by working in conjunction with 
the new Medicare Part D benefit. As noted elsewhere in the preamble, 
the Act recognized this interest on the part of States through special 
provisions related to SPAPs. As discussed in greater detail 
subsequently in this impact analysis, States operating SPAPs which 
provide subsidized drug coverage to individuals that will be eligible 
for the Medicare drug benefit will gain substantial savings starting in 
2006, when Medicare Part D begins providing very generous coverage for 
beneficiaries with limited means. As a result of these savings, States 
may have additional funds, with which they could provide additional 
coverage that wraps around the Medicare drug benefit if they wish to do 
so. SPAP assistance with beneficiary cost sharing will count toward the 
true out-of-pocket cost catastrophic threshold. As a result, this would 
enable SPAPs to provide as generous or more generous assistance for the 
beneficiaries who currently receive coverage through these programs, at 
a lower cost per beneficiary for the States due to the availability of 
the Medicare drug benefit.
    Higher income beneficiaries that do not currently have prescription 
drug coverage--Non-low income beneficiaries that do not currently have 
prescription drug coverage will also benefit from the subsidized drug 
coverage that will be available through Medicare Part D. On average, 
these beneficiaries will be much better off with Part D coverage than 
they were

[[Page 4471]]

without drug coverage. Indeed, average spending for non-low-income 
beneficiaries is expected to be about $2,260 in 2006. Compared with not 
having drug coverage, beneficiaries who spend at least $820 a year 
(around $70 a month) on prescription drugs in 2006 will see immediate 
net savings through the Medicare drug benefit. This break-even point 
actually comes earlier when the discounted prices and other formulary 
management savings that plans will offer are considered. Beneficiaries 
spending less than $820 a year on prescription drugs will pay more in 
premium than they receive in benefits during the first year of the Part 
D drug benefit. However, a relatively small portion of beneficiaries 
will fall below the break-even point, largely due to the fact that the 
Part D premium is highly subsidized, with beneficiaries only paying 
about a quarter of the total cost of the premium on average. We 
estimate that about one-fourth (27 percent) of all Medicare 
beneficiaries will have drug spending below $820 in 2006. However, as 
discussed earlier, even for these relatively healthy beneficiaries, an 
unexpected illness could result in large and unanticipated drug costs, 
and annual prescription drug spending levels are expected to rise as 
people age, such that these beneficiaries will be much better off 
enrolling in Part D when they first become eligible to do so, and 
avoiding the late enrollment penalty. As noted previously, an estimated 
30 percent of beneficiaries pay more in premiums under current Medicare 
Part B coverage than they collect in benefits during any given year. 
Nevertheless, most beneficiaries choose to enroll in Part B when they 
first become eligible because of its insurance value--they know that 
they will do better over time if they have insurance coverage than if 
they remain uninsured. The same is true for the new Medicare Part D 
prescription drug benefit.
    Beneficiaries that currently have Medicare Advantage--In July 2004, 
approximately 4.2 million beneficiaries were enrolled in general 
Medicare Advantage Plans (that is, those not operating under an 
employer waiver), and about 82 percent of these beneficiaries (3.4 
million) had some prescription drug coverage through their Medicare 
Advantage plan. However, most beneficiaries that currently have drug 
coverage through Medicare Advantage plans do not have a drug benefit 
that is as generous as the Medicare Part D standard benefit. For 
example, around 34 percent had coverage for generic drugs only, about 
48 percent had coverage for both brand and generic drugs, and almost 
all beneficiaries in these plans had annual coverage limits of $2,000 
or less, while only about 2 percent of the beneficiaries in Medicare 
Advantage plans had unlimited brand and generic drug coverage. Medicare 
Part D will give all beneficiaries access to subsidized brand and 
generic drug coverage and catastrophic coverage through Part D plans, 
including MA-PDs, as well as additional assistance for low-income 
beneficiaries. We expect that the combination of the new Medicare-
subsidized Part D drug benefit, as well as the availability of rebates 
for Medicare Advantage Plans that are related to the provision of 
Medicare Part A and Part B services, and the attractiveness of drug 
coverage to beneficiaries will result in Medicare Advantage plans 
offering prescription drug premiums and benefit designs that are more 
advantageous to beneficiaries than the existing prescription drug 
offerings in the current Medicare Advantage market.
    Beneficiaries that currently have drug coverage through a Medigap 
plan--The Medicare Part D prescription drug benefit will also provide 
savings for beneficiaries in comparison to existing Medigap insurance 
policies that include drug coverage. The new Medicare prescription drug 
coverage offers a much better value to beneficiaries than Medigap 
plans, where the enrollee must pay the full cost of the premium (which 
is not subsidized by the Federal government) and has no catastrophic 
protection against high prescription drug costs. By comparison, the 
Medicare drug benefit provides beneficiaries with comprehensive drug 
coverage at a lower cost, with the beneficiary paying only about 25 
percent of the Part D premium. These savings occur at all spending 
levels. For example, at a drug spending level of $1,000 a year, 
beneficiaries who switch from Medigap H and I plans will save over $800 
a year in premiums and cost-sharing, and those in plan J will save over 
$1,300 a year in premiums and cost-sharing by enrolling in Part D. 
Similarly, a beneficiary who spends $3,000 a year on drugs will 
typically save about $1,300 a year in premiums and cost sharing by 
switching to the new Medicare drug benefit from a Medigap H or I plan, 
and save almost $1,700 a year by switching from a Medigap J plan. 
Additionally, it is important to note that enrollees who switch from 
Medigap drug coverage into a Part D prescription drug plan will be able 
to keep their other Medigap benefits, such as payment of deductibles 
and coinsurance for doctor and hospital care, while paying lower 
premiums since their drug coverage will no longer be included in the 
Medigap plan. They will also be able to switch into two new Medigap 
benefit packages that will allow purchasers to insure against 
catastrophic costs for benefits covered under traditional Medicare and, 
together with the new drug benefit, allow beneficiaries to insure 
against catastrophic expenses for hospital, doctor, and prescription 
drug costs. Since all beneficiaries face some risk of catastrophically 
high bills for these services, these are important additions to the 
choices available to beneficiaries to manage their costs and potential 
financial exposure.
    Beneficiaries that currently have employer- or union-sponsored 
coverage--As discussed elsewhere in this impact analysis, for well over 
a decade the availability and generosity of employment-based retiree 
health coverage has been eroding, particularly for future retirees. 
Medicare Part D, including the retiree drug subsidy and the other 
options it gives employers and unions for providing additional drug 
coverage that complements the standard Part D drug benefit, will help 
to counteract this trend by increasing the financial support that is 
available to employers and unions for retiree drug coverage. We discuss 
the anticipated effects of the Medicare retiree drug subsidy and the 
various other ways that Medicare Part D offers assistance with retiree 
prescription drug costs to employers and unions in a subsequent section 
of this impact analysis.
    Overall, both our analysis and the analyses of several independent 
researchers have found that the new Medicare drug benefit will provide 
substantial help to millions of beneficiaries. However, we did receive 
some comments expressing concerns about how Medicare Part D will affect 
access to prescription drugs for certain beneficiary subpopulations.
    Comment: We received numerous comments from beneficiary advocacy 
groups, States, and others expressing concern about the potential for 
dual eligible beneficiaries to experience coverage gaps if they do not 
enroll in a Part D plan prior to January 1, 2006 (when their primary 
prescription drug coverage will be transitioned from Medicaid to 
Medicare). These commenters stated that dual eligibles are particularly 
vulnerable due to their extensive and complex medical needs and limited 
financial resources, and that such coverage gaps could interfere with 
their ability to obtain medically necessary prescription drugs.

[[Page 4472]]

 Additionally, various commenters noted that it will be particularly 
difficult to educate the dual eligible population about the relatively 
complex array of choices that are inherent in the new Part D drug 
benefit due to a variety of factors, including cognitive impairments 
(which may make it difficult for some dual eligibles to select a Part D 
plan, including those who are disabled, mentally ill, and/or 
institutionalized), limited proficiency with written English, and 
general poor health status. A few commenters also asserted that the 
potential for various different actuarially equivalent benefit designs 
under Part D could contribute to beneficiaries' difficulty in comparing 
Part D plans and making an informed choice among the options that are 
available to them. Some commenters expressed concern that dual eligible 
beneficiaries could be exposed to late enrollment penalties if they 
enroll in a Part D plan after the initial enrollment period has ended, 
which could represent an added financial burden for individuals that 
are on a fixed income. Some commenters also expressed concern that the 
provision allowing Part D plans to disenroll individuals whose behavior 
is disruptive could cause additional gaps in drug coverage and exposure 
to late enrollment penalties that could disproportionately affect 
beneficiaries with mental illness or cognitive difficulties. Commenters 
asserted that interruptions in access to needed prescription drugs 
could ultimately potentially have a negative impact on health outcomes 
and costs for dual eligibles and other beneficiaries with HIV/AIDS, 
mental illness, or developmental disabilities, as well as for 
beneficiaries that are institutionalized in skilled nursing facilities. 
For this reason, several commenters recommended either delaying 
implementation of Part D for dual eligibles to ensure a smooth 
transition; delaying implementation of the late enrollment penalty for 
dual eligibles; or auto-enrolling dual eligibles into Part D plans by 
Fall 2005 (with the ability to change plans) to avoid coverage gaps. 
Additionally, some commenters also suggested auto-enrolling 
beneficiaries that are enrolled in Medicare Savings Programs, as well 
as other low-income subsidy-eligible beneficiaries into Part D plans. 
Finally, some commenters recommended increased funding for SHIPs, AAAs, 
and States to provide an extensive network of local, face-to-face, 
culturally and linguistically competent counseling services to notify 
and educate the dual-eligible population about the low-income subsidy, 
and improve beneficiaries' overall comprehension of and enrollment into 
Part D plans.
    Response: We share the commenters' concerns about the importance of 
facilitating a smooth transition to Medicare Part D for dual eligibles, 
and ensuring access to necessary prescription drug coverage for 
vulnerable populations. As discussed elsewhere, we have modified the 
final rule to ensure that auto-enrollment of dual eligibles will begin 
as soon as the eligible Part D plans are known prior to January 1, 
2006. Additionally, given the significant savings that will be 
available to beneficiaries through the low-income subsidy, our final 
rule also includes facilitated enrollment provisions for all other 
beneficiaries who are determined or deemed eligible for the low-income 
subsidy. It is important to note that for low-income beneficiaries, the 
Part D benefit design will be fairly standardized due to the cost-
sharing subsidies.
    Also, as discussed in the preamble, we anticipate making every 
effort to provide beneficiaries with information to assist them in 
considering whether they should change Part D plans after they have 
been auto-enrolled and as part of the facilitated enrollment process. 
For example, we anticipate working with SHIPs, States and a broad array 
of public, voluntary, and private community organizations serving 
Medicare beneficiaries to assist dual eligibles and other beneficiaries 
(including targeted efforts among historically underserved populations) 
in understanding the various options that are available to them under 
Medicare Part D. We also anticipate that the special enrollment period 
provisions in the final rule will help to ensure that dual eligibles 
and other beneficiaries are able to change to a PDP or MA-PD that 
better meets their needs. We have also made additional revisions in the 
final rule to provide additional protections for vulnerable 
individuals, such as the mentally ill, who potentially might face 
involuntary disenrollment from a PDP due to disruptive behavior. 
Ultimately, as discussed earlier, we believe that Medicare Part D will 
improve access to and stability of generously subsidized drug coverage 
for many dual eligibles and lower income beneficiaries due to the 
broader income eligibility criteria that are associated with the 
Medicare Part D low-income subsidy, which means that small income 
fluctuations will be less likely to jeopardize beneficiaries' 
eligibility for coverage. In addition, the duration of eligibility for 
the low-income subsidy is for one year.
    Comment: We also received numerous comments from beneficiary 
advocacy groups and others expressing concern that some beneficiaries 
with extensive and complex medical needs that enroll in PDPs and MA-PDs 
could be required to switch their medications due to a given Part D 
plan's formulary restrictions. Several commenters stated that there is 
a possibility that a beneficiary's current prescription drugs may not 
be included on their Part D plan's formulary, or may be included in a 
formulary tier that has higher cost-sharing requirements, because PDPs 
and MA-PDs will only be required to include at least two drugs from 
each therapeutic class on their formularies, and will not have any 
limits on their application of tiered co-payments under Medicare Part D 
(including the ability to use different tiers for different classes of 
drugs, and to make changes in tiers during the plan year). These 
commenters stated that many beneficiaries need immediate and ongoing 
access to medically necessary and therapeutically appropriate 
medications, which often may not be interchangeable with other drugs in 
the same therapeutic class--including dual eligibles; institutionalized 
beneficiaries; beneficiaries with HIV/AIDS, mental illness, 
developmental disabilities, or other life-threatening and 
pharmacologically complex conditions; and beneficiaries in 
subpopulations where there is data suggesting that specific drugs may 
be more efficacious than others (for example, based on gender, 
ethnicity or disease category)--and expressed concern that the Part D 
appeals process could cause delays in these beneficiaries receiving 
timely access to needed medications. Commenters also asserted that 
various other cost-control mechanisms can potentially delay 
beneficiaries' access to necessary and appropriate treatment, including 
dispensing limits, prior authorization requirements, therapeutic 
substitution, step therapy, and fail first provisions. Some commenters 
also suggested that Part D formulary cost-sharing requirements could be 
particularly burdensome for certain beneficiaries, including dual 
eligibles whose States do not currently require co-payments for 
prescription drugs and institutionalized beneficiaries (who could be 
subject to out-of-network costs if they obtain their drugs through a 
long-term care pharmacy that has an exclusive contract with the 
facility where they reside and provides value-added therapeutic 
management services, but is not part of their Part D plan's pharmacy 
network). Some commenters

[[Page 4473]]

also expressed concern that Part D plans may not actively solicit the 
inclusion of I/T/U pharmacies in their networks, noting that in some 
areas, I/T/U pharmacies may be the only facilities capable of providing 
medication therapy management services to certain American Indian / 
Alaska Native beneficiaries due to language and cultural barriers. 
Additionally, several commenters expressed concern that some mentally 
ill patients could be switched to less effective medications and 
experience painful withdrawal symptoms because benzodiazepines and 
barbiturates are excluded from being Part D drugs. Finally, a 
substantial number of commenters requested that CMS designate certain 
groups of beneficiaries--including dual eligibles; institutionalized 
beneficiaries; and beneficiaries with HIV/AIDS, mental illness, 
developmental disabilities, or other life-threatening and 
pharmacologically complex conditions--as special populations that are 
protected from the potential effects that formulary restrictions could 
have on their access to medically necessary prescription drugs through 
the inclusion of alternative or open formularies and other special 
provisions and exemptions.
    Response: We agree with commenters' concerns about the importance 
of continuity of care and access to medically necessary drugs for 
vulnerable populations. The preamble considers the various issues that 
were raised in the comments relating to special populations and Part D 
plans' formulary restrictions, and discusses the steps we are taking to 
be responsive to these concerns. For example, although Part D plans 
will not be required to include every Part D drug on their formularies, 
we will require Part D plan formularies to include adequate access to a 
broad range of drugs used to treat diseases for which drugs exist. 
Additionally, we will comprehensively review Part D plans' proposed 
benefit designs--including their tiered cost-sharing formulary 
structures, P&T committee structure and utilization, utilization 
management policies and processes, and exceptions and appeals 
processes--to ensure that they provide an adequate benefit that 
generally complies with all applicable standards under Part D.
    As discussed in the preamble, we will also review Part D plan 
formularies to ensure that plans do not discriminate against certain 
classes of Part D eligible individuals by adopting a benefit design 
(including any formulary or tiered formulary structure) that would 
substantially discourage enrollment by certain beneficiaries. We 
believe that our review of Part D plans' benefit designs, including 
their utilization management policies and processes, will address 
commenters' concerns regarding access to Part D drugs for vulnerable 
populations and ensure that Part D plans' benefit designs do not 
discriminate against certain groups of beneficiaries.
    In addition to the safeguards noted above, as discussed in the 
preamble, we have also modified the final rule to include a requirement 
that Part D plans establish an appropriate transition process for new 
enrollees whose current drug therapies may not be included in the Part 
D plan's formulary. We expect that a plan's transition process would 
address procedures for medical review of non-formulary drug requests 
and, when appropriate, a process for switching new plan enrollees to 
therapeutically appropriate formulary alternatives failing an 
affirmative medical necessity determination. We will review the Part D 
plans' proposed transition processes as part of our overall benefit 
package review process.
    We have also modified the final rule to clarify that Part D plans 
must disclose information about any utilization management procedures 
that they may use as part of the formulary information that they must 
disseminate to beneficiaries. We believe that this provision will 
assist beneficiaries in making informed choices during the enrollment 
process in determining which Part D plan will best meet their needs.
    Additionally, as discussed elsewhere in the preamble, we believe 
that our approach of providing for any willing pharmacy contracts 
tailored to long-term care pharmacies that serve institutionalized 
populations will encourage the participation of long-term care 
pharmacies in the Part D plans' networks, and thus help to assure that 
institutionalized beneficiaries will continue to have access to these 
pharmacies, while also providing for increased competition in this 
area. Also, in what we anticipate are those limited instances where a 
beneficiary's Part D plan does not have the long-term care pharmacy 
servicing the beneficiary's particular long-term care facility in its 
network, then the beneficiary is eligible for a special enrollment 
period that will enable them to switch plans. Should such a change in 
Part D plans be necessary and involve a transition period, our rules 
also provide that non-routine use of an out-of-network pharmacy is 
permitted when the beneficiary cannot reasonably access a network 
pharmacy. We note that the final rule provides that CMS will pay the 
out-of-network differential for appropriate non-routine use of out-of-
network pharmacies on behalf of all full low-income subsidy individuals 
and will pay amounts above the statutory cost-sharing limit for partial 
low-income subsidy-eligible Part D enrollees.
    We have used a similar approach in addressing concerns relating to 
access to I/T/U pharmacies. As discussed elsewhere in the preamble, we 
have added a provision to our final regulations requiring Part D plans 
to offer contracts to all I/T/U pharmacies in their service areas, and 
to include a special addendum to their standard contracting terms and 
conditions in order to account for the special circumstances of I/T/U 
pharmacies.
    Finally, we expect that some Medicare beneficiaries will continue 
to have access to drugs excluded under Medicare Part D, such as 
benzodiazepines, through Part D plans or State Medicaid plans. First, 
Medicare Part D allows PDPs and MA-PDs to provide drugs that are 
specifically excluded from being Part D drugs if they do so as 
supplemental benefits through enhanced alternative coverage. We believe 
that some beneficiaries with chronic conditions will choose to enroll 
in Part D plans that offer enhanced alternative coverage. Additionally, 
under Medicaid, States will be able to, at their discretion, provide 
coverage for a drug that is an excluded Medicare Part D drug.
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

[[Page 4474]]

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 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 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 associated with 
direct hospitalization and procedural costs for this cohort of patients 
over the first 4 years of the study, 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 (for example, as a result of adverse drug reactions which require 
additional health care services). Second, the Medicare prescription 
drug benefit will improve access to prescription drugs for a

[[Page 4475]]

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, March/
April 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 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, www.iom.edu or 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. For example, we are 
currently collaborating with AHRQ and other experts to identify 
priorities for developing better evidence and increasing value in the 
use of outpatient medications, and intend to develop further evidence 
as part of the implementation of the drug benefit.
    In the proposed rule, we requested comments related to how outcome 
improvements and overall health care cost reductions related to drug 
coverage can be incorporated into the implementation of the drug 
benefit.
    Comment: We received a comment from a quality organization which 
stated that when administered appropriately, a prescription drug 
benefit can affect care across the spectrum, from preventing infection 
or disease to managing or reversing the impact of chronic disease, and 
controlling the cost of overall care; however, a poorly managed drug 
benefit can worsen the health of beneficiaries, raise costs, and 
potentially negatively affect public health. The commenter went on to 
state that prescription drugs are a critical element of an evidence-
based benefit package, and that administration of a drug benefit must 
simultaneously guard against potential underutilization of needed drugs 
and over utilization of inappropriate drugs, both of which have the 
potential to negatively affect quality and costs for the individual and 
for society as a whole. Another quality organization stated that 
medication therapy management program services are a vital component 
for ensuring that Medicare beneficiaries receive their Part D benefits 
in a safe and effective manner. Several quality organizations provided 
recommendations relating to Part D plan quality assurance measures and 
systems, encouraged us to develop quality and performance measures for 
assessing the services provided by PDPs and MA-PDs, and offered to 
assist us in developing requirements and performance measures. 
Additionally, we received a number of comments that included examples 
of successful medication therapy management programs and described 
methods for measuring outcomes for asthmatic, diabetic, and 
hypertensive patients. Additionally, one quality organization commenter 
urged us to standardize the format, terms, definitions, and types of 
information that PDP sponsors will use in describing their quality 
assurance measures and systems and medication therapy management 
programs in the plan information they disseminate to beneficiaries.
    Response: We appreciate the information that commenters provided 
relating to incorporating quality improvements and potential cost 
reductions into the implementation of the Medicare drug benefit. We 
agree that effective medication therapy management programs and quality 
assurance measures and systems can help to improve beneficiaries' 
health outcomes, and ultimately reduce health care costs, and will 
continue to look at this issue closely. As mentioned in the preamble, 
we intend to work with various stakeholders to develop appropriate 
quality elements and utilization measures, and incorporate them into 
Medicare Part D where appropriate.
4. Positive Effects of the Medicare Retiree Drug Subsidy and Other 
Employer/Union 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

[[Page 4476]]

coverage for their retirees. In this section, we describe the Medicare 
retiree drug subsidy and the various other ways that Medicare Part D 
offers financial assistance with retiree prescription drug costs to 
employers and unions. We also discuss some of the potential effects 
that these options will have on the availability and generosity of 
retiree drug coverage for Medicare-eligible 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. Overall, we believe that the implementation of 
Medicare Part D, including the Medicare retiree drug subsidy and the 
other opportunities it affords employers and unions for providing 
continued prescription drug assistance to their Medicare retirees, will 
result in combined aggregate payments by employers/unions and Medicare 
for drug coverage on behalf of retirees that are 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 employment-based 
retiree coverage for future Medicare beneficiaries that has already 
been taking place.
a. Overview of the Medicare Retiree Drug Subsidy
    The positive benefits for retiree coverage from the new retiree 
drug subsidy program are related to the subsidy payments it will make 
available to sponsors of employer and union plans that provide high 
quality retiree drug coverage, the special tax-favored status of the 
subsidy payments that will be made to the qualified retiree health plan 
sponsors, 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. We note that employers and 
unions that want to participate in the retiree drug subsidy program 
also retain the option of providing 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, while 
still qualifying for the retiree drug subsidy program by arranging for 
an employer or union-sponsored retiree drug benefit through a separate 
private contract with the MA organization.
    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 attributable to the portion of 
each qualifying retiree's gross prescription drug costs that is between 
the cost threshold and cost limit (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 the 
financial liabilities associated with employment-based retiree drug 
coverage and encourages employers and unions 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 
employment-based 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 to the drug spending between $250 and $5,000 to 
approximate the average annual retiree drug subsidy for 2006. This 
calculation yielded an estimated per capita retiree drug subsidy amount 
of $668 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. In the proposed 
rule, we sought comment on the completeness and accuracy of our MCBS-
based projections for valuing the retiree subsidy. While we did not 
receive any comments specifically relating to the use of MCBS data for 
valuing the retiree drug subsidy, we did receive comments about the use 
of MCBS data more generally (see section D of this impact analysis). As 
discussed in more detail previously, we acknowledge that there are 
limitations associated with using MCBS data; however, we believe that 
the MCBS offers the best data available for making these estimates 
because it is the largest nationally representative survey of 
prescription drug utilization and costs for Medicare beneficiaries.
    The Medicare retiree drug subsidy is excluded from the taxable 
income of the plan sponsor (just as the Medicare subsidy provided to 
beneficiaries through the Medicare prescription drug benefit is 
excluded from the taxable income of the beneficiary). While the tax-
free nature of the retiree drug subsidy does not affect the value of 
the subsidy to firms without taxable income, the tax-free nature of the 
Medicare retiree drug subsidy generally increases its value to plan 
sponsors that are subject to taxation. 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 
(Congressional Research Service, ``Weighted Effective Total Tax Rates 
on the Corporate and Noncorporate Sectors,'' cited in the Congressional 
Budget Office's letter and report to the Honorable Don Nickles, 
February 24, 2004, see www.cbo.gov). Combining this tax rate and the 
estimated $668 average per capita subsidy amount for 2006, we estimate 
that the $668 tax-free retiree drug subsidy amount would be equivalent 
to a taxable subsidy of $934 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 $668 average retiree drug subsidy 
amount would be equivalent to about $891 of taxable income for 
employers with a marginal tax rate of 25 percent and about $1,028 of 
taxable income for employers with a marginal tax rate of 35 percent.
    Our implementation of the retiree drug subsidy program is guided by 
the following four policy goals: 1) maximizing the number of Medicare-
eligible retirees with high quality employer or union-provided retiree 
drug coverage, and maximizing the generosity of their coverage; 2) 
avoiding financial windfalls in the retiree drug subsidy program by 
ensuring that plan sponsors contribute at least as much to retiree drug 
coverage as Medicare pays them as a subsidy; 3) minimizing

[[Page 4477]]

administrative burden while maximizing flexibility for employers and 
unions; and 4) fulfilling our fiduciary responsibility by limiting 
overall budgetary costs. We have taken a number of steps to be 
responsive to the concerns that were raised in the comments relating to 
the retiree drug subsidy program. We believe that the flexibility that 
we have provided relating to actuarial equivalence, plan definition, 
qualifying covered retirees, payment methodology, and data reporting 
requirements will make it easier for employers and unions to continue 
offering their existing retiree drug plans to Medicare-eligible 
retirees, while qualifying for the retiree drug subsidy.
b. Overview of Additional Options Available to Employers and Unions 
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 and unions a variety of other 
options for continuing to assist their Medicare-eligible retirees in 
obtaining more generous drug coverage. For example, employers and 
unions that are supporting retiree coverage now could also choose to 
provide additional drug coverage by using the new Medicare Part D 
subsidy directly (that is, encouraging their retirees to enroll in a 
Medicare Part D plan which includes a significant government subsidy 
for the standard benefit) with the employer/union providing additional 
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: 1) arranging for a PDP or MA-PD Part D plan to 
provide enhanced benefits to their retirees; 2) arranging for a PDP or 
an MA-PD under a waiver to offer a customized plan that is exclusive to 
the employer or union's retirees; 3) choosing through a waiver to 
become a Part D plan for their retirees that offers enhanced benefits 
(this is equivalent to offering a self-insured benefit); or 4) 
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). In addition to the 
various options that are available for providing additional retiree 
drug coverage in coordination with a Part D plan, employers and unions 
also have the opportunity to assist their Medicare-eligible retirees in 
paying all or part of their Part D premiums.
    Under these approaches for coordinating employer or union-sponsored 
retiree drug coverage with Part D, the employers/unions' costs 
associated with providing retiree drug benefits are reduced on a 
dollar-for-dollar basis by the amount that Medicare subsidizes Part D 
plans. For example, we estimate that employers and unions that choose 
to provide enhanced or separate supplemental drug coverage that wraps 
around Part D will achieve, on average, a minimum of $900 per 
beneficiary of savings in 2006.
    For Medicare Advantage Part C, we have broad authority to waive 
rules that hinder the design, enrollment in, or offering of employer 
plans to Medicare eligible beneficiaries. We believe that this waiver 
authority, which has also been extended to Part D, can assist PDPs and 
MA-PDs in designing prescription drug benefits that are offered 
exclusively to employers for their retiree populations, and make it 
easier for employers to contract with (or become) PDPs and MA-PDPs to 
provide enhanced benefits to their retirees that supplement the 
standard Part D benefit (for example, additional assistance with cost 
sharing).
    We anticipate providing considerable flexibility in the waiver 
process for PDPs and MA-PDs that are offered exclusively to employers. 
As discussed in the preamble, we will be using a streamlined approach 
for implementing employer group waivers that allows maximum flexibility 
for employers to retain retiree prescription drug coverage. As part of 
this process, we will include details on the types of waivers that we 
will consider in guidelines, and we will address additional waiver 
requests from specific employers or plans on a flow basis. 
Additionally, we note that once waivers have been granted, they will be 
available to all similarly situated employers or unions, thus 
maximizing the number of employers that will be able to benefit from 
the flexibility of the waiver process.
    We are also committed to easing the transition to employer/union 
participation in providing separate supplemental coverage that wraps 
around Part D. Employers and unions that choose this option will need 
to coordinate their wraparound benefits with the standard Part D 
benefit, a function that can be performed by the employer or union's 
insurer or third party administrator. As discussed more fully in the 
preamble, CMS will play a role in facilitating coordination of benefits 
and the tracking of TrOOP. We are considering the most efficient way of 
assisting in coordinating benefits and TrOOP tracking, including 
through the establishment of a TrOOP facilitation contractor, 
contractors, or a blend of approaches. We will provide more details of 
our solution in this regard in CMS guidance to be released before the 
statutory deadline of July 1, 2005. We believe that the TrOOP 
facilitation process will make it easier for employers and unions to 
offer supplemental coverage that wraps around Part D.
    Finally, it is important to note that since the final rule includes 
a two-prong actuarial equivalence test for qualifying for the retiree 
drug subsidy, as discussed in subpart R of the preamble, there may be 
some employers or unions that provide retiree drug coverage that is 
creditable on a gross value basis but, for example, are not making 
sufficient contributions toward the financing of the benefit to qualify 
for the retiree drug subsidy on a net value basis. These employers and 
unions can choose at any time to modify their existing retiree drug 
benefit designs to supplement Part D. Under this circumstance, as 
discussed in subpart B of the preamble, the Medicare retirees would be 
eligible for a special enrollment period for Medicare Part D because 
their retiree drug coverage no longer meets the criteria for creditable 
coverage. The special enrollment period provision would enable these 
employers/unions to work with their retiree populations and the new 
Part D plans to achieve a smooth transition and ensure that their 
Medicare-eligible retirees would not be subject to late enrollment 
penalties when they enroll in Part D. We believe that the availability 
of special enrollment periods provides important additional flexibility 
and time to employers and unions as they evaluate the various options 
that are available to them under the Medicare drug benefit and retiree 
drug subsidy.
c. How Employers and Unions Are Likely To Respond To The Options That 
Are Available To Them Under The MMA
    While there is considerable uncertainty about the choices that 
employers and unions will make regarding the form of prescription drug 
assistance that they may choose to provide for their Medicare-eligible 
retirees, we believe that employers and unions 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, as we noted in the proposed rule, with the decline over the 
years in the number of employers/unions offering retiree health 
insurance coverage, it is likely that many of the remaining employers 
and unions who

[[Page 4478]]

continue to offer such coverage directly are likely those employers/
unions who have a contractual commitment or other interest in 
maintaining that coverage.
    Second, although employers and unions' 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 have praised the MMA for giving businesses flexibility in 
deciding how their retiree health plans will work in relation to the 
Medicare prescription drug benefit, and for offering employers and 
unions a 28 percent Medicare retiree drug subsidy payment that would 
not be taxed for plan sponsors 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, www.employersandmedicare.org; ``Chamber Praises Congressional 
Action on Medicare Reforms,'' U. S. Chamber of Commerce, November 25, 
2003, www.uschamber.com).
    Additionally, several major corporations issued 2003 annual reports 
that included estimates suggesting that they will collectively 
experience an $11.8 billion reduction in their accumulated 
postretirement benefits obligation that will occur over time due to the 
Medicare subsidy payments they anticipate receiving under the Medicare 
retiree drug subsidy program (``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 www.wsj.com). Although 
some of these companies may have needed to revise their initial 
estimates to reflect the Financial Accounting Standards Board's (FASB) 
Final Staff Position on accounting for the effects of the Medicare 
retiree drug subsidy payments, which was 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 
www.fasb.org) and the provisions of this final rule, these initial 
reports suggest that some employers are already planning to take 
advantage of the substantial savings that are available to them under 
Medicare Part D.
    However, given the uncertainty that exists about the future choices 
that employers and unions will make we requested comments about how 
employers and unions are likely to view the various options that are 
available under Medicare Part D for assisting them in continuing or 
enhancing their retiree health benefits. Specifically, we were 
interested in comments on the factors that will affect employers' and 
unions' choices between applying for the retiree drug subsidy, wrapping 
around Part D coverage, qualifying as an enhanced Part D plan directly, 
or using an enhanced PDP or MA-PD plan to provide enhanced coverage to 
their retirees. This information will assist us in understanding how 
these options can be designed together to maximize the increase in 
availability of high quality drug benefits for retirees. The following 
sections summarize the major issues relating to employers and unions' 
likely responses to the various options available to them under the MMA 
that we discussed in the proposed rule, as well as the comments that we 
received relating to these issues.
i. Major Factors That Will Affect Employers And Unions' Responses To 
The Options That Are Available To Them Under The MMA
    In the proposed rule, we identified several factors that could 
potentially influence employers and unions' responses to the 
opportunities for continuing to provide high quality retiree drug 
benefits that are available to them through the retiree drug subsidy 
and the various options that are available for coordinating their 
coverage with Part D.
    For example, we noted that the Medicare retiree drug subsidy is 
excluded from the taxable income of the plan sponsor (just as the 
Medicare subsidy provided to beneficiaries through the Medicare 
prescription drug benefit is excluded from the taxable income of the 
beneficiary). While the tax-free nature of the retiree drug subsidy 
does not affect the value of the subsidy to firms without taxable 
income, the tax-free nature of the Medicare retiree drug subsidy 
generally increases its value to private sector employers that are 
subject to taxation. For example, as noted previously, the tax-free 
$668 average retiree drug subsidy amount would be equivalent to about 
$891 of taxable income for employers with a marginal tax rate of 25 
percent and about $1,028 of taxable income for employers with a 
marginal tax rate of 35 percent.
    We also stated that based on published employer surveys, reports 
from employers and benefit consultants, and other available sources of 
evidence, we expect that some employers and unions 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/union 
contributions would augment Medicare's subsidized coverage under Part 
D. We noted that many employers and unions 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 and unions relative to the interaction of 
their retiree coverage with Medicare. Thus, some employers and unions 
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. We also stated that we 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 and unions to continue to provide a benefit package of 
similar or greater generosity compared to their existing arrangements 
while potentially lowering their prescription drug costs.
    We also noted that another important factor that will affect 
whether employers or unions will use the retiree drug subsidy is 
whether their contribution to the retiree coverage is sufficient to 
qualify for the retiree drug subsidy, 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. 
We suggested that such increased contributions could be in the 
financial interest of some employers and unions 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. However, we also stated that providing 
enhanced benefits or separate wraparound coverage in coordination with 
Part D may also be an attractive option to employers and unions 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. In both cases, 
these employers/unions could use their contributions to augment 
Medicare's subsidized coverage under

[[Page 4479]]

Part D, and thereby provide a more generous benefit to their Medicare-
eligible retirees.
    Comment: We received several public comments from employers and 
employer groups that supported the MMA and proposed rule's overall 
approach of encouraging employers and unions to continue providing 
retiree health coverage, while providing flexibility and minimizing 
administrative burdens. Several of these comments indicated that 
employer and union retiree health plan sponsors' responses to the 
various options that are available to them under the Medicare drug 
benefit and retiree drug subsidy will be affected by a variety of 
factors, including: the timeframe of CMS regulation and guidance; the 
degree of flexibility in the retiree drug subsidy program (for example, 
relating to the actuarial equivalence methodology, application process, 
plan sponsor and qualifying covered retiree definitions, payment 
methodology and frequency, and subsidy payment allocation 
requirements); the amount of flexibility in the waiver process for 
employer-sponsored PDPs and MA-PDs; the financial incentives and degree 
of administrative burden associated with the various options; the 
timely availability of feasible PDP and wraparound options in the 
market; and employers and unions' own internal timeframes and processes 
required to make benefit design changes.
    We also received several comments suggesting that plan sponsors' 
responses to the various options that are available to them under the 
MMA, including whether or not they will choose to accept the retiree 
drug subsidy, may vary according to the type of employer or union plan. 
For example, one commenter stated that small, self-insured employers 
might find that the cost of obtaining an actuarial attestation may 
exceed the value of the retiree drug subsidy payments that they would 
receive. Similarly, a few commenters stated that employer/union plan 
sponsors and insurers offering fully-insured retiree health plans might 
have difficulty tracking claims at the individual plan sponsor level 
for purposes of meeting the retiree drug subsidy program's data 
submission and record retention requirements.
    Additionally, a few public sector employer commenters stated that 
the definition of plan sponsor that was being used in the proposed rule 
did not seem to be broad enough to allow some public retirement systems 
to qualify for the retiree drug subsidy. Two public sector employer 
commenters suggested that some governmental entities may be discouraged 
from obtaining the retiree drug subsidy because its tax-free nature 
does not provide an additional financial incentive to non-taxable plan 
sponsors that provide retiree health benefits. Also, one public 
employer group commenter requested that we assure through final 
regulations or the waiver process that State and local government plans 
have the same opportunity to directly sponsor a PDP or MA-PD as other 
employer/union plan sponsors.
    Finally, a few commenters expressed concerns that retiree health 
plans with limited employer/union contributions--including some State 
and local government retiree health plans and many church plans that 
require their retirees to contribute in excess of 50 percent of the 
cost of prescription drug coverage--might have difficulty qualifying 
for the retiree drug subsidy if a net-value test is used in determining 
actuarial equivalence.
    Response: In recognition of the considerable diversity that exists 
within the employer and union community, the MMA gives employers and 
unions several options for accessing the new financial resources that 
Medicare Part D makes available for assisting them in continuing to 
offer high quality retiree drug coverage. For example, employers and 
unions have the option of continuing to provide drug coverage that is 
at least actuarially equivalent to the standard Part D benefit for 
their Medicare-eligible retirees as a primary insurer, and receiving a 
direct retiree drug subsidy that reduces the cost of providing this 
coverage. As discussed in more detail in subpart R, to qualify for the 
retiree subsidy, plans must meet a two-prong test for actuarial 
equivalence, which includes a net-value test. We chose this definition 
of actuarial equivalence for the retiree subsidy because we believe it 
best achieves our goals of maximizing the number of beneficiaries 
retaining employment-based retiree drug coverage while not creating 
windfalls to sponsors.
    Employers and unions, including those that do not qualify for the 
subsidy, have several other options under Medicare Part D for providing 
prescription drug assistance to their retirees. For example, employers 
and unions can choose to offer drug coverage that maintains or exceeds 
the generosity of their current benefit designs by providing additional 
coverage that complements the standard Part D prescription drug 
benefit, effectively becoming a secondary insurer that uses the Part D 
benefit to subsidize the costs of their Medicare-eligible retirees' 
drug coverage. As discussed earlier, this coordination can be achieved 
by: 1) arranging for a PDP or MA-PD Part D plan to provide enhanced 
benefits to their retirees; 2) arranging for a PDP or an MA-PD under a 
waiver to offer a plan that is exclusive to the employer's retirees; 3) 
choosing through a waiver to become a Part D plan that offers enhanced 
benefits; or 4) 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). We recognize that some of the 
options that are available through the Medicare drug benefit and 
retiree drug subsidy may be more attractive to certain employers/unions 
than other options. However, we believe that these options give 
employers and unions a wide variety of opportunities for continuing to 
provide a generous level of retiree coverage.
    Our implementation of the various options that are available to 
employers and unions under the Medicare drug benefit and retiree drug 
subsidy for continuing to offer high quality prescription drug coverage 
to Medicare-eligible retirees at a lower cost is guided by four policy 
goals: 1) maximizing the number of Medicare-eligible retirees with high 
quality employer or union-provided retiree drug coverage, and 
maximizing the generosity of their coverage; 2) avoiding financial 
windfalls in the retiree drug subsidy program by ensuring that plan 
sponsors contribute at least as much to retiree drug coverage as 
Medicare pays them as a subsidy; 3) minimizing administrative burden 
while maximizing flexibility for employers and unions; and 4) 
fulfilling our fiduciary responsibility by limiting overall budgetary 
costs. The preamble considers the issues that were raised in the 
comments from employers, unions, and other related entities and 
describes the policy decisions that we made relating to these issues, 
balancing the various policy goals in an effort to achieve the maximum 
increase in support for retiree health coverage as existing employer 
and union contributions are augmented by new financial support from the 
Medicare prescription drug benefit and retiree drug subsidy. We have 
taken a number of steps to be responsive to the concerns that were 
raised in the comments. Similarly, we are exploring options for 
increasing flexibility in employers' and unions' ability to directly 
sponsor PDPs or MA-PDs. For example, as discussed in the preamble, we 
have provided flexibility in the payment methodology and data 
submission requirements related to retiree drug subsidy payments to 
plan sponsors with insured benefits.

[[Page 4480]]

 In addition, where appropriate, the potential impact of these various 
policy decisions has been factored into the projection assumptions for 
the impact analysis, as discussed elsewhere in this impact analysis.
ii. Potential Effect of Factors Unrelated to Medicare on Employer and 
Union Behavior
    In the proposed rule, we noted that although the Medicare 
prescription drug benefit and retiree drug subsidy represent additional 
funding sources for employment-based retiree drug coverage that can 
help employers and unions to retain drug coverage for their retirees, 
there are also a number of economic forces unrelated to Medicare that 
will play a role in employers' and unions' decision making regarding 
both the availability and the generosity of employment-based 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 and unions 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, and cost trends,'' regardless of changes in the 
Medicare program (EBRI Special Analysis prepared for Senator Charles E. 
Grassley, Dallas L. Salisbury and Paul Fronstin, Employee Benefit 
Research Institute, July 18, 2003, available at www.ebri.org).
    Comment: We received one comment from a retiree advocacy group 
suggesting that the recent Equal Employment Opportunity Commission 
(EEOC) ruling could significantly affect employer/union behavior 
relating to retiree health benefits for Medicare-eligible retirees.
    Response: As noted above, several economic and non-economic forces 
that are not related to the Medicare retiree drug subsidy and the other 
opportunities that are available for coordinating employer/union-
sponsored coverage with Part D could potentially influence employers' 
and unions' decisions about the availability and generosity of retiree 
health benefits for Medicare-eligible retirees. We agree that the 
recent EEOC ruling is a non-Medicare related factor that could 
potentially affect employers' and unions' behavior concerning retiree 
drug coverage. In that ruling, the EEOC approved a proposed final rule 
that would allow ``employers and labor organizations to offer retirees 
a wide range of health plan designs that incorporate Medicare or 
comparable State health benefit programs without violating the ADEA.'' 
EEOC states that its proposed final rule would enable employers and 
unions to supplement a retiree's Medicare coverage or take advantage of 
the tax-free retiree drug subsidy without having to demonstrate that 
the drug coverage they provide to their Medicare-eligible retirees is 
identical to the drug coverage that they offer to their early retirees. 
There is considerable uncertainty about how the EEOC's ruling will 
ultimately affect employer and union behavior (see EEOC web site, 
http://www.eeoc.gov/policy/regs/retiree_benefits/).
    Similarly, the Governmental Accounting Standards Board (GASB, which 
develops accounting standards for State and local governments) recently 
issued Statement No. 43, Financial Reporting for Postemployment Benefit 
Plans Other Than Pension Plans and Statement No. 45, Accounting and 
Financial Reporting by Employers for Postemployment Benefits Other Than 
Pensions, which will require State and local governments to begin 
reporting the long-term costs of their retiree health benefit 
liabilities on an accrual basis and will encourage them to begin 
setting aside money in trust funds to cover the future costs of 
providing benefits to their retirees (``GASB Issues Standards to 
Improve Postemployment Benefit Plan Reporting,'' May 11, 2004 and 
``GASB Issues Statement That Addresses Employer Reporting of 
Postemployment Benefits Other Than Pensions,'' August 2, 2004, see GASB 
web site, http://www.gasb.org/news/index.html). Some experts have 
speculated that the GASB standards could put additional financial 
pressures on State and local governments to reduce their financial 
liabilities by making changes in their retiree health benefits; 
however, others have noted that some State and local governments may 
find it difficult to make such changes due to legislative and 
collective bargaining considerations, or may not opt to make such 
changes due to labor relations considerations.
    Additionally, while there is some uncertainty relating to their 
potential impact on employer and union behavior, factors such as 
existing caps on retiree health benefits that have been instituted by 
some plan sponsors, and demographic trends could also potentially 
influence employer and union decision making concerning retiree health 
benefits. Furthermore, as discussed elsewhere, the availability and 
generosity of retiree health coverage had been declining for more than 
a decade prior to enactment of the MMA, particularly for future 
retirees, and available evidence suggests that this erosion is 
continuing to occur (primarily in the form of increasing retirees' 
share of premiums and increasing eligibility restrictions for future 
retirees) due to ongoing financial pressures on employers (Comments 
made during discussion of the Medicare Payment Advisory Commission 
(MedPAC) Supplement to the Kaiser/HRET Survey, Transcript of MedPAC 
Public Meeting, November 16, 2004, see MedPAC web site, http://www.medpac.gov/public_meetings/transcripts/1104_allcombined_transc.pdf).
iii. Employers And Unions Have Not Yet Decided How They Will Respond
    In the proposed rule, we noted that some employers and unions 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 
www.employersandmedicare.org). We also noted that at the time that the 
proposed rule was published, most publicly traded companies had chosen 
to defer recognizing the effects of the Medicare retiree drug subsidy 
payments pending receipt of additional accounting and regulatory 
guidance. However, we noted that available evidence suggests 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.
    Comment: We received comments suggesting that most employers and 
unions have not yet decided how they will respond to the options that 
are available to them under the Medicare drug benefit and retiree drug 
subsidy. However, a few commenters did provide some information about 
employers' and unions' future plans. For example, two public sector 
employer commenters expressed a desire to continue providing their 
current retiree health benefits and receive the retiree drug subsidy. 
Similarly, a retiree advocacy group comment included information about 
a private employer that plans to separate its retiree drug coverage 
from its other retiree health coverage so that its Medicare-eligible 
retirees can choose between remaining in the employer's retiree drug 
plan or enrolling in a Part D plan, and plans to stop offering retiree 
drug coverage in a few years when the value of its retiree drug benefit 
becomes

[[Page 4481]]

lower than the value of the standard Part D benefit due to existing 
financial caps that the company had placed on its contribution to the 
costs of retiree coverage.
    Response: Recent anecdotal information from various benefit 
consultants, researchers, and other experts suggests that many 
employers and unions have not yet determined how they will respond to 
the options that are available under the Medicare drug benefit and 
retiree drug subsidy, due to uncertainty about some of the details 
relating to how these options will be implemented.
    However, in spite of employers and unions' uncertainty, some early 
evidence suggests that many employers and unions are likely to continue 
providing prescription drug assistance to their Medicare-eligible 
retirees. Recent surveys that included questions related to the 
Medicare drug benefit and retiree drug subsidy suggest that the vast 
majority of current Medicare-age retirees are likely to continue 
receiving some form of prescription drug assistance from their former 
employers/unions--either primary drug coverage that qualifies for the 
retiree drug subsidy, enhanced or supplemental coverage that wraps 
around the standard Part D benefit, or assistance with paying Part D 
premiums--and that few beneficiaries with retiree drug coverage were 
likely to lose their employment-based retiree drug benefits and/or 
retiree health benefits. The surveys suggest that many employers are 
likely to continue to assist their retirees by taking advantage of the 
financial support for retiree drug coverage that is available through 
the retiree drug subsidy and other options for coordinating with Part 
D, rather than ceasing to provide prescription drug assistance for 
their Medicare-eligible retirees (Comments made during discussion of 
the Medicare Payment Advisory Commission (MedPAC) Supplement to the 
Kaiser/HRET Survey, Transcript of MedPAC Public Meeting, November 16, 
2004, see MedPAC web site, http://www.medpac.gov/public_meetings/transcripts/1104_allcombined_transc.pdf; Kaiser/Hewitt 2004 Survey on 
Retiree Health Benefits).
iv. Employers' And Unions' Responses May Change Over Time
    Comment: We received several comments suggesting that employers' 
and unions' responses to the various options that are available to them 
under the Medicare drug benefit and retiree drug subsidy may change 
over time. For example, a benefit consultant stated that many plan 
sponsors will initially be attracted to accepting the retiree drug 
subsidy because this decision may be the easiest course 
administratively; however, as time goes on, it may be more attractive 
for employers and unions to consider modifying their retiree drug plans 
to supplement and coordinate with Part D. This benefit consultant also 
anticipated that the typical employer/union plan will provide retiree 
drug benefits that are better than Part D in 2006, but suggested that 
this pattern is likely to reverse over time. This commenter stated that 
the value of employment-based coverage for future retirees may well be 
less than the value of the highly-subsidized standard Part D coverage, 
suggesting that as plan sponsors' retiree populations begin to include 
more future retirees (who may be disproportionately affected by the 
economic caps that some companies have placed on their contributions to 
the cost of retiree coverage), this could result in a gradual shift in 
the average generosity of employment-based plans, thus making the 
option of supplementing the Part D benefit a more attractive approach 
for providing retiree drug coverage.
    Similarly, we received a comment suggesting that another factor 
that may contribute to changes in employer and union behavior over time 
relates to the effect of financial caps that some employers have placed 
on their contributions to retiree health benefits in response to rising 
costs and the implementation of Financial Accounting Statement No. 106 
(FAS 106). Specifically, as employers' contribution levels reach these 
caps, their retiree drug plans may no longer qualify for the retiree 
drug subsidy, or their retiree drug plans could become less valuable 
than the new Medicare drug benefit.
    In addition, several commenters stated that employers and unions 
typically require a lead-time of at least one year to implement benefit 
design changes (and even longer in the case of church plans), and may 
not have sufficient advance information that would enable them to take 
full advantage of the various options that are available to them under 
Medicare Part D by 2006. For example, two commenters indicated that 
although employers are very interested in the option of wrapping around 
Medicare Part D coverage, they do not yet see arrangements in the 
marketplace that they feel would make this option feasible, such as the 
availability of cross-regional PDP and MA-PD offerings.
    Response: In responding to the various options that are available 
to them under the Medicare drug benefit and retiree drug subsidy, 
employers and unions have two major choices. They will either need to 
determine whether they want to continue to offer creditable coverage 
that qualifies for the retiree drug subsidy and remain the primary 
insurer for their Medicare-eligible retirees' drug coverage, or whether 
they want to become a secondary payer that offers additional coverage 
that complements the Medicare Part D, with Medicare acting as the 
primary insurer. In developing this final rule, we have sought to 
provide significant flexibility in implementing the various options 
that are available to employers and unions under the Medicare drug 
benefit and retiree drug subsidy. We believe that this approach will 
help us to maximize the number of employers and unions that are able to 
take advantage of the various options available under the Medicare 
prescription drug benefit and retiree drug subsidy for retaining and 
enhancing their retiree drug coverage.
    As discussed earlier, it is also important to note that an employer 
or union that provides retiree drug coverage that is creditable on a 
gross value basis but, for example, is not making sufficient 
contributions toward the financing of the benefit to qualify for the 
retiree drug subsidy on a net value basis can choose at any time to 
modify its existing benefit design to supplement Part D. Under this 
circumstance, as discussed in subpart B of the preamble, the Medicare 
retirees would be eligible for a special enrollment period for Medicare 
Part D because their retiree drug coverage no longer meets the criteria 
for creditable coverage. The special enrollment period provision would 
enable these employers and unions to work with their retiree 
populations and the new Part D plans to achieve a smooth transition and 
ensure that their Medicare-eligible retirees would not be subject to 
late enrollment penalties when they enroll in Part D. We believe that 
the availability of special enrollment periods provides important 
additional flexibility and time to employers and unions as they 
evaluate the various options that are available to them under the 
Medicare drug benefit and retiree drug subsidy.
    However, we recognize that employers and unions will not be making 
their decisions in a static environment; rather, many of the 
environmental factors that will affect their decisions will continue to 
change over time, including the impact of rising health care costs and 
financial caps on employer contributions to retiree health coverage, 
demographic shifts in employers' and unions' retiree populations (as 
more of the future

[[Page 4482]]

retirees who may have less generous benefits than the current retirees 
begin to retire), and changes in a plan sponsor's financial position. 
Additionally, as discussed in the proposed rule, we believe that some 
employers and unions may prefer to provide coverage that interfaces 
with Medicare Part D in much the same way that they supplement the 
basic Medicare Part A and Part B benefits, and we acknowledge that they 
may require some additional lead-time to implement this option. 
Moreover, anecdotal information from various benefit consultants, 
researchers, and other experts suggests that some employers/unions that 
initially choose to accept the retiree drug subsidy may move to a 
wraparound option a few years later (Comments made during discussion of 
the Medicare Payment Advisory Commission (MedPAC) Supplement to the 
Kaiser/HRET Survey, Transcript of MedPAC Public Meeting, November 16, 
2004, see MedPAC web site, http://www.medpac.gov/public_meetings/transcripts/1104_allcombined_transc.pdf).
    For these reasons, we believe that it is likely that some 
employers' and unions' responses to the various options that are 
available to assist them in providing high quality drug coverage under 
the Medicare drug benefit and retiree subsidy may change over time--
either in the aggregate or for specific retiree subpopulations. As 
discussed earlier, we have updated our enrollment estimates to reflect 
this potential change in employer and union behavior over time. We 
believe that these enrollment estimates are the best available given 
the considerable amount of uncertainty surrounding the possible 
responses of current plans to the many options that are available to 
them for interacting with Part D.
d. Anticipated Effects of the Medicare Retiree Drug Subsidy Program and 
Part D Assistance for Retirees on the Availability and Generosity of 
Retiree Drug Benefits
    We also requested comments on how choices by employers and unions 
relating to the retiree drug subsidy, wrapping around Part D coverage, 
qualifying as an enhanced Part D plan directly, or using an enhanced 
PDP or MA-PD plan will affect retirees' net payments for drugs and 
other health services.
    Comment: We received several comments from retiree advocacy groups 
and unions, which stated that the implementation of Medicare Part D 
will pose several potential risks for retirees with regard to the 
availability and generosity of their employment-based coverage, and 
requested that the final rule include additional retiree protections. 
Specifically, these commenters stated that Medicare-eligible retirees 
have a risk of: losing their current generous employer or union-
sponsored retiree drug coverage; experiencing significant increases in 
out-of-pocket costs; not making the best choice for receiving 
prescription drug coverage due to confusion about the multiple options 
that are available to them; being exposed to the late enrollment 
penalty; and experiencing reduced access to newer drugs due to Part D 
formulary limitations. We also received comments from two employer 
groups suggesting that there is a risk for disabled beneficiaries in 
active worker plans (although they are in a non-work status) to receive 
less generous drug coverage if they are not deemed as being qualifying 
covered retirees for purposes of the retiree drug subsidy. Finally, one 
employer group commenter suggested that some retirees that choose to 
enroll in Part D plans could lose their other retiree health benefits 
because many employers may require their retirees not to enroll in a 
Part D plan as a condition of eligibility for the employer's qualified 
retiree health plan.
    Response: A variety of factors will affect employers' and unions' 
decisions about how to respond to the various options that are 
available to them under the Medicare drug benefit and retiree drug 
subsidy. These decisions will ultimately affect the nature of the 
retiree drug benefits that will be available to current and future 
Medicare-eligible retirees. As discussed elsewhere, the availability 
and generosity of retiree health coverage had been declining for more 
than a decade prior to enactment of the MMA, particularly for future 
retirees, and available evidence suggests that this erosion is 
continuing to occur (primarily in the form of increasing retirees' 
share of premiums and increasing eligibility restrictions for future 
retirees) due to ongoing financial pressures on employers. For example, 
according to comments made by a researcher from the Health Research and 
Educational Trust, the cost of retiree health benefits has increased by 
56 percent since 2000, and 27 percent of Medicare-eligible retirees 
receive their benefits from firms that have more Medicare-eligible 
retirees than active workers (Comments made during discussion of the 
Medicare Payment Advisory Commission (MedPAC) Supplement to the Kaiser/
HRET Survey, Transcript of MedPAC Public Meeting, November 16, 2004, 
see MedPAC web site, http://www.medpac.gov/public_meetings/transcripts/1104_allcombined_transc.pdf).
    In the context of this continuing erosion in the availability and 
generosity of retiree coverage, the Medicare drug benefit and retiree 
drug subsidy make considerable new financial resources available to 
assist employers and unions in continuing to offer high quality retiree 
health benefits. Employers and unions have considerable latitude in 
making changes in their existing retiree health benefit designs unless 
they have made a specific promise to maintain these benefits in their 
formal written plan documents, collective bargaining agreements, or 
other contractual commitments; or in the case of public employers, 
unless they have other statutory or regulatory constraints on their 
ability to make such changes. This has always been the case, and 
continues to be the case with the enactment of the MMA. However, we 
believe that the substantial additional resources that Medicare Part D 
provides through the retiree drug subsidy and the various options that 
employers and unions have for coordinating with Part D can help to 
counteract some of the financial pressures that have been contributing 
to the trends toward erosion in retiree health benefits by making it 
more affordable for employers and unions to continue providing high 
quality retiree drug coverage. Additionally, as discussed earlier, 
available evidence suggests that the majority of current Medicare-age 
retirees are likely to continue receiving prescription drug assistance 
from their former employers and unions--either in the form of primary 
drug coverage that qualifies for the retiree drug subsidy, enhanced or 
supplemental coverage that wraps around the standard Part D benefit, or 
assistance with paying Part D premiums--and that very few beneficiaries 
are likely to lose their employer or union-sponsored retiree drug 
benefits altogether.
    The preamble describes the policy decisions that we made relating 
to the various options that are available to employers and unions under 
Medicare Part D, in an effort to balance our various policy goals and 
to achieve the maximum increase in support for retiree health coverage. 
We have taken a number of steps to be responsive to the concerns that 
were raised in the comments that we received relating to the proposed 
rule. For example, we believe that the flexibility that we have 
provided relating to actuarial equivalence, plan definition, qualifying 
covered retirees, payment methodology, and data reporting requirements 
will

[[Page 4483]]

make it easier for employers and unions to continue offering their 
existing retiree drug plans to Medicare-eligible retirees, while 
qualifying for the retiree drug subsidy. In cases where employers and 
unions choose to provide additional retiree drug benefits through 
separate wraparound coverage that supplements Part D, or enhanced 
benefits through Part D plans, they can coordinate this additional 
coverage with Part D in such a way that they can continue providing 
generous retiree drug benefits at a lower cost, while ensuring that 
their retirees do not experience significant changes in their out-of-
pocket spending.
    Additionally, given that approximately 30 percent of the large 
private sector firms (that is, firms with 1,000 or more employees) that 
currently offer retiree health coverage to new Medicare-age retirees 
require those retirees to pay 61 to 100 percent of the cost of their 
retiree health premiums, based on findings from the 2004 Kaiser/Hewitt 
Survey on Retiree Health Benefits, some retirees are likely to 
experience a significant reduction in their out-of-pocket costs by 
enrolling in the government-subsidized Part D plans. We also note that 
many beneficiaries' current employer/union-sponsored coverage includes 
various features that are similar to Part D, including the use of 
tiered formularies, which may help to minimize potential disruptions 
associated with switching from an existing employment-based retiree 
drug plan to a Part D plan (``Current Trends and Future Outlook For 
Retiree Health Benefits: Findings from the Kaiser/Hewitt 2004 Survey on 
Retiree Health Benefits,'' The Henry J. Kaiser Family Foundation and 
Hewitt Associates, December 2004, available at http://www.kff.org).
    Additionally, as discussed earlier, it is also important to note 
that an employer or union that provides retiree drug coverage that is 
creditable (on a gross value basis) can choose at any time to modify 
its existing benefit design to supplement Part D. Under this 
circumstance, the Medicare retirees would be eligible for a special 
enrollment period for Medicare Part D because their retiree drug 
coverage no longer meets the criteria for creditable coverage. Thus, 
the special enrollment period provision would enable these employers 
and unions to work with their retiree populations and the new Part D 
plans to achieve a smooth transition and ensure that their Medicare-
eligible retirees would not be subject to late enrollment penalties 
when they enroll in Part D.
    We anticipate working closely with employers, unions, and advocacy 
groups to assist beneficiaries that have employment-based drug coverage 
in understanding the various choices that are available to them under 
Part D and choosing the option that will provide them with the best 
value, given their particular circumstances. Ultimately, we believe 
that Medicare Part D, including the retiree drug subsidy and the other 
options it gives employers and unions for providing drug coverage, will 
help to counteract the trend toward erosion in retiree health benefits 
by significantly increasing the amount of financial support that is 
available to employers and unions for retiree drug coverage, and by 
providing important support for recent retirees and future retirees 
that may have less generous employer/union support.
    Overall, we believe that the implementation of Medicare Part D, 
including the Medicare retiree drug subsidy and the other opportunities 
it affords employers and unions for providing continued prescription 
drug assistance to their Medicare retirees, will result in combined 
aggregate payments by employers/unions and Medicare for drug coverage 
on behalf of retirees that are 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 employment-based 
retiree coverage for future Medicare beneficiaries that has already 
been taking place.
e. 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. 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 
www.healthaffairs.org). 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 
stable for the nation's current retirees during recent years. However, 
the apparent stability of benefits has been changing for future 
retirees. We believe that certainly absent the new law, these trends 
would have continued. In enacting the law, the Congress hoped that the 
opportunities available to employers and unions under the Medicare 
prescription drug benefit and retiree subsidy would help to ameliorate 
the erosion in retiree health coverage. Overall, we do expect that the 
implementation of Medicare Part D, including the Medicare retiree drug 
subsidy and the other opportunities it affords employers and unions for 
providing continued prescription drug assistance to their Medicare 
retirees, will result in combined aggregate payments by employers/
unions and Medicare for drug coverage on behalf of retirees that are 
significantly greater than they otherwise would have been without the 
enactment of the MMA.
    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 2004 Annual Survey of Employer-Sponsored Health 
Benefits, available at 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

[[Page 4484]]

of Financial Accounting Standards No. 106: Employers' Accounting for 
Postretirement Benefits Other Than Pensions,'' Financial Accounting 
Standards Board, December 1990, available at 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 
www.gao.gov). However, the recent declines have been more gradual than 
what occurred during the early 1990s, with 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 2004 Annual Survey of Employer-Sponsored Health 
Benefits, available at 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 20 percent in 2004 (data from the 
National Survey of Employer-Sponsored Health Plans, 2004 cited in a 
press release entitled ``US health benefit cost rises 7.5 percent in 
2004, lowest increase in five years,'' Mercer Human Resource 
Consulting, November 22, 2004, available at 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 2004 Annual Survey of 
Employer-Sponsored Health Benefits, available at 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 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 2004, 
36 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, 2004). 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, 2003 and 2004 Annual Surveys of 
Employer-Sponsored Health Benefits, available at 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 
changed their health benefit designs to a defined contribution 
structure (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, 2004).
    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 and unions 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 employment-based 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 and unions for providing continued prescription 
drug assistance to their Medicare retirees, will result in combined 
aggregate payments by employers/unions and Medicare for drug coverage 
on behalf of retirees that are 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 employment-based 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. 
However, we believe that these estimates provide a reasonable 
representation of the likely net Federal budgetary effects of the 
Medicare Part D program.
    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 $49 billion in CY 2006 and 
$68 billion in CY 2010, with the total net effect estimated to be about 
$293 billion over the period from 2006-2010. We note that these 
estimates are slightly higher than those presented in the proposed rule 
due largely to the higher per capita spending estimates for the

[[Page 4485]]

low-income subsidy enrollees as discussed in section F.2 of this impact 
analysis. Table IV-3 provides year-by-year estimates of the net Federal 
budgetary effects\9\ 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.
---------------------------------------------------------------------------

    \9\-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 $61 billion in CY 2006 and 
nearly $365 billion over the five-year period from CY 2006-2010. The 
estimated $365 billion in additional net Federal spending over the 
five-year period is made up of approximately $419 billion in Federal 
Medicare spending on direct government subsidies, government 
reinsurance payments, low-income subsidies, and retiree drug subsidies, 
with an offset of nearly $55 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).\10\
---------------------------------------------------------------------------

    \10\ For the purpose 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. Estimates of CMS administrative costs for these activities 
will be incorporated in the forthcoming President's Budget.
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 $11 billion in CY 2006 
and about $72 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 $13 billion in CY 2006 
and about $84 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 related 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 and the Medicare Savings Program, we assume a 
smaller new enrollment 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 full Medicaid benefits 
package, most would have done so already. We assume a somewhat higher 
new enrollment 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 $2 billion in CY 
2006, and total about $12 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 (SSA) for conducting eligibility determinations 
for low-income benefits under Part D. In addition, States are required 
to provide us with data for the purpose of calculating the amounts 
States are required to pay Medicare to compensate for a portion of 
full-benefit dual eligibles' drug costs. These and other State 
administrative activities related to Medicare Part D will generate 
State administrative costs, as discussed in more detail in the State 
section of the impact analysis. We estimate that the Federal share of 
these net costs will be $39 million in FY 2004, $73 million in FY 2005, 
and average $67 million from FY 2006-2010.\11\ These net costs reflect 
savings from reduced State claims processing workload as dual 
eligibles' drug coverage is shifted from Medicaid to Medicare.
---------------------------------------------------------------------------

    \11\ For the purpose 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.
---------------------------------------------------------------------------

3. SSA Administrative Costs
    SSA will incur administrative costs associated with its 
responsibilities under the MMA. SSA is developing and executing an 
outreach plan to educate beneficiaries about the low-income subsidy 
assistance that is available under Medicare Part D. To assist 
beneficiaries with their requests for subsidy assistance, SSA is 
developing simplified application, appeal, and redetermination forms. 
SSA has responsibility for determining eligibility for the low-income 
subsidy, performing reviews of determinations based on requests for 
appeal, and redetermining eligibility. To do this, SSA must develop 
computer systems, regulations, and internal SSA instructions for 
processing applications, appeals, and re-determinations. In addition, 
SSA is developing training materials for State employees so that they 
can use SSA's simplified application form and application process, and 
is conducting data exchanges with CMS and other Federal Agencies 
necessary for making eligibility determinations. Estimates for SSA 
administrative costs for these activities will be incorporated in the 
forthcoming President's Budget.

[[Page 4486]]



   Table IV-3. 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         69.7      76.2      83.3      91.0      99.2      419.3
 Spending
 Related to
 Medicare
 Part D,
 Including
 the
 Retiree
 Subsidy
------------------------------------------------------------------------
State           -9.0      -9.9     -10.9     -11.9     -13.0      -54.7
 Payments
 to
 Partially
 Offset
 Medicare
 Drug Costs
 for Dual
 Eligibles
------------------------------------------------------------------------
Subtotal        60.6      66.2      72.5      79.1      86.1      364.6
------------------------------------------------------------------------
             ........  ........  ........  ........  ........
------------------------------------------------------------------------
Net Effect   ........  ........  ........  ........  ........
 of
 Medicaid
 Benefit
 Spending
------------------------------------------------------------------------
Additional       2.0       2.2       2.5       2.7       2.9       12.3
 Federal
 Matching
 Payments
 for Newly
 Enrolled
 Dual
 Eligibles
------------------------------------------------------------------------
Reduction      -13.3     -14.9     -16.6     -18.5     -20.7      -84.0
 in Federal
 Matching
 Payments
 for
 Medicaid
 Drug
 Expenditur
 es for
 Dual
 Eligibles
------------------------------------------------------------------------
Subtotal       -11.3     -12.7     -14.1     -15.8     -17.8      -71.7
------------------------------------------------------------------------
             ........  ........  ........  ........  ........
------------------------------------------------------------------------
Net Federal     49.3      53.6      58.4      63.3      68.3      292.9
 Budgetary
 Effects of
 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 tax revenues.

H. States

1. Overall State Budgetary Impacts
    We estimate that, as a result of Medicare Part D, States will 
realize net savings of $7.9 million over the CY 2006-2010 period, as 
shown in Table IV-4. Estimated State savings range from approximately 
$1.0 billion in CY 2006, increasing each year during the five-year 
period, to reach about $2.2 billion by CY 2010. The estimated $7.9 
billion in net State savings over the five-year period are made up of 
$72.6 billion in State savings related to Medicare Part D that are 
partially offset by $64.8 billion in State costs related to Medicare 
Part D. We note that our estimates of State savings are slightly lower 
than those presented in the proposed rule because our current estimate 
of the overall impact on States includes an estimate of State 
administrative costs while our previous estimate had not.
    We estimate that States will save approximately $73 billion from CY 
2006 to 2010 as the Medicare Part D drug benefit and Medicare retiree 
drug subsidy provide financial support for the 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 ($63.4 billion) are the result of Medicare Part D 
replacing drug coverage for full benefit dual eligibles that would 
otherwise be paid for by Medicaid. States offering qualified retiree 
prescription drug coverage to their own former employees (and their 
spouses and dependents) will also achieve savings due to the Medicare 
retiree drug subsidy and the other options Part D offers employers and 
unions for providing retirees with prescription drug coverage at lower 
costs. We estimate these savings to be $6.3 billion from CY 2006 to CY 
2010. In addition, 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 ($3 billion 
from CY 2006 to CY 2010). We discuss the estimated savings for State 
prescription drug programs in more detail in a separate section later 
in this analysis.
    The estimated $73 billion in State savings, discussed previously, 
will be partially offset by approximately $65 billion in State costs 
related to Medicare Part D over the period CY 2006-2010. 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 $54.7 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 purpose 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. Thus, for the purpose 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. We assume that a larger share of these 
beneficiaries will receive benefits as QMB/SLMB individuals than will 
receive full Medicaid benefits, with 21 percent of the new enrollees 
estimated to receive full Medicaid, 20 percent to receive QMB benefits, 
and 59 percent to receive SLMB benefits. We assume a smaller new 
enrollment rate among those beneficiaries that are eligible for

[[Page 4487]]

full Medicaid benefits, because we believe that if these beneficiaries 
were likely to sign up for the full Medicaid benefit package, most 
would have done so already. We assume a somewhat higher new enrollment 
rate for those beneficiaries that are eligible for QMB/SLMB benefits. 
Because there are currently more beneficiaries eligible for but not 
enrolled in the SLMB program than the QMB program, new enrollees into 
the SLMB program make up the majority of the estimated 1.1 million new 
enrollees. We estimate that State Medicaid spending on benefits for 
these 1.1 million individuals will be about $9.1 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 $504 million 
over the period CY 2006-2010.
    States will also incur administrative costs related to Medicare 
Part D. We estimate that these State costs will be $39 million in FY 
2004, $73 million in FY 2005 and average $90 million per year from FY 
2006-2010 (after receiving Federal matching payments). In FY 2004 and 
2005, we anticipate that States will incur costs on data file cleanup 
(to enable States to provide us with information on dual eligibles). In 
addition, in FY 2005, we estimate that States will incur costs for 
development of State eligibility determinations systems for Part D and 
for processing eligibility determinations for individuals who apply for 
the low-income subsidy through the State during the early stages of the 
low-income subsidy application period. In FY 2006-2010, we expect that 
the bulk of States' administrative costs will be associated with 
processing Part D applications, re-determinations, and appeals; and 
State screening of Part D low-income subsidy applicants for eligibility 
for the Medicare Savings programs. The additional administrative costs 
during FY 2006-2010 will be partially offset by State savings on claims 
processing costs, as dual eligibles' prescription drug claims will no 
longer be processed by States. We note that our estimates of State 
administrative costs are somewhat lower than those cited in the 
proposed rule because, as discussed subsequently, we anticipate that 
SSA will play a substantial role in the eligibility determinations 
process for the low-income subsidy, lessening the burden on States. We 
anticipate that prior to implementation of Medicare Part D, States will 
incur costs related to the data file preparation work necessary to 
provide us with information on which beneficiaries are full dual 
eligibles, QMBs, SLMBs, or QIs. States are required, effective with CY 
2003 and all subsequent MSIS data submittals, to provide accurate and 
complete coding to identify the numbers and types of Medicaid and 
Medicare dual eligibles, with CY 2003 data submittals required to be 
completed by December 31, 2004. In accordance with the statute, this 
final rule also requires States to submit an electronic file, beginning 
effective August 2005, and each subsequent month, that identifies each 
full benefit dual eligible enrolled in the State for each month.
    As discussed in the preamble, we will send notices of eligibility 
to all deemed low-income subsidy eligible individuals, relieving States 
of the financial burden of sending notices to these beneficiaries. We 
will also educate Medicare beneficiaries, including dual eligibles, 
through a variety of methods about prescription drug coverage under the 
new Part D benefit, which we expect would eliminate the need for States 
to carry out this function.
    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. As a result, 
States will need to develop an eligibility determinations system for 
processing Part D low-income subsidy applications. However, States have 
considerable flexibility in designing the system in a manner that would 
be most cost-effective given their existing eligibility determination 
processes and the likelihood that SSA will process a substantial number 
of applications. We anticipate that SSA will have a substantial role in 
processing Part D eligibility determinations, which will considerably 
reduce State costs related to processing Part D applications. SSA will 
be conducting an extensive outreach campaign to inform low-income 
Medicare beneficiaries about the Medicare Part D low-income subsidy 
assistance and inform them that they can apply for the low-income 
subsidy through SSA. In addition, as discussed in the preamble, we are 
encouraging States to consider using the SSA application form and 
process as their default approach for processing low-income subsidy 
applications. While States would have to develop a process to determine 
eligibility for an individual who requests a ``State'' determination as 
opposed to an ``SSA'' determination, States may use the SSA low-income 
subsidy application in order to reduce the administrative burden 
associated with sending notices and processing appeals and re-
determinations. With SSA performing a substantial role in eligibility-
processing, States would also be relieved of a significant burden in 
verifying information reported on low-income subsidy applications. As a 
result, States could focus most of their attention on assisting 
individuals with completing the SSA application, and screening and 
enrolling individuals in the Medicare Savings Program.
    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.
    Comment: Several States noted that they did not believe they would 
realize net savings as a result of Part D. These States commented that 
their costs would exceed their savings. In addition, some States 
pointed out that the characteristics of their situation, in terms of 
such issues as savings for retirees, existence of a SPAP, 
administrative costs associated with low-income eligibility 
determinations, or new Medicaid enrollments, would mean that their 
particular State costs would exceed savings from Medicare Part D.
    Response: Based on our estimates, we believe that, in aggregate, 
State savings will exceed State costs over the 5 year period, CY 2006-
2010. Our best estimate, based on available data, is that generally 
States will realize net savings from the implementation of Medicare 
Part D, and these savings will increase over time, as shown in Table 
IV-4. We estimate that States will save approximately $7.9 billion from 
CY 2006 to CY 2010 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 have been 
paid for by Medicaid (about $63 billion from CY 2006 to CY 2010).

[[Page 4488]]

    Comment: Several States asserted that exempting Medicare Part D 
prices from Medicaid best price will have a negative financial effect 
on States. In addition, several States also asserted that Medicare Part 
D will reduce their drug price negotiating power for the non-dual 
population.
    Response: As noted elsewhere in the preamble, we do not have the 
statutory authority to modify the best price provisions of the Medicaid 
best price statute and the exemption of Part D under the MMA. However, 
we do not believe that the exemption of PDP and MA-PD prices from 
``best price'' will adversely affect best price compared with what it 
would have been in the absence of Medicare Part D. We expect that price 
negotiations by PDPs and MA-PDS with drug manufacturers will lead to 
price concessions for beneficiaries. Nevertheless, the expected 
increase in drug use among the Medicare population, due to the 
expansion of drug coverage, will make it less likely that manufacturers 
will respond by raising their prices to other lines of business. 
Consequently, we expect that there would be minimal, if any effect, on 
best price.
    In terms of the impact on States' negotiating power with drug 
manufacturers, we believe that States would remain large volume 
purchasers of prescription drugs even after the dual eligible 
beneficiaries transition to Part D coverage. Furthermore, a number of 
States have joined purchasing pools to increase their market power in 
an effort to reduce their Medicaid spending on prescription drugs. As 
such, we believe that the States would maintain their bargaining power 
with drug manufacturers and that there would be minimal impact on their 
ability to negotiate price concessions.
    Comment: Two States noted that the estimate of net State savings 
should include administrative costs.
    Response: The estimate of State administrative costs is included in 
the estimate of net State savings, as shown in Table IV-4.
    Comment: One State wanted us to clarify whether we included the 
estimated fiscal impact of the following programmatic and 
administrative State costs: (1) additional compliance responsibilities 
with HIPAA and privacy rule notice of practice provisions; (2) 
Certificates of Coverage requirements; (3) educating staff; (4) 
coordinating the State pharmacy programs (and systems) with the PDPs 
for purposes of medication management programs; and (5) educating dual 
eligibles on Medicare Part D.
    Response: Our estimates of State administrative costs take into 
account staff training activities. We have not included new costs for 
HIPAA, the privacy rule notice of practice provisions, or Certificates 
of Coverage because we do not agree that the MMA imposes additional 
compliance responsibilities on States in these areas. In terms of the 
costs of educating beneficiaries, we did not include these costs in our 
estimate as we believe they will be negligible, for several reasons. 
First, SSA will be conducting an extensive outreach campaign to inform 
low-income Medicare beneficiaries about the Medicare Part D low-income 
subsidy assistance and inform them that they can apply for the low-
income subsidy through SSA. Second, CMS will send notices of 
eligibility to all deemed low-income subsidy eligible individuals, 
relieving States of the financial burden of sending notices to these 
beneficiaries. Third, CMS will educate Medicare beneficiaries, 
including dual eligibles, through a variety of methods about 
prescription drug coverage under the new Part D benefit, which we 
expect would lessen the need for States to carry out this function.
    As discussed elsewhere in the preamble, we recognize that SPAPs and 
States have an interest in acquiring access to prescription drug 
utilization data for purposes of their medical and case management 
activities. We are continuing to work on means to practically expedite 
data sharing. As noted previously, although we do not have the 
authority to require data exchanges between Part D plans and the 
States, we will strongly encourage Part D plans to independently share 
data on these shared enrollees with State Medicaid plans consistent 
with the HIPAA Privacy Rule provisions for the sharing of protected 
health information with another covered entity for that entity's health 
care operations.
    Comment: Two States noted that we underestimated the administrative 
cost estimates for States to conduct low eligibility determinations 
under Part D. One State noted that, due to the complexity of the new 
drug benefit and the incidence of cognitive impairment in the dual 
eligible population, the figure of $100 million is underestimated and 
should be reconsidered. Similarly, another State noted that if the 
States are required to determine low-income subsidy eligibility for 
low-income individuals other than Medicaid and Medicare Savings Program 
recipients, there will be additional costs to the States. The State 
asserted that the significant costs include system changes necessary to 
do the eligibility determinations and to issue notices to beneficiaries 
and notify CMS; the cost of applications, forms, and information 
material; the cost of writing and maintaining a policy manual; the cost 
of developing training materials and training staff; and the cost of 
new positions, space, and supplies for new staff needed to do 
determinations. This State noted that these costs will be even higher 
if the States are required to process automatic enrollments and if each 
State must coordinate subsidy eligibility determination processes with 
SSA.
    Response: We recognize that States will incur costs associated with 
the eligibility determinations for Medicare Part D benefit. In 
developing our State administrative cost estimates related to 
eligibility determinations, we took into account the costs of 
developing eligibility systems; developing training materials; 
processing Part D applications, re-determinations, and appeals; 
screening and enrolling beneficiaries in Medicare Savings programs; and 
notifying CMS about beneficiaries determined eligible for the Part D 
low-income subsidy. In estimating these costs we included the cost of 
staff time, benefits, overhead, and training involved. We did not 
include State costs for auto-enrollment as CMS will be responsible for 
that function. We have estimated total State administrative costs 
(after receiving Federal matching payments) of $39 million in FY 2004, 
$73 million in FY 2005 and on average $90 million per year from FY 
2006-2010. The vast majority of these costs are for the eligibility 
determinations process described above. While we recognize that States 
will incur significant costs related to eligibility determinations, we 
believe that our estimates represent a reasonable assessment of these 
costs. As noted previously, we anticipate that SSA's role in processing 
Part D low-income subsidy eligibility determinations will considerably 
reduce State costs related to processing Part D low-income subsidy 
applications. SSA will be conducting an extensive outreach campaign to 
inform low-income beneficiaries about the Medicare Part D low-income 
subsidy assistance and inform them that they can apply for the low-
income subsidy through SSA. In addition, we are encouraging States to 
consider using the SSA application form and process as their default 
approach for processing low-income subsidy applications. While States 
would have to develop a process to determine eligibility for an 
individual who

[[Page 4489]]

requests a ``State'' determination as opposed to an ``SSA'' 
determination, States may use the SSA low-income subsidy application in 
order to reduce the administrative burden associated with sending 
notices and processing appeals and re-determinations. With SSA playing 
a substantial role in eligibility-processing, States would also be 
relieved of a significant burden in verifying information reported on 
low-income subsidy applications. In addition, while States must develop 
a process to support eligibility determinations when specifically 
requested of them, States have flexibility in designing the system in a 
manner that would be most cost-effective given their existing 
eligibility determination processes and the likelihood that SSA will 
process a substantial portion of Part D low-income subsidy 
applications.
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) in 2006, 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, twenty States were 
operating SPAPs that provide subsidized drug coverage to individuals 
who will be eligible for Medicare Part D. We anticipate that many of 
these States will choose to continue providing financial assistance 
with drug expenditures, because they can achieve the same or a 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.
    Comments: The comments from States did not indicate a preferred 
option for restructuring their SPAP benefits in relation to Medicare 
Part D. One commenter indicated that given the proposed system for 
coordination of benefits, it seems likely that SPAPs will structure 
their benefit design to wrap around Medicare Part D. However, another 
commenter stated that choosing a wraparound benefit design would entail 
significant administrative and information systems costs.
    Response: We are uncertain at this time what actions States will 
take to structure their SPAP benefits in relation to Part D. Part D 
provides States with a number of options for continuing their provision 
of prescription drug assistance to Medicare beneficiaries (for example, 
wrapping around Medicare Part D, or paying for some portion or all of 
premiums, including buying enhanced coverage). While we recognize that 
SPAPs will incur administrative costs in modifying their programs, we 
do not have enough information to quantify those costs. Currently, 
SPAPs have varying levels of administrative costs and their choices 
will influence the size of their future operating costs. For example, 
if SPAPs choose to provide premium assistance in contrast to a 
wraparound design, then their administrative costs might be lower than 
an operational design that would require ongoing processing of claims. 
We believe that we have provided flexibility for the States to 
restructure their SPAP programs to best serve the needs of their 
enrollees. We expect that regardless of how States choose to alter 
their SPAP benefits to work in relation to Part D, States will achieve 
savings as Part D coverage replaces benefit spending previously 
financed by SPAPs. Even though States will incur administrative costs 
in adapting the structure of their programs in relation to Part D, the 
benefit savings will far exceed administrative costs as administrative 
costs represent a small share of expenses associated with providing 
prescription drug coverage.
    In the proposed rule, we invited 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. However, the public comments did 
not include estimates of SPAP enrollment and expenditure data by FPL, 
nor did the comments include State-specific savings estimates. 
Additionally, we did not receive any comments on our methodology for 
estimating potential savings from SPAP expenditures. Several States 
with SPAPs have publicly stated that they are realizing savings from 
the Medicare approved drug discount card and transitional assistance 
program. We anticipate that Medicare Part D will bring even larger 
savings for SPAP programs.
    We retain the same methodology for estimating savings related to 
SPAP programs as we used in the proposed rule. 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. On October 28, 2004 HHS 
announced the awards to States for fiscal Year 2005. 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

[[Page 4490]]

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.
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. In the proposed 
rule, we noted that due to the special treatment SPAPs receive relative 
to the TrOOP, 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. We sought comments on this 
issue and welcomed further data and analyses from States.
    Comment: One State that operates a Pharmacy Plus waiver program 
responded to our request for comments. The State indicated that it does 
not plan to restructure its Pharmacy Plus program as a SPAP. The State 
commented that its pharmaceutical assistance programs provide its 
residents with benefits that are more generous than Medicare Part D. It 
provided comparative scenarios based on illustrative beneficiary 
spending levels and stated that beneficiaries in its State would be 
better off financially under the current arrangement. One beneficiary 
advocacy group agreed with the State's point-of-view. The public 
comments did not contain any other data or analysis on the issues we 
raised in the proposed rule regarding Pharmacy Plus Waiver programs.
    Response: The State's comments compare a current benefit design 
with the structure of the standard Medicare Part D benefit, which will 
be implemented in January 2006, but assumes no State supplementation to 
the Medicare benefit nor does it include the special Medicare low-
income subsidies that will be available to certain populations. 
Medicare Part D will provide a generous package of prescription drug 
coverage. While State Medicaid programs will no longer be able to claim 
Federal financial participation for those drugs after January 1st, 
2006, we assume that States that developed special pharmaceutical 
assistance programs may be interested in continuing to provide 
financial assistance to these beneficiaries. The final rule provides 
that Pharmacy Plus programs can continue with Federal match after 
January 1, 2006, under certain circumstances. As indicated elsewhere in 
the Preamble, any State that operates a Pharmacy Plus demonstration 
program must determine whether it is feasible to continue that Pharmacy 
Plus program by submitting a revised budget neutrality calculation for 
the demonstration. We will review the revised budget neutrality 
calculation and approve or disapprove the continuation of the Pharmacy 
Plus demonstration for the period when Part D is effective.
    Under the Statute, there is a financial incentive favoring States 
that provide Medicare beneficiaries direct financial assistance for the 
purchase of prescription drugs. As noted elsewhere in the preamble, 
Section 1860D-2(b)(4)(C)(ii) of the Act only allows a person or a SPAP 
to make payments that will count toward TrOOP for an individual Part D 
enrollee. However, as previously discussed, Pharmacy Plus waiver 
programs are not considered to be SPAPs. Therefore, Pharmacy Plus 
program expenditures cannot be counted towards the calculation of 
TrOOP. As noted earlier, the Pharmacy Plus Waiver Programs could be 
modified to take advantage of the incentive set by statute.
    Given these considerations, we continue to believe that generally 
States would benefit by restructuring their prescription drug programs 
using a State-only SPAP design that wraps around Medicare Part D, 
rather than continuing their Pharmacy Plus programs. Depending on the 
State and the nature of the population, we believe that generally 
States could realize savings relative to their current Pharmacy Plus 
spending levels while protecting program participants from higher out-
of-pocket costs. 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.

Table IV-4. Projected State Savings and Costs Due to the Medicare Drug Benefit and Retiree Drug Subsidy, CY 2006-
                                           2010 (billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                             2006        2007        2008        2009        2010      2006-2010
----------------------------------------------------------------------------------------------------------------
Savings                                   ..........  ..........  ..........  ..........  ..........  ..........
----------------------------------------------------------------------------------------------------------------
Reduction in State Medicaid Spending          -10.0       -11.2       -12.5       -14.0       -15.6       -63.4
----------------------------------------------------------------------------------------------------------------
State Savings on Drug Costs for Retired        -1.0        -1.2        -1.3        -1.4        -1.5        -6.3
 State Workers
----------------------------------------------------------------------------------------------------------------
Savings for State Pharmacy Assistance          -0.6        -0.6        -0.6        -0.6        -0.6        -3.0
 Programs
----------------------------------------------------------------------------------------------------------------
Costs                                     ..........  ..........  ..........  ..........  ..........  ..........
----------------------------------------------------------------------------------------------------------------
State Payments to the Federal Government        9.0         9.9        10.9        11.9        13.0        54.7
 for Full-Benefit Dual Eligibles
----------------------------------------------------------------------------------------------------------------
State Spending for New Medicaid                 1.5         1.6         1.8         2.0         2.2         9.1
 Enrollees
----------------------------------------------------------------------------------------------------------------

[[Page 4491]]

 
Lost Revenue from Prohibition on Taxes          0.06        0.08        0.10        0.12        0.14        0.50
 on Premiums for Part D Coverage
----------------------------------------------------------------------------------------------------------------
State Administrative Costs\*\                   0.09        0.09        0.09        0.09        0.09        0.45
----------------------------------------------------------------------------------------------------------------
Net Savings/Costs                              -1.0        -1.3        -1.5        -1.8        -2.2        -7.9
----------------------------------------------------------------------------------------------------------------
Note: Positive numbers denote increased spending; negative numbers denote reduced spending (that is, savings).
  Numbers may not sum to total due to rounding.
\*\ Prior to 2006, States are estimated to incur administrative costs related to Medicare Part D of $39 million
  in FY 2004 and $73 million in FY 2005.

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 of PDPs 
and MA-PDs administering the Medicare prescription drug benefit, the 
cost of creditable coverage disclosure notices that the MMA requires be 
provided to Medicare beneficiaries and to CMS, the administrative costs 
associated with certain coordination of benefits as required by the 
MMA, and the administrative costs for employers and unions 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 11.9 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 health insurance market. Our administrative load of 12.7 
percent in 2006 translates into administrative costs being about 11.2 
percent 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 $21 million for PDPs and $34 million for MA 
organizations, with the remainder (approximately $144 million) being 
the government's share. These estimates are slightly different from 
those presented in the proposed rule and reflect our updated estimates 
for the Medicare Advantage program and Part D. 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 such as 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 Pharmacy Plus programs, State Pharmacy Assistance programs 
(SPAPs), and the Indian Health Service--are required to provide at 
certain times disclosure notices to beneficiaries on whether the drug 
coverage they provide equals or exceeds the actuarial value of standard 
Part D coverage. As discussed in the preamble,

[[Page 4492]]

certain entities that provide Part D coverage that is by definition 
creditable coverage (that is, PDPs and MA-PDs) will not be required to 
provide disclosure notices. Additionally, as discussed previously, 
States will not need to provide disclosure notices to full-benefit dual 
eligibles, as this will be handled through our process of deeming these 
beneficiaries as being eligible for the low-income subsidy.
    The largest cost for providing these disclosure notices is expected 
to occur in the months preceding the implementation of the drug benefit 
in January 2006. Thereafter, notices will need to be provided by these 
entities prior to each subsequent Part D annual coordinated election 
period (AEP), if there is a change in creditable coverage status, or 
upon request by the individual. 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. In an 
effort to reduce the burden associated with providing these notices, we 
have revised our final regulations to allow notices of creditable and 
non-creditable status to be provided with other information materials 
that these entities distribute to beneficiaries (rather than 
separately) and, as discussed in the preamble, we anticipate providing 
model language for both types of notices.
    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 SPAPs, State Pharmacy Plus 
programs, the Indian Health Service (IHS), and private sector and 
State/local government group health plans that provide retiree drug 
coverage, we estimate that the cost of creditable coverage disclosure 
notices will be about $18 million in CY 2005, with anticipated savings 
from the implementation of Medicare Part D expected to far exceed the 
disclosure notice costs for each of these entities. We note that the 
estimated disclosure notice cost for these entities has decreased from 
our previous estimate in the proposed rule because we are allowing most 
entities (with the exception of Medigap plans) to include disclosure 
notices with other existing plan materials (instead of requiring a 
separate notice) and CMS will be handling the disclosure notices for 
full-benefit dual eligibles through our process of deeming these 
beneficiaries as being eligible for the low-income subsidy.
    For Medigap insurers and employer/union 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 $62 million in CY 2005 (which translates into an average 
of roughly $151 per employer/union that offers drug coverage to 
Medicare beneficiaries who are active workers and about $11,050 per 
Medigap insurer).
    We anticipate that annual disclosure notice costs in years after 
2005 will generally be significantly lower. For example, while entities 
will be required to provide disclosure notices prior to each Part D 
annual coordinated election period, they will be able to include these 
notices in their existing plan materials with minimal modifications 
unless there has been a change in their creditable coverage status. 
Similarly, while group health plans that provide drug coverage to 
active workers will also need to provide disclosure notices to the more 
limited number of new beneficiaries who age into the Medicare program, 
they will also be able to include these notices in their existing plan 
materials at minimal cost.
    We anticipate that most of the disclosure notice costs in years 
after 2005 will be related to changes in benefit design and/or 
creditable coverage status among employer and/or union-sponsored plans 
providing coverage to active workers and retirees. For example, we 
estimate that some group health plans providing coverage to active 
workers will 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, as well as in the event of a 
change in their creditable coverage status. Similarly, we anticipate 
that there will be some disclosure notice costs associated with changes 
in creditable coverage status among employer/union-sponsored retiree 
plans that choose to transition from providing coverage that qualifies 
for the retiree subsidy to providing coverage that complements the 
Medicare drug benefit. Additionally, we anticipate that a small number 
of beneficiaries will request an additional copy of their creditable 
coverage disclosure notice during any given year, which may need to be 
sent separately from the other plan materials that the various entities 
normally provide to their participants.
    We estimate maximum costs of roughly $8 million to $9 million per 
year for disclosure notices during the period CY 2006-2010. We note 
that the estimated disclosure notice cost for years after 2005 has 
increased somewhat from our previous estimate in the proposed rule 
because in addition to the estimated costs associated with creditable 
coverage status changes and reconfirmations relating to active worker 
plans, we have also included costs associated with plan sponsors 
providing notices to Medicare retirees in the event of a change in 
status and costs associated with providing additional copies of notices 
to a small number of individual beneficiaries upon request. For private 
sector and State/local government group health plans that provide 
retiree drug coverage, we estimate that the maximum cost of creditable 
coverage disclosure notices will be about $3 million per year during 
the period CY 2006-2010 (including costs associated with change of 
creditable coverage status notices and costs associated with providing 
additional notices to individuals upon request). For Medigap insurers 
and employer/union group health plans that offer coverage only to 
beneficiaries who are active workers, the cost of providing disclosure 
notices is estimated to be approximately $5 to $6 million per year 
during the period CY 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 wage data from the 
Department of Labor for an actuary and for administrative personnel, 
adjusted to 2005 and loaded for compensation, overhead, general 
administration and fee, with additional adjustments for wage growth in 
subsequent years.
    In terms of the basic costs of preparing and mailing the disclosure 
notices, we assume that each entity required to provide these notices 
expends 8 hours for developing the notice (with one exception described 
below), 1 hour for providing a copy of the notice to CMS, 1 hour per 60 
notices for providing separate notices to beneficiaries in the case of 
Medigap plans, approximately 5 minutes per notice for providing 
separate additional

[[Page 4493]]

copies of the notices to individual beneficiaries upon request, and 
negligible costs for incorporating notices into existing plan materials 
that are provided to beneficiaries (since these plan materials are 
already being disseminated to their participants). The one exception to 
this relates to 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 plan sponsors.
    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. As 
discussed subsequently in the section on administrative costs for the 
retiree drug subsidy, our estimates of the time involved in doing 
actuarial valuations were informed by discussions held with actuaries 
in our Office of the Actuary and other industry experts. 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. With 
respect to the Indian Health Service, we expect that the actuarial 
assessment is not likely to be complex since the coverage is likely to 
be creditable; we assume that the IHS would expend less than 6 hours 
for actuarial work.
    We believe that the notice requirement related to Medigap drug 
policies will be relatively straightforward. In accordance with section 
104 of the MMA, we are 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 minimal. 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 purpose of this analysis, we assume 6 hours on 
average per Medigap insurer for actuarial valuations, taking into 
account that those with pre-standardized plans may do more extensive 
actuarial valuations.
    Employer or union-sponsored retiree health plans that apply for the 
Medicare retiree drug subsidy will have to perform an actuarial 
valuation for the purpose of their application. We assume that those 
plans will simply use the actuarial valuation that was developed for 
the retiree subsidy application for the disclosure notices. We note 
that the first prong of the retiree drug subsidy program's actuarial 
equivalence test requires plan sponsors to compare the gross value of 
their drug benefit with the value of the standard Part D benefit (which 
is the same comparison that they will need to make for disclosure 
notice purposes). Thus, we assume nominal 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.
    We anticipate that employer or union-sponsored retiree health plans 
that do not choose to apply for the retiree drug subsidy will need a 
minimal amount of time to compare the value of their drug benefit with 
the value of the standard Part D benefit, and expect that these 
employers/unions will be able to use the simplified actuarial methods 
that we anticipate developing and publishing for comparing a sponsor's 
plan with the standard Part D benefit, as discussed in subpart R of the 
preamble, in making this comparison. For these reasons, we assume that 
each of these plan sponsors will on average incur expenses for one-
quarter of an hour of actuarial time. As discussed in more detail 
subsequently, this relatively low number reflects our assumption that 
the insurers and PBMs will build actuarial models that can determine 
creditable coverage status for multiple plans with similar benefit 
designs in a relatively automated fashion, and that they will spread 
the associated costs across many plan sponsors.
    In addition, in future years, employer or union sponsored plans 
that offer retiree coverage may incur costs associated with changes in 
creditable coverage status. For those entities that experience such 
changes, we use the same assumptions relating to the time involved in 
doing the actuarial valuation, developing the notice, and notifying CMS 
and beneficiaries as for the initial creditable coverage notices, with 
adjustments for future growth in wages. It is important to note that 
there is uncertainty relating to the number of firms that will apply 
for the retiree drug subsidy versus providing enhanced or supplemental 
prescription drug coverage that complements Medicare Part D, especially 
since approximately 90 percent of the retirees with employment-based 
coverage are concentrated in 10 percent of the firms that provide this 
coverage. Given this uncertainty, we take the approach of estimating 
the maximum possible cost associated with disclosure notice activities 
for these firms.
    Disclosure notices are also required of group health plans that 
provide drug coverage to active workers who are Medicare beneficiaries 
(that is, beneficiaries for whom 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 400,000 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 note that our rough estimate of the number of 
employers that may be providing coverage to Medicare beneficiaries that 
are active workers has decreased from our previous estimate that was 
included in the proposed rule, because we had inadvertently included 
employers with fewer than 20 employees who are exempt from Medicare 
Secondary Payer requirements in the prior estimate.
    We anticipate that many of these employers that provide drug 
coverage to beneficiaries who are active workers are purchasing 
standard health insurance products from insurers that sell these plans 
to numerous purchasers, and that the cost of the actuarial valuation 
for purposes of confirming that this coverage is creditable 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 multiple clients. In addition, 
the cost of the valuation for those employers and unions that also 
offer retiree drug coverage could potentially 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 (particularly since some 
employers and unions' retiree plans provide coverage that is

[[Page 4494]]

similar to the coverage that is available in their active worker 
plans). Additionally, we expect that these employers/unions and their 
insurers or plan administrators will be able to use the simplified 
actuarial methods described above in comparing their drug coverage to 
the standard Part D benefit. For these reasons, we assume that each of 
these employers/unions will on average incur expenses for one-quarter 
of an hour of actuarial time. This relatively low number reflects our 
assumption that insurers and PBMs will build actuarial models for 
determining creditable coverage in an automated fashion that will be 
able to accommodate different cost-sharing structures with minor 
modification, and that they will spread the fixed cost associated with 
building these models across many employers and unions. Consequently, 
the estimated one-quarter of an hour of actuarial time represents the 
estimated share of the cost for those systems that will be passed on to 
each employer.
    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 these employers may alter 
their drug benefit design to such an extent that a reconfirmation of 
their creditable coverage status may be appropriate. We assume that 
those active workers who become new Medicare beneficiaries each year 
will receive disclosure notices as part of existing plan materials that 
these employers normally provide to their employees, that about 25 
percent of the firms providing coverage to beneficiaries who are active 
workers will need to obtain a new actuarial valuation on their benefit 
design per year, and that about 1 percent of the firms providing 
coverage to beneficiaries who active workers will have a change in 
creditable coverage status that requires them to provide a notice to 
CMS as well as a notice to beneficiaries in their plan materials in any 
given year. 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--$151 per employer on average in CY 2005 and we expect 
less in future years.
    Finally, we anticipate that a minimal number of beneficiaries will 
request an additional copy of a creditable coverage disclosure notice 
in any given year. Specifically, we estimate that approximately 5 
percent of the beneficiaries receiving coverage through group health 
plans for active workers, and retiree health plans that participate in 
the retiree drug subsidy program will request an additional copy of 
their disclosure notice in any given year. Similarly, we estimate that 
approximately 5 percent of the beneficiaries that choose to continue 
receiving creditable drug coverage through Medigap plans will request 
an additional copy of their disclosure notice in any given year (we 
assume that most beneficiaries that have Medigap drug coverage will 
enroll in Part D because most Medigap coverage is not creditable). 
Finally, we estimate that a smaller percentage (1 percent) of the 
beneficiaries in retiree health plans that choose not to participate in 
the retiree drug subsidy program will request an additional copy of 
their disclosure notice in any given year because we anticipate that 
most of the beneficiaries in these plans will already be enrolled in 
Part D (since many of these employers/unions are likely to have drug 
coverage that complements the standard Part D benefit). In cases where 
individuals request an additional copy of the creditable coverage 
disclosure notice, we assume that the entity will give the beneficiary 
a copy of the same disclosure notice that it has already incorporated 
into its plan materials. Therefore, we do not assume that these 
entities will incur an additional cost associated with developing a new 
disclosure notice for this purpose; however, as discussed previously, 
we conservatively estimate that these entities will incur a nominal 
cost in disseminating this information to beneficiaries upon request.
    We believe that the changes that we have made in the final rule 
related to allowing various entities to provide notices of creditable 
and non-creditable coverage status with other existing plan materials 
that are distributed to beneficiaries (rather than separately), 
providing model language for both types of notices, and allowing 
employers and unions to use simplified actuarial methods to determine 
the actuarial equivalence of their drug coverage to the Part D benefit 
will help to reduce the administrative burden associated with the 
disclosure notice requirements, while also ensuring that beneficiaries 
receive the information they will need to make an informed decision 
about enrolling in Part D.
3. Coordination of Benefits Under Employer And Union-Sponsored Plans 
and SPAPs
    We are 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.
    Section 1860D-23(a) of the Act authorizes the Secretary to 
establish procedures and requirements to promote the effective 
coordination of benefits between a Part D plan and an SPAP with respect 
to payment of premiums and coverage, and payment for supplemental 
prescription drug benefits. In addition, as specified at section 1860D-
24(a) of the Act, we will apply coordination of benefit requirements to 
other prescription drug plans including group health plans, the Federal 
Employees Health Benefits Program (FEHBP), military coverage (including 
TRICARE), Medicaid (including a plan operating under a waiver under 
section 1115 of the Act), and other coverage that we specify.
    The elements to be coordinated 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. As required by the statute, 
we will establish procedures before July 1, 2005, to ensure the 
effective coordination of benefits between Part D plans and SPAPs and 
third party coverage.
    As discussed more fully in the Preamble, we plan to play a role in 
ensuring that benefits are coordinated and TrOOP is tracked. We intend 
to establish an efficient and effective process for handling 
coordination of benefits and tracking of the TrOOP by the Part D plans, 
consistent with the statute and the guidance we will issue. We are 
considering how best to facilitate these processes, including through 
the establishment of a TrOOP facilitation contractor, contractors, or 
some type of blended approach. We also plan to

[[Page 4495]]

facilitate TrOOP by leveraging coordination of benefits processes 
currently in place under Medicare, and by creating an on-line 
eligibility file query to assist pharmacies in directing claims to the 
correct payer. As discussed, we will provide guidance on the specific 
processes for coordinating claims prior to July 1, 2005. We believe the 
coordination effort will reduce the confusion that could result for 
multiple payers being involved in payment of an individual claim. We 
believe that a coordination of benefits and TrOOP facilitation effort 
will ease the burden on Part D plans especially, but also on 
pharmacists and ultimately on beneficiaries since it will help ensure 
that claims involving multiple payers are paid correctly, accurately, 
and as timely as possible.
    Section 1860D-24(a)(3) of the Act permits the Secretary to impose 
user fees on plans (but not on SPAPs) for the transmittal of benefit 
coordination information under Part D. We are also provided authority 
to retain a portion of these user fees to offset costs we incur in 
providing for the coordination of benefits. Costs incurred may include 
items such as the necessary infrastructure, system security, and 
outreach and education activities related to TrOOP. We plan to provide 
more detailed information regarding the user fee, including the amount 
and collection processes in CMS guidance to be issued prior to July 1, 
2005. However, we plan to charge no more than $1 per annum in 2006 for 
each beneficiary enrolled in a Part D plan to provide for funding of a 
Part D coordination of benefits and TrOOP facilitation process, and we 
expect that the fee will be considerably less. This cost is expected to 
be collected from plans at a rate of 1/12 of $1 per month for each 
enrolled beneficiary. We expect that these small costs will be 
reflected in plan administrative costs as part of their bids.
    We believe that a maximum of $1 per year per enrolled beneficiary 
is a relatively modest sum, given the value of the coordination of 
benefits function to Part D plans, beneficiaries, pharmacists, and 
secondary payers. The user fee represents a small fraction of the total 
expense of administering the Part D benefit. Indeed, the $1 per 
enrollee per year maximum user fee amount is quite small when 
considered on a per claim basis, given the sheer volume of Part D 
claims expected in 2006. We believe that imposing a user fee to cover 
the expenses involved in coordinating benefits and facilitating 
accurate TrOOP tracking is more cost effective and convenient for Part 
D plans than having the plans plan for, implement, and perform these 
functions independently.
    Pharmacies have much to gain by having a coordination of benefits 
effort as described more fully in the Preamble. Pharmacies have a great 
interest in ensuring that claims are paid correctly and quickly at the 
point of sale. We expect that pharmacies will have an on-line 
eligibility file query capability to facilitate situations where the 
pharmacy is lacking information in order to bill the appropriate payer. 
Having an electronic source of payer information on customers with 
multiple insurances will be a valuable service to pharmacies. While the 
advent of the Part D benefit will require pharmacies to electronically 
submit a portion of claims to more than one insurer, the cost of doing 
so will be quite small in comparison to the positive effect on 
pharmacies of the Part D benefit (including increased sales of 
prescriptions and increased foot traffic in the ``front end'' of the 
store).
    The majority of commenters supported the option of having a TrOOP 
facilitator assist us in ensuring that benefits coordination and TrOOP 
facilitation is performed. We believe that this support underscores the 
value of the function to plans, pharmacies, and beneficiaries. We are 
currently considering the best approach for all parties concerned. We 
are prepared to have a role in coordinating benefits and tracking 
TrOOP, as explained more fully in the Preamble, since this approach is 
effective and is supported by commenters. CMS is considering 
facilitating TrOOP in many ways, including through the establishment of 
a TrOOP facilitation contractor, contractors, or a blended approach. We 
will continue to work with the parties involved to pursue an approach 
that makes the most sense for plans, pharmacies, and beneficiaries. We 
will continue discussions and will issue details and guidance prior to 
July 1, 2005.
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 defined standard prescription drug coverage under 
Medicare Part D. The attestation must be certified by the attesting 
actuary, and the application must be signed by the plan sponsor (or a 
plan administrator designated by the sponsor). As part of this 
application, employers and unions are also required to provide other 
information including data about the eligible covered Medicare retirees 
in their plan or plans, as well as a signed sponsor agreement. In 
addition, entities accepting the Medicare retiree drug subsidy payments 
will have to report certain prescription drug cost data for the purpose 
of receiving subsidy payments 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 rule, we have tried to minimize the 
administrative burden associated with the operation of the retiree 
subsidy program. 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.
    For purposes of the ``Collection of Information Requirements'' 
section and the accounting statement in this rule, we have developed an 
estimate of the time and aggregate employer/union costs involved in the 
various administrative functions associated with employers and unions 
obtaining the Medicare retiree subsidy including: subsidy application 
requirements, including performing the actuarial valuation; preparing 
and coordinating the plan(s)' enrollment files and other information 
databases to identify the eligible Medicare retiree population and 
other relevant information; assembling the application; reporting data 
and information (for example, data on prescription drug costs for the 
purpose of receiving subsidy payments); and record retention. We base 
our cost estimates on 2005 wage data for an actuary, computer 
programmer, 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

[[Page 4496]]

plans are required to provide to us an attestation that the actuarial 
value of the prescription drug coverage in each such plan is at least 
equal to the actuarial value of defined 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).
    One factor in the cost of actuarial attestation is that one 
actuarial model can potentially be used to analyze multiple plans' 
benefit designs that, for example, are similar in design but use 
different co-payments or have different levels of beneficiary premium 
contributions. We believe it is likely that various entities that work 
with employer/union sponsored group health plans (such as employee 
benefit consultants, actuarial firms, insurance companies, or PBMs) are 
likely to develop such models and spread the development costs across 
numerous clients, lessening the cost to any one employer/union. In 
addition, we believe it is likely the entities that develop actuarial 
models and pass the costs onto employers/unions will likely amortize 
over time the fixed costs of model development.
    Besides the fixed costs of developing an actuarial model, each 
actuarial valuation will likely require some individual time by an 
actuary. That analysis time may vary depending on the complexity of the 
plan offered by the employer/union. Given that some employers 
(particularly large employers) may often offer multiple plans (benefit 
options) which may involve multiple valuations, we expect that the 
actuarial time would vary across employers.
    To develop assumptions about the time and costs involved, we had 
discussions with actuaries in our 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 
generally range from 6 to 40 hours. For the purpose of this analysis, 
we assume that on average employer/union sponsored retiree health plans 
incur costs for the actuarial valuation in the initial year ranging 
from 2 hours of actuarial time for very small firms (assuming that the 
entity that performs the actuarial valuation spreads the cost of 
developing an actuarial model across a large number of clients and 
amortizes the costs over time) to 60 hours for very large firms that 
offer multiple plans (benefit options) and require significant 
specialized analysis. 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, plan sponsors applying for 
the retiree subsidy will need to prepare the application and related 
enrollment data and information on retirees, and sign the sponsor 
agreement. 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. In addition, we assume a half hour for 
signing the sponsor agreement. 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. 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 signing the agreement would be in the range of 
about 2.9 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/unions 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. If a sponsor elects to receive monthly or 
quarterly retiree subsidy payments or an interim annual retiree subsidy 
payment, the plan sponsor must submit aggregated gross cost data, an 
estimate of the difference between these gross costs and allowable 
costs (based on expected rebates and other price concessions), and any 
other data CMS may require upon submission of data for payment at each 
of the time intervals elected by the sponsor, with a final 
reconciliation within 15 months after the end of the plan year. For 
final reconciliation purposes, sponsors must submit total gross cost 
data segregated per qualifying covered retiree; actual rebates, 
discounts or other price concessions received for such costs; and any 
other data CMS may require, within 15 months after the end of the plan 
year. In addition, plans sponsors are required to provide on a monthly 
basis an update to their enrollment file (for example, accretes and 
deletes). Because prescription drug data and records are highly 
automated, there are significant economies of scale related to data 
reporting requirements, which we believe will lessen the cost to any 
one employer/union group health plan. We anticipate that insurers, 
PBMs, and third-party administrators will incur initial fixed costs in 
modifying their current claims processing systems to track prescription 
spending data in the required format to be submitted for payment 
purposes. We believe there would be substantial economies of scale in 
making these systems changes, as we anticipate that an entity (such as 
a third party administrator or insurer) could generally use the same 
approach for numerous clients. We also anticipate that entities that 
work with group health plans (such as insurers, PBMs, third-party 
administrators, actuarial firms, and employee benefit consultants) will 
incur fixed costs associated with developing a methodology for rebate 
allocation and modifying their systems to allocate rebates accordingly. 
We believe that it is likely that these entities would generally use a 
similar approach for allocating rebates and making systems 
modifications for its clients and would spread the fixed development 
costs across those clients. While we recognize that there will be some 
individual client specific work necessary for rebate allocation, we 
believe it is likely that certain aspects of this process such as 
developing a general rebate allocation method and general approach to 
systems changes would provide economies of scale. In addition, since 
some of these same entities will likely be developing

[[Page 4497]]

systems to track costs and allocate rebates for both the Medicare 
retiree drug subsidy and the Medicare Part D program, we believe it is 
likely that there may be some overlap in the initial development phases 
of this work for some of these entities that may provide additional 
economies of scale.
    In the initial year, we estimate that plan sponsors will incur 
costs equal to about 0.8 percent of their expected subsidy payments due 
to the fixed costs associated with developing methodologies and 
modifying systems to generate the required cost data and allocate 
rebates. As noted previously, we assume a relatively low amount of cost 
per plan sponsor because we anticipate that entities that work with 
group health plans (such as insurers, PBMs, actuarial firms, and 
employee benefits consultants) will spread the fixed costs associated 
with this work across many clients. With respect to costs associated 
with developing the infrastructure to provide a monthly enrollment 
update, we believe that the systems and procedures needed to do this 
would have already been developed as part of the plans sponsors work 
identifying qualified retirees during the initial application process, 
and consequently, those costs have been included in our prior cost 
estimate in that area. In terms of the costs associated with generating 
the required cost data and enrollment data (once the systems have been 
developed and tested), we assume that the average number of hours of 
staff time involved in submitting the drug cost data and enrollment 
data will range from 12 hours (for a very small firm that we assume 
submits cost data annually) to 56 (for a very large firm that we assume 
submits cost data monthly). Based on these assumptions and taking into 
account the time involved for firms of different sizes, we estimate 
that the cost associated with submitting drug cost data and enrollment 
data would on average be in the range of about 0.9 percent of the value 
of the retiree subsidy.
    In addition to data reporting, employers that receive the subsidy 
will also be required to retain data and records for six years. For the 
purpose 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 0.4 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 will represent on average 
in the range of about 6.8 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/unions 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 estimate that the vast 
majority of these beneficiaries will enroll in Medicare Part D. 
However, we note that these estimates do not take into account the 
possibility that a small portion of beneficiaries with pre-standardized 
Medigap plans may have creditable drug coverage. To the extent that 
such situations exist and beneficiaries, who have had these policies 
for a long period of time (that is, prior to standardization in the 
early 1990s), choose to remain in them, our estimates of the number of 
beneficiaries shifting from Medigap drug coverage to Medicare Part D 
may be slightly overstated.
    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. We estimate that the resulting reduction in Medigap insurers 
revenues associated with the MMA prohibition on the sale or renewal of 
policies with drug coverage would be approximately $2.4 billion in 
2006, $2.5 billion in 2007, $2.7 billion in 2008, $2.9 billion in 2009, 
and $3.1 billion in 2010. We note, however, that some Medigap insurers 
may choose to enter the PDP or MA-PD market and offer those products. 
As discussed elsewhere in the impact analysis, the Medicare 
prescription drug benefit is subsidized and expected to attract 
substantial enrollment, which may provide new business opportunities 
for Medigap insurers. 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 
government-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 projections 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. Our current estimates of the revenue 
impact on Medigap insurers are slightly lower than those presented in 
the proposed rule because the analysis assumes a slightly lower rate of 
enrollment in Medicare Part D. 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 rule will have a ``significant economic impact on a 
substantial number of small entities.''
    If a rule is expected to have a significant economic impact on a 
substantial number of small entities the RFA requires that a Regulatory 
Flexibility Analysis be performed. 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.

[[Page 4498]]

    With respect to the Medicare prescription drug benefit and retiree 
drug subsidy, there are four areas that we believe merit discussion 
related to small business impacts: (1) retail pharmacies, (2) long-term 
care pharmacies,(3) insurers and PBMs, and (4) employers. We anticipate 
that the retail 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 retail pharmacy revenues, both positive and negative, our 
estimate is that the impact on the overall retail pharmacy industry, 
including small pharmacies, generally will be positive.
    In addition to retail pharmacies, long-term care pharmacies will 
play an important role in the Medicare Part D drug benefit. The long-
term care (LTC) pharmacy industry is dominated by four large 
corporations. Because of significant data limitations related to the 
remainder of the market, we are unable to predict with certainty either 
the presence or absence of ``a significant economic impact on a 
substantial number'' of small LTC pharmacies. We believe that a more 
competitive market under Medicare Part D will reward LTC pharmacies 
offering the lowest prices and highest quality service; it may also 
open the door for new entrants into the market as LTC facilities 
restructure their existing contracts with LTC pharmacies. We anticipate 
that there may be changes in market share among the pharmacies that 
service LTC facilities. The competitive results we expect are likely to 
impact many small LTC pharmacies positively, while some will likely 
experience a negative effect. This changing market will be the result 
of the competitive situation under Medicare Part D.
    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. The effects of the statute and regulation promulgating the 
Medicare Part D program would increase drug utilization and thus be 
favorable to many insurers and PBMs. Furthermore, in considering how 
the regulations could be made more flexible, we have analyzed the 
regulatory provisions of this rule over which we have discretion and 
concluded that they 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. As discussed elsewhere in the preamble we have made the 
retiree drug subsidy as flexible as possible for employers by giving 
them the option to use either a calendar year or plan year cycle for 
purposes of obtaining the retiree subsidy, and to elect the payment 
frequency (that is, monthly, quarterly, or annually) that best meets 
their needs. For example, small employers may find receiving payment 
only on an annual basis as the least burdensome approach given the size 
of their retiree population and associated Medicare retiree 
prescription drug payments, and our final rule provides for this 
option.
    While we believe that we could certify that this rule will not have 
a significant economic impact on a substantial number of small retail 
pharmacies, employers, or insurers/PBMs, we provide a Regulatory 
Flexibility Analysis for each. In addition, since we are unable to 
predict with certainty either the presence or absence of a significant 
economic impact on a substantial number of small long-term care 
pharmacies, we also provide an analysis for these entities.
    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. Retail pharmacies
    The RFA requires us to determine whether this rule will have a 
significant economic impact on a substantial number of small retail 
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 retail 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 retail pharmacies. However, we estimate 
that overall the revenue effect on the retail pharmacy industry, 
including small pharmacies, will generally be positive.
    We anticipate that, although the Medicare prescription drug benefit 
will lead to both revenue increases and decreases for retail 
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 retail 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 in the subsequent methodological discussion, 
we estimate that the complex set of 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 1.5 
percent to an upper bound of 2.7 percent. This estimated increase in 
retail pharmacy revenues will be partially offset by a reduction in 
retail pharmacy revenues for dual eligibles as discussed subsequently.
    Since State Medicaid programs typically pay higher reimbursement 
rates to retail pharmacies than private sector insurers, we expect that 
retail pharmacies would experience some

[[Page 4499]]

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 retail pharmacy 
revenues that could result from full-benefit dual eligibles receiving 
drug coverage from Medicare is 1.0 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 0.5 percent to 1.6 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 
retail 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 retail 
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 retail pharmacies and increased sales 
for pharmacies' other goods in addition to prescription medicines.
    We note that our estimate of the overall impact on small retail 
pharmacies represents the average effect. We recognize that the effect 
on any specific retail pharmacy will likely vary to some extent around 
the average. While we have estimated that the average effect on small 
retail pharmacies would range from 0.5 percent to 1.6 percent, it is 
possible that some individual retail pharmacies could experience 
smaller positive effects and even in some cases negative revenue 
effects. While it is possible that a specific retail pharmacy because 
of unique circumstances could experience a negative revenue impact, we 
believe that this will generally be uncommon. While we cannot predict 
with full certainty the dynamic effects of this new program for 
individual pharmacies, we will monitor program and plan performance 
related to beneficiary access and periodically solicit views on ways we 
can improve the program.
    It is important to note that our estimates of the revenue effect of 
Medicare Part D on retail pharmacies differ slightly from those 
presented in the proposed rule. We have revised our analysis to reflect 
the slightly lower uptake assumption for Medicare Part D assumed 
throughout the final rule impact analysis. Because retail pharmacies 
are estimated to experience increased revenues due to the increased 
utilization of drugs among beneficiaries who gain drug coverage under 
Medicare Part D, our assumption of slightly lower enrollment in 
Medicare Part D results in our finding a slightly smaller positive 
revenue impact on retail pharmacies. In the proposed rule, we estimated 
that the average impact of Medicare Part D on retail pharmacies would 
be a revenue increase of 0.6 percent to 1.9 percent. Due to our revised 
Part D uptake assumptions, we now estimate that the average impact of 
Medicare Part D on retail pharmacies will be a revenue increase of 0.5 
to 1.6 percent.
    Comment: In the proposed rule, we sought comments on several issues 
related to small pharmacies, including comments on our conclusion that 
retail pharmacy revenues would be positively impacted by Medicare Part 
D, comments and data related to the distributional impact of Medicare 
Part D on small retail pharmacies, and comments on any aspect of the 
rule that may affect adversely affect pharmacies of any size.
    We received several comments that questioned our conclusion that 
Medicare Part D would have a positive revenue impact on small retail 
pharmacies. One commenter asserted that the proposed rule's analysis 
overstated the degree of certainty about the revenue impact on retail 
pharmacies and failed to acknowledge that some retail pharmacies may 
lose revenue. The commenter also asserted that the impact on retail 
pharmacies would depend on the degree to which its business model is 
based on prescription drug sales, the proportion of its customer base 
that is made up of Medicare beneficiaries and dual eligibles, and 
whether the pharmacy is preferred or non-preferred. This commenter also 
took issue with the assertion that small retail pharmacies will share 
in the positive revenue effects of Medicare Part D because the 
commenter claimed that the any willing pharmacy provision was of 
limited effectiveness due to the preferred pharmacy provisions, the 
special provisions for MA-PD plans that own their own pharmacies to 
meet network adequacy standards, and the provisions for Part D plans to 
meet network adequacy standards through accreditation from a Medicare-
approved accrediting organization.
    We also received several comments that asserted that small retail 
pharmacies and in some cases regional chains would be hurt by the 
preferred pharmacy provision because they cannot collectively negotiate 
contracts with plans. The commenters asserted that plans could 
designate large retail pharmacy chains as preferred, and leave out 
small pharmacies. The commenters claimed that even if small retail 
pharmacies are allowed access to preferred pharmacy networks, if the 
fees negotiated by the large corporations are very low, smaller 
pharmacies can not afford to participate. Another commenter wanted us 
to mandate that plans solicit inner city and rural pharmacies that meet 
SBA small business standard for their pharmacy network and give them 
access to any terms that the plan offers to a subset of pharmacies.
    A number of commenters asserted that small, independent, or rural 
pharmacies would be hurt unless steps were taken to avert plans from 
steering beneficiaries to mail order, implement TRICARE standards at a 
smaller geographic level (many urged implementation at the local level, 
some supported the State level), eliminate the preferred provider 
provisions, and provide guidelines for plans on dispensing fees. One 
commenter wanted dispensing fees for non-profit entities to reflect 
their preferred acquisition costs, arguing that without this Medicare 
would be assisting tax-exempt non-profit competitors of small business 
pharmacies.
    Response: Our analysis estimated that on average retail pharmacy 
revenues will increase by 0.5 percent to 1.6 percent as a result of 
Medicare Part D. We believe these estimates are conservative because 
they do not take into account the effect of the Federal Upper Payment 
limit on current Medicaid reimbursement, the additional revenues that 
retail pharmacies are likely to receive from medication therapy 
management, and the additional revenues that retail pharmacies that 
sell non-prescription drug products will gain from additional foot 
traffic.
    As noted in the proposed rule, we recognize that our estimates 
represent an average impact and that the effect on individual retail 
pharmacies will vary around this average. While we believe

[[Page 4500]]

that we have conservatively estimated an average revenue increase 
ranging from 0.5 percent to 1.6 percent, it is possible that some 
individual retail pharmacies could experience smaller positive effects 
and even in some cases negative revenue impacts, while others may 
experience larger positive effects. While a specific retail pharmacy 
because of its individual circumstances could experience a negative 
revenue impact we believe this will generally be uncommon for several 
reasons.
    While we agree with the commenter that retail pharmacies with a 
disproportionate customer base made up of Medicare beneficiaries and 
dual eligibles will be more heavily impacted by Medicare Part D, we 
believe this is unlikely to translate into a negative impact for retail 
pharmacies. The effect of Medicare Part D on retail pharmacy revenues 
is largely driven by increased utilization of drugs among beneficiaries 
without prior drug coverage and reduced revenues for beneficiaries who 
are dual eligibles (as well as increased revenues from medication 
therapy management for targeted beneficiaries with chronic illnesses, 
which is not reflected in our estimates). If a retail pharmacy had an 
unrepresentative customer base, with substantially more dual eligibles 
and fewer uninsured beneficiaries than average, then it is possible 
that the pharmacy might experience a negative revenue impact from 
Medicare Part D. However, as mentioned in the proposed rule, we believe 
it is likely that retail pharmacies that serve large populations of 
dual eligibles will be located in low-income areas that also have a 
large population of beneficiaries without prior drug coverage, and 
consequently, larger revenue declines associated dual eligibles would 
be offset by larger revenue increases associated with beneficiaries 
that lacked prior drug coverage. We sought comment on this in the 
proposed rule and received no specific data or information on this 
issue.
    We also agree that Medicare Part D will generally have a greater 
impact on those retail pharmacies that depend on prescription drug 
revenues for a larger portion of their sales. We note, however, that 
since the average impact on retail pharmacies' prescription drug 
revenues is estimated to be positive, the impact on retail pharmacies' 
overall revenues would also be expected to be positive regardless of 
the extent to which a pharmacy relies on prescription drug revenues.
    A number of commenters voiced concern that the preferred pharmacy 
provision would disadvantage small retail pharmacies. As discussed in 
the preamble, the preferred pharmacy provision is stipulated by 
statute. This provision would allow plans the option of offering 
differential cost-sharing in preferred versus non-preferred pharmacies 
provided that this does not increase government costs. While we 
acknowledge that preferred pharmacies may have some competitive 
advantage over non-preferred pharmacies, we believe a number of factors 
mitigate this. Importantly, our policy decision in the final rule to 
strengthen the network adequacy requirements by implementing the 
TRICARE access standard at the State (rather than regional) level 
provides pharmacies with more leverage in negotiating with Part D 
plans. In addition, the final rule requirement that plans offer 
reasonable and relevant standard terms and conditions for network 
participation to all similarly situated pharmacies promotes retail 
pharmacy access to Part D networks. In addition, the estimated 11 
million Part D low-income subsidy enrollees--which account for more 
than one-third of all Part D enrollees in 2006--would not face a 
difference in cost-sharing between preferred and non-preferred 
pharmacies because of the nominal cost-sharing levels guaranteed by the 
low-income subsidy. Also, as indicated in the preamble, plans cannot 
use the preferred pharmacy provision in a discriminatory manner, for 
example related to rural areas. Finally, the statutory requirement that 
any differential cost-sharing not effect the Government cost when 
combined with the final rule requirement that plans offer standard 
terms and conditions for participation to any willing pharmacy, we 
believe mitigates against large differentials in cost sharing between 
preferred and non-preferred pharmacies.
    With respect to the commenter requesting that we require plans to 
offer preferred terms to small pharmacies in rural and inner city 
areas, we believe that we have used the available statutory authority 
to the fullest extent possible to promote the participation of small 
pharmacies. We have done this through our requirement that plans offer 
reasonable and relevant standard terms and conditions for network 
participation. We also modified our access standard to be measured on a 
State basis rather than a regional basis, which necessitates plans 
providing adequate access to rural areas and strengthens pharmacies 
bargaining power.
    We disagree with the comment that allowing special network adequacy 
standards for MA-PD plans that provide retail prescription drugs 
through pharmacies owned by the plan would impact retail pharmacies 
negatively, as we do not think that these types of arrangements are 
very common. We also believe that the provision that Part D plans could 
meet the network adequacy standards through accreditation from a 
Medicare-approved accrediting body, would not in any way jeopardize 
network adequacy or retail pharmacies' ability to participate in 
networks. As discussed in the preamble, the accreditation standards 
used by the organizations would have to be determined by CMS to be no 
less stringent than our own requirements and we would retain the 
authority to initiate enforcement action against any Part D plan 
sponsor that we determine, on the basis of our own survey or the 
results of the accreditation survey, no longer meets the Medicare 
requirements with regard to network adequacy.
    With respect to mail order, as discussed in the preamble, the 
statute allows plans to offer lower cost-sharing at preferred 
pharmacies, including mail order pharmacies. Consequently, we cannot, 
as some commenters urged, require plans to offer similar coinsurance in 
both retail and mail order settings. However, this is similar to what 
currently occurs in the commercial insurance market today. We have 
included in our impact estimates the effect of beneficiaries using mail 
order at the same rate as individuals in the commercial market. Even 
taking into account this possible increased use of mail order among 
beneficiaries, our analysis finds an overall positive impact of 
Medicare Part D on retail pharmacy revenues. In addition, there are 
some aspects of Medicare Part D, which are not as typical of the 
commercial market, which put retail pharmacies on a more level playing 
field with mail order. As noted in the proposed rule, the nearly 11 
million beneficiaries who are estimated to enroll in the low-income 
subsidy face nominal cost-sharing, and consequently we believe there 
will be little, if any, difference in these beneficiaries' out-of-
pocket costs between retail and mail order pharmacies. Our regulation 
also requires that plans allow retail pharmacies to dispense the same 
quantity of a prescription (for example, a 90-day supply) as mail order 
pharmacies, provided it is allowed by State pharmacy law. Also under 
Medicare Part D, plans are required to have medication therapy 
management programs which represent an additional service that 
pharmacists will be able to provide and receive reimbursement.
    As noted previously, a number of commenters expressed concern that

[[Page 4501]]

dispensing fees to retail pharmacies may not be adequate and urged us 
to provide guidance to Part D plans to ensure adequate dispensing fees, 
including one commenter who requested that dispensing fees for non-
profit pharmacies reflect their preferred acquisition costs so as to 
not to disadvantage for-profit pharmacies that compete with these 
entities. Given plans' need to secure a network of providers 
(especially in light of the final rule decision to strengthen the 
network adequacy standards by implementing the TRICARE standard at the 
State, rather than regional, level), we believe plans will have every 
incentive to adequately reimburse retail pharmacies for the costs 
involved with providing covered Part D drugs to plan enrollees.
    Comment: One commenter stated that retail pharmacies will receive 
additional revenues from medication therapy management and fees paid by 
plans for providing drug utilization review and quality assurance. 
Another commenter wrote that the lack of detail in the proposed rule on 
medication therapy management makes it difficult to estimate its 
economic impact.
    Response: While it is difficult to quantify the revenue impact on 
retail pharmacies of medication therapy management at this time, we 
believe, as one of the commenters indicates, that plan payments to 
pharmacies for medication therapy management will generate additional 
retail pharmacy revenues. As noted elsewhere, the positive revenue 
effect from these types of payments to retail pharmacies is not 
included in our impact estimates, making our estimate of a positive 
revenue impact on retail pharmacies conservative.
    Comment: One commenter asserted that additional foot traffic in 
retail pharmacies would not offset what it claimed was an adverse 
impact of Medicare Part D on retail pharmacies because more than 90 
percent of small retail pharmacy revenues are derived from prescription 
drugs.
    Response: Our analysis in the proposed rule found that on average 
retail pharmacy revenues would increase as a result of Medicare Part D 
because the increased utilization of prescription drugs associated with 
Medicare beneficiaries acquiring drug coverage is estimated to more 
than offset decreased revenues from new pharmacy discounts and new use 
of mail order among some beneficiaries. We indicated in the proposed 
rule that our estimate of the revenue impact on retail pharmacies was 
conservative since it did not take into account several issues, 
including the possibility that pharmacy revenues may increase to some 
extent due to additional foot traffic generating increased sales of 
non-prescription drug products for pharmacies. We agree with the 
commenter that small retail pharmacies typically derive more of their 
revenues from prescription drugs than large pharmacies. Consequently, 
while small retail pharmacies would likely experience some increase in 
their non-drug revenues due to additional foot traffic, the increase 
would be less significant for small pharmacies than large pharmacies. 
However, since our revenue estimates conservatively assume no revenue 
increase resulting from additional foot traffic, our estimate of the 
average revenue impact on retail pharmacies is unaffected by this 
issue.
    Comment: One pharmacy association commenter criticized our 
definition of significant economic impact as a revenue impact of 3 to 5 
percent. The commenter claimed that this does not take into account 
pharmacy profit margins, which they assert have ranged in past decade 
from 2.9 percent to 3.8 percent (on a net, pre-tax basis).
    Response: HHS uses revenues rather than profit margins to estimate 
the economic impact of a rule on small entities because in our 
experience reliable data on profit margins are very difficult to 
obtain, while reliable data on revenues are much more readily available 
and straightforward.
    One example of the difficulties in obtaining reliable profit margin 
data and in how to interpret those data in the case of small businesses 
relates to how owners' salaries are treated. Profit margin estimates 
can vary substantially depending on how one considers the owner's 
salary relative to the profits of the business. For example, a 2002 
study on the pharmacy industry conducted by Booz Allen Hamilton for us 
cites data from the National Community Pharmacist Association (NCPA), 
which indicate that independent retail pharmacies had average profit 
margins, in 2000, of nearly 8 percent when owners' salaries were 
included and about 3 percent when owners' salaries were excluded. 
Furthermore, when the Internal Revenue Service (IRS) determines income 
tax liability for sole proprietorships, it considers the businesses' 
incomes to be profits plus the owners' salaries. In the case of 
pharmacies and drug stores, IRS data on sole proprietorships show 
fairly similar profit margin levels with NCPA--about 7 percent 
including owners' salaries in the late 1990s. Thus, if profit margins 
were used to determine the economic impact of rules on small 
businesses, how the owners' salaries are treated could significantly 
alter findings. Furthermore, data are generally not available to 
separate the portion of an owner's salary that compensates for labor 
versus the portion that reflects profit taking in the form of salary, 
which makes developing an accurate estimate of small businesses' profit 
margins very difficult.
    Even if these difficulties were not present, changes in sales 
levels do not translate directly into proportional changes in profits. 
One commenter, discussed later in this analysis, claims that higher 
sales levels can reduce profits. In fact, retailers have many possible 
responses to changes in their sales levels in terms of management, 
staffing, inventory levels, and other aspects of their business models, 
and which responses they choose are likely to determine whether, and to 
what extent, profits rise or fall. We have no way to predict these 
responses' precise effects on profits, but of course would expect 
decisions to be profit maximizing.
    Regardless of whether the HHS standard for significant economic 
impact focuses on revenues rather than profit margins, as stated 
elsewhere in the preamble, we have taken a number of steps to mitigate 
the financial impact on small retail pharmacies and drug stores.
    Comment: One commenter asserted that the regulatory impact analysis 
should estimate collectively the effect of both the implementation of 
Medicare Part D and changes in Medicare Part B on pharmacies.
    Response: Changes to Medicare Part B are not the subject of this 
rule, and as such are not within the scope of this regulatory impact 
analysis.
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 
generally 95 percent of beneficiaries without drug coverage will enroll 
in the Medicare drug benefit (with somewhat lower uptake--71 percent--
assumed among beneficiaries with drug spending in the lowest quintile). 
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

[[Page 4502]]

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 possible 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 purpose 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. Beneficiaries 
without drug coverage whom we project would enroll in Medicare Part D 
account for about 12 percent of all drug spending by Medicare 
beneficiaries (based on 2001 MCBS data). If we assume that these 
previously uninsured Part D enrollees experience a 76 percent increase 
in drug expenditures due to a use effect, this would represent about an 
8.9 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 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 12 percent of all drug spending by 
Medicare beneficiaries, we estimate that extending a 15 percent 
discount to these beneficiaries would result in about a 1.8 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. Few Medigap plans actively negotiate prescription drug 
discounts for enrollees. Consequently, we assume that all beneficiaries 
with previous Medigap drug coverage who are projected to enroll in 
Medicare Part D obtain new pharmacy discounts. With these enrollees 
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

[[Page 4503]]

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 2.0 
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 2.0 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 1.1 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. In the proposed rule, we requested additional data that could 
help inform our assumptions and analysis related to new mail order use 
by beneficiaries without prior drug coverage, but we did not receive 
any comments providing data on this issue.
    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 3.8 percent and 6.6 percent. We 
estimate that this would represent an average increase in retail 
pharmacy revenues of between 1.5 percent and 2.7 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 1.0 percent.\12\ 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.
---------------------------------------------------------------------------

    \12\ This is slightly lower than our proposed rule estimate of a 
1.1 percent revenue effect because we have updated our analysis to 
take into account the most recently available Medicaid pharmacy 
reimbursement rates. Because a few States have reduced their current 
Medicaid pharmacy reimbursement rates, the effect on pharmacy 
revenues of shifting dual eligibles' drug coverage from Medicaid to 
Medicare is slightly less.
---------------------------------------------------------------------------

    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 fourth quarter 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

[[Page 4504]]

Express Scripts data on the average AWP for brand drugs ($77.42) and 
generic drugs ($32.57) in 2002.\13\ (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 current Medicaid 
reimbursement rates 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.
---------------------------------------------------------------------------

    \13\ 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.
    The revenue impact on pharmacies of transitioning dual eligibles 
from Medicaid to Medicare Part D is measured by taking pharmacies' 
current revenues for dual eligibles minus their expected revenues for 
this population under Medicare Part D. Consequently, by overstating 
current Medicaid pharmacy revenues, our analysis overstates (rather 
than understates) the adverse impact on pharmacies from transitioning 
dual eligibles to Medicare Part D.
    Second, for the purpose 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 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 purpose of this 
analysis, we average the findings from the two studies and assume a 
dispensing fee of $1.96 for brand drugs and $2.15 for generic.\14\ 
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.
---------------------------------------------------------------------------

    \14\ There was a typographical error in the text of the proposed 
rule describing our dispensing fee assumption for generic drugs. Our 
model and findings in the proposed rule were based on an assumed 
generic dispensing fee of $2.15. The proposed rule text should have 
read $2.15, not $2.11.
---------------------------------------------------------------------------

    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

[[Page 4505]]

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.\15\ 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 1.0 percent. 
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.
---------------------------------------------------------------------------

    \15\ 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).
---------------------------------------------------------------------------

    Comment: Another commenter asserted that if pharmacy revenues 
increase as predicted in the proposed rule then pharmacies will lose 
money because business expenses (more claims transmissions, more 
inventory, higher paychecks) will be more than 3 percent.
    Response: Due to the expansion of prescription drug coverage among 
Medicare beneficiaries, prescription drug utilization is expected to 
increase moderately among beneficiaries, which will result in more 
scripts being dispensed by pharmacies. To accommodate a modest increase 
in the demand for prescription drugs, pharmacies will turn over more 
inventory to sell to beneficiaries and may also, depending on their 
current capacity, respond by increasing their staff hours. Similarly, 
pharmacies are likely to experience some increase in the number of 
claims transmissions they submit due to increased utilization of drugs 
among beneficiaries and due to the submission of claims transmissions 
for beneficiaries with Medicare Part D drug coverage who previously 
lacked any coverage. Part D plans will be paying pharmacies for the 
cost of dispensing these drugs through fees plans negotiate with 
pharmacies for ingredient cost and dispensing. In addition, some 
pharmacists may receive additional payments from plans for medication 
management services. We believe that the need for plans to maintain an 
adequate pharmacy network provides a strong incentive for plans to 
compensate pharmacies adequately for their costs.
    In addition to the increased claims transmissions discussed above, 
pharmacies may also have additional claims transmissions for those Part 
D enrollees who have supplemental drug coverage (for example, from an 
employer or SPAP) that is coordinated with, but not integrated with, 
Medicare Part D. Since it is unknown how prevalent supplemental drug 
coverage will be, and whether it will more commonly take the form of 
enhanced coverage that is integrated with Part D or supplemental drug 
coverage that is coordinated with Part D, it is difficult to make an 
estimate of the additional claims transmission volume that may be 
generated. However, because of the efficiency of arranging for 
additional coverage through the PDP or MA-PD, we think the incentive is 
to arrange for or provide enhanced coverage rather than utilize claims 
based coordination of benefits. Furthermore, since claims transmissions 
costs are generally a very small fraction of the cost of dispensing a 
prescription to a beneficiary, and even smaller fraction of the average 
price of a prescription, we believe that these costs would not be 
substantial, especially in comparison to the additional pharmacies 
revenues generated by Medicare Part D. In addition, as discussed 
elsewhere, we will be arranging for a TrOOP facilitation process to 
minimize the level of effort involved for pharmacies in dealing with 
coverage that supplement Medicare Part D.
    Comment: One commenter voiced concern about the private sector 
dispensing estimates used in the impact analysis, arguing that the 
generic fee was not sufficiently greater than the brand fee to provide 
incentives for use of generic drugs. In addition the commenter asserted 
that these fees were below a pharmacy's average cost for dispensing a 
prescription, which it claimed was $7.50 to $8.00 depending on the 
geographic location.
    Response: We indicated in the proposed rule that the assumptions we 
made about the average pharmacy reimbursement rate, including 
dispensing fees, for brand and generic drugs under PDPs and MA-PDs were 
not meant to convey our expectation of the actual pharmacy 
reimbursement rates negotiated by PDPs and MA-PDs with pharmacies. 
Instead, they were assumptions made in order to estimate the potential 
impact of Medicare Part D on pharmacies for the purpose of a regulatory 
flexibility analysis. These assumptions were based on available 
literature about typical pharmacy reimbursement rates under private 
sector insured products.
    Dispensing fees paid to pharmacies will depend on the outcome of 
the negotiations between pharmacies and plans. Given plans' need to 
secure a network of providers, we believe plans will have every 
incentive to adequately reimburse pharmacies for the costs involved 
with providing covered Part D drugs to plan enrollees. Furthermore, as 
discussed in the preamble plans have the flexibility to provide higher 
dispensing fees for generic drugs to encourage utilization if they wish 
to do so.
    Comment: One commenter asserted that the analysis overstates the 
current Medicaid revenues to pharmacies because the commenter claims 
that 20 percent of all Medicaid prescriptions are paid at the 
pharmacy's usual and customary rate, not the estimated acquisition 
cost, and because there are higher costs of business in Medicaid that 
do not exist in private programs. They assert that this means that the 
transfer to Medicare Part D of the dual eligibles could have a greater 
effect on pharmacies than estimated.
    Response: As discussed elsewhere, we believe that our analysis 
overstates the revenues pharmacies currently receive from Medicaid 
because it does not take into account the effect of the Federal Upper 
Payment Limit in capping Medicaid reimbursement for multi-source drugs 
with 3 or more generic equivalents. Due to data limitations, our 
analysis also overstates current pharmacy revenues from Medicaid 
because we inflate Medicaid drug spending for dual eligibles to pre-
rebate levels as though all spending had been fee-for-service. In 
addition, to the extent

[[Page 4506]]

that Medicaid reimbursement is further limited by pharmacies' usual and 
customary price, as the commenter asserts, our estimates of current 
pharmacy revenues from Medicaid would be further overstated.
c. Overall Effect
    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 0.5 percent and 1.6 percent as a result of the 
Medicare prescription drug benefit. This is the result of an increase 
in prescription drug revenues ranging from 1.5 percent to 2.7 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 1.0 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 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. Given the current industry practice of broad 
pharmacy networks and given Medicare Part D's any willing pharmacy 
provision, which includes the requirement that plans offer reasonable 
and relevant standard terms and conditions for network participation to 
all similarly situated pharmacies, we anticipate that all pharmacies 
that wish to participate in Medicare Part D will be able do so. 
Furthermore, we believe that the strengthening of the network adequacy 
standard in the final rule to be implemented at the State level 
provides pharmacies more bargaining leverage with plans. 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.
d. Other Pharmacy Issues
    Requirements related to reporting, recordkeeping, and other 
compliance activities for small pharmacies under this program are 
minimal. The statute requires that network pharmacies notify a Part D 
enrollee at the point of sale of the differential between the price of 
a drug and the lowest priced generic drug under the program that is 
therapeutically equivalent and bioequivalent and available at the 
pharmacy. While it is possible that this requirement could represent 
some burden, we anticipate that the burden would be at most marginal. 
The pharmacy community routinely indicates that it is common practice 
for pharmacies to promote the use of generic drugs. Thus, this 
requirement is unlikely to represent a change in current practice for 
most pharmacies. We anticipate that the costs of the systems 
infrastructure required to furnish this pricing information will be 
borne by the Part D plan. The only cost to pharmacies would be the time 
involved in conveying the information to the beneficiary, which we 
anticipated would be small.
2. Long-Term Care (LTC) Pharmacies
a. LTC Pharmacy Access
    As discussed in subpart C of the preamble, 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 long-term care 
facilities. As discussed previously in the preamble, we believe that 
the Medicare drug benefit can improve competition in the long-term care 
pharmacy market, while Medicare's requirements for participation 
preserve the relationships and levels of service that long-term care 
facilities now enjoy vis-[agrave]-vis their contracted long-term care 
pharmacies.
    To that end, our final rule requires that Part D plans offer 
standard contracting terms and conditions for long-term care 
pharmacies. In other words, we are establishing a specific ``any 
willing pharmacy'' requirement for long-term care pharmacies. Part D 
plans would be expected to develop standard contracting terms and 
conditions for long-term care pharmacies, such that any pharmacy in a 
service area could become an eligible long-term care pharmacy by 
certifying that it meets certain performance and service criteria for 
providing pharmacy services to long-term care facilities, which will 
reflect widely used best practices and will be detailed through 
guidance. Plans in a region would be required to contract with any 
willing long-term care pharmacy in that region, provided those 
pharmacies were able to reach agreement with plans on all standard 
contract terms and conditions--including payment rates.
    As discussed, we will require Part D plans to demonstrate that they 
have contracts with a sufficient number of LTC pharmacies to ensure 
``convenient access'' to prescription drugs for institutionalized 
beneficiaries within the service area. As noted in the subpart C 
preamble, we do not think we have the statutory authority to establish 
access requirements related to the routine use of out-of-network 
pharmacies. Thus, in the context of beneficiaries residing in LTC 
facilities, Part D plans will therefore have to demonstrate that they 
have an adequate plan network for beneficiaries who may reside in LTC 
facilities. We would also expect that LTC facilities, in choosing LTC 
pharmacies, will want pharmacies who are participating in all Part D 
plans in which their residents are enrolled within their area. We will 
provide more detailed information in CMS guidance regarding what 
constitutes ``convenient access,'' but we expect that plans will 
demonstrate convenient access based in part on the number of enrollees 
in their service areas and the geographic distribution, capacity, and 
contracting relationships between long-term care facilities and long-
term care pharmacies in those service areas. We note that these LTC 
pharmacy access requirements are in addition to the retail pharmacy 
access standards.
    In formulating our policies for LTC pharmacy access, we have relied 
on information provided by all stakeholders through the proposed rule 
comment process. Through these comments and follow-up discussions, we 
have listened to specific concerns of pharmacies (chains and 
independents, including small pharmacies), trade associations 
representing for profit and non-profit nursing facilities, trade 
associations representing LTC pharmacies, LTC and independent 
pharmacists, State Medicaid pharmacy

[[Page 4507]]

directors, pharmacy benefit managers (PBMs) and plans, and beneficiary 
advocates. We considered a number of policy alternatives and have 
discussed those considerations fully in the preamble for subpart C and 
in Section M., Alternatives Considered, of this Impact Analysis. Taking 
into consideration the feedback we received from the various 
stakeholders, we believe our final regulations for the Part D benefit 
will ensure LTC facility residents' access to prescription drugs in a 
way that balances greater competition in the LTC pharmacy market with 
the preservation of relationships and levels of service that LTC 
facilities currently receive from their contracted LTC pharmacies. We 
also believe that the policy approach we are taking provides new 
opportunities for small LTC pharmacies.
b. Impacts on the Current LTC Pharmacy Market
    We estimate from the National Health Expenditures data previously 
mentioned that prescription drug spending in the LTC sector of nursing 
homes and nursing home providers was about $12.5 billion in 2003. 
Clearly, the implementation of Part D will influence the LTC pharmacy 
market. We have actively sought information on the LTC pharmacy market 
and the role of small pharmacies in that market. From our stakeholder 
outreach and research, we have determined that four large national 
corporations claim a majority of the market's revenue (about 60 
percent). None of these four corporations is a small business; their 
revenues range from hundreds of millions of dollars to billions of 
dollars. As a group these four corporations do business in all but 4 
States, and in the aggregate operate hundreds of pharmacies.
    There are very limited data sources related to the rest of the LTC 
pharmacy industry. Consequently, we present the information we are able 
to obtain and provide a qualitative discussion of our assessment of 
impacts on the LTC pharmacy market. We obtained through the Economics 
Department of the National Association of Chain Drug Stores (NACDS) 
information indicating that in the aggregate there are approximately 
1,760 LTC pharmacies, of which approximately 1,360 do not appear to be 
establishments of the four large corporations. Based on information 
from a financial analyst report, some of these pharmacies may be part 
of smaller regional chains. Information from financial analysts 
indicate that the remaining approximately 40 percent of the LTC 
pharmacy market is handled by smaller regional or individual market LTC 
pharmacies. We were not able to locate publicly available data which 
would inform us of the revenues for all LTC pharmacies. We were able to 
obtain one financial analyst report indicating that some of the smaller 
regional or individual entities have revenues greater than the $6 
million small business threshold established by the Small Business 
Administration for pharmacies. In addition, industry sources indicate 
that some of the entities in the LTC pharmacy market are also in the 
retail pharmacy market.
    We were also able to learn from NACDS that there are differences in 
the geographic distribution of LTC pharmacies between the larger 
corporate LTC pharmacies and other LTC pharmacies. For example, 85 
percent of corporate pharmacy facilities are in urban areas (MSAs), 
whereas approximately 77 percent of the regional or individual LTC 
pharmacies are in urban areas. Conversely, the regional and individual 
pharmacies appear to have a relatively larger physical presence in 
rural (non-MSA) areas. For example, the smaller regional and individual 
LTC pharmacies outnumber the national corporate pharmacies 5-1 in rural 
(non-MSA) areas, whereas in urban areas this ratio is lower.
    Some stakeholders believe that the size of the independently-owned 
pharmacies may make it more difficult for them to compete in certain 
geographic locations. We believe the data on market presence in rural 
versus urban locations supports this. From financial analysts, we 
learned that the chains that own LTC pharmacies typically view the 
density of LTC facilities (that is, number of facilities within a 
geographic area) and Medicaid pharmacy reimbursement rates as some of 
the key factors in determining interest in ownership and geographic 
market entry.
    As discussed in greater detail subsequently, we believe that the 
changed competitive market under Part D will likely make it possible 
for new players to enter the LTC pharmacy market, and will likely also 
create better incentives for price competition for the provision of 
drugs and pharmacy services to LTC facility residents. The National 
Community Pharmacists Association (NCPA) has indicated that LTC 
pharmacy is the fastest growing segment of the independent pharmacy 
business. NCPA has stated that if competition is injected into this 
marketplace, independent pharmacies will compete on price and win on 
service. We have received similar information from independent and 
chain pharmacies, as well as pharmacy wholesalers who are currently in 
or contemplating entry into the LTC pharmacy market.
    Part D plans will be required to offer a standard contract to ``any 
willing'' LTC pharmacy. Once a pharmacy has negotiated its agreement 
with a plan and becomes a network provider, the LTC pharmacy is 
eligible for selection by a LTC facility to serve the pharmacy needs of 
the residents of that facility that are members of that plan. We expect 
that each long-term care facility will select one or more eligible 
network pharmacies to provide a plan's long-term care drug benefits to 
its residents. In order to minimize the number of pharmacy suppliers 
and maintain patient safety, long-term care facilities will likely 
select long-term care pharmacies that meet Part D standards and 
participate in the largest number of plans' long-term care networks.
    The competitive design of Medicare Part D provides several 
benefits. First, Part D plans, depending on the level of competition, 
may be able to negotiate more favorable market rates due to the 
incentive pharmacies have to be in as many networks as possible. This 
potentially means that LTC facility residents may receive better 
pricing on their prescription drugs. Second, if a LTC pharmacy is 
participating in as many plans as possible, it is likely that a LTC 
facility will be able to select only one pharmacy to serve all of its 
residents. This would help to preserve the ``one pharmacy--one nursing 
home relationship'' priority cited in comments by LTC facility and LTC 
pharmacy representatives.
    Another impact of this competitive model may be a change in who 
receives and manages manufacturer rebates. Currently, large LTC 
pharmacy chains maintain their own formularies and have contracts with 
pharmaceutical manufacturers for performance payments or rebates (that 
is, price concessions based on volume, formulary and market share 
movement). Under Part D, with the LTC pharmacy subject to the formulary 
of the Part D plan, it is unlikely that manufacturers would continue to 
pay LTC pharmacies for the same rebates they will likely be paying Part 
D plans. In this more competitive system, the Part D plan would have to 
pass on the rebate in the form of lower beneficiary premiums and better 
benefits, in contrast to all of these rebate dollars generally accruing 
to LTC pharmacies under the current system. As discussed subsequently, 
this movement of management of formulary and related rebates from LTC 
pharmacies in the less competitive current environment through Part D

[[Page 4508]]

plans and on to beneficiaries and the Medicare program in the more 
competitive Part D environment may mean that the competitive pricing 
advantage that the large LTC pharmacy corporations had over smaller LTC 
pharmacies is lessened.
    While LTC facilities may use a particular pharmacy for all of their 
residents and payers (including Medicaid prescription drug and LTC 
benefits, Medicare Part A drugs and services, and private pay pharmacy 
services), some contracts may need to be revised because payments from 
Medicare Part D plans will replace Medicaid payments on behalf of 
beneficiaries dually eligible for both programs. Currently, for LTC 
pharmacies, Medicaid is the largest single payer for prescription drugs 
and associated dispensing fees, providing for approximately 60 to 65 
percent of their revenue. Dually eligible beneficiaries are a large 
portion of the Medicaid nursing home population. Thus, we would expect 
that a shift from Medicaid to Part D plan payment could have an impact 
on LTC pharmacies. Over time, we anticipate that the drug payments 
negotiated by Part D plans may be lower than Medicaid rates in some 
geographic areas, as a result of market competition. In support of this 
view, our analysis of data supplied by IMS Health for commonly used 
drugs provided through LTC pharmacies suggests an existing payment 
differential between Medicaid and third party payers, on the order of 
approximately 7 percent on average.
    We expect over time in some geographic areas where there is healthy 
competition among Part D plans and among LTC pharmacies (including 
large corporations, regional and independent entities) to supply LTC 
facilities that payment rates may become more similar to those 
currently achieved by third party payers. In other markets where there 
is less competition (that is, independent entities but few or no large 
national corporate or regional chains), Part D plans may be less able 
to negotiate lower rates.
    In the current market, some LTC pharmacies bundle a range of 
additional services along with the cost of the drugs and related 
dispensing fees that are offered to LTC facilities. Payment for these 
added services is often not segregated by service offering. Part D 
allowable costs do not include some of the non-dispensing services 
currently bundled into LTC pharmacy (for example, the Part D dispensing 
fee may not include costs associated with drug administration or other 
professional fees). With the implementation of Part D there will be a 
need to price these services separately, creating more transparency for 
the costs and charges paid by LTC facilities.
    We recognize that some LTC pharmacies in more competitive markets 
may face both demand for a lower cost structure from Part D plans and 
simultaneous pressure from LTC facilities for value-added services that 
were previously bundled. As indicated by one commenter (not a small 
business), the demands of the market can produce stress on the 
participants; the commenter strongly suggested that without adequate 
reimbursement, LTC pharmacies will either reduce service levels or 
cease doing business. We believe that market competition in combination 
with our access requirements should result in effective negotiations 
between Part D plans and LTC pharmacies. Furthermore, the greater 
transparency in pricing and competition for value-added LTC pharmacy 
services to be provided to LTC facilities should result in more 
competitive pricing for these services. This transparency and 
competition may also provide more opportunities for small LTC 
pharmacies to compete on the basis of quality and service against 
larger players for LTC facility business. In addition, Part D plan 
payments under medication therapy management programs, described in 
further detail elsewhere in this preamble, may represent an additional 
revenue stream to long-term care pharmacies for some of the special 
services provided by these pharmacies but not reimbursed through 
dispensing fees.
    While there is uncertainty related to the market behavior of the 
various players, we believe that under Part D, greater competition in 
the LTC pharmacy market may result over time in lower average Part D 
drug prices for beneficiaries and the Medicare program, and that it 
also may have the potential to reduce drug prices for non-Part D 
enrollees (private pay residents, as well as those covered under the 
Part A skilled nursing facility benefit). These changes would come as a 
result of competitive market forces.
    Under Part D, small LTC pharmacies in rural areas are more likely 
to have a greater ability in their local markets to compete effectively 
compared to the larger LTC pharmacy chains. In non-rural areas, smaller 
regional and individual LTC pharmacies will benefit from the shift of 
manufacturer rebates and the leveling of the field upon which price is 
decided. However, structural efficiencies may be a key determinant of 
long-term success in areas in which there are more LTC pharmacies 
competing for business.
    A more competitive market will reward pharmacies offering the 
lowest prices and highest quality service; it may also open the door 
for new entrants into the market as LTC facilities restructure their 
existing contracts. Because of the competition there may also be 
changes in the LTC facilities' negotiation of rates and services with 
LTC pharmacies. We anticipate that there may be changes in market share 
among the pharmacies that service LTC facilities. This changing market 
will be the result of the competitive situation afforded LTC facilities 
in choosing LTC pharmacies.
    Although these changes may adversely affect some LTC pharmacies, 
large or small, we would note that as a result of the growth in the 
aged population, with the aging of the large cohort of the ``boomer'' 
generation, financial analysts predict significant growth in the LTC 
facility and pharmacy sector, and the changes associated with Part D 
implementation would not be expected to deter that growth.
    As shown by our analysis, we are unable to predict with certainty 
either the presence or absence of ``a significant economic impact on a 
substantial number'' of small LTC pharmacies. In accordance with 
longstanding HHS policy, we therefore treat our regulatory provisions 
as having such an effect. Under the Regulatory Flexibility Act, we must 
present the following information. The need for and objectives of our 
final rule provisions on long term care pharmacy are described earlier 
in the preamble under subpart C. As indicated there and in this 
analysis, we have gone to great lengths (including an Open Door Forum 
and other types of outreach) to consult with the LTC pharmacy 
community, to identify alternatives, and to assess issues in reaching 
our final decision. Unfortunately, we have been unable to find 
authoritative data on the number of ``small'' LTC pharmacies affected 
in this fast-evolving field of business. Based on the previously 
mentioned data from NACDS and from a proprietary source serving this 
market, we believe there may be at least several hundred but probably 
less than 1,000 ``small'' LTC pharmacies, but we do not have specific 
data on either overall counts or on the number of small pharmacies that 
will have new access to serving LTC facilities as a result of the 
competitive changes outlined here. We are not imposing any new 
reporting or recordkeeping requirements, other than the statutory 
requirement related to providing beneficiaries with information on 
generic alternatives. We

[[Page 4509]]

have tried to reduce the burden for LTC pharmacies associated with this 
requirement and recognizing the unique situation for beneficiaries in 
LTC facilities, by modifying the timing of the requirement from a point 
of service basis. Long term care pharmacies will have to provide 
information about differential price information to Part D plans, which 
will in turn, provide that information to their institutionalized 
beneficiaries through an explanation of benefits statement. In 
addition, the performance and service criteria that we expect will be 
included in the standard contracts between Part D plans and LTC 
pharmacies will be those that simply reflect existing community 
practices with respect to LTC pharmacy service delivery. It is 
important to note that we have taken a significant step in terms of 
assuring business opportunity for small pharmacies by requiring that 
plan sponsors contract on equal terms with ``any willing'' pharmacy to 
assure broad access to nursing home residents. In practice, we believe 
that this means that many existing LTC pharmacies as well as new market 
entrants in certain areas will have a substantial competitive 
opportunity, in most instances broader than at present. As discussed 
under subpart C of this preamble and in the analysis above, the 
factual, legal, and policy reasons for this decision are compelling. 
Nonetheless there is inherent uncertainty related to the specific 
impact on any single entity. The competitive results we expect are 
likely to impact many small LTC pharmacies positively, while some will 
likely experience a negative effect.
3. Insurers and Pharmacy Benefit Managers (PBMs)
    This 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 rule. That rule includes a 
regulatory flexibility analysis 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 regulatory flexibility analysis for the Medicare Advantage 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 
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. 
Stand-alone 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, a portion of the 
insurance firms that might be interested in being a PDP and thus 
affected by these rules are ``small entities'' by virtue of their non-
profit status.
    PDP eligibility provisions in the MMA rely on the Medicare 
Advantage enrollment provision (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. In the proposed rule we 
sought comment on this question and received no response. Consequently, 
we have not considered this level of enrollment in our analysis. 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. We have established 34 PDP 
regions, not including territories, and the average population in these 
exceeds one million Medicare beneficiaries.
    In our RFA for the Medicare Advantage program, we include a 
detailed analysis on regional Medicare Advantage markets and small 
entities. That discussion is applicable to the PDP market, and 
therefore we are not repeating that 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. 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 rule extends 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 sought information in the 
proposed rule on whether PBMs are considering

[[Page 4510]]

becoming PDP sponsors. While we received no specific comments 
indicating PBMs' intentions with regard to Medicare Part D, we note 
that we did receive comments on the proposed rule from several PBMs.
    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 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 
stand-alone 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. In the 
proposed rule we requested additional information on the 
characteristics of this industry and its firms, but we did not receive 
comments on this issue.
    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 the regional boundaries could affect the 
ability of some PBM firms to compete for PDP contracts. However, we 
believe that the regional boundaries are unlikely to be an issue for 
PBMs or PDP sponsors more generally due to our decision announced on 
December 6, 2004 to designate 34 PDP regions--25 regions made up of a 
single State, 6 regions made up of two States, with the remaining 3 
regions made up of 3 States, 4 States and 7 States respectively. We 
believe that most if not all PBMs are not plan-specific, and thus would 
be able to compete in single State regions, multi-State regions, or 
nationally. In addition, in developing the regional boundaries, we were 
cognizant that the regions need to have a large enough Medicare 
population to assure PDP viability, while not being so large as to 
cause plans to have difficulty enrolling and providing services to 
beneficiaries especially in the start-up year. The 34 regions were 
designed to strike that balance.
    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 rule as such will not significantly 
adversely effect a substantial number of small entity PBMs. In the 
proposed rule we sought comment on this conclusion and on any 
provisions that might adversely affect small firms; however, we 
received no comments on this issue.
4. 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 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.
    In the proposed rule we requested comments on any provisions of 
this proposed rule that may be particularly

[[Page 4511]]

difficult for small entities, and on any alternatives that might lessen 
such burdens. One of the particular areas of concern was the burden 
related to the payment timing, that is, monthly, quarterly, or 
annually. As noted previously, we want to make the retiree drug subsidy 
process as flexible as possible to encourage employers, including small 
employers, to participate. In particular, we think our provision 
allowing plan sponsors to voluntarily elect to use an annual or 
quarterly payment process, rather than requiring a monthly process, 
will significantly reduce the burden for small employers that wish to 
apply for the retiree drug subsidy.
    In addition, as discussed in greater detail in subpart R of the 
preamble, given statutory provisions, we think our alternative approach 
for dealing with sponsors of insured plans helps to address concerns 
that were raised in the comments we received related to such retiree 
plan products. As discussed in the subpart R preamble and in the final 
regulation, the quarterly or monthly interim subsidy payments can be 
based on a determination by the insurer--using reasonable actuarial 
principles--that allocates a portion of the premium costs to the gross 
covered prescription drug costs incurred for a sponsor's qualifying 
covered retirees between the cost threshold and the cost limit. If the 
insurer determines premiums based on the pooling of employer/union 
experience in a given policy, the insurer will be permitted to make 
such determination based on the aggregate experience incurred under 
such policy for all employers'/unions' qualifying covered retirees. 
Thus, we think our decisions to provide the options for quarterly or 
annual payments, in addition to a monthly process, and to provide a 
simplified method for dealing with premium allocation for fully-insured 
retiree benefit arrangements, recognizing statutory payment provisions 
for the retiree drug subsidy, facilitates the participation of small 
employers in the retiree drug subsidy program.
    Another area of concern for small employers was actuarial 
attestation. We received several comments from small employers stating 
that we should accept attestations of actuaries with the insurance 
carriers or with third party administrators who can attest on behalf of 
the sponsor that the sponsor's retiree drug coverage is actuarially 
equivalent to Part D. As indicated in the subpart R preamble, sponsors 
can submit attestations of actuaries employed by insurance carriers or 
the third party administrators of their retiree drug plans.
    One health care plan administrator raised concerns about the burden 
of actuarial equivalence on small employers and requested streamlined 
processes. The commenter asserted that small self-insured retiree plans 
operated by third party administrators are unlikely to have an actuary 
on staff, and that even if a group of plans is operated through the 
same PBM they would still need separate actuarial studies. The 
commenter requested that due to the cost of an annual attestation, we 
allow small employers to submit an application, their eligibility list 
and plan benefit descriptions and provide CMS with two years of 
experience or premium data and have CMS actuaries perform the 
attestation on behalf of their plan.
    As we noted previously, the statute does not permit us to perform 
the attestation on behalf of a plan sponsor. However, as discussed 
elsewhere, since many small employers are likely to purchase retiree 
coverage through insurance companies who offer similar policies to many 
employers, we expect that the costs of the actuarial attestation would 
be spread across these employers. In addition, we would expect that, in 
order to offer health insurance and develop a benefits package, a self-
insured plan sponsored by a small employer would have access to 
actuarial information through a third party administrator or through 
the entity that assisted the employer in designing the insurance 
offering, and that the simplified computation methods that we are 
developing would lessen the complexity and time involved in the 
actuarial valuation.
    At the same time, we acknowledge that there are administrative 
costs associated with obtaining the retiree drug subsidy. We believe 
that the revenues from the subsidy would outweigh the costs. As noted 
earlier, we estimate that the administrative costs associated with 
obtaining the Medicare retiree drug subsidy will represent on average 
about 6.8 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, related enrollment 
information, and reporting data on prescription drug costs for the 
purpose of receiving subsidy payments. It is important to note that 
this estimate reflects an average across all plan sponsors. While 
administrative costs for small employers as a percent of retiree 
subsidy dollars are likely to be higher than the average, we believe 
that subsidy payments are likely to exceed the administrative costs of 
obtaining the subsidy for many small employers. 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 among small employers that purchase retiree coverage from 
insurance companies, much of the costs associated with the actuarial 
valuation and data reporting would generally be spread across many 
employers that are purchasing the same or similar insurance products.
    However, it is important to note that under Medicare Part D, 
employers have several options for providing prescription drug 
assistance to their retirees at a lower cost. For example, employers 
that purchase enhanced benefits or provide supplemental wraparound 
coverage for their retirees who are enrolled in Part D plans will also 
achieve savings because the Federal government provides a significant 
subsidy for the cost of standard Medicare Part D. We recognize that the 
relative benefits to employers of one option versus another will depend 
on an employer's individual circumstances. In developing all of the 
employer/union options described in this final rule, we have sought to 
provide employers and unions with maximum flexibility while minimizing 
employer/union burden as much as possible.
    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 are married, or are 
married to an individual who is also a Medicare beneficiary. Second, we 
convert the number of

[[Page 4512]]

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 IV-5.
    As an extreme example, we assume the absolute maximum subsidy per 
person that an employer/union 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 $668 in 2006 (which, for 
example, would be equivalent to about $891 of taxable income for 
employers with a marginal tax rate of 25 percent and about $1,028 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 IV-6 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 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 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 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 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 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 a 
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.\16\
---------------------------------------------------------------------------

    \16\ 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 cross-walked 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 IV-5) 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.

[[Page 4513]]

    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 
private sector 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 and unions, both because these large employers/unions 
are more likely to provide coverage, and large employers/unions 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.
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[[Page 4515]]


[GRAPHIC] [TIFF OMITTED] TR28JA05.001

5. 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. As required by law, prescription drugs provided during 
hospital stays are covered under a separate Medicare payment system. 
Therefore, we are not providing an analysis.
6. Other Requirements in the Regulatory Flexibility Act
    The RFA requires that a Final Regulatory Flexibility Analysis 
(FRFA) meet certain requirements, including responsiveness to public 
comments, estimates of small entities affected, a description of 
compliance requirements, a description of steps to minimize impact on 
small entities, and a statement of the factual, legal, and policy 
reasons for selecting the adopted alternatives. This impact analysis, 
taken together with the preamble as a whole, meets all of these 
requirements. Since the overall effects of the final rule are generally 
positive on small entities (with the exception of small long-term care 
pharmacies for which the effect is uncertain), and since we have 
consistently chosen the least burdensome compliance options legally 
available to us, we believe we have met or exceeded all expectations.

L. Accounting Statement

    In accordance with the OMB A-4 circular on regulatory impact 
analyses, we have included an accounting statement in Table IV-7. The 
Medicare prescription drug benefit and retiree drug subsidy represent 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 CY 2006-2010. For the 
purpose 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 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 rule on State and local governments and small businesses, as 
discussed in the relevant sections of the analysis.

[[Page 4516]]

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[[Page 4517]]

M. Alternatives Considered

1. Designation of Regions
    The MMA requires that we establish between 10 to 50 PDP regions 
within the 50 States and the 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. In developing the PDP 
and MA-PD regions, we relied on a market survey (conducted for us by 
Research Triangle Incorporated), obtained input from a series of public 
meetings and calls, and reviewed hundreds of written comments.
    On December 6, 2004, we announced the 34 PDP regions and 26 
Medicare Advantage PPO regions. The decision on the regional 
configuration for PDPs, per se, is not a subject of this rule, although 
our authority from the Act to designate different regions is included 
in the final rule. Therefore, as part of alternatives considered we are 
including background related to our decision to designate PDP regions 
that differ somewhat from the MA regions. In designating PDP regions, 
our primary objective is 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 two 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, we considered the need to configure 
the PDP regions that are different from MA regions, and whether a 
different configuration would contribute to this goal. One of the 
principal questions we needed to consider 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 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. 
Furthermore, an important consideration, which we received comment on, 
is the administrative capacity of PDPs to handle a large volume of 
initial enrollees in the start-up year, including distribution of plan 
information, enrollment cards, and answering beneficiaries' inquiries 
through call centers. Because of the differences in enrollment 
expectations between regional PPOs and PDPs, from an administrative 
capacity standpoint it is possible to design somewhat larger geographic 
areas covering larger populations for PPO regions than for PDP regions. 
At the same time, to the extent possible, having consistent or at least 
very similar regions for the MA-PDs and the PDPs will facilitate 
beneficiary choice and Medicare program administration. As was 
announced on December 6, 2004, we have established in the vast majority 
of areas identical PDP and PPO regions. In a limited set of situations, 
(that is, for 8 PPO multi-state regions), the regions have been further 
subdivided to contain a smaller number of States, and consequently 
population sized PDP regions. We have used our authority to create PDP 
regions that are different from the MA regions in those circumstances 
where we believed it was necessary to create a reasonably sized 
potential population enrollment in order to attract sufficient PDPs 
into the region. While there are PDP regions with larger populations, 
those regions are typically a single State region.
2. Bid Level Negotiations
    As mentioned previously, the FEHBP standard in 5 USC 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 the Office of Personnel Management views its FEHBP 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 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

[[Page 4518]]

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 expect 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 the 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. HSAs, FSAs, MSAs, and HRAs and TrOOP
    As discussed in the preamble of subpart C, we considered how health 
savings accounts (HSAs), flexible savings arrangements (FSAs), health 
reimbursement arrangements (HRAs), and Archer MSAs should be treated 
relative to beneficiary spending against the annual out-of-pocket 
limit. Costs that are paid by a Part D enrollee will count as incurred, 
or true out-of-pocket (TrOOP) costs, while costs that are paid by a 
``group health plan,'' ``insurance or otherwise,'' or ``third party 
payment arrangements'' through which Part D enrollees may be reimbursed 
will not count as TrOOP expenditures. The issue we considered was 
whether expenditures from an HSA, FSA, Archer MSA, or HRA are to be 
exempted from the definition of ``group health plan'' and treated as 
expenditures that are incurred by a beneficiary.
    The statute provides that the Secretary may establish procedures 
``for determining whether costs for Part D eligible individuals are 
being reimbursed through insurance or otherwise, a group health plan, 
or other third-party payment arrangement..'' We believe the statute 
thus grants us discretion to decide whether personal savings vehicles 
are equivalent to such plans for the purpose of applying the incurred 
costs rule.
    As noted previously, we agree with the majority of commenters that 
HSAs, FSAs, and Archer MSAs are similar to beneficiaries' bank accounts 
in the sense that such accounts consist of funds set aside by a 
beneficiary for his or her personal use, as opposed to group health 
plan contributions which are essentially pooled for the benefit of 
numerous enrollees in a structured benefit plan.
    We do not think, as previously summarized, that allowing HSA, FSA, 
and Archer MSA expenditures to count toward the TrOOP would create a 
double taxpayer subsidy. Because a beneficiary's own savings, when not 
in the context of an HSA, FSA, or Archer MSA, will be counted as 
incurred costs for the purpose of meeting the true-out-of-pocket 
threshold, there will be no differential treatment of funds on the 
expenditure side. In contrast, we believe that to not except HSAs, 
FSAs, and Archer MSAs from our definition of ``group health coverage'' 
would create an unjustifiable penalty on beneficiaries for the use of 
personal health savings vehicles. We have determined that the action 
most consistent with the intent to count an individual eligible's 
contributions toward incurred costs is to exempt personal savings 
vehicles (HSAs, FSAs, and Archer MSAs) from our definition of ``group 
health plan.
    However, we think that health reimbursement arrangements (HRAs) 
differ from HSAs, FSAs, and Archer MSAs because HRAs are solely 
employer-funded; therefore, we considered them separately. HRAs are 
fundamentally different from HSAs, FSAs, and Archer MSAs, which are 
funded at least in part by the individual. Due to this distinction, we 
have determined that HRA contributions should not count toward the 
true-out-of-pocket threshold. To reflect this distinction, we have 
added a definition to the regulation that defines ``personal savings 
vehicles'' to include HSAs, FSAs, and Archer MSAs; the definition does 
not include HRAs.

4. Actuarial Equivalence of Retiree Drug Subsidy and Interactions with 
Other Means of Enhancing Retiree Drug Coverage

    As discussed previously, the MMA requires that plans qualifying for 
the retiree drug subsidy must offer retiree drug benefits that are at 
least actuarially equivalent to those available under the standard Part 
D benefit. The MMA also provides the Secretary with the authority to 
determine the standards and methods for specific actuarial equivalence 
requirements associated with qualifying for the retiree drug subsidy.
    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 created by Section 1860D-22 of the Act and for securing 
and enhancing retiree drug coverage more generally through the other 
means of assuring high quality retiree drug coverage that are provided 
by the Act (including, as described above, employer/union wraparound 
coverage and employer/union support for enhanced Part D plans). As 
discussed previously, our consideration of the various alternatives for 
determining actuarial equivalence in the context of the retiree drug 
subsidy reflects these four policy objectives: 1) maximizing the number 
of Medicare-eligible retirees with high quality employment-based 
retiree drug coverage, and maximizing the generosity of their coverage; 
2) avoiding financial windfalls in the retiree drug subsidy program by 
ensuring that plan sponsors contribute at least as much to retiree drug 
coverage as Medicare pays them as a subsidy; 3) minimizing 
administrative burden while maximizing flexibility for employers and 
unions; and 4) fulfilling our fiduciary responsibility by limiting 
overall budgetary costs.
    As discussed elsewhere in this document, for more than a decade 
prior to enactment of the MMA, employers have been systematically 
reducing the availability and generosity of the level of retiree drug 
coverage offered, particularly for future retirees. The MMA provisions 
creating Part D provide multiple options for assisting plan sponsors in 
continuing to provide high

[[Page 4519]]

quality retiree drug benefits. Sponsor options range from participating 
in the retiree drug subsidy program to taking advantage of various 
mechanisms for complementing the drug coverage that their retirees 
receive through Part D plans by providing additional coverage over and 
above the standard Part D benefit that, in combination with standard 
Part D coverage, maintains or exceeds the generosity of their current 
benefit designs. As discussed earlier in this impact analysis, there is 
considerable uncertainty about how plan sponsors will respond to the 
various options that are available to them under Medicare Part D. In 
the proposed rule, we sought comments on how best to use the 
Secretary's statutory authority in setting the specific actuarial 
equivalence requirements related to qualifying for the retiree drug 
subsidy, while balancing the various tradeoffs and interactions among 
our key policy objectives. Our ultimate goal in implementing these MMA 
provisions is not only to protect but also to enhance the availability 
of high quality drug benefits for retirees.
a. Options for Determining Actuarial Equivalence
    In the proposed rule, we discussed various possible options for 
determining actuarial equivalence, and sought comments on desirability 
and legal bases for the different options, as well as on plan sponsors' 
likely responses to the different approaches for determining actuarial 
equivalence. We received a substantial number of comments encouraging 
flexibility in the methodology for determining actuarial equivalence. 
The preamble considers the issues that were raised in the various 
comments that we received, and describes the policy decisions that we 
made relating to these issues. A discussion of the options that we 
considered relating to the actuarial equivalence standard and plan 
definition that will be used in determining actuarial equivalence for 
the purpose of qualifying for the retiree drug subsidy program follows.
i. Actuarial Equivalence Standard
    One important factor that will affect how employers and unions 
respond to the retiree drug subsidy relates to the actuarial 
equivalence standard. As discussed earlier in this impact analysis, 
while we believe that most of the employment-based retiree drug 
coverage that is currently available in the marketplace is at least as 
generous as the standard Part D benefit on a gross value basis, there 
is considerable variation in employers' and unions' contributions to 
the cost of retiree coverage (for example, approximately 30 percent of 
the large private sector firms with 1,000 or more employees that 
currently offer retiree health coverage to new Medicare-age retirees 
require those retirees to pay 61 to 100 percent of the cost of their 
retiree health premiums, according to the 2004 Kaiser/Hewitt Survey on 
Retiree Health Benefits). Thus, the actuarial equivalence standard that 
is selected will affect the number of employers and unions that are 
able to qualify for the substantial assistance that is available 
through the retiree subsidy. As noted previously, however, the retiree 
drug subsidy is one of several options available to employers and 
unions for continuing to provide assistance with drug costs.
    As discussed in the preamble, our proposed rule described three 
potential standards for determining actuarial equivalence in the 
context of the retiree drug subsidy: 1) a single prong ``gross value'' 
test in which the value of the sponsor's retiree drug plan design is 
compared with the value of the standard Part D plan design, without 
taking the financing of the coverage into account (the same test as for 
``creditable coverage,'' which would generally require that the 
expected amount of paid claims under the sponsor's retiree drug 
coverage be at least equal to the expected amount of paid claims under 
the standard Part D benefit); 2) a gross value test as in the first 
option, with an additional stipulation restricting the subsidy payment 
that a plan sponsor receives to no more than what the sponsor 
contributed to the cost of the retiree drug coverage on behalf of its 
retirees; and 3) a two-prong test in which the first prong is the 
``gross value'' test as in the first option, and the second prong is a 
``net value'' test which takes into account the sponsor's contribution 
toward the financing of the retiree prescription drug coverage. We also 
discussed several variants for determining the threshold value of the 
second prong in the third option, the ``net value'' test, including: a) 
the average per capita amount that Medicare will expect to pay for the 
retiree drug subsidy (the lowest variant); b) the after-tax value of 
the retiree drug subsidy (since the retiree subsidy payments are not 
subject to Federal income tax); and c) the expected value of paid 
claims under standard Part D coverage minus the retiree's expected 
monthly beneficiary premiums for such coverage (the highest variant).
    In the proposed rule, we stated that the first option (single-prong 
gross value test) could not by itself preclude the existence of 
windfalls because unless financing is considered, an employer or union 
could theoretically impose as much as the full cost of the retiree drug 
coverage on the retiree through retiree premiums, and still be eligible 
for a subsidy payment if the value of the drug benefit that the 
employee was paying for was at least equal to the value of the standard 
Part D benefit. We also noted that the second option (single-prong 
gross value test with a requirement that the retiree drug subsidy 
payment amount could not exceed the amount paid by a plan sponsor on 
behalf of its retirees) would preclude windfalls and be relatively easy 
to operationalize, but stated that we had questions about the adequacy 
of the legal basis underpinning this option. Similarly, we stated that 
the third option (two-prong test of the gross value and net value of 
the sponsor's retiree drug coverage) would preclude windfalls, and that 
each of the three potential variants of the second prong of the two-
prong test (that is, the net value test) would also preclude windfalls. 
However, we noted that each of these variants provides a different 
balance between the potentially competing objectives of maximizing the 
number of plan sponsors that participate in the retiree drug subsidy 
and providing greater protection to beneficiaries.
    The vast majority of comments that we received from both business 
groups and beneficiary advocacy groups supported the two-prong test 
(the third option) as best serving our stated goals of maximizing the 
number of retirees that retain their employer or union-sponsored 
retiree drug coverage while not creating windfalls to plan sponsors. 
However, we did receive several comments that supported the gross value 
test (the first option) because they felt there was no legislative 
authority to require any other test, or because they were concerned 
that they would not be able to qualify for the retiree drug subsidy 
based on a net value test (due to relatively high retiree premium 
contribution levels in their plans).
    We received a variety of comments relating to the threshold value 
for the second prong of the two-prong test, with beneficiary advocacy 
and union groups generally supporting the highest variant that was 
identified in the proposed rule (that is, the expected value of paid 
claims under standard Part D coverage minus the retiree's expected 
monthly beneficiary premiums for such coverage) due to concerns about 
the potential for cost-shifting, and employer groups supporting the 
lowest variant that was identified in the proposed rule (that is, the 
average per capita amount that Medicare expects to pay for the retiree 
drug subsidy in a given year) due to concerns about maximizing employer

[[Page 4520]]

and union eligibility for the retiree drug subsidy. Additionally, 
several employer groups proposed that we consider an additional variant 
for the net value test, which would involve either: 1) determining the 
expected value of claims paid under Part D by adjusting for the impact 
that the true-out-of-pocket (TrOOP) provision would have on the value 
of the reinsurance subsidy portion of the standard Part D benefit if an 
employer or union chose to provide their retirees with additional 
coverage that supplemented the standard Part D benefit; or 2) allowing 
plan sponsors to use the expected per capita value of the retiree drug 
subsidy that they would receive (based on their own claims experience) 
as a proxy for this test since, by their calculation, both of these 
approaches would result in approximately the same value. These employer 
groups asserted that their proposed alternative variant would provide a 
more appropriate comparison because the relative value of the standard 
Part D benefit would be lower for their retirees since catastrophic 
coverage is only available when an individual's TrOOP expenses exceed a 
specified threshold, and employers/unions' contributions for 
supplemental drug coverage would not count toward the beneficiary's 
true out-of-pocket spending for purposes of TrOOP.
    As discussed in the preamble, the approach that we have taken in 
the final rule with regard to the actuarial equivalence standard seeks 
to balance our various policy goals within the context of our statutory 
authority. We agree with the majority of commenters that the two-prong 
test best accomplishes our goals of maximizing the number of 
beneficiaries retaining employment-based retiree drug coverage while 
not creating windfalls to sponsors. We also believe that the MMA 
statutory provisions impose some constraints on the methods that can be 
used in determining actuarial values for the purpose of qualifying for 
the retiree drug subsidy.
    For these reasons, we have decided to require the use of a two-
prong test for determining actuarial equivalence in the contest of the 
retiree drug subsidy, with the first prong of the test (the gross value 
test) generally requiring that the expected amount of paid claims under 
the sponsor's retiree drug coverage be at least equal to the expected 
amount of paid claims under the standard Part D benefit. We have also 
decided to establish that employment-based retiree drug coverage 
satisfies the net value portion of the actuarial equivalence test if 
its actuarial value (as determined after reducing the gross value of 
the benefit by expected retiree premiums) is at least equal to the net 
value of defined standard prescription drug coverage under Part D (as 
determined after reducing the gross value of the benefit by the 
expected monthly beneficiary premiums), with the net value of the 
defined standard prescription drug coverage reflecting the impact of 
having an employer's or union's coverage supplement a retiree's Part D 
coverage and thus increase the point at which the retiree would receive 
catastrophic Part D benefits. We will require sponsors to calculate the 
value of the drug coverage provided under the sponsor's plan and the 
defined standard prescription drug coverage under Part D based upon 
their own claims experience for plan participants (or their spouses or 
dependents) who are Part D eligible individuals because we believe that 
the plan sponsors' claims experience for these individuals best 
reflects the true value of the prescription drug coverage under the 
plan. However, we will allow plan sponsors that do not have sufficient 
claims data to support a reasonable calculation based on actual claims 
data to utilize alternative normative databases in accordance with our 
guidance. Our guidelines on the appropriate methodology for applying 
this two-prong actuarial equivalence test will also include simplified 
actuarial methods that could be used by plan sponsors that may have 
difficulty measuring the TrOOP impact associated with their benefit 
design.
    We believe that this approach effectively balances our policy 
objectives of maximizing the number of beneficiaries who receive high 
quality retiree drug coverage while avoiding the creation of windfalls. 
We agree that employers and unions are likely to consider the effects 
that TrOOP will have on the value of the Part D benefit for their 
retirees (that is, reducing the value of the reinsurance subsidy for 
catastrophic coverage) as one of the factors in their decision making. 
In this context, we agree with the commenters who stated that employers 
and unions will be deciding among several options, including continuing 
to sponsor a plan for retiree drug coverage by electing the retiree 
drug subsidy, sponsoring or becoming a PDP, or providing wraparound 
coverage that supplements Part D. While we understand the concerns of 
some commenters relating to the potential for cost-shifting to occur if 
a lower threshold value is used for the net value test, we note that 
the ongoing erosion that has occurred in the generosity of retiree 
health coverage in recent years, through increases in retirees' premium 
contributions and cost-sharing arrangements, indicates that many plan 
sponsors already had an incentive to restructure the costs of their 
retiree health benefits prior to the enactment of the MMA. We do not 
believe that the Medicare retiree drug subsidy program, in and of 
itself, creates any additional incentives for plan sponsors to shift 
costs than what already exists; indeed, as discussed elsewhere in this 
impact analysis and in the proposed rule, employer survey results 
suggest that prior to the MMA many plan sponsors were already planning 
on making additional increases in retirees' premiums and cost-sharing 
within the next few years in an effort to manage the cost of retiree 
health coverage. Rather, we believe that the presence of the additional 
resources that are available through the retiree drug subsidy program, 
as well as the use of the two-prong actuarial equivalence test, will 
provide an incentive for more employers and unions to retain the 
generosity of their existing retiree drug coverage than would have 
occurred absent the law change. Thus, we believe that accounting for 
the effect of TrOOP in the net value portion of the two-prong actuarial 
equivalence test will assist in maximizing the number of employers and 
unions that will qualify for and choose to apply for the retiree drug 
subsidy, thereby helping to maximize the number of Medicare 
beneficiaries that will be able to retain their employment-based 
retiree drug coverage.
ii. Plan Definition
    Another important factor that will affect employers' and unions' 
responses to the retiree drug subsidy program relates to plan 
definition that will be used for the purpose of determining actuarial 
equivalence in the context of the retiree drug subsidy. In this case, 
the primary issue relates to whether employers and unions that offer 
multiple benefit designs within a given retiree health plan (for 
example, with differing retiree contribution levels and/or cost-sharing 
arrangements) will be required to apply the actuarial equivalence test 
across all of the beneficiaries in the plan, or if these employers and 
unions should be allowed to apply the actuarial equivalence test to 
subgroups of beneficiaries and/or benefit designs within a given plan, 
if they choose to do so.
    As discussed in the preamble, in the proposed rule, we proposed to 
adopt the rules in COBRA regulations for determining the number of 
group health plans an employer or union sponsor provides. Under those 
rules, all benefits

[[Page 4521]]

offered by a plan sponsor would be treated as one group health plan 
unless the sponsor treats them as separate plans through its plan 
documents and operations. The proposed rule also stated that plan 
sponsors would be required to determine actuarial equivalence for each 
plan ``as a whole.'' That is, a given plan would be determined to be 
actuarially equivalent if, on average, the actuarial value of the 
retiree drug coverage under the plan is at least equal to the actuarial 
standards described above.
    While several employer groups agreed with our use of the COBRA plan 
definition, they also indicated that plan sponsors need additional 
flexibility to distinguish among retirees with differing arrangements 
within a single plan when establishing actuarial equivalence (such as 
groups of retirees with different benefit arrangements characterized by 
contribution or benefit levels based on years of service, date of 
retirement, collectively bargained status, status as a member of a 
``grandfathered'' group of retirees, or other factors). These 
commenters stated that many plan sponsors may use a single 
administrative system to administer multiple benefit designs, and it is 
not uncommon that a given retiree health plan would include both a 
grandfathered group of retirees for whom the employer makes a 
substantial contribution and a non-grandfathered group with limited or 
no employer contributions. These commenters also expressed concern that 
it is possible that such a plan might not be able to qualify for the 
retiree drug subsidy based on its average actuarial value due to the 
averaging of the generous benefits of the grandfathered retirees with 
the less generous benefits of the non-grandfathered retirees that are 
in the same plan. For this reason, they recommended that sponsors 
should be given the discretion to aggregate all retirees in a single 
plan as a whole or to apply the actuarial equivalence test to each 
individual ``benefit option'' within a plan in order to maximize the 
number of employers and unions that are able to qualify to receive 
retiree drug subsidy payments. However, a few commenters expressed 
concern that the plan definition that is used for the purpose of the 
retiree drug subsidy should minimize the extent to which some classes 
of retirees are offered, and employers/unions receive subsidy payments 
for, retiree drug coverage that is inferior to the standard Part D 
benefit.
    We believe the MMA provisions give CMS the authority to provide for 
the actuarial attestation to be submitted for the plan as a whole or to 
require that separate actuarial attestations be provided for each 
benefit option within a single plan. We also believe that by providing 
increased flexibility in the requirements for qualifying for the 
retiree drug subsidy, we can increase the incentive to plan sponsors to 
maintain their retiree drug coverage, and thereby maximize the number 
of Medicare retirees that retain their employment-based retiree drug 
coverage. However, we also believe that the MMA requires us to insure 
that all beneficiaries in plans that are receiving the retiree drug 
subsidy have creditable drug coverage that is at least equal in value 
to the standard Part D benefit.
    In an effort to balance these concerns, we have added provisions in 
the final rule to allow plan sponsors the flexibility of choosing 
whether to apply the net prong of the actuarial equivalence test to 
their plan as a whole, or to apply the net prong of the actuarial 
equivalence test to each individual benefit option within a plan. In 
this context, a sponsor will only be allowed to apply the net prong of 
the actuarial equivalence test to a given retiree drug plan on an 
aggregate basis if each benefit option in that plan qualifies as 
creditable coverage (that is, each benefit design under the plan must 
meet the gross value test, which is the first prong of the two-prong 
actuarial equivalence test). A plan sponsor that fails to meet that 
standard for a given plan will be required to apply the net prong of 
the actuarial equivalence test to each individual benefit option within 
that plan for the purpose of qualifying for the retiree drug subsidy. 
However, sponsors may aggregate together the benefit options within the 
plan that meet the creditable coverage standard (that is, the gross 
value test) for purposes of the net prong of the actuarial equivalence 
test. We believe that these requirements will maximize plan sponsors' 
flexibility, protect beneficiaries, and reduce the chance of windfalls 
being created.
b. Interaction With Other Means of Enhancing Retiree Drug Coverage
    We recognize that employers' and unions' decisions about choosing 
between obtaining the retiree drug subsidy versus using other means to 
provide additional retiree drug coverage that complements the standard 
Part D benefit (for example, by offering supplemental drug coverage 
that wraps around a Part D plan, or providing enhanced coverage through 
a PDP or MA-PD) will depend on the relative attractiveness of each of 
these options, given their particular circumstances. We believe that 
the flexibility that we have provided in this final rule with regard to 
the actuarial equivalence requirements related to qualifying for the 
Medicare retiree drug subsidy will help to make the retiree drug 
subsidy an attractive and feasible option for many employers and 
unions.
    Additionally, as discussed earlier, we note that in addition to the 
retiree drug subsidy, Medicare Part D also gives employers and unions a 
variety of other options for continuing to provide prescription drug 
assistance to their Medicare-eligible retirees. We believe that these 
additional approaches to providing generous retiree coverage will be 
attractive to employers and unions who may not make sufficient 
contributions or provide sufficiently generous coverage on their own to 
qualify for the retiree drug subsidy. Ultimately, we believe that this 
combination of approaches will maximize the number of beneficiaries who 
continue to receive employment-based assistance with their drug 
coverage as a result of combining the additional resources for 
supporting retiree health coverage that are available through Medicare 
Part D with contributions from employers and unions.
5. Retiree Subsidy--Payment Methodology and Data Reporting
a. Method and Frequency of Medicare Retiree Drug Subsidy Payments
    We believe that the statute gives us broad discretion to determine 
the methodology and timing for distributing the Medicare retiree drug 
subsidy payments. The proposed rule covered in detail the various 
options for calculating and making these payments. Specifically, we 
presented several alternatives for the method and frequency of subsidy 
payments and rebates, and included a discussion of whether payments 
should be based on an employer or union's plan year or calendar year.
    Regarding the method and frequency of payments, we described four 
options in the proposed rule: (1) monthly payments based on actual 
experience with monthly adjustments for price concessions; (2) a single 
end-of-year payment based on plan sponsors' submission of actual cost 
data including rebate data at the close of the plan year; (3) multiple 
payments at interims throughout the year based on estimates of claims, 
rebates, chargebacks, and discounts, with an end-of-year 
reconciliation; or (4) periodic lagged payments throughout the year 
based on actual claims experience and estimates of discounts, 
chargebacks, and rebates, with an end-of-year reconciliation. A 
detailed discussion of these four options can be found in the proposed 
rule. In

[[Page 4522]]

short, annual retroactive payments would have the greatest 
administrative simplicity compared to interim or monthly payments; 
however, more frequent payments would provide a more even cash flow for 
sponsors. In addition, making payments based on estimates rather than 
actual costs would allow for faster payments to sponsors, but would 
require additional work to produce actuarially sound estimates and 
later to reconcile estimates with actual experience, and would 
potentially have a greater risk that substantial overpayments or 
underpayments could occur.
    In the proposed rule, we stated that option one was our preferred 
approach. Under this option, the plan sponsor would submit the amount 
of beneficiary spending eligible for the retiree subsidy by the 15th of 
the month following each monthly payment period. Sponsors would also 
submit the amount of any rebates, discounts, other price concessions 
received, and any adjustments to actual expenditures from prior months. 
By the 30th of each month, Medicare would make a subsidy payment based 
on the certified amount for the preceding month and adjusted for price 
concessions recognized for prior months. At the end of the calendar 
year, there would be a final reconciliation of actual costs except for 
any outstanding price concessions, which would be accounted for when 
they are received or recognized, and reconciled as an offset of a 
future monthly payment.
    The responses to our proposed alternatives were mixed. While 
recognizing that plan sponsors may prefer different methods and 
frequency of payments based on their unique situations, we proposed 
option one as our preferred approach because we wanted to balance 
employers' and unions' perceived preference for frequent payments with 
a desire to avoid overly complex administrative procedures. Although we 
felt that this solution reasonably balanced various concerns, the 
comments we received indicated that flexibility is needed to reflect 
different circumstances of individual sponsors.
    Thus, our final decision was to create a flexible payment system in 
which employers and unions could choose among multiple methods of 
receiving payment. We will allow a sponsor to receive payments on a 
monthly, quarterly, or annual basis. Under the monthly or quarterly 
option a sponsor will provide the aggregated actual gross covered 
retiree plan-related prescription drug costs incurred for all of its 
qualifying covered retirees during the payment period for which it is 
claiming a subsidy payment, an estimate of the difference between these 
gross costs and allowable costs (based on expected rebates and other 
price concessions), and any other data CMS may require. Sponsors 
choosing the monthly or quarterly payment options would then be 
required to provide within 15 months after the end of the plan year the 
total gross covered retiree plan-related prescription drug costs for 
the plan year segregated by each qualifying covered retiree; actual 
rebate/discount/other price concession data for the plan year in 
question; and any other data CMS may require.
    Under the annual payment approach, we will offer two payment 
options: (1) a one-time final annual payment, in which a sponsor will 
submit actual cost and rebate/discount/other price concession data per 
retiree within 15 months after the end of the plan year; or (2) an 
interim annual payment, in which a sponsor after the end of the plan 
year will submit the aggregated actual gross drug costs incurred for 
all of its qualifying covered retirees for which it is claiming a 
subsidy payment; an estimate of the difference between these gross 
costs and allowable costs (based on expected rebates and other price 
concessions); and any other data CMS may require after the end of the 
plan year. Sponsors choosing the interim annual payment option would 
then be required to provide within 15 months after the end of the plan 
year the total gross covered retiree plan-related prescription drug 
costs for the plan year segregated by each qualifying covered retiree; 
actual rebate/discount/other price concession data for the plan year in 
question; and any other data CMS may require. In cases where 
manufacturer rebates, discounts, and other price concessions are not 
specifically allocated to the drug spending of a particular qualifying 
covered retiree, we will permit the plan sponsor (or its agent) to 
assign these rebates/discounts/other price concessions to their 
qualifying covered retirees based on reasonable actuarial principles.
b. Plan Year Versus Calendar Year
    The proposed rule included a discussion of whether to use a plan 
year or calendar year in determining the retiree drug subsidy amount. 
As with the method and frequency of payments, commenters' preferences 
were mixed with respect to this issue. We had originally proposed the 
calendar year approach because it would be the least burdensome method 
for us to administer. This approach is most straightforward since the 
cost threshold and cost limit levels are determined on a calendar year 
basis. However, we recognize that using a plan year approach would be 
more consistent with the administrative practices of plan sponsors 
whose plan operations are based on a non-calendar year. In response to 
numerous comments requesting flexibility in this area, we have 
determined that a plan-year approach should be used. Using a plan-year 
approach, we will be able to accommodate employer or union-sponsored 
plans that are structured around either a calendar-based plan year or a 
non-calendar plan year.
    A non-calendar year approach to retiree subsidy payments requires 
the creation of rules for: (1) determining whether a sponsor's plan is 
actuarially equivalent to Part D for purposes of qualifying for the 
retiree subsidy; (2) applying the cost threshold and cost limit, which 
function on a calendar-year basis, to the plan year; and (3) 
determining retiree subsidy payments for employers/unions with a plan 
year that straddles 2005 and 2006 when the Medicare retiree drug 
subsidy begins. In subpart R of the preamble we present the options for 
calculating subsidy payments using a plan year approach with respect to 
each of these factors. In summary, we determined that the cost 
threshold and cost limit for the calendar year in which the plan year 
ends will be used for determining subsidy payments. For the purpose of 
determining actuarial equivalence, a plan sponsor may use the elements 
of the defined standard prescription drug coverage from the calendar 
year before the year in which the plan year ends, provided that the 
attestation of actuarial equivalence is submitted no later than 60 days 
after the publication of the new coverage limits for the upcoming 
calendar year. During the transition to the retiree subsidy program for 
employers/unions with a plan year beginning in 2005 but ending in 2006, 
subsidy amounts will be determined on a monthly basis for the entire 
plan year (2005-2006), but will only be paid for claims incurred in 
2006.
c. Retiree Subsidy Data Collection
    Another issue we considered related to the retiree drug subsidy is 
what type of data should be collected from plan sponsors. Our 
objectives in making this decision were to minimize the burden on plan 
sponsors while ensuring that we receive adequate data to correctly 
determine subsidy payments to plan sponsors. Regardless of the method 
that is used to make the retiree subsidy payments, we will need data 
from plan sponsors to calculate the appropriate payment levels. The 
question is whether

[[Page 4523]]

actual cost data should be submitted by plan sponsors on an individual 
retiree basis or in an aggregated format.
    We considered several alternatives in this area. CMS could require 
that plan sponsors submit: (1) aggregate allowable costs of all 
eligible retirees in the plan for the relevant time period; (2) costs 
aggregated over the relevant time period for each individual in the 
plan; (3) a combination of individual and aggregate data; or (4) actual 
claims data for each individual retiree in the plan.
    Many commenters favored option one, aggregated reporting of 
allowable retiree costs, because employers and unions may not currently 
keep records of individual costs for some of the elements that must be 
submitted to CMS. However, it is important that the data submissions 
are sufficiently detailed to ensure that we can make accurate payments 
to plan sponsors. We ultimately determined that data aggregated across 
all plan enrollees would not be sufficient to fulfill this purpose.
    As described in the proposed rule, we previously ruled out the 
fourth option because we believe requiring submissions of enrollee 
level claims data would be overly burdensome for plan sponsors taking 
the subsidy and raise privacy concerns. Option two--aggregate per 
enrollee data--would create some administrative burdens and privacy 
concerns, but to a lesser and more reasonable degree than a claims 
level data requirement.
    A combination approach to data collection would diminish the 
negative effects of individual level data submissions while providing 
for sufficient assurance of payment accuracy. For instance, we could 
require the type of submission described in option two for the first 
two years of the subsidy, and require the type of submission described 
in option one thereafter. Alternatively, the format of data we require 
might vary depending on the timing of the plan sponsor's submission 
within a plan year.
    We determined that the latter of these two combinations is better 
aligned with the various payment methodologies that will be used under 
the retiree subsidy program. If a sponsor elects to receive monthly or 
quarterly retiree subsidy payments or an interim annual retiree subsidy 
payment, the plan sponsor will be required to submit aggregated gross 
cost data, an estimate of the difference between these gross costs and 
allowable costs (based on expected rebates and other price 
concessions), and any other data CMS may require upon submission of 
data for payment at each of the time intervals elected by the sponsor, 
with a final reconciliation within 15 months after the end of the plan 
year. Using aggregated data for interim monthly, quarterly or annual 
payments will allow plan sponsors to receive more frequent payments 
without a disproportionate administrative burden.
    Regardless of the payment method chosen, for final reconciliation 
purposes all sponsors will be required to submit total gross cost data 
segregated per qualifying covered retiree; actual rebates, discounts, 
or other price concessions received for such costs; and any other data 
CMS may require, within 15 months after the end of the plan year. This 
requirement will provide assurance that subsidy payments are 
appropriate for the actual costs incurred. If rebates and other price 
concessions for a plan are not specifically allocated by a manufacturer 
to the drug spending of a particular qualifying covered retiree, a 
sponsor will be permitted to assign such price concessions to 
qualifying covered retirees using reasonable actuarial principles. For 
sponsors who choose the monthly, quarterly, or interim annual payment 
option, the final data submission will serve as the basis for the 
reconciliation process, in which we will adjust the payments made for 
the plan year in question in a manner that we will specify in separate 
guidance. For sponsors who choose the one-time final annual payment 
method, this will be the primary submission of cost data required for 
payment. However, as discussed in the preamble, plan sponsors who 
choose either of the annual payment options will still be required to 
provide us with updates of their enrollment information on a monthly 
basis.
6. Beneficiary Access to Drugs in Long-Term Care Facilities
    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''). While we do not directly regulate long-term care 
pharmacies, this rule will indirectly influence their operations. Long-
term care facilities generally contract with one long-term care 
pharmacy to supply the prescription drugs needed by the residents. With 
the implementation of Part D, in order to serve Medicare Part D 
enrollees as a network pharmacy, these long-term care pharmacies will 
have to contract with both the facility and the Part D plans serving 
the region. In the proposed rule, we stated our goal of balancing 
convenient access to long-term care pharmacies with appropriate payment 
to long-term care pharmacies under the provisions of the MMA. We 
proposed two potential options to meet this goal and requested public 
comment.
    Under one option, we would 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. 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.
    To the extent that we require Part D 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) for long-term care pharmacy-
specific packaging and services with a number of long-term care 
pharmacies in order to meet our requirement. If we require Part D plans 
to contract with any long-term care pharmacy in a service area, we 
cannot compel long-term care pharmacies to accept the plans' terms and 
conditions. Yet, given the additional risk associated with 
institutionalized beneficiaries, it may not be sufficient to rely on 
the market alone to ensure that Part D plans include a sufficient 
number of long-term care pharmacies in their networks. Absent a 
contracting mandate, Part D plans may view contracting with long-term 
care pharmacies--given the risk associated with institutionalized 
beneficiaries--as too risky.
    If we do not require Part D Plans to contract with long term care 
pharmacies, some Part D enrollees in long-term care facilities may be 
served by plans whose networks do not include the long-term care 
pharmacy under contract with their long-term care facility. As a 
result, long-term care facilities could face an additional 
administrative burden-managing covered Part D drugs supplied by 
multiple sources (such as other long-term care pharmacies, and mail-
order pharmacies). This scenario differs from current industry 
practices of most long-term care facilities. In the absence of direct 
collaboration between a plan and a Part D enrollee's long-term care 
pharmacy, it would be difficult for long-

[[Page 4524]]

term care facilities to meet Federal pharmacy management standards.
    The second option (that is, do not require but encourage Part D 
plans to negotiate with and include long-term care pharmacies in their 
networks) would allow for the long-term care pharmacies to maintain 
their existing one-on-one relationships with long term care facilities. 
However, for beneficiaries whose Part D plan networks do not include 
the long-term care pharmacy under contract with their long-term care 
facility, accessing out-of-network pharmacies could remain a problem. 
However, it is important to note that the Final Rule provides a special 
enrollment period for PDP enrollment and disenrollment for 
beneficiaries entering in, living in, or leaving an institution. In 
addition, individuals enrolled in MA-PD plans have an unlimited open 
enrollment period for institutionalized individuals. In addition, we 
believe that relying on the pharmacy access standards in Sec.  
423.120(a) of our final rule will not assure sufficient access to long-
term care pharmacies, since many of these pharmacies are not retail 
pharmacies and therefore would not count toward those requirements.
    We believe it is essential to inject competition into the long-term 
care pharmacy market while preserving the relationships and levels of 
service that long-term care facilities now enjoy vis-[agrave]-vis their 
contracted long-term care pharmacies. As discussed in greater detail in 
the preamble for subpart C, our Final Rule will require that Part D 
plans offer standard contracting terms and conditions, including 
product performance and delivery and packaging requirements to all 
long-term care pharmacies in their service areas. We will also require 
Part D plans to demonstrate that they have contracts with a sufficient 
number of long-term care pharmacies to ensure ``convenient access'' to 
prescription drugs for institutionalized beneficiaries within the 
region.
    To further assure ``convenient access'' to a pharmacy for long-term 
care residents, we will allow each long-term care facility to select 
one or more eligible network pharmacies to provide a plan's long-term 
care drug benefits to its Medicare residents. In order to minimize the 
number of pharmacy suppliers and maintain patient safety, long-term 
care facilities will likely select long-term care pharmacies meeting 
Part D standards that participate in the largest number of plan 
networks. To maintain convenient access and minimize out-of-pocket 
expenditures, plan beneficiaries would obtain Part D benefits from the 
eligible long-term care pharmacy selected by the facility. As noted 
previously, beneficiaries in long-term care facilities are eligible for 
special enrollment periods. In order to preserve their existing 
relationships with long-term care facilities, all long-term care 
pharmacies will likely have to accept the terms and conditions (and 
network pricing) offered by the Part D plan or lose the plan's entire 
book of business to another long-term care pharmacy. We believe that 
our long-term care pharmacy access rules will align incentives for 
competition while maintaining beneficiary access to the necessary 
services.
7. Coordination of Benefits and TrOOP
    We also considered options regarding implementing provisions in the 
statute related to coordination of benefits between PDP and MA-PDs and 
SPAPs and other insurance coverage. Under Option 1, the PDPs and MA-PD 
plans would be solely responsible for tracking TrOOP costs. Under 
Option 2, we would be involved, hiring a TrOOP facilitation contractor 
to establish a single point of contact between primary and secondary 
payers.
    The overwhelming majority of commenters supported the second 
option, with us having a role in ensuring coordination of benefits and 
facilitating accurate TrOOP tracking. Given this preference, we are 
prepared to assume a role in ensuring these important functions occur, 
and that they occur in as real-time as possible. While plans ultimately 
are responsible for tracking TrOOP consistent with the statute as 
discussed elsewhere in the preamble, we will facilitate the 
coordination of benefits and participate in other processes to help 
ensure that the plan are in a position to do so. We continue to fully 
develop the specifications of such assistance, and the operational 
details involved in bringing it about. In accordance with the statute, 
we will establish procedures before July 1, 2005 to ensure the 
effective coordination of benefits.
    N. Conclusion
    We estimate that about 39 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 CY 2006. By CY 2010, due to growth in the overall Medicare 
population, we estimate that about 42 million Medicare beneficiaries 
will be receiving drug coverage through a Medicare Part D plan or 
through an employer or union sponsored retiree plan that is eligible 
for the Medicare retiree drug subsidy. The net Federal budgetary effect 
of the Medicare prescription drug benefit and retiree drug subsidy is 
estimated to be about $293 billion during CY 2006-2010. Medicare Part D 
is estimated to generate about $7.9 billion in net savings for States 
over the five-year period from CY 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 half their costs, and for 
beneficiaries with very high drug costs it will cover substantially 
more. For low-income beneficiaries coverage is comprehensive, covering 
on average about 96 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 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 400

    Grant programs-health, Health facilities, Health maintenance 
organizations (HMO), Medicaid, Medicare Reporting and recordkeeping 
requirements

42 CFR Part 403

    Grant programs-health, Health insurance, Hospitals

42 CFR Part 411

    Kidney diseases, Medicare, Reporting and recordkeeping requirements

[[Page 4525]]

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), Medicare, 
Penalties, Privacy, Reporting and recordkeeping

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

PART-400 INTRODUCTION; DEFINITIONS

0
1. The authority citation for part 400 continues to read as follows:

    Authority:  (Secs. 1102 and 1971 of the Social Security Act (42 
U.S.C. 1302 and 1395hh) and 44 U.S.C. Chapter 35.

Subpart B--Definitions

0
2. Section 400.202 is amended by--
    A. Adding in alphabetical order the definition of Medicare Part C.
    B. Adding in alphabetical order the definition of Medicare Part D.
0
The additions read as follows:


Sec.  400.202   Definitions specific to Medicare.

* * * * *
    Medicare Part C means the choice of Medicare benefits through 
Medicare Advantage plans authorized under Part C of the title XVIII of 
the Act.
    Medicare Part D means the voluntary prescription drug benefit 
program authorized under Part D of title XVIII of the Act.
* * * * *

PART 403--SPECIAL PROGRAMS AND PROJECTS

0
3. 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 1395 hh).

Subpart B--Medicare Supplemental Policies

0
4. 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) If the policy otherwise meets the definition in this section, a 
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.
    (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

0
5. 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, 1395 w-101 through 1395w-
152, and 1395hh).

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

0
6. In Sec.  411.351, the definition of ``Outpatient prescription 
drugs'' is revised to read as follows:


Sec.  411.351   Definitions.

* * * * *
    Outpatient prescription drugs mean all drugs covered by Medicare 
Part B or Part D.
* * * * *

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

0
7. 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.
0
8. In Sec.  417.440, revise paragraph (b)(2) to read as follows:


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

* * * * *
    (b) * * *
    (2) Supplemental services elected by an enrollee. (i) Except as 
provided under paragraph (b)(2)(ii) of this section, a Medicare 
enrollee of an HMO or CMP may elect to pay for optional services that 
are offered by the HMO or CMP in addition to the covered Part A and 
Part B services.
    (ii) An HMO or CMP may elect to provide qualified prescription drug 
coverage (as defined at Sec.  423.104 of this chapter) as an optional 
supplemental service in accordance with the applicable requirements 
under part 423 of this chapter, including Sec.  423.104(f)(4) of this 
chapter.
    (iii) The HMO or CMP may not set health status standards for those 
enrollees whom it accepts for these optional supplemental services.
* * * * *

0
9. 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 are 
reimbursed under this part. These costs are reimbursed solely under the 
applicable provisions of part 423 of this chapter.

0
10. Part 423 is added as set forth below:

PART 423--VOLUNTARY MEDICARE PRESCRIPTION DRUG BENEFIT

Subpart A--General Provisions
423.1 Basis and scope.
423.4 Definitions.
423.6 Cost-Sharing in beneficiary education and enrollment-related 
costs.
Subpart B--Eligibility and Enrollment
423.30 Eligibility and enrollment.
423.32 Enrollment process.
423.34 Enrollment of full-benefit dual eligibles
423.36 Disenrollment process

[[Page 4526]]

423.38 Enrollment periods.
423.40 Effective dates.
423.44 Involuntary disenrollment by 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 out-of-network access to covered Part D 
drugs at out-of-network pharmacies.
423.128 Dissemination of Part D 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 Part D 
Plans
423.150 Scope.
423.153 Drug utilization management, quality assurance, and 
medication therapy management programs (MTMPs).
423.156 Consumer satisfaction surveys.
423.159 Electronic prescription program.
423.162 Quality improvement organization activities.
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 Part D sponsors .
423.279 National average monthly bid amount.
423.286 Rules regarding premiums.
423.293 Collection of monthly beneficiary premium.
Subpart G-- Payments to Part D Plan Sponsors 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 Reopening.
423.350 Payment appeals.
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.
423.415 Temporary waivers for entities seeking to offer a 
prescription drug plan in more than one State in a region
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 Plans with Other Prescription Drug 
Coverage
423.452 Scope.
423.453 Definitions.
423.458 Application of Part D rules to certain Part D 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
423.500 Scope and basis.
423.501 Definitions.
423.502 Application requirements.
423.503 Evaluation and determination procedures for applications to 
be determined qualified to act as a sponsor.
423.504 General provisions.
423.505 Contract provisions.
423.506 Effective date and term of contract.
423.507 Nonrenewal 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 Part D sponsor.
423.512 Minimum enrollment requirements.
423.514 Reporting requirements.
423.516 Prohibition of midyear implementation of significant new 
regulatory 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.
423.568 Standard timeframe and notice requirements for 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 (IRE).
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 (MAC) review.
423.630 Judicial review.
423.634 Reopening and revising determinations and decisions.
423.636 How a Part D plan sponsor must effectuate standard 
redeterminations or reconsiderations, or decisions.
423.638 How a Part D plan sponsor must effectuate expedited 
redeterminations or reconsiderations.
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 Preearing.
423.663 Record of hearing.
423.664 Authority of hearing officer.
423.665 Notice and effect of hearing decision.
423.666 Review by the 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.

[[Page 4527]]

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.
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 
prescription drug 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 prescription drug 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 of 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-22. Special rules for Employer-Sponsored 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 
actuarial guidelines.
    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 
USC 355(c)), including an application referred to in section 505(b)(2) 
of the Federal Food, Drug and Cosmetic Act (21 USC 355(b)(2)).
    Cost plan means a plan operated by a Health Maintenance 
Organization (HMO) or Competitive Medical Plan (CMP) in accordance with 
a cost-reimbursement contract under section 1876(h) of the Act.
    Eligible fallback entity or fallback entity is defined at Sec.  
423.855.
    Fallback prescription drug plan is defined at Sec.  423.855.
    Formulary means the entire list of Part D drugs covered by a Part D 
plan.
    Full-benefit dual eligible individual has the meaning given the 
term at Sec.  423.772, except where otherwise provided.
    Generic drug means a drug for which an application under section 
505(j) of the Federal Food, Drug, and Cosmetic Act (21 USC 355(j)) is 
approved.
    Group health plan is defined at Sec.  423.882.
    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 title XVIII of the Act.
    MA plan has the meaning given the term in Sec.  422.2 of this 
chapter.
    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.
    Monthly beneficiary premium means the amount calculated under Sec.  
423.286 for Part D plans other than fallback prescription drug plans, 
and Sec.  423.867(a) for fallback prescription drug plans.
    PACE Plan means a plan offered by a PACE organization.
    PACE organization is defined in Sec.  460.6 of this chapter.
    Part D eligible individual means an individual who meets the 
requirements at Sec.  423.30(a).
    Part D plan (or Medicare Part D plan) means a prescription drug 
plan, an MA-PD plan, a PACE Plan offering qualified prescription drug 
coverage, or a cost plan offering qualified prescription drug coverage.
    Part D plan sponsor or Part D sponsor refers to a PDP sponsor, MA

[[Page 4528]]

organization offering a MA-PD plan, a PACE organization offering a PACE 
plan including qualified prescription drug coverage, and a cost plan 
offering qualified prescription drug coverage.
    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. This includes 
fallback entities.
    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. This includes fallback prescription drug plans.
    Service area (Service area does not include facilities in which 
individuals are incarcerated.) means for --
    (1) A prescription drug plan, an area established in Sec.  
423.112(a) within which access standards under Sec.  423.120(a) are 
met;
    (2) An MA-PD plan, an area that meets the definition of MA service 
area as described in Sec.  422.2 of this chapter, and within which 
access standards under Sec.  423.120(a) are met;
    (3) A fallback prescription drug plan, the service area described 
in Sec.  423.859(b);
    (4) A PACE plan offering qualified prescription drug coverage, the 
service area described in Sec.  460.22 of this chapter; and
    (5) A cost plan offering qualified prescription drug coverage, the 
service area defined in Sec.  417.1 of this chapter.
    Subsidy-eligible individual means a full subsidy eligible 
individual (as defined at Sec.  423.772) or other subsidy eligible 
individual (as defined at Sec.  423.772).
    Tiered cost-sharing means a process of grouping Part D drugs into 
different cost sharing levels within a Part D 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 
of this chapter 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 and enrollment.

    (a) General rule. (1) An individual is eligible for Part D if he or 
she:
    (i) Is entitled to Medicare benefits under Part A or enrolled in 
Medicare Part B; and
    (ii) Lives in the service area of a Part D plan, as defined under 
Sec.  423.4.
    (2) Except as provided in paragraphs (b), (c), and (d) of this 
section, an individual is eligible to enroll in a PDP if:
    (i) The individual is eligible for Part D in accordance with 
paragraph (a)(1) of this section;
    (ii) The individual resides in the PDP's service area; and
    (iii) The individual is not enrolled in another Part D plan.
    (3) Retroactive Part A or Part B determinations. Individuals who 
become entitled to Medicare Part A or enrolled in Medicare Part B for a 
retroactive effective date are Part D eligible as of the month in which 
a notice of entitlement Part A or enrollment in Part B is provided.
    (b) Coordination with MA plans. A Part D eligible individual 
enrolled in a MA-PD plan must obtain qualified prescription drug 
coverage through that plan. 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 PACE plan. A Part D eligible individual 
enrolled in a PACE plan that offers qualified prescription drug 
coverage under this Part must obtain such coverage through that plan.
    (d) Enrollment in a cost-based HMO or CMP. A Part D eligible 
individual enrolled in a cost-based HMO or CMP (as defined under part 
417 of this chapter) that elects to receive qualified prescription drug 
coverage under such plan is ineligible to enroll in another Part D 
plan. A Part D eligible individual enrolled in a cost-based HMO or CMP 
offering qualified prescription drug coverage is eligible to enroll in 
a PDP if the individual does not elect to receive qualified 
prescription drug coverage under the cost-based HMO or CMP and 
otherwise meets the requirements of paragraph (a)(2) of this section.


Sec.  423.32   Enrollment process.

    (a) General rule. A Part D eligible individual who wishes to enroll 
in a PDP may enroll during the enrollment periods specified in Sec.  
423.38, by filing the appropriate enrollment form with the PDP or 
through other mechanisms CMS determines are appropriate.
    (b) Enrollment form or CMS-approved enrollment mechanism. The 
enrollment form or CMS-approved enrollment mechanism must comply with 
CMS instructions regarding content and format and must have been 
approved by CMS as described in Sec.  423.50.
    (i) The enrollment must be completed by the individual and include 
an acknowledgement by the beneficiary for disclosure and exchange of 
necessary information between the U.S. Department of Health and Human 
Services (or its designees) and the PDP sponsor. Individuals who assist 
beneficiaries in completing the enrollment, including authorized 
representatives, must indicate they have provided assistance and their 
relationship to the beneficiary.
    (ii) Part D eligible individuals enrolling or enrolled in a Part D 
plan must provide information regarding reimbursement for Part D costs 
through other insurance, group health plan or other third-party payment 
arrangement, and consent to the release of the information provided by 
the individual on other insurance, group health plan or other third-
party payment arrangements, as well as any other information on 
reimbursement of Part D costs collected or obtained from other sources, 
in a form and manner approved by CMS.
    (c) Timely process an individual's enrollment request. A PDP 
sponsor must timely process an individual's enrollment request in 
accordance with CMS enrollment guidelines and enroll Part D eligible 
individuals who are eligible to enroll in its plan under Sec.  
423.30(a) and who elect to enroll or are enrolled in the plan during 
the periods specified in Sec.  423.38.
    (d) 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.
    (e) Maintenance of enrollment. An individual who is
    enrolled in a PDP remains enrolled in that PDP until one of the 
following occurs:
    (i) The individual successfully enrolls in another PDP or MA-PD 
plan;
    (ii) The individual voluntarily disenrolls from the PDP;

[[Page 4529]]

    (iii) The individual is involuntary disenrolled from the PDP in 
accordance with Sec.  423.44(b)(2);
    (iv) The PDP is discontinued within the area in which the 
individual resides; or
    (iv) The individual is enrolled after the initial enrollment, in 
accordance with Sec.  423.34(c).
    (f) Enrollees of cost-based HMOs or CMPs and PACE. Individuals 
enrolled in a cost-based HMO or CMP plan (as defined in part 417 of 
this chapter) or PACE (as defined in Sec.  460.6 of this chapter) that 
offers prescription drug coverage under this part as of December 31, 
2005, remain enrolled in that plan as of January 1, 2006, and receive 
Part D benefits offered by that plan until one of the conditions in 
Sec.  423.32(e) are met.


Sec.  423.34   Enrollment of full-benefit dual eligible individuals.

    (a) General rule. CMS must ensure the enrollment into Part D plans 
full-benefit dual eligible individuals who fail to enroll in a Part D 
plan.
    (b) Definition of full-benefit dual eligible individual. For 
purposes of this section, a full-benefit dual eligible individual means 
an individual who is:
    (1) Determined eligible by the State for--
    (i) Medical assistance for full-benefits under title XIX of the Act 
for the month under any eligibility category covered under the State 
plan or comprehensive benefits under a demonstration under section 1115 
of the Act. ; or
    (ii) 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.
    (2) Eligible for Part D in accordance with Sec.  423.30(a).
    (c) Enrolling a full-benefit duel eligible individual. 
Notwithstanding Sec.  423.32(e), during the annual coordinated election 
period, CMS may enroll a full-benefit dual eligible individual in 
another PDP if CMS determines that the further enrollment is warranted.
    (d) Automatic enrollment rules. (1) General rule. CMS must 
automatically enroll full-benefit dual eligible individuals who fail to 
enroll in a Part D plan into a PDP offering basic prescription drug 
coverage in the area where the individual resides that has a monthly 
beneficiary premium that does not exceed the low-income premium subsidy 
amount (as defined in Sec.  423.780(b)). In the event that there is 
more than one PDP in an area with a monthly beneficiary premium at or 
below the low-income premium subsidy amount, individuals must be 
enrolled in such PDPs on a random basis.
    (2) Individuals enrolled in an MSA plan or one of the following 
that does not offer a Part D benefit. Full-benefit dual eligible 
individuals enrolled in an MA Private Fee For Service (PFFS) plan or 
cost-based HMO or CMP that does not offer qualified prescription drug 
coverage or an MSA plan and who fail to enroll in a Part D plan must be 
automatically enrolled into a PDP plan as described in paragraph (d)(1) 
of this section.
    (e) Declining enrollment and disenrollment. Nothing in this section 
prevents a full-benefit dual eligible individual from--
    (1) Affirmatively declining enrollment in Part D; or
    (2) Disenrolling from the Part D plan in which the individual is 
enrolled and electing to enroll in another Part D plan during the 
special enrollment period provided under Sec.  423.38.
    (f) Effective date of enrollment. Enrollment of full-benefit dual 
eligible individuals under this section must be effective as follows:
    (1) January 1, 2006 for individuals who are full-benefit dual 
eligible individuals as of December 31, 2005;
    (2) The first day of the month the individual is eligible for Part 
D under Sec.  423.30(a)(1) for individuals who are Medicaid eligible 
and subsequently become newly eligible for Part D under Sec.  
423.30(a)(1) on or after January 1, 2006; and
    (3) For individuals who are eligible for Part D under Sec.  
423.30(a)(1) and subsequently become newly eligible for Medicaid on or 
after January 1, 2006, enrollment is effective as soon as practicable 
after being identified as a newly full-benefit dual eligible 
individual, in a process to be determined by CMS.


Sec.  423.36   Disenrollment process.

    (a) General rule. An individual may disenroll from a PDP during the 
periods specified in Sec.  423.38 by enrolling in a different PDP plan, 
submitting a disenrollment request to the PDP in the form and manner 
prescribed by CMS, or filing the appropriate disenrollment request 
through other mechanisms as determined by CMS.
    (b) 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.
    (c) 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.


Sec.  423.38  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 
paragraph (a)(3)(ii) and (a)(3)(iii) of this section, 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 of this 
chapter.
    (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 is the 3 months before becoming eligible for Part D, the month of 
eligibility, and the three months following eligibility to Part D.
    (iii) An individual who becomes entitled to Medicare Part A or 
enrolled in Part B for a retroactive effective date has an initial 
enrollment period under this Part beginning with the month in which 
notification of the Medicare determination is received and ending on 
the last day of the third month following the month in which the 
notification was received.
    (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 coordinated election period is November 
15th through December 31st for coverage beginning the following 
calendar year.
    (c) Special enrollment periods. A Part D eligible individual may 
enroll in a PDP or disenroll from a PDP and enroll

[[Page 4530]]

in another PDP or MA-PD plan (as provided at Sec.  422.62(b) of this 
chapter), 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 as defined under Sec.  423.56(a). Loss of 
credible prescription drug coverage due to failure to pay any required 
premium is not considered involuntary loss of the coverage.
    (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, that he or she 
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 non-enrollment in a Part D plan 
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) of this chapter.
    (6) The PDP sponsor's contract is terminated by the PDP sponsor or 
by CMS, as provided under Sec.  423.507 through Sec.  423.510, or the 
PDP plan is no longer offered in the area when the individual resides.
    (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.  423.40   Effective dates.

    (a) Initial enrollment period. (1) An enrollment made prior to the 
month of entitlement to Part A 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.
    (2) Except as otherwise provided under Sec.  423.34(f), an 
enrollment made during or after the month of entitlement to Part A 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.
    (3) 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 is 
effective the first day of the month the individual is eligible for 
Part D.
    (4) In no case is an enrollment in Part D effective before January 
1, 2006 or before entitlement to Part A or enrollment 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.  423.38(b), the coverage or change 
in coverage is effective as of the first day of the following calendar 
year.
    (2) Exception for January 1, 2006 through May 15, 2006. Enrollment 
elections made during the annual coordinated election period between 
January 1, 2006 and May 15, 2006 are 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.  423.38(c), the effective date is determined by CMS, which, to 
the extent practicable, is determined in a manner consistent with 
protecting the continuity of health benefits coverage.


Sec.  423.44   Involuntary 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 eligibility for Part D.
    (iii) Death of the individual.
    (iv) The PDP sponsor's contract is terminated by CMS
    or by a PDP or through mutual consent. 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)(2)(iv) of 
this section (that is, other than death or loss of Part D eligibility, 
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)(iii) 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 file a 
grievance 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

[[Page 4531]]

sponsor has the option to decline future enrollment by the individual 
in any of its PDPs until the individual has paid any past premiums due 
to the PDP sponsor.
    (2) Disruptive behavior. (i) Definition. A PDP enrollee is 
disruptive if his or her behavior substantially impairs the plans 
ability to arrange or provide for services to the individual or other 
plan members. An individual cannot be considered disruptive if the 
behavior is related to the use of medical services or compliance (or 
noncompliance) with medical advice or treatment.
    (ii) Basis of disenrollment for disruptive behavior. A PDP may 
disenroll an individual whose behavior is disruptive as defined in 
Sec.  423.44(d)(2)(i) only after the PDP sponsor meets the requirements 
described in this section and after CMS has reviewed and approved the 
request.
    (iii) Effort to resolve the problem. The PDP sponsor must make a 
serious effort to resolve the problems presented by the individual, 
including providing reasonable accommodations, as determined by CMS, 
for individuals with mental or cognitive conditions, including mental 
illness, Alzheimers disease, and developmental disabilities. In 
addition, the PDP sponsor must inform the individual of the right to 
use the PDP's grievance procedures. The individual has a right to 
submit any information or explanation that he or she may wish to the 
PDP.
    (iv) Documentation. The PDP sponsor must document the enrollee's 
behavior, its own efforts to resolve any problems, as described in 
paragraph (d)(2)(iii) of this section, and any extenuating 
circumstances. The PDP sponsor may request from CMS the ability to 
decline future enrollment by the individual. The PDP sponsor must 
submit this information and any documentation received by the 
individual to CMS.
    (v) CMS review of the proposed disenrollment. CMS reviews the 
information submitted by the PDP sponsor and any information submitted 
by the individual (which the PDP sponsor has submitted to CMS) to 
determine if the PDP sponsor has fulfilled the requirements to request 
disenrollment for disruptive behavior. If the PDP sponsor has fulfilled 
the necessary requirements, CMS reviews the information and make a 
decision to approve or deny the request for disenrollment, including 
conditions on future enrollment, within 20 working days. During the 
review, CMS ensures that staff with appropriate clinical or medical 
expertise reviews the case before making a final decision. The PDP 
sponsor is required to provide a reasonable accommodation, as 
determined by CMS, for the individual in exceptional circumstances that 
CMS deems necessary. CMS notifies the PDP sponsor within 5 working days 
after making its decision.
    (vi) Exception for fallback prescription drug plans. CMS reserves 
the right to deny a request from a fallback prescription drug plan as 
defined in Sec.  423.855 to disenroll an individual for disruptive 
behavior.
    (vii) 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.
    (3) Loss of Part D eligiblity. If an individual is no longer 
eligible for Part D, CMS notifies the PDP that the disenrollment is 
effective the first day of the calendar month following the last month 
of Part D eligibility.
    (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) Individual no longer resides in the PDP service area--Basis for 
disenrollment. The PDP must disenroll an individual if the individual 
notifies the PDP that he or she has permanently moved out of the PDP 
service area.
    (6) Plan termination. (i) When a PDP contract terminates as 
provided in Sec.  423.507 through Sec.  423.510, 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 
prescription drug coverage 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.
    (7) Misrepresentation of third-party reimbursement.
    (i) If CMS determines an individual has materially misrepresented 
information to the PDP sponsor as described 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 sponsor 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.


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 the end of the individual's initial 
enrollment period during which the individual meets all of the 
following conditions:
    (1) The individual was eligible to enroll in a Part D plan;
    (2) The individual was not covered under any
    creditable prescription drug coverage; and
    (3) The individual was not enrolled in a Part D plan.
    (b) [Reserved]


Sec.  423.48   Information about Part D.

    Each Part D 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) and (a)(3) of this section, a Part D plan may not 
distribute any marketing materials (as defined in paragraph (b) of 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 certain types of 
marketing materials that use, without modification, proposed model 
language as specified by CMS) before the date of distribution, the Part 
D 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 Part D sponsor is deemed by CMS to meet certain 
performance requirements established by CMS, the Part D sponsor may 
distribute designated marketing materials 5 days following their 
submission to CMS.
    (3) Prior to distribution, the Part D sponsor submits and certifies 
that for certain types of marketing materials it followed all 
applicable marketing guidelines, or for certain other marketing 
materials that it used, without modification, proposed model language 
as specified by CMS.
    (b) Definition of marketing materials. Marketing materials include 
any

[[Page 4532]]

informational materials targeted to Medicare beneficiaries which--
    (1) Promote the Part D plan.
    (2) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in a Part D plan.
    (3) Explain the benefits of enrollment in a Part D plan, or rules 
that apply to enrollees.
    (4) Explain how Medicare services are covered under a Part D plan, 
including conditions that apply to such coverage.
    (c) Examples of marketing materials. Examples of marketing 
materials include, but are not limited to--
    (1) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the Internet.
    (2) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (3) Presentation materials such as slides and charts.
    (4) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (for example, physicians or 
other providers).
    (5) Membership communication materials such as membership rules, 
subscriber agreements, member handbooks and wallet card instructions to 
enrollees.
    (6) Letters to members about contractual changes; changes in 
providers, premiums, benefits, plan procedures etc.
    (7) Membership or claims processing activities.
    (d) 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 Part D plan 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 Part D plan. In addition, the Part D plan may reduce its service 
area and no longer be offered in the area where a beneficiary resides.
    (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.
    (e) Deemed approval. If CMS has not disapproved the distribution of 
a marketing materials or form submitted by a Part D sponsor for a Part 
D plan in a Part D region, CMS is deemed to not have disapproved the 
distribution of the marketing material or form in all other Part D 
regions covered by the Part D plan, with the exception of any portion 
of the material or form that is specific to the Part D region.
    (f) Standards for Part D marketing. (1) In conducting
    marketing activities, a Part D plan 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 
Part D plan.
    (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 Part D sponsor or its Part D plan. 
The Part D 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 Part D plan. The 
Part D organization may explain that the organization is approved for 
participation in Medicare.
    (v) Use providers, provider groups, or pharmacies to distribute 
printed information comparing the benefits of different Part D plans 
unless providers, provider groups or pharmacies accept and display 
materials from all Part D plan sponsors.
    (vi) Accept Part D plan enrollment forms in provider offices, 
pharmacies or other places where health care is delivered.
    (vii) Employ Part D 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 Part D 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 listed in paragraph (b) of this section 
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 CMS actuarial guidelines.
    (b) Types of coverage. The following coverage is considered 
creditable if it meets the definition provided in paragraph (a) of this 
section:
    (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 State Pharmaceutical
    Assistance Programs (SPAP) as defined at Sec.  423.454.
    (5) Coverage of prescription drugs for veterans, survivors and 
dependents under chapter 17 of title 38, U.S.C.
    (6) Coverage under a Medicare supplemental policy (Medigap policy) 
as defined at Sec.  423.205.
    (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

[[Page 4533]]

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).
    (10) Coverage provided by a PACE organization.
    (11) Coverage provided by a cost-based HMO or CMP under part 417 of 
this chapter.
    (12) Coverage provided through a State High-Risk Pool as defined 
under 42 CFR 146.113(a)(1)(vii).
    (13) Other coverage as the Secretary may determine appropriate.
    (c) General disclosure requirements. With the exception of PDPs and 
MA-PD plans under Sec.  423.56(b)(1) and PACE or cost-based HMO or CMP 
that provide qualified prescription drug coverage under this Part, each 
entity that offers prescription drug coverage under any of the types 
described in Sec.  423.56(b), must disclose to all Part D eligible 
individuals enrolled in or seeking to enroll in the coverage whether 
the coverage is creditable prescription drug coverage.
    (d) Disclosure of non-creditable coverage. In the case that the 
coverage of the type described in Sec.  423.56(b) is not creditable 
prescription drug, the disclosure described in paragraph (c) of this 
section to Part D eligible individuals must also include:
    (1) The fact that the coverage is not creditable prescription drug 
coverage, as provided by CMS;
    (2) That there are limitations on the periods in a year in which 
the individual may enroll in Part D plans; and
    (3) That the individual may be subject to a late enrollment 
penalty, as described under Sec.  423.46.
    (e) Disclosure to CMS. With the exception of PDPs and MA-PD plans 
under Sec.  423.56(b)(1) and PACE or cost-based HMO or CMP that provide 
qualified prescription drug coverage under this Part, all other 
entities listed under paragraph (b) of this section must disclose 
whether the coverage they provide is creditable prescription drug 
coverage to CMS in a form and manner described by CMS.
    (f) Notification content and timing requirements. The disclosure 
notification to Part-D eligible individuals required in Sec.  423.56(c) 
and (d) must be provided in a form and manner prescribed by CMS. 
Notices must be provided, at minimum, at the following times:
    (1) Prior to an individual's initial enrollment period for Part D, 
as described under Sec.  423.38(a);
    (2) Prior to the effective date of enrollment in the prescription 
drug coverage and upon any change that affects whether the coverage is 
creditable prescription drug coverage;
    (3) Prior to the commencement of the Annual Coordinated Election 
Period that begins on November 15 of each year, as defined in Sec.  
423.38(b); and
    (4) Upon request by the individual.
    (g) 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 
prescription drug coverage, the individual may apply to CMS to have the 
coverage treated as creditable prescription drug coverage for purposes 
of applying the late penalty described in Sec.  423.46.

Subpart C--Benefits and Beneficiary Protections.


Sec.  423.100   Definitions.

    As used in this part, unless otherwise specified-
    Actual cost means the negotiated price for a covered Part D drug 
when the drug is purchased at a network pharmacy, and the usual and 
customary price when a beneficiary purchases the drug at an out-of-
network pharmacy consistent with Sec.  423.124(a).
    Affected enrollee means a Part D enrollee who is currently taking a 
covered Part D drug that is either being removed from a Part D plan's 
formulary, or whose preferred or tiered cost-sharing status is 
changing.
    Alternative prescription drug coverage means coverage of Part D 
drugs, other than standard prescription drug coverage that meets the 
requirements of Sec.  423.104(e). 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(d)(2)); 
or
    (2) Enhanced alternative coverage (alternative coverage that meets 
the requirements of Sec.  423.104(f)(1)).
    Basic prescription drug coverage means coverage of 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.
    Contracted pharmacy network means pharmacies, including retail, 
mail-order, and institutional pharmacies, under contract with a Part D 
sponsor to provide covered Part D drugs at negotiated prices to Part D 
enrollees.
    Covered Part D drug means a Part D drug that is included in a Part 
D plan's formulary, or treated as being included in a Part D plan's 
formulary as a result of a coverage determination or appeal under Sec.  
423.566, Sec.  423.580, and Sec.  423.600, Sec.  423.610, Sec.  
423,620, and Sec.  423.630, and obtained at a network pharmacy or an 
out-of-network pharmacy in accordance with Sec.  423.124.
    Dispensing fees means costs that-
    (1) Are incurred at the point of sale and pay for costs in excess 
of the ingredient cost of a covered Part D drug each time a covered 
Part D drug is dispensed;
    (2) Include only pharmacy costs associated with ensuring that 
possession of the appropriate covered Part D drug is transferred to a 
Part D enrollee. Pharmacy costs include, but are not limited to, any 
reasonable costs associated with a pharmacist's time in checking the 
computer for information about an individual's coverage, performing 
quality assurance activities consistent with Sec.  423.153(c)(2), 
measurement or mixing of the covered Part D drug, filling the 
container, physically providing the completed prescription to the Part 
D enrollee, delivery, special packaging, and overhead associated with 
maintaining the facility and equipment necessary to operate the 
pharmacy. In the case of pharmacies owned and operated by a Part D plan 
itself, notwithstanding number (3) of this definition, dispensing fees 
are understood to be the equivalent of all reasonable costs discussed 
in the previous sentence, including the salaries of pharmacists and 
other pharmacy workers as well as the costs associated with maintaining 
the pharmacy facility and equipment necessary to operate the pharmacy; 
and
    (3) Do not include administrative costs incurred by the Part D plan 
in the operation of the Part D benefit, including systems costs for 
interfacing with pharmacies.
    Government-funded health program means any program established, 
maintained, or funded, in whole or in part, 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 of any of the 
foregoing, which uses public funds, in whole or in part, to provide to, 
or pay on behalf of, an individual the cost of Part D drugs, including 
any of the following:
    (1) An approved State child health plan under title XXI of the Act

[[Page 4534]]

providing benefits for child health assistance that meets the 
requirements of section 2103 of the Act;
    (2) The Medicaid program under title XIX of the Act or a waiver 
under section 1115 of the Act;
    (3) The veterans' health care program under Chapter 17 of title 38 
of the United States Code;
    (4) The Indian Health Service program under the Indian Health Care 
Improvement Act under Chapter 18 of title 25 of the United States Code; 
and
    (5) Any other government-funded program whose principal activity is 
the direct provision of health care to persons.
    Group health plan, for purposes of applying the definition of 
incurred costs in Sec.  423.100, has the meaning given such term in 29 
U.S.C. 1167(1), but specifically excludes a personal health savings 
vehicle, as used in this subpart.
    Incurred costs means costs incurred by a Part D enrollee for 
covered Part D drugs --
    (1) That are not paid for under the Part D plan 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(d)(5)(iii), including any price 
differential for which the Part D enrollee is responsible under Sec.  
423.124(b); 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 defined in 
Sec.  423.454); or
    (iii) Under Sec.  423.782.
    Insurance means a health plan that provides, or pays the cost of 
Part D drugs, including, but not limited to, any of the following:
    (1) Health insurance coverage (as defined in 42 U.S.C. 300gg-
91(b)(1));
    (2) A Medicare Advantage plan (as described under section 
1851(a)(2) of the Act); and
    (3) A PACE organization (as defined under sections 1894(a)(3) and 
1934(a)(13) of the Act)
    but specifically excluding a personal health savings vehicle.
    I/T/U pharmacy means a pharmacy operated by the Indian Health 
Service, an Indian tribe or tribal organization, or an urban Indian 
organization, all of which are defined in section 4 of the Indian 
Health Care Improvement Act, 25 U.S.C. 1603.
    Long-term care facility means a skilled nursing facility as defined 
in section 1819(a) of the Act, or a medical institution or nursing 
facility for which payment is made for an institutionalized individual 
under section 1902(q)(1)(B) 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;
    (2) Are reduced by those discounts, direct or indirect subsidies, 
rebates, other price concessions, and direct or indirect remunerations 
that the Part D sponsor has elected to pass through to Part D enrollees 
at the point of sale; and
    (3) Includes any dispensing fees.
    Network pharmacy means a licensed pharmacy that is under contract 
with a Part D sponsor to provide covered Part D drugs at negotiated 
prices to its Part D plan enrollees.
    Non-preferred pharmacy means a network pharmacy that offers covered 
Part D drugs at negotiated prices to Part D enrollees at higher cost-
sharing levels than apply at a preferred pharmacy.
    Or otherwise means through a government-funded health program.
    Out-of-network pharmacy means a licensed pharmacy that is not under 
contract with a Part D sponsor to provide negotiated prices to Part D 
plan enrollees.
    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) Medical supplies associated with the injection of insulin, 
including 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 for that individual under 
Part A or Part B (even though a deductible may apply, or even though 
the individual is eligible for coverage under Part A or Part B but has 
declined to enroll in Part A or Part B); and
    (ii) Drugs or classes of drugs, or their medical uses, which may be 
excluded from coverage or otherwise restricted under Medicaid under 
sections 1927(d)(2) or (d)(3) of the Act, except for smoking cessation 
agents.
    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.
    Personal health savings vehicle means a vehicle through which 
individuals can set aside their own funds to pay for health care 
expenses, including covered Part D drugs, on a tax-free basis including 
any of the following--
    (1) A Health Savings Account (as defined under section 220 of the 
Internal Revenue Code);
    (2) A Flexible Spending Account (as defined in section 106(c)(2) of 
the Internal Revenue Code) offered in conjunction with a cafeteria plan 
under section 125 of the Internal Revenue Code; and
    (3) An Archer Medical Savings Account (as defined under section 223 
of the Internal Revenue Code);
    but specifically excluding a Health Reimbursement Arrangement (as 
described under Internal Revenue Ruling 2002-41 and Internal Revenue 
Notice 2002-45)
    Plan allowance means the amount Part D plans that offer coverage 
other than defined standard coverage may use to determine their payment 
and Part D enrollees' cost-sharing for covered Part D drugs purchased 
at an out-of-network pharmacy or in a physician's office in accordance 
with the requirements of Sec.  423.124(b).
    Preferred drug means a covered Part D drug on a Part D 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 covered 
Part D drugs at negotiated prices to Part D enrollees at lower levels 
of cost-sharing than apply at a non-preferred pharmacy under its 
pharmacy network contract with a Part D plan.
    Qualified prescription drug coverage means any standard 
prescription drug coverage or alternative prescription drug coverage

[[Page 4535]]

    Retail pharmacy means any licensed pharmacy that is not a mail 
order pharmacy from which Part D enrollees could purchase a covered 
Part D drug without being required to receive medical services from a 
provider or institution affiliated with that pharmacy.
    Required prescription drug coverage means coverage of 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 (as defined under section 
1854(b)(2)(C) of the Act) 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 Part D drugs 
that meets the requirements of Sec.  423.104(d). 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.  
423.104(d)(2)(i)(A) and (d)(5)(i)); or
    (2) Actuarially equivalent standard coverage (standard prescription 
drug coverage that provides for cost-sharing as described in Sec.  
423.104(d)(2)(i)(B) or cost-sharing as described in Sec.  
423.104(d)(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(f)(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 an out-of-
network pharmacy or a physician's office charges a customer who does 
not have any form of prescription drug coverage for a covered Part D 
drug.


Sec.  423.104   Requirements related to qualified prescription drug 
coverage.

    (a) General. Subject to the conditions and limitations set forth in 
this subpart, a Part D sponsor must provide enrollees with coverage of 
the benefits described in paragraph (c) of this section. The benefits 
may be provided directly by the Part D sponsor 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 prescription drug plans. 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. The coverage provided by a Part D plan must 
be qualified prescription drug coverage.
    (d) Standard prescription drug coverage. Standard prescription drug 
coverage includes access to negotiated prices as described under 
paragraph (g)(1) of this section, provides coverage of 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 (d)(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 actual costs for 
covered Part D drugs covered under the Part D plan above the annual 
deductible specified in paragraph (d)(1) of this section, and up to the 
initial coverage limit under paragraph (d)(3) of this section, that 
is--
    (A) Equal to 25 percent of actual cost; or
    (B) Actuarially equivalent to an average expected coinsurance of no 
more than 25 percent of actual cost, as determined through processes 
and methods established under Sec.  423.265(c) and (d).
    (ii) Tiered copayments. A Part D plan providing actuarially 
equivalent standard coverage may apply tiered copayments, provided that 
any tiered copayments are consistent with paragraph (d)(2)(i)(B) of 
this section and are approved as described in Sec.  423.272(b)(2).
    (3) Initial coverage limit. The initial coverage limit is equal 
to--
    (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 (d)(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 
above the initial coverage limit described in paragraph (d)(3) of this 
section and annual out-of-pocket threshold described in paragraph 
(d)(5)(iii) of this section that is equal to 100 percent of actual 
costs.
    (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 (d)(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 (d)(5)(iv) of this section and rounded 
to the nearest multiple of 5 cents; or
    (B) Coinsurance. Coinsurance of five percent of actual cost.
    (ii) As determined through processes and methods established under 
Sec.  423.265(c) and (d), a Part D plan may substitute for cost-sharing 
under paragraph (d)(5)(i) of this section an amount that is actuarially 
equivalent to expected cost-sharing under paragraph (d)(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 (d)(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 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.
    (e) Alternative prescription drug coverage. Alternative 
prescription drug coverage includes access to negotiated prices as 
described under paragraph (g)(1) of this section, provides coverage of 
Part D drugs, and must meet the following requirements--

[[Page 4536]]

    (1) Has an annual deductible that does not exceed the annual 
deductible specified in paragraph (d)(1) of this section;
    (2) Imposes cost-sharing no greater than that specified in 
paragraphs (d)(5)(i) or (ii) of this section once the annual out-of-
pocket threshold described in paragraph (d)(5)(iii) of this section is 
met;
    (3) Has a total or gross value that is at least equal to the total 
or gross value of defined standard coverage.
    (4) 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 for the coverage; and
    (5) Provides coverage that is designed, based upon an actuarially 
representative pattern of utilization, to provide for the payment, for 
costs incurred for covered Part D drugs, that are equal to the initial 
coverage limit under paragraph (d)(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 (d)(3) of this section for the year exceeds the deductible 
described in paragraph (d)(1) of this section; and
    (ii) 100 percent minus the coinsurance percentage specified in 
paragraph (d)(2)(i) of this section.
    (f) Enhanced alternative coverage. (1) Enhanced alternative 
coverage must meet the requirements under paragraph (e) 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 that are specifically excluded as Part D 
drugs under paragraph (2)(ii) of the definition of Part D drug under 
Sec.  423.100; or
    (B) Any of the following changes or combination of changes that 
increase the actuarial value of benefits under the Part D plan 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 
(d)(1) of this section;
    (2) A reduction in the cost-sharing described in paragraphs (d)(2) 
or (d)(5) of this section, or
    (3) An increase in the initial coverage limit described in 
paragraph (d)(3) of this section.
    (C) Both the coverage described in paragraph (f)(1)(ii)(A) of this 
section and the changes or combination of changes described in 
paragraph (f)(1)(ii)(B) 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 the other plan provides qualified prescription drug 
coverage and unless the requirements of paragraph (f)(3)(i) of this 
section are met.
    (4) Restrictions on the offering of enhanced alternative coverage 
by cost plans.
    (i) A cost plan that elects to offer qualified prescription drug 
coverage may offer enhanced alternative coverage as an optional 
supplemental benefit under Sec.  417.440(b)(2)(ii) of this chapter only 
if the cost plan also offers basic prescription drug coverage. An 
enrollee in the cost plan may, at the individual's option, elect 
whether to receive qualified prescription drug coverage under the cost 
plan and, if so, whether to receive basic prescription drug coverage 
or, if offered by the cost plan, enhanced alternative coverage.
    (ii) A cost plan that offers qualified prescription drug coverage 
as an optional supplemental benefit under Sec.  417.440(b)(2)(ii) of 
this chapter may not offer prescription drug coverage that is not 
qualified prescription drug coverage. A cost plan that does not offer 
qualified prescription drug coverage under Sec.  417.440(b)(2)(ii) of 
this chapter may offer prescription drug coverage that is not qualified 
prescription drug coverage under Sec.  417.440(b)(2)(i) of this 
chapter.
    (g) Negotiated prices. (1) Access to negotiated prices. A Part D 
sponsor is required to provide its Part D enrollees with access to 
negotiated prices for covered Part D drugs included in its Part D 
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 are not taken into account in establishing Medicaid's best 
price under section 1927(c)(1)(C) of the Act--
    (i) A Part D plan, as defined in Sec.  423.4; or
    (iii) A qualified retiree prescription drug plan (as defined in 
Sec.  423.882) for Part D eligible individuals.
    (3) Disclosure. (i) A Part D sponsor is required to disclose to CMS 
data on aggregate negotiated price concessions obtained from 
pharmaceutical manufacturers, as well as data on aggregate negotiated 
price concessions obtained from pharmaceutical manufacturers that are 
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 or lower covered Part D drug prices at the point 
of sale.
    (ii) Information on negotiated prices disclosed to CMS under 
paragraph (g)(3) of this section is protected under the confidentiality 
provisions applicable under section 1927(b)(3)(D) of the Act.
    (4) Audits. CMS and the Office of the Inspector General may conduct 
periodic audits of the financial statements and all records of Part D 
sponsors pertaining to any qualified prescription drug coverage they 
may offer under a Part D 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 other than a fallback 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

[[Page 4537]]

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) Standards for convenient access 
to network pharmacies. Except as provided in paragraph (a)(7) of this 
section, a Part D plan must have a contracted pharmacy network 
consisting of retail pharmacies sufficient to ensure that for 
beneficiaries residing in each State in a prescription drug plan's 
service area(as defined in Sec.  423.112(a)), each State in a regional 
MA-PD plan's service area (as defined in Sec.  422.2 and Sec.  
422.455(a) of this chapter), a local MA-PD plan's service area (as 
defined in Sec.  422.2 of this chapter), or a cost plan's geographic 
area (as defined in Sec.  417.401 of this chapter), the following 
requirements are satisfied:
    (i) At least 90 percent of Medicare beneficiaries, on average, in 
urban areas served by the Part D plan live within 2 miles of a network 
pharmacy that is a retail pharmacy or a pharmacy described under 
paragraph (a)(2) of this section;
    (ii) At least 90 percent of Medicare beneficiaries, on average, in 
suburban areas served by the Part D plan live within 5 miles of a 
network pharmacy that is a retail pharmacy or a pharmacy described 
under paragraph (a)(2) of this section; and
    (iii) At least 70 percent of Medicare beneficiaries, on average, in 
rural areas served by the Part D plan live within 15 miles of a network 
pharmacy that is a retail pharmacy or a pharmacy described under 
paragraph (a)(2) of this section.
    (2) Applicability of some non-retail pharmacies to standards for 
convenient access. Part D plans may count I/T/U pharmacies and 
pharmacies operated by Federally Qualified Health Centers and Rural 
Health Centers toward the standards for convenient access to network 
pharmacies in paragraph (a)(1) of this section.
    (3) Access to non-retail pharmacies. A Part D plan's contracted 
pharmacy network may be supplemented by non-retail pharmacies, 
including pharmacies offering home delivery via mail-order and 
institutional pharmacies, provided the requirements of paragraph (a)(1) 
of this section are met.
    (4) Access to home infusion pharmacies. A Part D plan's contracted 
pharmacy network must provide adequate access to home infusion 
pharmacies consistent with written policy guidelines and other CMS 
instructions.
    (5) Access to long-term care pharmacies. A Part D plan must offer 
standard contracting terms and conditions, including performance and 
service criteria for long-term care pharmacies that CMS specifies, to 
all long-term care pharmacies in its service area. The plan must 
provide convenient access to long-term care pharmacies consistent with 
written policy guidelines and other CMS instructions.
    (6) Access to I/T/U pharmacies. A Part D plan must offer standard 
contracting terms and conditions conforming to the model addendum that 
CMS develops, to all I/T/U pharmacies in its service area. The plan 
must provide convenient access to I/T/U pharmacies consistent with 
written policy guidelines and other CMS instructions.
    (7) 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 or cost plan (as described in section 1876(h) of 
the Act) that provides its enrollees with access to covered Part D 
drugs through pharmacies owned and operated by the MA organization or 
cost plan, provided the organization's or plan's pharmacy network meets 
the access standard set forth under Sec.  422.112 of this chapter for 
an MA plan, or Sec.  417.416(e) of this chapter for a cost plan.
    (ii) An MA private fee-for-service plan described in Sec.  422.4 of 
this chapter that--
    (A) Offers qualified prescription drug coverage; and
    (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.  423.104(d)(2) and (d)(5).
    (8) Pharmacy network contracting requirements. In establishing its 
contracted pharmacy network, a Part D sponsor offering qualified 
prescription drug coverage--
    (i) Must contract with any pharmacy that meets the Part D plan's 
standard terms and conditions; and
    (ii) May not require a pharmacy to accept insurance risk as a 
condition of participation in the Part D plan's contracted pharmacy 
network.
    (9) Differential cost-sharing for preferred pharmacies. A Part D 
sponsor offering a Part D plan that provides coverage other than 
defined standard coverage may reduce copayments or coinsurance for 
covered Part D drugs obtained through a preferred pharmacy relative to 
the copayments or coinsurance applicable for such drugs when obtained 
through a non-preferred pharmacy. Such differentials are taken into 
account in determining whether the requirements under Sec.  
423.104(d)(2) and (d)(5) and Sec.  423.104(e) are met. Any cost-sharing 
reduction under this section must not increase CMS payments to the Part 
D plan under Sec.  423.329.
    (10) Level playing field between mail-order and network pharmacies. 
A Part D sponsor must permit its Part D plan enrollees to receive 
benefits, which may include a 90-day supply of covered Part D drugs, at 
any of its network pharmacies that are retail pharmacies. A Part D plan 
may require an enrollee obtaining a covered Part D drug at a network 
pharmacy that is a retail pharmacy to pay any higher cost-sharing 
applicable to that covered Part D drug at the network pharmacy that is 
a retail pharmacy instead of the cost-sharing applicable to that 
covered Part D drug at the network pharmacy that is a mail-order 
pharmacy.
    (b) Formulary requirements. A Part D sponsor 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 Part D sponsor's formulary must be developed and 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 relative 
to-
    (A) The Part D sponsor and Part D plan; and
    (B) Pharmaceutical manufacturers.
    (iii) Includes at least one practicing physician and one practicing 
pharmacist who are experts regarding care of elderly or disabled 
individuals.
    (iv) 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

[[Page 4538]]

information as it determines appropriate.
    (v) Considers whether the inclusion of a particular Part D drug in 
a formulary or formulary tier has any therapeutic advantages in terms 
of safety and efficacy.
    (vi) Reviews policies that guide exceptions and other utilization 
management processes, including drug utilization review, quantity 
limits, generic substitution, and therapeutic interchange.
    (vii) Evaluates and analyzes treatment protocols and procedures 
related to the plan's formulary at least annually consistent with 
written policy guidelines and other CMS instructions.
    (viii) Documents in writing its decisions regarding formulary 
development and revision and utilization management activities.
    (ix) Meets other requirements consistent with written policy 
guidelines and other CMS instructions.
    (2) Provision of an adequate benefit. A Part D plan's formulary 
must-
    (i) Except as provided in paragraph (b)(2)(ii) of this section, 
include within each therapeutic category and class of Part D drugs at 
least two Part D drugs that are not therapeutically equivalent and 
bioequivalent, with different strengths and dosage forms available for 
each of those drugs, except that only one 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 Part D drug.
    (ii) Include at least one Part D drug within a particular category 
or class of Part D drugs to the extent the Part D plan demonstrates, 
and CMS approves, the following-
    (A) That only two drugs are available in that category or class of 
Part D drugs; and
    (B) That one drug is clinically superior to the other drug in that 
category or class of Part D drugs.
    (iii) Include adequate coverage of the types of drugs most commonly 
needed by Part D enrollees, as recognized in national treatment 
guidelines.
    (iv) Be approved by CMS consistent with Sec.  423.272(b)(2).
    (3) Transition Process. A Part D sponsor must provide for an 
appropriate transition process for new enrollees prescribed Part D 
drugs that are not on its Part D plan's formulary. The transition 
policy must meet requirements consistent with written policy guidelines 
and other CMS instructions.
    (4) Limitation on changes in therapeutic classification. Except as 
CMS may permit to account for new therapeutic uses and newly approved 
Part D drugs, a Part D sponsor may not change the therapeutic 
categories and classes in a formulary other than at the beginning of 
each plan year.
    (5) Provision of notice regarding formulary changes
    (i) Prior to removing a covered Part D drug from its Part D plan's 
formulary, or making any change in the preferred or tiered cost-sharing 
status of a covered Part D drug, a Part D sponsor must provide at least 
60 days notice to CMS, State Pharmaceutical Assistance Programs (as 
defined in Sec.  423.454), entities providing other prescription drug 
coverage (as described in Sec.  423.464(f)(1)), authorized prescribers, 
network pharmacies, and pharmacists prior to the date such change 
becomes effective, and must either--
    (A) Provide direct written notice to affected enrollees at least 60 
days prior to the date the change becomes effective; or
    (B) At the time an affected enrollee requests a refill of the Part 
D drug, provide such enrollee with a 60 day supply of the Part D drug 
under the same terms as previously allowed, and written notice of the 
formulary change.
    (ii) The written notice must contain the following information-
    (A) The name of the affected covered Part D drug;
    (B) Whether the plan is removing the covered Part D drug from the 
formulary, or changing its preferred or tiered cost-sharing status;
    (C) The reason why the plan is removing such covered Part D drug 
from the formulary, or changing its preferred or tiered cost-sharing 
status;
    (D) Alternative drugs in the same therapeutic category or class or 
cost-sharing tier and expected cost-sharing for those drugs; and
    (E) The means by which enrollees may obtain a coverage 
determination under Sec.  423.566 or exception under Sec.  423.578.
    (iii) Part D sponsors may immediately remove from their Part D plan 
formularies covered Part D drugs deemed unsafe by the Food and Drug 
Administration or removed from the market by their manufacturer without 
meeting the requirements of paragraphs (b)(5)((i) of this section. Part 
D sponsors must provide retrospective notice of any such formulary 
changes to affected enrollees, CMS, State Pharmaceutical Assistance 
Programs (as defined in Sec.  423.454), entities providing other 
prescription drug coverage (as described in Sec.  423.464(f)(1)), 
authorized prescribers, network pharmacies, and pharmacists consistent 
with the requirements of paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), 
(b)(5)(ii)(C), and (b)(5)(ii)(D) of this section.
    (6) Limitation on formulary changes prior to the beginning of a 
contract year. Except as provided under paragraph (b)(5)(iii) of this 
section, a Part D sponsor may not remove a covered Part D drug from its 
Part D plan's formulary, or make any change in the preferred or tiered 
cost-sharing status of a covered Part D drug on its plan's formulary, 
between the beginning of the annual coordinated election period 
described in Sec.  423.38(b) and 60 days after the beginning of the 
contract year associated with that annual coordinated election period.
    (7) Provider and patient education. A Part D sponsor must establish 
policies and procedures to educate and inform health care providers and 
enrollees concerning its formulary.
    (c) Use of standardized technology. A Part D sponsor 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(g). The card or other technology must 
comply with standards CMS establishes.


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

    (a) Out-of-network access to covered part D drugs. (1) Out-of-
network pharmacy access. A Part D sponsor must ensure that Part D 
enrollees have adequate access to covered Part D drugs dispensed at 
out-of-network pharmacies when the enrollees--
    (i) Cannot reasonably be expected to obtain such drugs at a network 
pharmacy; and
    (ii) Do not access covered Part D drugs at an out-of-network 
pharmacy on a routine basis.
    (2) Physician's office access. A Part D sponsor must ensure that 
Part D enrollees have adequate access to vaccines and other covered 
Part D drugs appropriately dispensed and administered by a physician in 
a physician's office.
    (b) Financial responsibility for out-of-network access to covered 
Part D drugs. A Part D sponsor that provides its Part D enrollees with 
coverage other than defined standard coverage may require its Part D 
enrollees accessing covered Part D drugs as provided in paragraph (a) 
of this section to assume financial responsibility for any differential 
between the out-of-network pharmacy's (or provider's) usual and 
customary price and the Part D sponsor's plan allowance, consistent 
with the requirements of Sec.  423.104(d)(2)(i)(B) and Sec.  
423.104(e).

[[Page 4539]]

    (c) Limits on out-of-network access to covered Part D. A Part D 
sponsor must establish reasonable rules to appropriately limit out-of-
network access to covered Part D drugs.


Sec.  423.128   Dissemination of Part D plan information.

    (a) Detailed description. A Part D sponsor must disclose the 
information specified in paragraph (b) of this section in the manner 
specified by CMS.--
    (1) To each enrollee of a Part D plan offered by the Part D sponsor 
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 Part D plan description. The Part D plan description 
must include the following information about the qualified prescription 
drug coverage offered under the Part D 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. Information about the plan's formulary, including-
    (i) A list of drugs included on the plan's formulary;
    (ii) The manner in which the formulary (including any tiered 
formulary structure and utilization management procedures used) 
functions;
    (iii) The process for obtaining an exception to a plan's formulary 
or tiered cost-sharing structure; and
    (iv) A description of how a Part D eligible individual may obtain 
additional information on the formulary, 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 Part D sponsor 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, and appeals procedures. All 
grievance, reconsideration, exceptions, coverage determination, 
reconsideration, exceptions, and appeal rights and procedures required 
under Sec.  423.564 et. seq.
    (8) Quality assurance policies and procedures. A description of the 
quality assurance policies and procedures required under Sec.  
423.153(c), as well as the medication therapy management program 
required under Sec.  423.153(d).
    (9) Disenrollment rights and responsibilities.
    (10) Potential for contract termination. The fact that a Part D 
sponsor may terminate or refuse to renew its contract, or reduce the 
service area included in its contract, and the effect that any of those 
actions may have on individuals enrolled in a Part D plan;
    (c) Disclosure upon request of general coverage information, 
utilization, and grievance information. Upon request of a Part D 
eligible individual, a Part D sponsor 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) Benefits. (A) Covered services under the Part D 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 Part D plan's 
network and the extent to which an enrollee may select among those 
pharmacies; and
    (F) The Part D plan's out-of-network pharmacy access policy.
    (iv) Premiums;
    (v) The Part D plan's formulary;
    (vi) The Part D plan's service area; and
    (vii) Quality and performance indicators for benefits under the 
Part D plan as determined by CMS.
    (2) The procedures the Part D sponsor 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.  423.564;
    (ii) Appeals according to Sec.  423.580 et. seq.; and
    (iii) Exceptions according to Sec.  423.578.
    (4) Financial condition of the Part D sponsor, including the most 
recently audited information regarding, at a minimum, a description of 
the financial condition of the Part D sponsor offering the Part D plan.
    (d) Provision of specific information. Each Part D sponsor offering 
qualified prescription drug coverage under a Part D plan 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 website that--
    (i) Includes, at a minimum, the information required in paragraph 
(b) of this section.
    (ii) Includes a current formulary for its Part D plan, updated at 
least monthly.
    (iii) Provides current and prospective Part D enrollees with at 
least 60 days notice regarding the removal or change in the preferred 
or tiered cost-sharing status of a Part D drug on its Part D plan's 
formulary.
    (3) The provision of information in writing, upon request.
    (e) Claims information. A Part D sponsor must furnish directly to 
enrollees, in the manner specified by CMS and in a form easily 
understandable to such enrollees, a written 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.

[[Page 4540]]

    (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 for which Part D plans 
are required to provide notice as described in Sec.  423.120(b)(5).
    (6) Be provided during any month when prescription drug benefits 
are provided under this part, including for covered Part D spending 
between the initial coverage limit described in Sec.  423.104(d)(3) and 
the out-of-pocket threshold described in Sec.  423.104(d)(5)(iii).


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

    (a) General requirements. Except as provided under paragraph (c) of 
this section, a Part D sponsor 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 covered Part D drug that is therapeutically equivalent 
and bioequivalent and available at that pharmacy, unless the particular 
covered Part D drug being purchased is the lowest-priced 
therapeutically equivalent and bioequivalent 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 after 
the drug is dispensed 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;
    (4) A network pharmacy that is located in any of the U.S. 
territories; and
    (5) 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 by providing such 
information to Part D plans for inclusion in the written explanations 
of benefits required under Sec.  423.128(e); and
    (2) Under 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.

    For any medical records or other health and enrollment information 
it maintains with respect to enrollees, a PDP sponsor must establish 
procedures to do the following--
    (a) Abide by all Federal and State laws regarding confidentiality 
and disclosure of medical records, or other health and enrollment 
information. The PDP sponsor must safeguard the privacy of any 
information that identifies a particular enrollee and have procedures 
that specify--
    (1) For what purposes the information is used within the 
organization; and
    (2) To whom and for what purposes it discloses the information 
outside the organization.
    (b) Ensure that medical information is released only in accordance 
with applicable Federal or State law, or under court orders or 
subpoenas.
    (c) Maintain the records and information in an accurate and timely 
manner.
    (d) Ensure timely access by enrollees to the records and 
information that pertain to them.

Subpart D--Cost Control and Quality Improvement Requirements for 
Part D Plans


Sec.  423.150   Scope.

    This subpart sets forth the requirements relating to the following:
    (a) Drug utilization management programs, quality assurance 
measures and systems, and medication therapy management programs (MTMP) 
for Part D sponsors.
    (b) Consumer satisfaction surveys of Part D plans.
    (c) Electronic prescription program.
    (d) Quality improvement organization (QIO) activities.
    (e) Compliance deemed on the basis of accreditation.
    (f) Accreditation organizations.
    (g) Procedures for the approval of accreditation
    organizations as a basis for deeming compliance.


Sec.  423.153   Drug utilization management, quality assurance, and 
medication therapy management programs (MTMPs).

    (a) General rule. Each Part D sponsor must have established, for 
covered Part D drugs furnished through a Part D plan, a drug 
utilization management program, quality assurance measures and systems, 
and an MTMP as described in paragraphs (b), (c), and (d) of this 
section.
    (b) Drug utilization management. A Part D sponsor must have 
established a reasonable and appropriate drug utilization management 
program that--
    (1) Includes incentives to reduce costs when medically appropriate;
    (2) Maintains policies and systems to assist in preventing over-
utilization and under-utilization of prescribed medications; and
    (3) Provides CMS with information concerning the procedures and 
performance of its drug utilization management program, according to 
guidelines specified by CMS.
    (c) Quality assurance. A Part D sponsor must have established 
quality assurance measures and systems to reduce medication errors and 
adverse drug interactions and improve medication use that include all 
of the following--
    (1) Representation that network providers are required to comply 
with minimum standards for pharmacy practice as established by the 
States.
    (2) Concurrent drug utilization review systems, policies, and 
procedures designed to ensure that a review of the prescribed drug 
therapy is performed before each prescription is dispensed to an 
enrollee in a sponsor's Part D plan, typically at the point-of-sale or 
point of distribution. The review must include, but not be limited to,
    (i) Screening for potential drug therapy problems due to 
therapeutic duplication.
    (ii) Age/gender-related contraindications.
    (iii) Over-utilization and under-utilization.
    (iv) Drug-drug interactions.
    (v) Incorrect drug dosage or duration of drug therapy. (vi) Drug-
allergy contraindications.
    (vii) Clinical abuse/misuse.
    (3) Retrospective drug utilization review systems, policies, and 
procedures designed to ensure ongoing periodic examination of claims 
data and other records, through computerized drug claims processing and 
information retrieval systems, in order to identify patterns of 
inappropriate or medically unnecessary care among enrollees in a 
sponsor's Part D plan, or associated with specific drugs or groups of 
drugs.

[[Page 4541]]

    (4) Internal medication error identification and reduction systems.
    (5) Provision of information to CMS regarding its quality assurance 
measures and systems, according to guidelines specified by CMS.
    (d) Medication therapy management program (MTMP).
    (1) General rule. A Part D sponsor must have established a MTMP 
that--
    (i) Is designed to ensure that covered Part D 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) Is designed to reduce the risk of adverse events, including 
adverse drug interactions, for targeted beneficiaries described in 
paragraph (d)(2) of this section;
    (iii) May be furnished by a pharmacist or other qualified provider; 
and
    (iv) May distinguish between services in ambulatory and 
institutional settings.
    (2) Targeted beneficiaries. Targeted beneficiaries for the MTMP 
described in paragraph (d)(1) of this section are enrollees in the 
sponsor's Part D plan who --
    (i) Have multiple chronic diseases;
    (ii) Are taking multiple Part D drugs; and
    (iii) Are likely to incur annual costs for covered Part D drugs 
that exceed a predetermined level as specified by the Secretary.
    (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 (CCIP) under 
section 1807 of the Act. A Part D sponsor must provide drug claims data 
to CCIPs for those beneficiaries that are enrolled in CCIPs in a manner 
specified by CMS.
    (5) Considerations in pharmacy fees. An applicant to become a Part 
D sponsor must--
    (i) Describe in its application how it takes into account the 
resources used and time required to implement the MTMP it chooses to 
adopt in establishing fees for pharmacists or others providing MTMP 
services for covered Part D drugs under a Part D plan.
    (ii) Disclose to CMS upon request the amount of the management and 
dispensing fees and the portion paid for MTMP 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.
    (6) MTMP reporting. A Part D sponsor must provide CMS with 
information regarding the procedures and performance of its MTMP, 
according to guidelines specified by CMS.
    (e) 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 providing qualified 
prescription drug coverage, 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 Part D plan 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) [Reserved]
    (b) [Reserved]
    (c) Requirement. Part D sponsors must support and comply with 
electronic prescription standards relating to covered Part D drugs for 
Part D enrollees developed by CMS once final standards are effective.
    (d) 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 initial standards and final standards established 
by CMS once final standards are effective. Any payments must be in 
compliance with applicable Federal and State laws related to fraud and 
abuse, including the physician self-referral prohibition (section 1877 
of the Act) and the Federal anti kickback statute (section 1128B(b) of 
the Act).


Sec.  423.162  Quality improvement organization activities.

    (a) General rule. Quality improvement organizations (QIOs) are 
required to offer providers, practitioners, and Part D sponsors quality 
improvement assistance pertaining to health care services, including 
those related to prescription drug therapy, in accordance with 
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 part 480 
of this chapter. Part D sponsors are required to provide specified 
information to CMS for distribution to the QIOs as well as directly to 
QIOs.
    (c) Applicability of QIO confidentiality provisions. The provisions 
of part 480 of this chapter apply to Part D sponsors in the same manner 
as such provisions apply to institutions under part 480 of this 
chapter.


Sec.  423.165   Compliance deemed on the basis of accreditation.

    (a) General rule. A Part D sponsor is deemed to meet all of the 
requirements of any of the areas described in paragraph (b) of this 
section if--
    (1) The Part D sponsor 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 Part D sponsor'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) Drug utilization management programs, quality assurance 
measures and systems, and MTMPs as provided under Sec.  423.153.
    (3) Privacy, confidentiality, and accuracy of enrollee records, as 
provided under Sec.  423.136.
    (4) A program to protect against fraud, waste and abuse, as 
described in Sec.  423.504(b)(4)(vi)(H).
    (c) Effective date of deemed status. The date the Part D sponsor 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 Part D sponsor is accredited by the accreditation 
organization.
    (d) Obligations of deemed Part D sponsors. A Part D sponsor 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 Part D 
sponsor's deemed status for any of the following reasons--

[[Page 4542]]

    (1) CMS determines, on the basis of its own investigation, that the 
Part D sponsor does not meet the Medicare requirements for which deemed 
status was granted.
    (2) CMS withdraws its approval of the accreditation organization 
that accredited the Part D sponsor.
    (3) The Part D sponsor fails to meet the requirements of paragraph 
(d) of this section.
    (f) Enforcement authority. CMS retains the authority to initiate 
enforcement action against any Part D sponsor 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 the organization 
meets the following conditions:
    (1) In accrediting Part D sponsors and Part D 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, Part D 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 Part D sponsors.
    (iv) Information about any Part D sponsor against which the 
accrediting organization has taken remedial or adverse action, 
including revocation, withdrawal, or revision of the Part D sponsor'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 Part D sponsor, 
a deficiency that as determined by the accrediting organization poses 
immediate jeopardy to the plan'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 Part D sponsors.
    (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 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

[[Page 4543]]

the accreditation organization is not meeting the requirements of this 
subpart, CMS gives 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 
Part D sponsor 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.  423.165 or Sec.  423.171.
    (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 Part D plans and sponsors 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 Part D sponsors 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 Part D 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 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 is 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 Part D sponsors that it has 
accredited meet or exceed applicable Medicare requirements; and

[[Page 4544]]

    (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 E--[Reserved]

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 subpart, 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. An applicant may submit a bid to 
become a Part D plan sponsor.
    (b) Bid submission. Not later than the first Monday in June, each 
potential Part D sponsor must submit bids and supplemental information 
described in this section for each Part D plan it intends to offer in 
the subsequent calendar year.
    (c) Basic rule for bid. Each potential Part D sponsor must submit a 
bid and supplemental information in a format to be specified by CMS for 
each Part D 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, co-payments, coinsurance, and 
liability above the plan allowance in the case of out-of-network 
claims, 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 or 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 and supplemental 
information 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.
    (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 Part D 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, PACE organizations offering PACE 
plans including qualified prescription drug coverage, and cost-based 
HMOs or CMPs offering section 1876 cost plans including qualified 
prescription drug coverage, 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 applies 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 prescription drug plans. Fallback 
prescription drug plan bids are not

[[Page 4545]]

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 Part D sponsors.

    (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. In addition to its general negotiating 
authority under section 1860D-11(d)(2)(A) of the Act, CMS has 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 approves the Part D plan only 
if the plan and the Part D sponsor 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 approves a 
bid submitted under Sec.  423.265 only 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. (i) 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) or its utilization management program are 
likely to substantially discourage enrollment by certain Part D 
eligible individuals under the plan.
    (ii) 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, the formulary categories and classes alone 
will not be found to discourage enrollment.
    (iii) A plan that adopts the categories and classes discussed in 
paragraph (b)(2)(ii) of this section may nevertheless be found to 
discourage enrollment because it excludes specific drugs from the 
formulary.
    (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 approves a limited risk plan 
in accordance with paragraphs (c)(2) and (c)(3) of this section only 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 limited risk 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 approves only 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 (as defined at Sec.  
422.4(a)(3)) choosing to offer prescription drug coverage are subject 
to all MA-PD bid submission and approval requirements applicable to MA-
PD plans 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 network pharmacies, Sec.  423.120(a) and Sec.  
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.
    (e) Special rule for plans with standardized bids sufficiently 
below the national average monthly bid to result in a negative premium. 
In the event of a negative premium, as described in Sec.  
423.286(d)(1), CMS negotiates the incorporation of the negative premium 
amount into the bid as either a reduction in the supplemental premium 
if the Part D plan already submitted a bid with an enhanced alternative 
benefit, or CMS requires the addition of new enhanced alternative 
benefit of no less value than the amount of the negative premium.


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 submitted 
under Sec.  423.265 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 (not including fallbacks) and for each 
MA-PD plan described in section 1851(a)(2)(A)(i) of the Act. The 
calculation does not include bids submitted by MSA plans, MA private 
fee-for-service plans, specialized MA plans for special needs 
individuals, PACE programs under section 1894, and contracts under 
reasonable cost reimbursement contracts under section 1876(h) of the 
Act.
    (b) Calculation of weighted average. (1) 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) of this chapter) and the denominator 
equal to the total number of Part D eligible individuals enrolled in a 
reference month in all Part D plans except MSA plans, fallbacks, MA 
private fee-for-service plans, specialized MA plans for special needs 
individuals, PACE programs under section 1894, and contracts under 
reasonable cost reimbursement contracts under section 1876(h) of the 
Act.
    (2) For purposes of calculating the monthly national average 
monthly bid amount for 2006, CMS assigns equal weighting to PDP 
sponsors (other than fallback entities) and assigns MA-PD plans 
included in the national average bid a weight based on prior enrollment 
(new MA-PD plans are assigned zero weight).
    (c) Geographic adjustment. (1) Upon the development of an 
appropriate methodology, the national average monthly bid amount for 
Part D plans will be adjusted to take into account differences in 
prices for 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.

[[Page 4546]]

    (4) CMS does not apply any geographic adjustment until an 
appropriate methodology is developed.


Sec.  423.286  Rules regarding premiums.

    (a) General rule. Except as provided in paragraphs (d)(3) and (e) 
of this section, and with regard to employer group waivers, the monthly 
beneficiary premium for a Part D plan in a PDP region is the same for 
all Part D eligible individuals enrolled in the plan. The monthly 
beneficiary premium for a Part D 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 Part D 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 
Part D 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 
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. If the amount of the adjusted 
national average monthly bid amount exceeds the standardized bid amount 
by an amount greater than the base beneficiary premium and results in a 
negative premium, then the beneficiary premium is zero, and the excess 
amount is applied to supplemental Part D benefits as described in Sec.  
423.272(e).
    (2) Increase for supplemental prescription drug benefits. The 
portion of the Part D 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 of enrollees in the plan as determined based 
on negotiations between CMS and the Part D sponsor offering the plan.
    (3) Increase for late enrollment penalty. The base beneficiary 
premium for a Part D enrollee subject to the late enrollment penalty is 
increased 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) of this chapter equals 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 prescription drug plans. The monthly 
beneficiary premium charged under a fallback prescription drug plan is 
calculated under Sec.  423.867(a) and not under this section, except 
that enrollees in fallback prescription drug plans are subject to late 
enrollment penalties under paragraph (d)(3) of this section and 
fallback prescription drug plan premiums are reduced or eliminated in 
the case of a subsidy-eligible individual, as described in paragraph 
(e) of this section.


Sec.  423.293   Collection of monthly beneficiary premium.

    (a) General rule. Part D sponsors must charge enrollees a 
consolidated monthly Part D premium equal to the sum of the Part D 
monthly premium for basic prescription drug coverage (if any) and the 
premium for supplemental coverage (if any and if the beneficiary has 
enrolled in such supplemental coverage). Part D sponsors must also 
permit each enrollee, at the enrollee's option, to make payment of 
premiums (if any) under this part to the sponsor using any of the 
methods listed in Sec.  422.262(f) of this chapter.
    (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 Part D sponsor 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 
by the government from a Part D eligible individual in the manner 
described in Sec.  422.262(f)(1) of this chapter, CMS pays only the 
portion of the late enrollment penalty described in paragraph (b) of 
this section to the Part D sponsor 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) of this chapter, CMS reduces 
payments otherwise made to the Part D plan by an amount equal to the 
portion of the late enrollment penalty.
    (d) Special rule for fallback plans. This section does not apply to 
fallback prescription drug plans. The fallback plans follow the 
requirements set forth in Sec.  423.867(b).

Subpart G--Payments to Part D Plan Sponsors For Qualified 
Prescription Drug Coverage


Sec.  423.301   Scope.

    This subpart sets forth rules for the calculation and payment of 
CMS direct and reinsurance subsidies for Part D plans; the application 
of risk corridors and risk-sharing adjustments to payments; and 
retroactive adjustments and reconciliations to actual enrollment and 
interim payments. This subpart does not apply to fallback entities or 
fallback prescription drug plans.

[[Page 4547]]

Sec.  423.308   Definitions and terminology.

    For the purposes of this subpart, the following definitions apply-
    Actually paid means that the costs must be actually incurred by the 
Part D sponsor and must be net of any direct or indirect remuneration 
(including discounts, chargebacks or 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 
Part D sponsor for the drug.
    Allowable reinsurance costs means the subset of gross covered 
prescription drug costs actually paid that are attributable to basic 
prescription drug coverage for covered Part D drugs only and that are 
actually paid by the Part D sponsor or by (or on behalf of) an enrollee 
under the Part D plan. The costs for any Part D plan offering enhanced 
alternative coverage must be adjusted not only to exclude any costs 
attributable to benefits beyond basic prescription drug coverage, but 
also to exclude any costs determined to be attributable to increased 
utilization over the standard prescription drug coverage 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 actually paid 
costs for covered Part D drugs (not including administrative costs, but 
including dispensing fees) that are attributable to basic prescription 
drug coverage only and that are incurred and actually paid by the Part 
D sponsor under the Part D plan. Costs must be based upon imposition of 
the maximum amount of copayments permitted under Sec.  423.782. The 
costs for any Part D plan offering enhanced alternative coverage must 
be adjusted not only to exclude any costs attributable to benefits 
beyond basic prescription drug coverage, but also to exclude any 
prescription drug coverage costs determined to be attributable to 
increased utilization over standard prescription drug coverage 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 actually paid 
costs incurred under a Part D plan, excluding administrative costs, but 
including dispensing fees during the coverage year and costs relating 
to the deductible. They equal-
    (1) All reimbursement paid by a Part D sponsor to a pharmacy (or 
other intermediary) or to indemnify an enrollee when the reimbursement 
is associated with an enrollee obtaining drugs under the Part D plan; 
plus
    (2) All amounts paid under the Part D 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 Part D plan. These costs are 
determined regardless of whether the coverage under the plan exceeds 
basic prescription drug coverage.
    Target amount for any Part D plan equals the total amount of 
payments (from both CMS and by or on behalf of enrollees) to that plan 
for the coverage 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 Part D plan's standardized bid, 
risk adjusted for health status as provided in Sec.  423.329(b), minus 
the monthly beneficiary premium as determined in Sec.  423.286.
    (c) Reinsurance subsidies. CMS provides reinsurance subsidy 
payments described in Sec.  423.329(c) on a monthly basis during a year 
based on either estimated or incurred allowable reinsurance costs 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 individuals 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 Part D 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 
(as defined by Sec.  422.4(a)(3) of this chapter) offering qualified 
prescription drug coverage, 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.


Sec.  423.322   Requirement for disclosure of information.

    (a) Payment conditional upon provision of information. Payments to 
a Part D sponsor 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 including, but not limited to, determination 
of payments and payment-related oversight and program integrity 
activities. This restriction does not limit OIG's authority to fulfill 
the Inspector General's responsibilities in accordance with applicable 
Federal law.


Sec.  423.329   Determination of payments.

    (a) Subsidy payments. (1) Direct subsidy. CMS makes a direct 
subsidy payment for each Part D eligible beneficiary enrolled in a Part 
D 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)). The direct subsidy payment may be increased by the 
excess amount of a

[[Page 4548]]

negative premium as described in Sec.  423.286(d)(1), if applicable.
    (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 to take into account variation in costs for 
basic prescription drug coverage among Part D 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) of this chapter 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 of this 
chapter 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 of 
this chapter 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) of this chapter, 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 Part D 
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 incurred true out-of-pocket costs that exceed the annual 
out-of-pocket threshold specified in Sec.  423.104(d)(5)(iii).
    (2) Payment method. Payments under this section are based on a 
method that CMS determines.
    (i) Payments during the coverage year. CMS establishes a payment 
method by which payments of amounts
    under this section are made on a monthly basis during a year based 
on either estimated or incurred allowable reinsurance costs.
    (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 as defined by Sec.  
422.4(a)(3) of this chapter offering qualified 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) of the Act; 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 section 1851(a)(2)(A)(i) of the Act.
    (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 Part D 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 Part D sponsor 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 Part D plan for the 
coverage year, reduced by--
    (ii) The sum of--
    (A) The total reinsurance payments made under Sec.  423.329(c) to 
the Part D sponsor of the Part D plan for the year; and
    (B) The total non-premium subsidy payments made under Sec.  423.782 
to the Part D sponsor of the Part D plan for the coverage year.
    (2) Establishment of risk corridors. (i) Risk corridors. For each 
year, CMS establishes a risk corridor for each Part D plan. The risk 
corridor for a plan for a coverage 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 (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, 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

[[Page 4549]]

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. Only a PDP sponsor may request a reduction of risk 
under this paragraph. An MA organization offering an MA-PD plan, a PACE 
program offering qualified prescription drug coverage, and a cost-based 
HMO or CMP offering qualified prescription drug coverage may not 
request a reduction of risk under this paragraph.
    (3) Plans at risk for entire amount of supplemental prescription 
drug coverage. A Part D sponsor that offers a Part D plan that provides 
supplemental prescription drug benefits is 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 Part D plan for the coverage 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 Part D plan for the 
coverage 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 Part D 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 Part D 
plan for the year, CMS increases the total of the payments made to the 
Part D sponsor offering the Part D 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 Part D plan for the year are 
greater than the second threshold upper limit of the risk corridor for 
the Part D plan for the year, CMS increases the total of the payments 
made to the Part D sponsor offering the Part D 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 Part D plans to which this paragraph 
applies have adjusted allowable risk corridor costs for the Part D plan 
for the year that are more than the first threshold upper limit of the 
risk corridor for the Part D plan for the year; and
    (B) Such plans represent at least 60 percent of Part D eligible 
individuals enrolled in any Part D 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 Part D plan for the 
coverage year are less than the first threshold lower limit, but not 
less than the second threshold lower limit, of the risk corridor for 
the Part D plan for the coverage year, CMS reduces the total of the 
payments made to the Part D plan for the coverage year under this 
section by an amount (or otherwise recovers from the Part D sponsor 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 Part D plan for the coverage year 
are less the second threshold lower limit of the risk corridor for the 
Part D plan for the coverage year, CMS reduces the total of the 
payments made to the Part D sponsor for the coverage year under this 
section by an amount (or otherwise recovers from the Part D sponsor 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 Part D sponsor 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 Part D sponsor must provide the information that CMS 
requires.
    (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 this section.
    (d) No effect on monthly premium. No adjustment in payments made by 
reason of this section may affect the monthly beneficiary premium for 
qualified prescription drug coverage.


Sec.  423.343   Retroactive adjustments and reconciliations.

    (a) Application of enrollee adjustment. The provisions of Sec.  
422.308(f) of this chapter apply to payments to Part D sponsors under 
this section in the same manner as they apply to payments to MA 
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) of this chapter. 
CMS may recover payments associated with health status adjustments if 
the Part D 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 of the end of a 
coverage year, the Part D sponsor must provide the information that CMS 
requires.
    (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

[[Page 4550]]

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 Part D sponsor 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 of the end of a 
coverage year, the Part D sponsor must provide the information that CMS 
requires.
    (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 Part D sponsor does not provide the data in paragraph 
(d)(1) of this section. In the event adequate data is not provided for 
risk corridor costs, CMS assumes that the Part D plan's adjusted 
allowable risk corridor costs are 50 percent of the target amount.


Sec.  423.346   Reopening.

    (a) CMS may reopen and revise an initial or reconsidered 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 Part D sponsor
    (2) After that 12-month period, but within 4 years after the date 
of the notice of the initial or reconsidered determination to the Part 
D sponsor, upon establishment of good cause for reopening; or
    (3) At any time, in instances of fraud or similar fault of the Part 
D sponsor or any subcontractor of the Part D sponsor.
    (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.
    (d) A decision not to reopen under this section is final and is not 
subject to review.


Sec.  423.350   Payment appeals.

    (a) Payment determinations. (1) Payment methods subject to appeal. 
If CMS did not apply its stated payment methodology correctly, a Part D 
sponsor may appeal the following:
    (i) The reconciled health status risk adjustment of the direct 
subsidy as provided in Sec.  423.343(b).
    (ii) The reconciled reinsurance payments under Sec.  423.343(c).
    (iii) The reconciled final payments made for low-income cost 
sharing subsidies provided in Sec.  423.343(d); or
    (iv) Final risk-sharing payments made under Sec.  423.336).
    (2) Payment information not subject to appeal. Payment information 
submitted to CMS under Sec.  423.322 and reconciled under Sec.  423.343 
is final and may not be appealed nor may the appeals process be used to 
submit new information after the submission of information necessary to 
determine retroactive adjustments and reconciliations.
    (b) Request for reconsideration. (1) Time for filing a request. The 
request for reconsideration must be filed within 15 days from the date 
of the notice of the adverse determination.
    (2) Content of request. The request for reconsideration must 
specify the findings or issues with which the Part D sponsor disagrees 
and the reasons for the disagreements. Excluding new payment 
information, the request for reconsideration may include additional 
documentary evidence the sponsor wishes CMS to consider.
    (3) Conduct of informal written reconsideration.
    In conducting the reconsideration, CMS reviews the payment 
determination, the evidence and findings upon which it was based, and 
any other written evidence submitted by the Part D sponsor or by CMS 
before notice of the reconsidered determination is made.
    (4) 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 Part D sponsor on the sponsor's 
request.
    (5) 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 (c) of this section, or it is revised in 
accordance with Sec.  423.346.
    (c) Right to informal hearing. A Part D 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 Part 
D 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 Part D 
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 Part D 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 (d) of this 
section.

[[Page 4551]]

    (d) Review by the Administrator. (1) A Part D 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.

Subpart H--[Reserved]

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 or Sec.  423.415, 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 otherwise 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 PDP 
sponsor assumes financial risk on a prospective basis for benefits that 
it offers under a prescription drug plan and that is not covered under 
section 1860D-15(b) of the Act.
    (b) Reinsurance permitted. The PDP 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 or Sec.  423.415, the sponsor must meet 
the requirements in 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 (b), (c), or (d) of this section 
are met.
    (b) Grounds for approval of waivers. Subject to the waiver 
requirements specified in Sec.  423.410(e), 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 denied the license application on either of the following bases--
-
    (i) The State imposed 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) The State 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. The State denied the licensure application, in whole or 
in part, on the basis of the PDP sponsor's failure to meet solvency 
requirements and
    (i) The solvency requirements are different from the solvency 
standards CMS establishes in accordance with Sec.  423.420; or
    (ii) CMS determines that the State imposed, as a condition of 
licensing, any documentation or information requirements relating to 
solvency that are different from the standards CMS establishes in 
accordance with 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.
    (c) Waiver when licensing process not in effect. The grounds for 
approval specified in paragraph (b)(1) of this section are deemed met 
if CMS determines that the State does not have a licensing process in 
effect for PDP sponsors.
    (d) 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 an applicant to become a PDP 
sponsor has submitted a fully completed application for licensure to 
the State.
    (e) Waiver requirements. 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 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) A State that does not have a PDP sponsor. In the case of a 
State that does not have a PDP sponsor licensing process, the 36 month 
limitation on the waiver discussed in paragraph (e)(1) of this section 
does not apply, and the waiver may continue in effect for a given State 
as long as CMS determines that the State does not have a PDP sponsor 
licensing process in effect, and the PDP sponsor meets the solvency 
standards of Sec.  423.420(a).


Sec.  423.415   Temporary waivers for entities seeking to offer a 
prescription drug plan in more than one State in a region

    (a) General rule. Subject to paragraphs (b) and (c) of this 
section, if an applicant seeking to become a PDP sponsor wishes to 
operate in more than one State in a region, and is licensed as a risk 
bearing entity in at least one State in the region, then the applicant 
may receive a temporary regional plan waiver for the States in which it 
is not licensed.
    (b) 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 application is necessary if CMS determines 
that the State does not have a licensing process for potential PDP 
sponsors.
    (c) Processing of application for temporary waiver. The Secretary 
determines the time period appropriate for the timely processing of the 
application for temporary waiver.
    (d) Time limit for temporary waiver. The temporary waiver expires 
at the end of time period that the Secretary determines is appropriate 
for timely processing of the application by the State or States, but in 
no case is a waiver extend beyond the end of the calendar year.


Sec.  423.420  Solvency standards for non-licensed entities.

    (a) Establishment and publication. CMS establishes and publishes 
reasonable financial solvency and

[[Page 4552]]

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 or Sec.  423.415 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 Part D sponsor is State licensed or has a waiver 
application approved under Sec.  423.410 or Sec.  423.415 does not deem 
the sponsor to meet other requirements imposed under this part for a 
Part D 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) for Part D 
plans offered by Part D plan sponsors..
    (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 for any 
payment CMS makes on behalf of Part D plan or enrollees under this part 
(including the direct subsidy, reinsurance payments, and risk corridor 
payments); or for any payment made to Part D plans by a beneficiary or 
by a third party on behalf of a beneficiary.
    (2) Construction. Nothing in this section may be construed to 
exempt any Part D plan 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 of Part D Plans 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 MA-PD plans, employer-sponsored group 
prescription drug plans, cost plans, and PACE organizations; and 
establishes requirements for coordination of benefits with State 
Pharmaceutical Assistance Programs and other providers of prescription 
drug coverage.


Sec.  423.454   Definitions.

    For purposes of this part, the following definitions apply--
    Employer-sponsored group prescription drug plan means prescription 
drug coverage offered to retirees who are Part D eligible individuals 
under employment-based retiree health coverage (as defined in Sec.  
423.882) approved by CMS as a prescription drug plan.
    State Pharmaceutical Assistance Program (SPAP) means a State 
program that meets the requirements described under Sec.  
423.464(e)(1).


Sec.  423.458   Application of Part D rules to certain Part D 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 MA-PD plans offered by MA organizations beginning on or 
after January 1, 2006.
    (b) MA waiver. CMS waives any provision of this Part otherwise 
applicable to MA-PD plans or MA organizations under paragraph (a) of 
this section to the extent CMS determines that the provision 
duplicates, or is in conflict with, provisions otherwise applicable to 
the MA organizations or MA-PD plans 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 applies 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 MA-PD plan may request from CMS in writing--
    (i) A waiver of those requirements under this part otherwise 
applicable to the MA-PD plan or MA organization under paragraph (a) of 
this section that are duplicative of, or that are in conflict with, 
provisions otherwise applicable to the MA-PD plan, proposed MA-PD plan, 
or a MA organization under Part C of Medicare.
    (ii) A waiver of a requirement under this part otherwise applicable 
to the MA-PD plan or MA organization under paragraph (a) of this 
section, if such waiver improves coordination of benefits provided 
under Part C of Medicare with benefits under this Part.
    (c) Employer group waiver. (1) General rule. CMS may waive or 
modify any requirement under this part that hinders the design of, the 
offering of, or the enrollment in an employer-sponsored group 
prescription drug plan, 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 sponsor's employment-
based retiree health coverage. Any entity seeking to offer, sponsor, or 
administer an employer-sponsored group prescription drug plan may 
request, in writing, a waiver or modification of additional 
requirements under this Part that hinder its design of, the offering 
of, or the enrollment in, such employer-sponsored group prescription 
drug plan.
    (2) Use of waiver. Waivers or modifications approved by CMS under 
this section apply to any similarly situated entity seeking to offer, 
sponsor, or administer an employer-sponsored group 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 cost plan (as defined in Sec.  417.401 of this chapter) or PACE 
organization (as defined in Sec.  460.6 of this chapter) 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 cost plan under section 1876 of 
the Act or provisions applicable to PACE organizations under sections 
1894 and 1934 of the Act, or as necessary in order to improve 
coordination of this Part with the benefits offered by cost plans or 
PACE organizations.
    (1) Application of waiver. Any waiver or modification granted by 
CMS under this paragraph applies to any other similarly situated 
organization offering or seeking to offer qualified prescription drug 
coverage as a cost plan under section 1876 of the Act or as a PACE 
organization under sections 1894 and 1934 of the Act.
    (2) Request for waivers. Cost plans or PACE organizations seeking 
to offer qualified prescription drug coverage may request from CMS in 
writing-
    (i) A waiver of those requirements under this part otherwise 
applicable to cost plans or PACE organizations that are duplicative of, 
or that are in conflict with, provisions otherwise applicable to cost 
plans or PACE organizations.
    (ii) A waiver of a requirement under this part otherwise applicable 
to cost plans or PACE organizations, if such waiver improves 
coordination of

[[Page 4553]]

benefits provided by the cost plan under section 1876 of the Act, or by 
the PACE organization under section 1934 of the Act, 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 Part D sponsors and Part D plans 
(with respect to the offering of qualified prescription drug coverage) 
in the same way as they apply to MA organizations and MA plans under 
Part C of title XVIII of the Act, except all references to MA 
organizations and MA plans are considered references to Part D sponsors 
and Part D plans.


Sec.  423.464   Coordination of benefits with other providers of 
prescription drug coverage.

    (a) General rule. A Part D plan must permit SPAPs (described in 
paragraph (e)(1) of this section) and entities providing other 
prescription drug coverage (described in paragraph (f)(1) of this 
section) to coordinate benefits with such plan. A Part D plan must 
comply with all administrative processes and requirements established 
by CMS to ensure effective exchange of information and coordination 
between such plan and SPAPs and entities providing other prescription 
drug coverage for--
    (1) Payment of premiums and coverage; and
    (2) Payment for supplemental prescription drug benefits as 
described in Sec.  423.104(f)(1)(ii)(including payment to a 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 entity providing other 
prescription drug coverage.
    (b) Medicare as primary payer. The requirements of this subpart do 
not change or affect the primary or secondary payer status of a Part D 
plan and a SPAP or other prescription drug coverage. A Part D plan is 
always the primary payer relative to a State Pharmaceutical Assistance 
Program.
    (c) User fees. CMS may impose user fees on Part D plans 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 SPAPs and entities providing other 
prescription drug coverage in a manner similar to the manner in which 
user fees are imposed under section 1842(h)(3)(B) of the Act, except 
that CMS may retain a portion of user fees to defray its costs in 
carrying out such procedures. CMS will not impose user fees under this 
subpart on a SPAP or entities providing other prescription drug 
coverage.
    (d) Cost management tools. The requirements of this subpart do not 
prevent a Part D sponsor 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 
State program is 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 
subpart;
    (iv) Does not follow or adopt rules that change or affect the 
primary payer status of a Part D plan.
    The definition of SPAP excludes State Medicaid programs, section 
1115 demonstration programs, and any other program where program 
funding is from Federal grants, awards, contracts, entitlement 
programs, or other Federal sources of funding; and
    (v) Provides supplemental drug coverage to individuals based on 
financial need, age, or medical condition, and not based on current or 
former employment status.
    (2) Use of a single card. A card that is issued under Sec.  
423.120(c) for use under a Part D plan may also be used in connection 
with coverage of benefits provided under a SPAP and, in such a case, 
may contain an emblem or symbol indicating such connection.
    (3) Construction. Nothing in this subpart requires a SPAP to 
coordinate with, or provide financial assistance to enrollees in, any 
Part D plan.
    (f) Coordination with other prescription drug coverage. (1) 
Definition of other prescription drug coverage. Entities that provide 
other 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.
    (iii) FEHBP. The Federal Employee Health Benefits Program 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) Indian Health Service. Coverage under Chapter 18 of title 28 of 
the United States Code.
    (vi) Federally qualified health centers. Federally qualified health 
centers as defined under section 1861(aa)(4) of the Act.
    (vii) Rural health centers. Rural health centers as defined under 
section 1861(aa)(2) of the Act.
    (viii) Other prescription drug coverage. Other health benefit plans 
or programs that provide coverage or financial assistance for the 
purchase or provision of Part D drugs on behalf of Part D eligible 
individuals as CMS may specify.
    (2) Treatment under out-of-pocket rule. A Part D plan must exclude 
expenditures for covered Part D drugs made by insurance or otherwise, a 
group health plan, or other third party payment arrangements, including 
expenditures by plans offering other prescription drug coverage for 
purposes of determining whether a Part D plan enrollee has satisfied 
the out-of-pocket threshold provided under Sec.  423.104(d)(5)(iii). A 
Part D enrollee must disclose all these expenditures to a Part D plan 
in accordance with requirements under Sec.  423.32(b)(ii).
    (3) Imposition of fees. A Part D sponsor may not impose fees on 
SPAPs and entities offering other prescription drug coverage that are 
unrelated to the cost of the coordination of benefits.
    (4) Authority to recover expenditures due to incorrect information 
on true out-of-pocket costs. In the event that a Part D plan learns 
that it has made an erroneous payment due to inaccurate or incomplete 
information on the satisfaction of the out-of-pocket threshold under 
Sec.  423.104(d)(5)(iii), that plan is authorized to recover such costs 
directly from the Part D enrollee on whose behalf the costs were 
incurred. A Part D enrollee must reimburse the Part D plan for payment 
made for these costs.

Subpart K--Application Procedures and Contracts with Part D plan 
sponsors


Sec.  423.500   Scope.

    This subpart sets forth application procedures and contracts with 
Part D plans: application procedures and requirements; contract terms; 
procedures for termination of contracts; reporting by Part D plans. For 
purposes

[[Page 4554]]

of this subpart, Medicare Advantage (MA) organizations offering Part D 
plans follow the requirements of part 422 of this chapter for MA 
organizations, except in cases where the requirements for the qualified 
prescription drug coverage involve additional requirements.


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 Part D plan sponsor's 
enrollees by pharmacies and other providers, by Part D plan sponsor 
staff, medical groups, or independent practice associations, or by any 
combination of those entities.
    Downstream entity means any party that enters into a written 
arrangement, acceptable to CMS, below the level of the arrangement 
between a Part D plan sponsor (or 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 a written 
arrangement, acceptable to CMS, with a Part D plan sponsor or 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 Part D plan 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 Part D plan 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 Part D plan 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 Part D plan 
sponsor at a cost of more than $2,500 during a contract period.
    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 Part D plan 
sponsor, have a total value that exceeds $25,000 or 5 percent of the 
PDP sponsor's total operating expenses, whichever is less.


Sec.  423.502  Application requirements.

    (a) Scope. This section sets forth application requirements for an 
entity that seeks a determination from CMS that it is qualified to 
contract as a sponsor of a Part D plan.
    (b) Completion of an application. (1) In order to obtain a 
determination on whether it meets the requirements to become a Part D 
plan 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 is qualified to meet the requirements described in this part.
    (c) Responsibility for making determinations. (1) CMS is 
responsible for determining whether an entity is qualified to contract 
as a Part D plan sponsor and meets the requirements of this part.
    (2) A CMS determination that an entity is qualified to act as a 
Part D plan sponsor is distinct from the bid negotiations that occur 
under subpart F of part 423 and such negotiations are not subject to 
the appeals provisions included in subpart N 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 USC 552, the Freedom of 
Information Act, or because of exemptions provided in 45 CFR part 5 
(the Department's regulations providing exemptions to disclosure), must 
label the material ``privileged'' and include an explanation of the 
applicability of an exemption specified in 45 CFR part 5.


Sec.  423.503   Evaluation and determination procedures for 
applications to be determined qualified to act as a sponsor.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
entity's application 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) After evaluating all relevant information, CMS determines 
whether the application meets the applicable requirements specified in 
Sec.  423.504 and Sec.  423.505.
    (b) Use of information from a prior contracting period. If a Part D 
plan sponsor fails to comply with the terms of a previous year's 
contract (or in the case of a fallback entity, the previous 3-year 
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 based on the applicant's failure to comply with that prior 
contract with CMS even if the applicant currently meets all of the 
requirements of this part..
    (c) Notice of determination. Except for fallback entities, which 
are governed under subpart Q of this part, CMS notifies each applicant 
that applies to be determined qualified to contract as a Part D plan 
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 applicant, indicating that it qualifies to 
contract as Part D plan sponsor.
    (2) Intent to deny. (i) If CMS finds that the applicant does not 
appear qualified to contract as a Part D plan sponsor and/or has not 
provided enough information to evaluate the application, it gives the

[[Page 4555]]

applicant notice of intent to deny the application and a summary of the 
basis for this preliminary finding.
    (ii) Within 10 days from the date of the notice, the 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.
    (3) Denial of application. If CMS denies the application, it gives 
written notice to the applicant indicating--
    (i) That the applicant is not qualified to contract as a Part D 
sponsor under Part D of title XVIII of the Act;
    (ii) The reasons why the applicant does is not so qualified; and
    (iii) The applicant's right to request reconsideration in 
accordance with the procedures specified in subpart N.
    (d) Oversight of continuing compliance. (1) CMS oversees a Part D 
plan sponsor's continued compliance with the requirements for a Part D 
plan sponsor.
    (2) If a Part D plan 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 Part D 
drug plan it offers and be paid on behalf of Part D eligible 
individuals enrolled in those plans, a Part D plan sponsor must enter 
into a contract with CMS. The contract may cover more than one Part D 
plan.
    (b) Conditions necessary to contract as a Part D plan sponsor. Any 
entity seeking to contract as a Part D plan sponsor must--
    (1) Complete an application as described in Sec.  423.502 
demonstrating that the entity has the capability to meet the 
requirements of this Part, including those listed in Sec.  423.505.
    (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 Part D plan, or have secured a 
Federal waiver, as described in subpart I of this part. (Fallback 
entity applicants need not be licensed as risk-bearing entities, nor 
are they required to obtain State licensure demonstrating that the 
applicant is eligible to offer health insurance or health benefits 
coverage in each State in which it applies to operate.)
    (3) Meet the minimum enrollment requirements of Sec.  423.512(a) 
unless waived under Sec.  423.512(b).
    (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 Part D plan 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 Part D plan 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 Part 
D 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 Part D plan 
sponsor.
    (v)Insurance policies or other arrangements, secured and maintained 
by the Part D plan sponsor and approved by CMS to insure the Part D 
plan 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, contractors, agents, and directors.
    (D)Effective lines of communication between the compliance officer 
and the organization's employees, contractors, agents, directors, and 
members of the compliance committee.
    (E)Enforcement of standards through well-publicized disciplinary 
guidelines.
    (F) Procedures for effective 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 Part D plan sponsor.
    (1) If the Part D sponsor discovers 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 
conduct;
    (2) The Part D sponsor must conduct appropriate corrective actions 
(for example, repayment of overpayments and disciplinary actions 
against responsible individuals) in response to the potential violation 
referenced above.
    (H) A comprehensive fraud and abuse plan to detect, correct, and 
prevent fraud, waste, and abuse. This fraud and abuse plan should 
include procedures to voluntarily self-report potential fraud or 
misconduct related to the Part D program to the appropriate government 
authority.
    (5) Not have non-renewed a contract under Sec.  423.507 within the 
past 2 years unless--
    (i) During the 6-month period, beginning on the date the entity 
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 Part D sponsor payments in the payment area or 
areas at issue; or
    (ii) CMS has otherwise determined that circumstances warrant 
special consideration.
    (6) For a full risk or limited risk PDP applicant, not submitted a 
bid or offered a fallback prescription drug plan in accordance with the 
following rules.
    (i) CMS does not contract with 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--
    (A) 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;
    (B) Offers a fallback prescription drug plan in any PDP region 
during the year; or
    (C) Offered a fallback prescription drug plan in that PDP region 
during the previous year.
    (ii) Construction. For purposes of this paragraph (b)(6), an entity 
is treated as submitting an application to become qualified to contract 
as a full risk or limited risk PDP sponsor, if the entity is acting as 
a subcontractor for an integral part of the drug benefit management 
activities of a full risk or limited risk PDP sponsor or applicant. 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 full risk or limited risk PDP sponsor.

[[Page 4556]]

    (c) Contracting authority. 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.
    (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 Part D 
sponsors offering Part D 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 Part D plan sponsor's 
contract;
    (ii) Inspect or otherwise evaluate the facilities of the Part D 
sponsor when there is reasonable evidence of some need for the 
inspection; and
    (iii) Audit and inspect any books, contracts, and records of the 
Part D plan 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 Part D 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 Part D plan sponsor and 
CMS must contain the provisions specified in paragraph (b) of this 
section.
    (b) Requirements for contracts. The Part D plan sponsor agrees to--
    (1) All the applicable requirements and conditions set forth in 
this part and in general instructions.
    (2) Accept new enrollments, make enrollments effective, process 
voluntary disenrollments, and limit involuntary disenrollments, as 
provided in subpart B of this part.
    (3) Comply with the prohibition in Sec.  423.34(a) on 
discrimination in beneficiary enrollment.
    (4) Provide the basic prescription drug coverage as defined under 
Sec.  423.100 and, to the extent applicable, supplemental benefits as 
defined in Sec.  423.100. (Fallback entities may offer only standard 
prescription drug coverage as specified in Sec.  423.855.)
    (5) Disclose information to beneficiaries in the manner and the 
form specified by CMS under Sec.  423.128.
    (6) Operate quality assurance, cost and utilization management, 
medication therapy management, and support e-prescribing as required 
under subpart D of this part.
    (7) Comply with all requirements in subpart M of this part 
governing coverage determinations, grievances, and appeals, and 
formulary exceptions.
    (8) Comply with the reporting requirements in Sec.  423.514 and the 
requirements in Sec.  423.329(b) for submitting drug claims and related 
information to CMS for its use in risk adjustment calculations.
    (9) Provide CMS with the information CMS determines is necessary to 
carry out payment provisions in subpart G of this part (or for fallback 
entities, the information necessary to carry out the payment provisions 
in subpart Q of this part).
    (10) Allow CMS to inspect and audit any books and records of a Part 
D plan sponsor that pertain to the information regarding costs provided 
to CMS under paragraph (b)(9) of this section, or, if a fallback 
entity, the information submitted under subpart Q.
    (11) Be paid under the contract in accordance with the payment 
rules in subpart G of this part, or, if a fallback entity, in 
accordance with the payment rules of subpart Q of this part.
    (12) Except for fallback entities, submit a future year's bid, 
including all required information on premiums, benefits, and cost-
sharing, by any applicable due date, as provided in subpart F so that 
CMS and the Part D plan sponsor may conduct negotiations regarding the 
terms and conditions of the proposed bid and benefit plan renewal.
    (13) Permit CMS to determine that it is not qualified to renew its 
contract or that its contract may be terminated in accordance with this 
subpart and subpart N of this part. (Subpart N applies to fallback 
entities only to the extent a fallback contract is terminated.)
    (14) Comply with the confidentiality and enrollee record accuracy 
specified in Sec.  423.136.
    (15) Comply with State law and preemption by Federal law 
requirements described in subpart I of this part.
    (16) Comply with the coordination requirements with SPAPs and plans 
that provide other prescription drug coverage as described in subpart J 
of this part.
    (17) Provide benefits by means of point of service systems to 
adjudicate in a drug claims in a timely and efficient manner in 
compliance with CMS standards, except when necessary to provide access 
in underserved areas, I/T/U pharmacies (as defined in Sec.  423.100), 
and long-term care pharmacies (as defined in Sec.  423.100).
    (18) To 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.
    (c) Communication with CMS. The Part D plan sponsor must have the 
capacity to communicate with CMS electronically in accordance with CMS 
requirements.
    (d) Maintenance of records. The Part D plan sponsor agrees to 
maintain, for 10 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 part D plan 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 
Part D plan 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) Except for fallback entities, properly reflect all direct and 
indirect costs claimed to have been incurred and used in the 
preparation of the Part D plan 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).
    (v) Except for fallback entities, establish the basis for the 
components, assumptions, and analysis used by the Part D plan 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(c)(3).
    (2) Include records of the following:

[[Page 4557]]

    (i) Ownership and operation of the Part D sponsor's financial, 
medical, and other record keeping systems.
    (ii) Financial statements for the current contract period and 10 
prior periods.
    (iii) Federal income tax or informational returns for the current 
contract period and 10 prior periods.
    (iv) Asset acquisition, lease, sale, or other actions.
    (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 10 prior periods.
    (xii) All price concessions (including concessions offered by 
manufacturers) for the current contract period and 10 prior periods 
accounted for separately from other administrative fees.
    (e) Access to facilities and records. The Part D plan 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 Part D plan sponsor; and
    (iii) The enrollment and disenrollment records for the current 
contract period and 10 prior periods.
    (2) HHS, the Comptroller General, or their designees may audit, 
evaluate, or inspect any books, contracts, medical record s, patient 
care documentation, and other records of the Part D plan 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 Part D plan 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 10 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 Part D 
plan 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 Part D plan 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 Part D plan sponsor at any time.
    (f) Disclosure of information. The Part D plan 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 Part D plan 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 Part D plan.
    (ii) The Part D plan monthly basic beneficiary premium and Part D 
plan monthly supplemental beneficiary premium, if any, for the plan. 
Fallback entities submit the monthly beneficiary premium for standard 
prescription drug coverage.
    (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 Part D plans.
    (v) Information about beneficiary appeals and their disposition, 
and formulary exceptions.
    (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) Information on other matters that CMS may require, including, 
but not limited to, program monitoring and oversight, performance 
measures, quality assessment, research and evaluation, CMS outreach 
activities, payment-related oversight*, and fraud, abuse, and waste*, 
as specified in CMS guidelines.
    (viii) 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 and, upon an enrollee's request, the financial disclosure 
information required under Sec.  423.128(c)(4).
    (g) Beneficiary financial protections. The Part D plan sponsor 
agrees to comply with the following requirements:
    (1) Each Part D plan 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 Part D 
sponsor. To meet this requirement, the Part D plan sponsor must--
    (i) Ensure that all contractual or other written arrangements 
prohibit the sponsor'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 Part D plan sponsor for covered 
prescription drugs furnished by non-contracting pharmacists, or that 
have not otherwise entered into an agreement with the Part D plan 
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 Part D plan 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 Part D plan sponsor agrees to comply with-
    (1) Federal laws and regulations designed to prevent fraud, waste, 
and abuse, including, but not limited to

[[Page 4558]]

applicable provisions of Federal criminal law, the False Claims Act (32 
U.S.C. Sec. Sec.  3729 et seq.), and the anti-kickback statute (section 
1128B(b) of the Act).
    (2) HIPAA Administrative Simplification rules at 45 CFR parts 160, 
162, and 164.
    (i) Relationship with related entities, contractors, and 
subcontractors. (1) Notwithstanding any relationship(s) that the Part D 
plan sponsor may have with related entities, contractors, or 
subcontractors, the Part D sponsor maintains ultimate responsibility 
for adhering to and otherwise fully complying with all terms and 
conditions of its contract with CMS.
    (2) The Part D plan 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 Part D plan 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 10 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 Part D plan 
sponsors and pharmacies or other 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 
or other providers from holding an enrollee liable for payment of any 
fees that are the obligation of the Part D plan sponsor.
    (ii) Accountability provisions that indicate that the Part D 
sponsor may delegate activities or functions to a pharmacy, related 
entity, contractor, or subcontractor only 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 Part D plan sponsor's contractual 
obligations.
    (4) If any of the Part D plan 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 responsibilities described in 
paragraph (i)(4)(i) of this section or specify other remedies in 
instances when CMS or the Part D plan sponsor determine that the 
parties have not performed satisfactorily.
    (iii) Written arrangements must specify that the Part D plan 
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 Part D plan sponsor delegates selection of its 
prescription drug providers to another organization, the Part D 
sponsor's written arrangements with that organization must state that 
the CMS-contracting Part D plan sponsor retains the right to approve, 
suspend, or terminate any such arrangement.
    (j) Additional contract terms. The Part D plan 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) Certification of data that determine payment.
    (1) General rule. As a condition for receiving a monthly payment 
under subpart G of this part (or for fallback entities, payment under 
subpart Q of this part),, the Part D plan 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) (or for fallback entities, under 
Sec.  423.871(f)) 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 Part D plan 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 and Sec.  423.343 and acknowledge that this information will be 
used for the 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

[[Page 4559]]

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 Part D plan sponsor and CMS.
    (b) Term of contract. Each contract is for a period of 12 months.
    (c) Qualification to renew a contract. In accordance with Sec.  
423.507 of this subpart, an entity is determined qualified to renew its 
contract annually only if--
    (1) CMS informs the Part D plan sponsor that it is qualified to 
renew its contract; and
    (2) The Part D plan sponsor has not provided CMS with a notice of 
intention not to renew.
    (d) Renewal of contract contingent on reaching agreement on the 
bid. Although a Part D plan sponsor may be determined qualified to 
renew its contract under this section, if the sponsor and CMS cannot 
reach agreement on the bid under subpart F, no renewal takes place, and 
the failure to reach agreement is not subject to the appeals provisions 
in subpart N of this part.
    (e) The provisions of this section do not apply to fallback 
entities.


Sec.  423.507   Nonrenewal of contract.

    (a) Nonrenewal by a Part D plan sponsor. (1) Except for fallback 
entities, a Part D plan sponsor may elect not to renew its contract 
with CMS, effective at 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 Part D plan 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 qualified 
prescription drug coverage within the PDP region, including MA-PD plans 
, 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 Part 
D plan sponsor's service area.
    (3) If a Part D plan sponsor does not renew a contract under this 
paragraph (a), 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.
    (4) If a Part D plan sponsor does not renew a contract under this 
paragraph (a), it must ensure the timely transfer of any data or files.
    (b) CMS decision that a Part D plan sponsor is not qualified to 
renew. (1) Except for fallback entities, CMS may determine that a Part 
D plan sponsor is not qualified to renew its contract for any of the 
following reasons:
    (i) The reasons listed in Sec.  423.509(a) that also permit CMS to 
terminate the contract.
    (ii) The Part D plan sponsor has committed any of the acts in Sec.  
423.752 that support the imposition of intermediate sanctions or civil 
money penalties under Sec.  423.750.
    (2) Notice of decision. CMS provides notice of its decision of 
whether a Part D plan sponsor is qualified to renew its contract as 
follows:
    (i) To the Part D plan sponsor by May 1 of the current contract 
year.
    (ii) If CMS decides that a Part D plan sponsor is not qualified to 
renew its contract, to the Part D plan sponsor's Medicare enrollees by 
mail at least 90 days before the end of the current calendar year.
    (iii) If CMS determines that the Part D plan sponsor is not 
qualified to renew its 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 Part D plan sponsor's service area.
    (iv) The notice provisions in paragraphs (b)(2)(ii) and (iii) of 
this section also apply in cases where a non-renewal results because 
CMS and the Part D plan sponsor are unable to reach agreement on the 
bid under subpart F.
    (3) Notice of appeal rights. CMS gives the Part D plan sponsor 
written notice of its right to appeal the decision that the sponsor is 
not qualified renew its contract 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 Part D plan 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 Part D plan sponsor must notify its Medicare 
enrollees of any changes that CMS determines are appropriate for 
notification within timeframes specified by CMS.
    (d) Timely transfer of data and files. If a contract is terminated 
under paragraph (a) of this section, the Part D plan sponsor must 
ensure the timely transfer of any data or files.


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 Part D 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 Part D 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.  423.322 and 
Sec.  423.329 (or, for fallback entities, fails to provide the 
information in Sec.  423.871(f)).
    (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 subparts D 
and K of this part.
    (b) Notice of termination. If CMS decides to terminate a contract 
for

[[Page 4560]]

reasons other than the grounds specified in paragraph (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 Part D 
plan in writing 90 days before the intended date of the termination.
    (ii) The Part D plan sponsor notifies its Medicare enrollees of the 
termination by mail at least 30 days before the effective date of the 
termination.
    (iii) The Part D plan 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 Part D plan 
sponsor's service area.
    (iv) If a Part D plan sponsor's contract is terminated under 
paragraph (a) of this section, it must ensure the timely transfer of 
any data or files.
    (2) Immediate termination of contract by CMS. (i) For terminations 
based on violations specified in paragraph (a)(4) or paragraph (a)(5) 
of this section, CMS notifies the Part D plan 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 Part D sponsor covering the period of the 
month following the contract termination.
    (ii) CMS notifies the Part D plan sponsor's Medicare enrollees in 
writing of CMS's decision to terminate the Part D plan sponsor's 
contract. This notice occurs no later than 30 days after CMS notifies 
the plan of its decision to terminate the Part D plan sponsor's 
contract. CMS simultaneously informs the Medicare enrollees of 
alternative options for obtaining qualified 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 Part D plan sponsor's contract. This notice is published in one or 
more newspapers of general circulation in each community or county 
located in the Part D plan 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 Part D plan 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 paragraph (a)(4) 
or (a)(5) of this section, the Part D plan 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 Part D plan sponsor informing it of its 
termination appeal rights in accordance with Sec.  423.642.


Sec.  423.510   Termination of contract by the Part D sponsor.

    (a) Cause for termination. The Part D plan sponsor may terminate 
its contract if CMS fails to substantially carry out the terms of the 
contract.
    (b) Notice of termination. The Part D plan 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 Part D 
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 qualified 
prescription drug coverage 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 Part D plan 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 Part D plan sponsor's notice of intent to terminate.
    (d) CMS's liability. CMS's liability for payment to the Part D plan 
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 does 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.
    (f) Timely transfer of data and files. If a contract is terminated 
under paragraph (a) of this section, the Part D plan sponsor must 
ensure the timely transfer of any data or files.


Sec.  423.512   Minimum enrollment requirements.

    (a) Basic rule. Except as provided in paragraph (b) of this 
section, CMS does 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 Part 
D plan 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 a sponsor in a region.


Sec.  423.514   Reporting requirements.

    (a) Required information. Each Part D plan 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 Part D plan sponsor has a 
fiscally sound operation.
    (5) Other matters that CMS may require.
    (b) Significant business transactions. Each Part D plan 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 Part D plan sponsor and a party in 
interest, including the following:
    (i) Indication that the costs of the transactions listed in 
paragraph (c) of this section do not exceed the costs that would be 
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

[[Page 4561]]

prudent management and fiscal soundness requirements.
    (2) A combined financial statement for the Part D plan 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 
Part D sponsor go to a party in interest.
    (ii) Thirty five percent or more of the revenue of a party in 
interest is from the Part D plan 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 Part D plan 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 Part D plan 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 Part D plan 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 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 Part D plan sponsor 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 Part D plan 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 transfer. 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 that--
    (1) Is embodied in a document executed and signed by all 3 parties;
    (2) Meets the requirements of Sec.  423.552; and
    (3) 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

[[Page 4562]]

    (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 coverage determinations made by the Part D plan sponsor on the 
benefits under a Part D 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 Part D plan sponsor, reconsiderations by the 
independent review entity, ALJ hearings, reviews by the Medicare 
Appeals Council (MAC), and judicial reviews.
    Appointed representative means an individual either appointed by an 
enrollee or authorized under State or other applicable law to act on 
behalf of the enrollee in obtaining a coverage determination or in 
dealing with any of the levels of the appeals process. Unless otherwise 
stated in this subpart, the appointed representative has all of the 
rights and responsibilities of an enrollee 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.
    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 who has elected or has 
been enrolled in a Part D plan.
    Grievance means any complaint or dispute, other than one that 
involves a coverage determination, expressing dissatisfaction with any 
aspect of the operations, activities, or behavior of a Part D plan 
sponsor, regardless of whether remedial action is requested.
    Physician has the meaning given the term in section 1861(r) of the 
Act.
    Projected value means the charges incurred by the enrollee and 
future charges that are incurred within 12 months from the date the 
request for coverage determination or exception is received by the 
plan. Projected value includes enrollee co-payments, all expenditures 
incurred after an enrollee's expenditures exceed the initial coverage 
limit, and expenditures paid by other entities.
    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 Part D plan sponsor, the evidence and findings upon which it is 
based, and any other evidence the enrollee submits or the Part D plan 
sponsor obtains.


Sec.  423.562   General provisions.

    (a) Responsibilities of the Part D plan sponsor. A Part D plan 
sponsor must meet all of the following requirements.
    (1) A Part D plan sponsor, for each Part D 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, 
including determinations on requests for exceptions to a tiered cost-
sharing structure or to a formulary; and
    (iii) Appeal procedures that meet the requirements of this subpart 
for issues that involve coverage determinations.
    (2) A Part D plan sponsor must ensure that all enrollees receive 
written information about the--
    (i) Grievance and appeal procedures that are available to them 
through the Part D plan 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) A Part D plan sponsor must arrange with its network pharmacies 
to post or distribute notices instructing enrollees to contact their 
plans to obtain a coverage determination or request an exception if 
they disagree with the information provided by the pharmacist.
    (4) In accordance with subpart K of this part, if the Part D plan 
sponsor delegates any of its responsibilities under this subpart to 
another entity or individual through which the Part D plan sponsor 
provides covered benefits, the Part D plan sponsor is ultimately 
responsible for ensuring that the entity or individual satisfies the 
relevant requirements of this subpart.
    (b) Rights of enrollees. In accordance with the provisions of this 
subpart, enrollees have all of the following rights under Part D plans:
    (1) The right to have grievances between the enrollee and the Part 
D plan sponsor heard and resolved by the plan sponsor, as described in 
Sec.  423.564.
    (2) The right to a timely coverage determination by the Part D plan 
sponsor, as specified in Sec.  423.566 and Sec.  423.568, including the 
right to request from the Part D plan sponsor an exception to its 
tiered cost-sharing structure or formulary, as specified in Sec.  
423.578.
    (3) The right to request from the Part D plan sponsor an expedited 
coverage determination, as specified in Sec.  423.570.
    (4) 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 Part D plan 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 Part D plan sponsor 
affirms, in whole or in part, its adverse coverage determination, the 
right to a reconsideration or expedited reconsideration by an 
independent review entity (IRE) contracted by CMS, as specified in 
Sec.  423.600.
    (iv) If the IRE affirms the plan's adverse coverage determination, 
in whole or in part, the right to an ALJ hearing if the amount in 
controversy meets the requirements in Sec.  423.610.
    (v) If the ALJ affirms the IRE's adverse coverage determination, in 
whole or in part, the right to request MAC review of the ALJ hearing 
decision, as specified in Sec.  423.620.

[[Page 4563]]

    (vi) If the MAC affirms the ALJ's adverse coverage determination, 
in whole or in part, the right to judicial review of the hearing 
decision if the amount in controversy meets the requirements in Sec.  
423.630.
    (c) 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.
    (d) Relation to ERISA Requirements. Consistent with section 1860D-
22(b) of the Act, provisions of this subpart may, to the extent 
applicable under the regulations adopted by the Secretary of Labor, 
apply to claims for benefits under group health plans subject to the 
Employee Retirement Income Security Act.


Sec.  423.564  Grievance procedures.

    (a) General rule. Each Part D plan sponsor must provide meaningful 
procedures for timely hearing and resolving grievances between 
enrollees and the Part D plan sponsor or any other entity or individual 
through whom the Part D plan sponsor provides covered benefits under 
any Part D plan 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 Part D plan 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 Part D plan sponsor. For quality of care 
issues, an enrollee may file a grievance with the Part D plan sponsor, 
file a written complaint with the QIO, or both. For any complaint 
submitted to a QIO, the Part D plan sponsor must cooperate with the QIO 
in resolving the complaint.
    (d) Method for filing a grievance. (1) An enrollee may file a 
grievance with the Part D plan sponsor either orally or in writing.
    (2) An enrollee must file a grievance no later than 60 days after 
the event or incident that precipitates the grievance.
    (e) Grievance disposition and notification. (1) The Part D plan 
sponsor must notify the enrollee of its decision as expeditiously as 
the case requires, based on the enrollee's health status, but no later 
than 30 days after the date the Part D plan sponsor receives the oral 
or written grievance.
    (2) The Part D plan sponsor may extend the 30-day timeframe by up 
to 14 days if the enrollee requests the extension or if the Part D plan 
sponsor justifies a need for additional information and documents how 
the delay is in the interest of the enrollee. When the Part D plan 
sponsor extends the deadline, it must immediately notify the enrollee 
in writing of the reason(s) for the delay.
    (3) The Part D plan sponsor must inform the enrollee of the 
disposition of the grievance in accordance with the following 
procedures:
    (i) All grievances submitted in writing must be responded to in 
writing.
    (ii) Grievances submitted orally may be responded to either orally 
or in writing, unless the enrollee requests a written response.
    (iii) All grievances related to quality of care, regardless of how 
the grievance is filed, must be responded to in writing. The response 
must include a description of the enrollee's right to file a written 
complaint with the QIO. For any complaint submitted to a QIO, the Part 
D plan sponsor must cooperate with the QIO in resolving the complaint.
    (f) Expedited grievances. A Part D plan sponsor must respond to an 
enrollee's grievance within 24 hours if the complaint involves a 
refusal by the Part D plan sponsor to grant an enrollee's request for 
an expedited coverage determination under Sec.  423.570 or an expedited 
redetermination under Sec.  423.584, and the enrollee has not yet 
purchased or received the drug that is in dispute.
    (g) Record keeping. The Part D plan 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 
enrollee was notified of the disposition.


Sec.  423.566   Coverage determinations.

    (a) Responsibilities of the Part D plan sponsor. Each Part D plan 
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 the 
plan, including basic prescription drug coverage as specified in Sec.  
423.100 and supplemental benefits as specified in Sec.  
423.104(f)(1)(ii), and the amount, including cost sharing, if any, that 
the enrollee is required to pay for a drug. The Part D plan 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 Part D plan sponsor are coverage determinations:
    (1) A decision not to provide or pay for a Part D drug (including a 
decision not 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 
Part D plan sponsor determines that the drug is otherwise excludable 
under section 1862(a) of the Act if applied to Medicare Part D) that 
the enrollee believes may be covered by the plan;
    (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 concerning an exceptions request under Sec.  
423.578(a);
    (4) A decision concerning an exceptions request under Sec.  
423.578(b); or
    (5) A decision on the amount of cost sharing for a drug.
    (c) Who can request a coverage determination. Individuals who can 
request a standard or expedited coverage determination are--
    (1) The enrollee;
    (2) The enrollee's appointed representative, on behalf of the 
enrollee; or
    (3) 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. When a party makes a 
request for a drug benefit, the Part D plan sponsor must notify the 
enrollee (and the prescribing physician involved, as appropriate) of 
its determination as expeditiously as the enrollee's health condition 
requires, but no later than 72 hours after receipt of the request, or, 
for an exceptions request, the physician's supporting statement.
    (b) Timeframe for requests for payment. When a party makes a 
request

[[Page 4564]]

for payment, the Part D plan sponsor must notify the enrollee of its 
determination no later than 72 hours after receipt of the request.
    (c) Written notice for denials by a Part D plan sponsor. If a Part 
D plan 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--
    Use approved notice language in a readable and understandable form;
    State the specific reasons for the denial;
    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 appeals process;
    (ii) For payment denials, describe the standard redetermination 
process and the rest of the appeals process; and
    Comply with any other notice requirements specified by CMS.
    (e) Effect of failure to meet the adjudicatory timeframes. If the 
Part D plan sponsor fails to notify the enrollee of its determination 
in the appropriate timeframe under paragraphs (a) or (b) of this 
section, the failure constitutes an adverse coverage determination, and 
the plan sponsor must forward the enrollee's request to the IRE within 
24 hours of the expiration of the adjudication timeframe.


Sec.  423.570   Expediting certain coverage determinations.

    (a) Request for expedited determination. An enrollee or an 
enrollee's prescribing physician may request that a Part D plan sponsor 
expedite a coverage determination involving issues described in Sec.  
423.566(b). This does not include requests for payment of Part D 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 Part D plan sponsor, or if applicable, to the entity responsible 
for making the determination, as directed by the Part D plan sponsor.
    (2) A prescribing physician may provide oral or written support for 
an enrollee's request for an expedited determination.
    (c) How the Part D plan sponsor must process requests. The Part D 
plan sponsor must establish and maintain the following procedures for 
processing requests for expedited determinations:
    (1) An efficient and convenient means for accepting oral or written 
requests submitted by enrollees or prescribing physicians.
    (2) A method for documenting all oral requests and maintaining the 
documentation in the case file; and
    (3) A means for issuing 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 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 Part D plan sponsor denies a 
request for expedited determination, it must take the following 
actions:
    (1) Make the determination within the 72 hour timeframe established 
in Sec.  423.568(a) for a standard determination. The 72 hour period 
begins on the day the Part D plan sponsor receives the request for 
expedited determination, or, for an exceptions request, the physician's 
supporting statement.
    (2) Give the enrollee and prescribing physician prompt oral notice 
of the denial that--
    (i) Explains that the Part D plan sponsor must process the request 
using the 72 hour timeframe for standard determinations;
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the decision by the Part D plan 
sponsor 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 plan's grievance process and 
its timeframes.
    (3) Subsequently deliver, within 3 calendar days, equivalent 
written notice.
    (e) Actions on accepted requests for expedited determination. If a 
Part D plan 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 Part D plan 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 24 hours after receiving the request, or, 
for an exceptions request, the physician's supporting statement.
    (b) Confirmation of oral notice. If the Part D plan 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.
    (c) 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.
    (d) Effect of failure to meet the adjudicatory timeframes. If the 
Part D plan sponsor fails to notify the enrollee of its determination 
in the timeframe specified in paragraph (a) of this section, the 
failure constitutes an adverse coverage determination, and the Part D 
plan sponsor must forward the enrollee's request to the IRE within 24 
hours of the expiration of the adjudication timeframe.


Sec.  423.576   Effect of a coverage determination.

    The coverage determination is binding on the Part D plan sponsor 
and the enrollee unless it is reviewed and revised 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 plan's tiered cost-sharing 
structure. Each Part D plan sponsor that provides prescription drug 
benefits for Part D

[[Page 4565]]

drugs and manages this benefit through the use of a tiered formulary 
must establish and maintain reasonable and complete exceptions 
procedures subject to CMS' approval for this type of coverage 
determination. The Part D plan sponsor grants an exception whenever it 
determines that the non-preferred drug for treatment of the enrollee's 
condition is medically necessary, consistent with the physician's 
statement under paragraph (a)(4) of this section.
    (1) The exceptions procedures must address situations where a 
formulary's tiering structure changes during the year and an enrollee 
is using a drug affected by the change.
    (2) The exceptions criteria of a Part D plan sponsor must include, 
but are not limited to--
    (i) A description of the criteria a Part D plan sponsor uses to 
evaluate a determination made by the enrollee's prescribing physician 
under paragraph (a)(4) of this section.
    (ii) Consideration of whether the requested Part D drug that is the 
subject of the exceptions request is the therapeutic equivalent, as 
defined in Sec.  423.100, of any other drug on the plan's formulary.
    (iii) Consideration of the number of drugs on the plan'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 or the enrollee's prescribing physician may file a 
request for an exception.
    (4) A prescribing physician must provide an oral or written 
supporting statement that the preferred drug for the treatment of the 
enrollee's condition--
    (i) Would not be as effective for the enrollee as the requested 
drug;
    (ii) Would have adverse effects for the enrollee; or
    (iii) Both paragraphs (a)(4)(i) and (a)(4)(ii) of this section 
apply.
    (5) If the physician provides an oral supporting statement, the 
Part D plan sponsor may require the physician to subsequently provide a 
written supporting statement to demonstrate the medical necessity of 
the drug. The Part D plan sponsor may require the prescribing physician 
to provide additional supporting medical documentation as part of the 
written follow-up.
    (6) In no case is a Part D plan sponsor required to cover a non-
preferred drug at the generic drug cost-sharing level if the plan 
maintains a separate tier dedicated to generic drugs.
    (7) If a Part D plan sponsor maintains a formulary tier in which it 
places very high cost and unique items, such as genomic and biotech 
products, the sponsor may design its exception process so that very 
high cost or unique drugs are not eligible for a tiering exception.
    (b) Request for exceptions involving a non-formulary Part D drug. 
Each Part D plan sponsor that provides prescription drug benefits for 
Part D drugs and manages this benefit through the use of a formulary 
must establish and maintain exceptions procedures subject to CMS' 
approval for receipt of an off-formulary drug. The Part D plan sponsor 
must grant an exception whenever it determines that the drug is 
medically necessary, consistent with the physician's statement under 
paragraph (b)(5) of this section, and that the drug would be covered 
but for the fact that it is an off-formulary drug. Formulary use 
includes the application of cost utilization tools, such as a dose 
restriction, including the dosage form, that causes a particular Part D 
drug not to be covered for the number of doses prescribed or a step 
therapy requirement that causes a particular Part D drug not to be 
covered until the requirements of the plan's coverage policy are met, 
or a therapeutic substitution requirement.
    (1) The plan's formulary exceptions process must address each of 
the following circumstances:
    (i) Situations where a formulary changes during the year, and 
situations where an enrollee is already using a given drug.
    (ii) Continued coverage of a particular Part D prescription drug 
that the Part D plan sponsor is discontinuing coverage on the formulary 
for reasons other than safety or because the Part D prescription drug 
cannot be supplied by or was withdrawn from the market by the drug's 
manufacturer.
    (iii) An exception to a plan's coverage policy that causes a Part D 
prescription drug not to be covered because of cost utilization tools, 
such as a requirement for step therapy, dosage limitations, or 
therapeutic substitution.
    (2) The exception criteria of a Part D plan sponsor must include, 
but are not limited to--
    (i) A description of the criteria a Part D plan sponsor uses to 
evaluate a prescribing physician's determination made under paragraph 
(b)(5) of this section;
    (ii) A process for gathering and comparing applicable medical and 
scientific evidence on the safety and effectiveness of the requested 
non-formulary drug with the formulary drug for the enrollee, including 
safety information generated by an authoritative government body; and
    (iii) A description of the cost-sharing scheme that will be applied 
when coverage is provided for a non-formulary drug.
    (3) If the Part D plan 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.
    (4) An enrollee, the enrollee's appointed representative, or the 
prescribing physician (on behalf of the enrollee) may file a request 
for an exception.
    (5) A prescribing physician must provide an oral or written 
supporting statement that the requested prescription drug is medically 
necessary to treat the enrollee's disease or medical condition 
because--
    (i) All of the covered Part D drugs on any tier of a plan's 
formulary for treatment for the same condition would not be as 
effective for the enrollee as the non-formulary drug, would have 
adverse effects for the enrollee, or both;
    (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.
    (6) If the physician provides an oral supporting statement, the 
Part D plan sponsor may require the physician to subsequently provide a 
written supporting statement. The Part D plan sponsor may require the 
prescribing physician to provide additional supporting medical 
documentation as part of the written follow-up.
    (c) Requirements for exceptions. (1) General rule. A decision by a 
Part D

[[Page 4566]]

plan sponsor concerning an exceptions request under this section 
constitutes a coverage determination as specified at Sec.  423.566.
    (2) When a Part D plan sponsor does not make a timely decision. If 
the Part D plan sponsor fails to make a decision on an exceptions 
request and provide notice of the decision within the timeframe 
required under Sec.  423.568(a) or Sec.  423.572(a), as applicable, the 
failure constitutes an adverse coverage determination, and the Part D 
plan sponsor must forward the enrollee's request to the IRE within 24 
hours of the expiration of the adjudication timeframe.
    (3) When a tiering exceptions request is approved. Whenever an 
exceptions request made under Sec.  423.578(a) is approved, the Part D 
plan sponsor must provide coverage for the approved prescription drug 
at the cost-sharing level that applies for preferred drugs, and may not 
require the enrollee to request approval for a refill, or a new 
prescription to continue using the Part D prescription drug after the 
refills for the initial prescription are exhausted, as long as--
    (i) The enrollee's prescribing physician continues to prescribe the 
drug;
    (ii) The drug continues to be considered safe for treating the 
enrollee's disease or medical condition; and
    (iii) The enrollment period has not expired. If an enrollee renews 
his or her membership after the plan year, the plan may choose to 
continue coverage into the subsequent plan year.
    (4) When a non-formulary exceptions request is approved. Whenever 
an exceptions request made under Sec.  423.578(b) is approved--
    (i) The Part D plan sponsor may not require the enrollee to request 
approval for a refill, or a new prescription to continue using the Part 
D 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;
    (B) The drug continues to be considered safe for treating the 
enrollee's disease or medical condition; and
    (C) The enrollment period has not expired. If an enrollee renews 
his or her membership after the plan year, the plan may choose to 
continue coverage into the subsequent plan year.
    (ii) The Part D plan sponsor must not establish a special formulary 
tier or co-payment or other cost-sharing requirement that is applicable 
only to prescription drugs approved for coverage under this section.
    (iii) An enrollee may not request a tiering exception for a non-
formulary prescription drug approved under Sec.  423.578(b).
    (d) Notice regarding formulary changes. Whenever a Part D plan 
sponsor removes a covered part D drug from its formulary or makes any 
changes in the preferred or tiered cost-sharing status of such a drug, 
the Part D plan sponsor must provide notice in accordance with Sec.  
423.120(b)(5).
    (e) Limitation of the exceptions procedures to Part D drugs. 
Nothing in this section may be construed to allow an enrollee to use 
the exceptions processes set out in this section to request or be 
granted coverage for a prescription drug that does not meet the 
definition of a Part D drug.
    (f) Implication of the physician's supporting statement. Nothing in 
this section should be construed to mean that the physician's 
supporting statement required for an exceptions request will result in 
an automatic favorable determination.


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 a written request with the Part D plan 
sponsor that made the coverage determination. The Part D plan sponsor 
may adopt a policy for accepting oral requests.
    (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 Part D plan 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 Part D plan 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 with the 
Part D sponsor.


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 Part D plan sponsor 
expedite a redetermination that involves the issues specified in Sec.  
423.566(b). (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 Part D plan sponsor or, if applicable, to the entity responsible 
for making the redetermination, as directed by the Part D plan sponsor.
    (2) A prescribing physician may provide oral or written support for 
an enrollee's request for an expedited redetermination.
    (c) How the Part D plan sponsor must process requests. The Part D 
plan sponsor must establish and maintain the following procedures for 
processing requests for expedited redetermination:
    (1) Handling of requests. The Part D plan 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 making. The Part D plan sponsor must promptly 
decide 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 Part D plan 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 Part D plan 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

[[Page 4567]]

enrollee or the enrollee's ability to regain maximum function.
    (d) Actions following denial of a request. If a Part D plan sponsor 
denies a request for expedited redetermination, it must take the 
following actions:
    (1) Make the determination within the 7-day timeframe established 
in Sec.  423.590(a). The 7-day period begins the day the Part D plan 
sponsor receives the request for expedited redetermination.
    (2) Give the enrollee prompt oral notice of the denial that--
    (i) Explains that the Part D plan sponsor processes the enrollee's 
request using the 7-day timeframe for standard redetermination;
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the decision by the Part D plan 
sponsor 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 expedited grievance process 
and its timeframes.
    (3) Subsequently deliver, within three calendar days, equivalent 
written notice.
    (e) Action following acceptance of a request. If a Part D plan 
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 Part D plan 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 
Part D plan 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 Part D plan sponsor makes a redetermination that is 
completely favorable to the enrollee, the Part D plan sponsor must 
notify the enrollee in writing of its 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 7 calendar days 
from the date it receives the request for a standard redetermination.
    (2) If the Part D plan 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 7 calendar days from the date it receives the request for a 
standard redetermination.
    (b) Standard redetermination--request for payment. (1) If the Part 
D plan sponsor makes a redetermination that is completely favorable to 
the enrollee, the Part D plan sponsor must issue its redetermination 
(and effectuate it in accordance with Sec.  423.636(a)(2)) no later 
than 7 calendar days from the date it receives the request for 
redetermination.
    (2) If the Part D plan sponsor affirms, in whole or in part, its 
adverse coverage determination, it must notify the enrollee in writing 
of its redetermination no later than 7 calendar days from the date it 
receives the request for redetermination.
    (c) Effect of failure to meet timeframe for standard 
redeterminations. If the Part D plan sponsor fails to provide the 
enrollee with a redetermination within the timeframes specified in 
paragraphs (a) or (b) of this section, the failure constitutes an 
adverse redetermination decision, and the Part D plan sponsor must 
forward the enrollee's request to the IRE within 24 hours of the 
expiration of the adjudication timeframe.
    (d) Expedited redetermination. (1) Timeframe. A Part D plan 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) How the Part D plan sponsor must request additional 
information. If the Part D plan sponsor must receive medical 
information, the Part D plan sponsor must request the necessary 
information within 24 hours of the initial request for an expedited 
redetermination. Regardless of whether the Part D plan sponsor requests 
additional information, the Part D plan sponsor is responsible for 
meeting the timeframe and notice requirements.
    (e) Failure to meet timeframe for expedited redetermination. If the 
Part D plan 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, the failure constitutes an adverse redetermination decision, 
and the Part D plan sponsor must forward the enrollee's request to the 
IRE within 24 hours of the expiration of the adjudication timeframe.
    (f) Who must conduct the review of 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.
    (g) Form and content of an adverse redetermination notice. The 
notice of any adverse determination under paragraphs (a)(2) or (b)(2) 
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 reconsideration;
    (i) For adverse drug coverage redeterminations, describe both the 
standard and expedited reconsideration processes, including the 
enrollee's right to, and conditions for, obtaining an expedited 
reconsideration and the rest of the appeals process;
    (ii) For adverse payment redeterminations, describe the standard 
reconsideration process and the rest of the appeals process; and
    (4) Comply with any other notice requirements specified by CMS.


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

    (a) An enrollee who is dissatisfied with the redetermination of a 
Part D plan 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 with the IRE within 60 days of the date of 
the redetermination by the Part D plan sponsor.
    (b) When an enrollee files an appeal, the IRE is required to 
solicit the views of the prescribing physician. The IRE may solicit the 
views of the prescribing physician orally or in writing. A written 
account of the prescribing physician's views (prepared by either the 
prescribing physician or IRE, as

[[Page 4568]]

appropriate) must be contained in the IRE's record.
    (c) In order for an enrollee to request an IRE reconsideration of a 
determination by a Part D plan sponsor not to provide for a Part D drug 
that is not on the 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 non-formulary drug, would have 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 applicable in Sec.  423.590, including those 
deadlines that are applicable when a request for an expedited 
reconsideration is received and granted.
    (e) 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 reconsideration 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 
reconsideration need not, in all cases, be of the same specialty or 
subspecialty as the prescribing physician.


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 the Part D plan 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 adverse coverage determination by the Part D 
plan sponsor), 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 Part D plan 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 refusal by the Part D plan 
sponsor to provide drug benefits, CMS uses the projected value of those 
benefits to compute the amount remaining in controversy. The projected 
value of a Part D drug or drugs shall include any costs the enrollee 
could incur based on the number of refills prescribed for the drug(s) 
in dispute during the plan year.
    (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--
    (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 each aggregated appeal meets the filing requirement 
specified in Sec.  423.612(b); 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--
    The appeals have previously been reconsidered by an IRE;
    The request for ALJ hearing lists all of the appeals to be 
aggregated and each aggregated appeal meets the filing requirement 
specified in Sec.  423.612(b); and
    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 with the entity specified in the IRE's 
reconsideration notice.
    (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. The time and 
place for a hearing before an ALJ will be set in accordance with Sec.  
405.1020 of this chapter.
    (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, to the extent 
applicable.


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 redetermination made by a Part D 
plan 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 Part 
D plan 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.

[[Page 4569]]

    (d) A decision not to reopen by the Part D plan sponsor or any 
other entity is not subject to review.


Sec.  423.636   How a Part D plan sponsor must effectuate standard 
redeterminations, reconsiderations, or decisions.

    (a) Reversals by the Part D plan sponsor. (1) Requests for 
benefits. If, on redetermination of a request for benefit, the Part D 
plan sponsor reverses its coverage determination, the Part D plan 
sponsor must authorize or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires, but no later 
than 7 calendar days from the date it receives the request for 
redetermination.
    (2) Requests for payment. If, on redetermination of a request for 
payment, the Part D plan sponsor reverses its coverage determination, 
the Part D plan sponsor must authorize payment for the benefit within 7 
calendar days from the date it receives the request for 
redetermination, and make payment no later than 30 calendar days after 
the date the plan sponsor receives the request for redetermination.
    (b) Reversals other than by the Part D plan sponsor. (1) Requests 
for benefits. If, on appeal of a request for benefit, the determination 
by the Part D plan sponsor is reversed in whole or in part by the 
independent review entity, or at a higher level of appeal, the Part D 
plan sponsor must authorize or provide the benefit under dispute within 
72 hours from the date it receives notice reversing the determination. 
The Part D plan sponsor must inform the independent review entity that 
the Part D plan sponsor has effectuated the decision.
    (2) Requests for payment. If, on appeal of a request for payment, 
the determination by the Part D plan sponsor is reversed in whole or in 
part by the independent review entity, or at a higher level of appeal, 
the Part D plan sponsor must authorize payment for the benefit within 
72 hours, but make payment no later than 30 calendar days from the date 
it receives notice reversing the coverage determination. The Part D 
plan sponsor must inform the independent review entity that the Part D 
plan sponsor has effectuated the decision.


Sec.  423.638   How a Part D plan sponsor must effectuate expedited 
redeterminations or reconsiderations.

    (a) Reversals by the Part D plan sponsor. If, on an expedited 
redetermination of a request for benefits, the Part D plan sponsor 
reverses its coverage determination, the Part D plan 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 Part D plan sponsor receives the request for 
redetermination.
    (b) Reversals other than by the Part D plan sponsor. If the 
expedited determination or expedited redetermination for benefits by 
the Part D plan sponsor is reversed in whole or in part by the 
independent review entity, or at a higher level of appeal, the Part D 
plan sponsor must authorize or provide the benefit under dispute as 
expeditiously as the enrollee's health condition requires but no later 
than 24 hours from the date it receives notice reversing the 
determination. The Part D plan sponsor must inform the independent 
review entity that the Part D plan sponsor has effectuated the 
decision.

Subpart N--Medicare Contract Determinations and Appeals


Sec.  423.641  Contract determinations.

    This subpart establishes the procedures for 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 not to authorize a renewal of a contract with a 
PDP sponsor in accordance with Sec.  423.507(b).
    (c) A determination to terminate a contract with a PDP sponsor in 
accordance with Sec.  423.509.
    (d) Fallback entities are governed under subpart Q of this part, 
and are not subject to this subpart, except to the extent a fallback 
prescription drug plan contract is terminated by CMS.


Sec.  423.642   Notice of contract determination.

    (a) When CMS makes a contract determination under Sec.  423.641, 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.

[[Page 4570]]

    (c) Any favorable redetermination, including those resulting from a 
hearing or Administrator review, must be made by July 15 for the 
contract in question to be effective on January of the following year.


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
    (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.

[[Page 4571]]

    (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 the 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.
    (3) Suspension of payment to the Part D sponsor for Medicare 
beneficiaries who enroll.
    (4) Suspension of all Part D plan marketing activities to Medicare 
beneficiaries for the Part D 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, we 
may impose one, or more, of the sanctions specified in Sec.  
423.750(a)(2), (a)(3) or (a)(4) on any Part D sponsor that has a 
contract in effect. The Part D sponsor may also be subject to other 
applicable remedies available under law.
    (1) Fails substantially to provide, to a Part D plan enrollee, 
medically necessary services that the organization is required to 
provide (under law or under the contract) to a Part D plan enrollee, 
and that failure adversely affects (or is substantially likely to 
adversely affect) the enrollee.
    (2) Imposes on Part D plan enrollees premiums in excess of the 
monthly basic and supplemental beneficiary premiums permitted under 
section 1860D-1 et seq. 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 excluded 
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.  
423.750(a)(2) and (a)(4).


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 Part D 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 Part D sponsor 15 days 
from

[[Page 4572]]

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 Part D 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 Part D 
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 Part D 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 Part D 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 Part D 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 Part D 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 Part D sponsor for Medicare beneficiaries enrolled in 
the sanctioned plan during the sanction period; and
    (3) Require the Part D 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 Part D 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 Part D 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 Part D 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 Part D 
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 1003 of this chapter, the OIG 
may impose civil money penalties on the Part D sponsor in accordance 
with part 1003 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), 
CMS may impose civil money penalties on the Part D 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.  423.509(a), as described 
in Sec.  423.752(b), excepting those determinations under Sec.  
423.509(a)(4), CMS may impose civil money penalties, in addition to, or 
in place of, the sanctions that CMS may impose under Sec.  423.756(c), 
in the following amounts:
    (a) If the deficiency on which the determination is based has 
directly adversely affected (or has the substantial likelihood of 
adversely affecting) one or more Part D plan enrollees--up to $25,000 
for each determination.
    (b)For each week that a deficiency remains uncorrected after the 
week in which the Part D sponsor receives CMS' notice of the 
determination--up to $10,000 per week.
    (c)If CMS makes a determination that a Part D sponsor has 
terminated its contract with CMS other than in a manner described in 
Sec.  423.510 and that the sponsor has therefore failed to 
substantially carry of the terms of the contract, $250 per Medicare 
enrollee from the terminated Part D plan or plans at the time the Part 
D 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


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 Part D plan.


Sec.  423.772   Definitions.

    For purposes of this subpart, the following definitions apply:
    Applicant means the Part D eligible individual applying for the 
subsidies available to subsidy eligible individuals under this subpart.
    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 USC 
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 or under a 
section 1115 demonstration that provides pharmacy-only benefits to

[[Page 4573]]

these individuals.). 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.
    Full subsidy means the subsidies available to full subsidy eligible 
individuals under Sec.  423.780(a) and Sec.  423.782(a).
    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 representative for purposes of this subpart means --
    (1) An individual who is 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 applicant (and, if married, 
his or her spouse 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.


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, or 
seeking to enroll in a Part D 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 Supplemental Security 
Income (SSI) program under title XVI of the Act (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. The nearest multiple are rounded up if it is equal to 
or greater than $5 and down if it is less than $5.
    (c)(1) 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--
    (i) Full-benefit dual eligible individual;
    (ii) Recipient of SSI benefits under title XVI of the Act; or
    (iii) 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.
    (2) CMS notifies an individual treated as a full subsidy eligible 
under this paragraph (c) of this section that he or she does not need 
to apply for the subsidies available under this subpart, and is deemed 
eligible for a full subsidy for a period up to one year.
    (d) Other low-income subsidy individuals. Other low-income subsidy 
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. The nearest multiple will be 
rounded up if it is equal to or greater than $5 and down if it is less 
than $5.


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 
subpart are made by the State under its State plan under title XIX of 
the Act if the individual applies with the Medicaid agency, or if the 
individual applies with the Social Security Administration (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. Initial 
eligibility determinations are effective beginning with the first day 
of the month in which the individual applies, but no earlier than 
January 1, 2006 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 of Social 
Security. Redeterminations and appeals of eligibility determinations 
made by the Commissioner will be made in the manner specified by the 
Commissioner of Social Security.
    (d) Application requirements. (1) In order for applications for the 
subsidies under this subpart to be considered complete, applicants 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,

[[Page 4574]]

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.
    (2) Multiple applications. If the individual or his or her personal 
representative has previously filed an application with the State or 
SSA which seeks subsidy eligibility for any portion of the eligibility 
period covered by a subsequent application, the later application is 
void if the individual has received a positive subsidy determination on 
that earlier application from the State or SSA.


Sec.  423.780   Premium subsidy.

    (a) Full subsidy eligible individuals. Full subsidy eligible 
individuals are entitled to a premium subsidy equal to 100 percent of 
the premium subsidy amount.
    (b) Premium subsidy amount.
    (1) The premium subsidy amount is equal to an amount which is the 
lesser of:
    (i) Under the Part D plan selected by the beneficiary, the monthly 
beneficiary premium for a Part D plan other than a MA-PD plan that is 
basic prescription drug coverage, the portion of the monthly 
beneficiary premium attributable to basic prescription drug coverage 
for a Part D plan other than a MA-PD plan that is enhanced alternative 
coverage, or the MA monthly prescription drug beneficiary premium as 
defined under section 1854(b)(2)(B) of the Act, or
    (ii) The greater of the low-income benchmark premium amount for a 
PDP region as determined under paragraph (b)(2) of this section or the 
lowest monthly beneficiary premium for a prescription drug plan that 
offers basic prescription drug coverage in the PDP region.
    (2) Calculation of the low-income benchmark premium amount. (i) The 
low-income benchmark premium amount for a PDP region is a weighted 
average of the premium amounts described in this paragraph (b)(2)(ii) 
of this section , with the weight for each PDP and MA-PD plan equal to 
a percentage, the numerator being 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) of this chapter) and the denominator 
equal to the total number of Part D eligible individuals enrolled in 
all PDP and MA-PD plans (but not including PACE, private fee-for-
service plans or 1876 cost plans)in a PDP region in the reference 
month.
    (ii) Premium amounts: The premium amounts used to calculate the 
low-income benchmark premium amount are as follows:
    (A) The monthly beneficiary premium for a PDP that is basic 
prescription drug coverage;
    (B) The portion of the monthly beneficiary premium attributable to 
basic prescription drug coverage for a PDP that is enhanced alternative 
coverage; or,
    (C)The MA monthly prescription drug beneficiary premium (as defined 
under section 1854(b)(2)(B) of the Act) for a MA-PD plan.
    (c) Special rule for 2006 to weight the low-income benchmark 
premium. For purposes of calculating the low-income benchmark premium 
amount for 2006, CMS assigns equal weighting to PDP sponsors (including 
fallback entities) and assigns MA-PD plans a weight based on prior 
enrollment. New MA-PD plans are assigned a zero weight. PACE, private 
fee-for-service plans and 1876 cost plans are not included.
    (d) 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 premium subsidy amount described in paragraph (b) of 
this section as follows:
    (1) For individuals with income at or below 135 percent of the FPL 
applicable to their family size, the full premium subsidy amount.
    (2) For individuals with income greater than 135 percent but at or 
below 140 percent of the FPL applicable to the family size, a premium 
subsidy equal to 75 percent of the premium subsidy amount.
    (3) For individual with income greater than 140 percent but at or 
below 145 percent of the FPL applicable to the family size a premium 
subsidy equal to 50 percent of the premium subsidy amount.
    (4) For individuals with income greater than 145 percent but below 
150 percent of FPL applicable to the family size a premium subsidy 
equal to 25 percent of the premium subsidy amount.
    (e) 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 enrollment penalty for the first 60 months during 
which the penalty is imposed and 100 percent of their late enrollment 
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(d)(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(d)(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(d)(5)(A). This applies to both:
    (A) 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 and
    (B) those individuals who have income under 135 percent of the 
Federal poverty line applicable to the individual's family size who 
meet the resources test described at Sec.  423.773(b)(2).
    (ii) Full-benefit dual eligible individuals who are 
institutionalized have no cost-sharing for covered Part D drugs covered 
under their PDP or MA-PD plans.
    (iii) 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 Part D 
drugs equal to the lesser of:
    (A) A copayment amount of not more than $1 for a generic drug or 
preferred drugs that are multiple source (as defined under section 
1927(k)(7)(A)(i) of the Act) or $3 for any other drug in 2006, or for 
years after 2006 the amounts specified in this paragraph (a)(2)(iii)(A) 
for the percentage increase in the Consumer Price Index, rounded to the 
nearest multiple of 5 cents or 10 cents, respectively; or
    (B) The copayment amount charged to other individuals under this 
paragraph (a)(2)(i) of this section.
    (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(d)(5)).
    (b) Other low-income subsidy eligible individuals. Other low-income 
subsidy eligible individuals are entitled to the following:
    (1) In 2006, reduction in the annual deductible to $50. This amount 
is increased each year beginning in 2007

[[Page 4575]]

by the annual percentage increase in average per capita aggregate 
expenditures for Part D drugs, rounded to the nearest multiple of $1.
    (2) Fifteen percent coinsurance for all covered Part D drugs 
obtained after the annual deductible under the plan up to the out-of-
pocket limit (under Sec.  423.104(d)(5)(iii)).
    (3) For covered Part D drugs above the out-of-pocket limit (under 
Sec.  423.104(d)(5)(iii)), in 2006, copayments not to exceed $2 for a 
generic drug or preferred drugs that are multiple source drugs (as 
defined under section 1927(k)(7)(A)(i) of the Act) and $5 for any other 
drug. For years beginning in 2007, the amounts specified in section 
paragraph (b)(3) for the previous year increased 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 Part D sponsor offering the Part D plan, in which a 
subsidy eligible individual is enrolled, of the individual's 
eligibility for a subsidy under this section and the amount of the 
subsidy.
    (b) Reduction of premium or cost-sharing by PDP sponsor or 
organization. The Part D sponsor offering the Part D 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 
Part D sponsor must track the application of the subsidies under this 
subpart to be applied to the out-of-pocket threshold.
    (c) Reimbursement for cost-sharing paid before notification of 
eligibility for low-income subsidy. The Part D sponsor offering the 
Part D plan must reimburse subsidy eligible individuals, and 
organizations paying cost-sharing on behalf of such individuals, any 
excess premiums and cost-sharing paid by such individual or 
organization after the effective date of the individual's eligibility 
for a subsidy under this subpart.

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


Sec.  423.851   Scope.

    This subpart sets forth--the rights of beneficiaries to a choice of 
at least two sources of qualified 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-
    Actual costs means the subset of prescription drug costs (not 
including administrative costs or return on investment, but including 
costs directly related to the dispensing of covered Part D drugs during 
the year) that are attributable to standard benefits only and that are 
incurred and actually paid by the sponsor or organization under the 
plan.
    Actually paid has the same meaning described in Sec.  423.308.
    Eligible fallback entity or fallback entity means an entity that, 
for a particular contract period-
    (1) Is a PDP sponsor that does not have to be a risk-bearing entity 
(or, if applying to become a fallback entity, an entity that meets all 
the requirements to become a Part D plan sponsor except that it does 
not have to be a risk-bearing entity); and
    (2) Does not submit a risk bid under Sec.  423.265 for offering a 
prescription drug plan for any PDP region for the first year of that 
contract period. An entity is treated as submitting a risk bid if the 
entity is acting as a subcontractor for an integral part of the drug 
benefit management activities of an entity that is or applies to become 
a non-fallback 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 or applies to become a non-fallback PDP 
sponsor for a prescription drug plan.
    Fallback prescription drug plan means a prescription drug plan 
(PDP) offered by a fallback entity that--
    (1) Offers only defined standard or 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 all other requirements established for prescription drug 
plans, except as otherwise specified by CMS in this subpart or in 
separate guidance.
    Qualifying plan means a full-risk or limited-risk prescription drug 
plan, as defined in Sec.  423.258, or an MA-PD plan described in 
section 1851(a)(2)(A)(i) of the Act, that provides required 
prescription drug coverage, as defined in Sec.  423.100 An MA-PD plan 
must be open for enrollment and not operating under a capacity waiver 
to be counted as a qualifying plan. A PDP must not be operating under a 
restricted enrollment waiver, such as those that may be granted to 
special needs plans or employer group plans, in order to be counted as 
a qualifying plan in an area.


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.  
423.508, Sec.  423.509, or Sec.  423.510), CMS determines if Part D 
eligible individuals residing in the affected PDP region still 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, 
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 an area 
such as a territory, other than the 50 States or the District of 
Columbia requests waiver or modification of any Part D

[[Page 4576]]

requirement in order to provide qualified prescription drug coverage.


Sec.  423.863   Submission and approval of bids.

    (a) Submission of Bids. (1) Solicitation of bids. Separate from the 
risk 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(b).
    (2) Timing of bids. CMS determines when to solicit bids for 2006 so 
that potential fallback prescription drug plans have enough time to 
prepare a bid. After that, bids are solicited on 3 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 
prescription drug plan. In order to ensure access in an area in 
accordance with 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 prescription drug plan is 
offered within 90 days of notice.
    (6) No national fallback prescription drug plan. CMS may not enter 
into a contract with a single fallback entity for the offering of 
fallback prescription drug 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 PDP 
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 
prescription drug plans. In the case of a fallback prescription drug 
plan, the provisions of Sec.  423.293 (b) concerning payments of the 
late enrollment penalty to the PDP sponsor do not apply and the monthly 
beneficiary premium is collected in the manner specified in Sec.  
422.262(f)(1) of this chapter, or paid directly to the fallback entity 
by the beneficiary if there are either no benefits, or insufficient 
benefits available to be collected in the manner specified under Sec.  
422.262(f)(1) of this chapter. The amount of any premiums collected by 
the fallback entity is deducted from management fees due from CMS.


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 and Sec.  423.505 for Part D plans.
    (b) Period of contract. 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. Notwithstanding any other provisions of this part, 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.
    (ii) Quality programs. The entity provides the enrollees in its 
fallback prescription drug plan with quality programs that avoid 
adverse drug reactions, monitor for appropriate 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 (other than fallback 
entities) experience nationwide during a base period, or changing 
program emphases or requirements.
    (e) Payment terms. A contract approved with a fallback entity 
includes terms for payment for--
    (1) The actual costs 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 consist of administrative costs and return 
on investment and 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

[[Page 4577]]

determines is necessary to carry out the payment provisions under 
subpart G or under this subpart, or as required by law. Information 
disclosed to determine Medicare payment or reimbursement to the 
fallback entity 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, determining such payment or 
reimbursement. This restriction does not limit CMS or OIG authority to 
conduct audits and evaluations necessary to ensure accurate and correct 
payment and to otherwise oversee Medicare reimbursement
    (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 where the fallback plan are required to operate within the 
contracted service area(s).


Sec.  423.875   Payment 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 that are actually paid (net any manufacturer or 
pharmacy discounts, chargebacks, rebates, and similar price 
concessions) by either the qualified retiree prescription drug plan or 
the qualifying covered retiree (or on the qualifying covered retiree's 
behalf).
    Benefit option means a particular benefit design, category of 
benefits, or cost-sharing arrangement offered within a group health 
plan.
    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 a 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 Part D drugs 
during the year, whether paid for by the plan or the retiree, including 
costs directly related to the dispensing of Part D drugs.
    Group health plans include plans as defined in section 607(1) of 
ERISA, 29 U.S.C. Sec.  1167(1). They also include the following plans:
    (1) A Federal or State governmental plan, which is a plan providing 
medical care that is 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 (including a county or local 
government), 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) A collectively bargained plan, which is a plan providing 
medical care that is established or maintained under or by one or more 
collective bargaining agreements.
    (3) A church plan, which is a plan providing medical care that is 
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).
    (4) An account-based medical plan such as a Health Reimbursement 
Arrangement (HRA) as defined in Internal Revenue Service Notice 2002-
45, 2002-28 I.R.B. 93, a health Flexible Spending Arrangement (FSA) as 
defined in Internal Revenue Code (Code) section 106(c)(2), a health 
savings account (HSA) as defined in Code section 223, or an Archer MSA 
as defined in Code section 220, to the extent they are subject to ERISA 
as employee welfare benefit plans providing medical care (or would be 
subject to ERISA but for the exclusion in ERISA section 4(b), 29 
U.S.C.Sec.  . Sec.  1003(b), for governmental plans or church plans).
    Part D drug is defined in Sec.  423.100 of this part.
    Part D eligible individual is defined in Sec.  423.4 of this part.
    Qualified retiree prescription drug plan means employment-based 
retiree health coverage that meets the requirements set forth in Sec.  
423.884 of this chapter for a Part D eligible individual who is a 
retired participant or the spouse or dependent of a retired participant 
under the coverage.
    Qualifying covered retiree means a Part D eligible individual who 
is: a participant or the spouse or dependent of a participant; covered 
under employment-based retiree health coverage that qualifies as a 
qualified retiree prescription drug plan; and not enrolled in a Part D 
plan. For this purpose, the determination of whether an individual is 
covered under employment-based retiree health coverage is made by the 
sponsor in accordance with the rules of its plan. For purposes of this 
subpart, however, an individual is presumed not to be covered under 
employment-based retiree health coverage if, under the Medicare 
Secondary Payer rules in Sec.  411.104 of this chapter and related CMS 
guidance, the person is considered to be receiving coverage by reason 
of current employment status. The presumption applies whether or not 
the Medicare Secondary Payer rules actually apply to the sponsor. For 
this purpose, a sponsor also may treat a person receiving coverage 
under its qualified retiree prescription drug plan as the dependent of 
a qualifying covered retiree in accordance with the rules of its plan, 
regardless of whether that person constitutes the qualifying covered 
retiree's dependent for Federal or State tax purposes.
    Retiree drug subsidy amount, or subsidy payment, means the subsidy 
amount paid to sponsors of qualified retiree prescription drug coverage 
under Sec.  423.886(a).
    Standard prescription drug coverage is defined in Sec.  423.100 of 
this part.
    Sponsor is a plan sponsor as defined in section 3(16)(B) of the 
Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 
1002(16)(B), 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.
    Sponsor agreement means an agreement by the sponsor to comply with 
the provisions of this subpart.


Sec.  423.884   Requirements for qualified retiree prescription drug 
plans.

    (a) General. Employment-based retiree health coverage is considered 
to be a qualified retiree prescription drug plan if all of the 
following requirements are satisfied:
    (1) An actuarial attestation is submitted in accordance with 
paragraph (d) of this section. The rules for submitting attestations as 
part of

[[Page 4578]]

subsidy applications are described in paragraph (c) of this section.
    (2) Part D eligible individuals covered under the plan are provided 
with creditable coverage notices in accordance with Sec.  423.56.
    (3) Records are maintained and made available for audit in 
accordance with paragraph (f) of this section and Sec.  423.888(d).
    (b) Disclosure of information. The sponsor must have a written 
agreement with its health insurance issuer (as defined in 45 CFR 
160.103), or group health plan (as applicable) regarding disclosure of 
information to CMS, and the issuer or plan must disclose to CMS, on 
behalf of the sponsor, the information necessary for the sponsor to 
comply with this subpart.
    (c) Application. (1) Submitting an application. The sponsor (or its 
designee) must submit an application for the subsidy to CMS that is 
signed by an authorized representative of the sponsor. The application 
must be provided in a form and manner specified by CMS.
    (2) Required information. In connection with each application the 
sponsor (either directly or through its designee) must submit the 
following:
    (i) Employer Tax ID Number (if applicable).
    (ii) Sponsor name and address.
    (iii) Contact name and email address.
    (iv) Actuarial attestation that satisfies the standards specified 
in paragraph (d) of this section and any other supporting documentation 
required by CMS for each qualified retiree prescription drug plan for 
which the sponsor seeks subsidy payments.
    (v) A list of all individuals the sponsor believes (using 
information reasonably available to the sponsor when it submits the 
application) are qualifying covered retirees enrolled in each 
prescription drug plan (including spouses and dependents, if Medicare-
eligible), along with the information about each person listed below in 
this paragraph:
    (A) Full name.
    (B) Health Insurance Claim (HIC) number or Social Security number.
    (C) Date of birth.
    (D) Gender.
    (E) Relationship to the retired employee.
    (vi) A sponsor may satisfy paragraph (c)(2)(v) of this section by 
entering into a voluntary data sharing agreement (VDSA) with CMS (or 
any other arrangement CMS may make available).
    (vii) A signed sponsor agreement.
    (viii) Any other information specified by CMS.
    (3) Terms and conditions. To receive a subsidy payment, the sponsor 
(through the signed sponsor agreement or as otherwise specified by CMS) 
must specifically accept and agree to:
    (i) Comply with the terms and conditions of eligibility for a 
subsidy payment set forth in this regulation and in any related CMS 
guidance;
    (ii) Acknowledge that the information in the application is being 
provided to obtain Federal funds; and
    (iii) Require that all subcontractors, including plan 
administrators, acknowledge that information provided in connection 
with the subcontract is used for purposes of obtaining Federal funds.
    (4) Signature by sponsor. An authorized representative of the 
requesting sponsor must sign the completed application and certify that 
the information contained in the application is true and accurate to 
the best of the sponsor's knowledge and belief.
    (5) Timing. (i) General rule. An application for a given plan year 
must be submitted by no later than 90 days prior to the beginning of 
the plan year, unless a request for an extension has been filed and 
approved under procedures established by CMS.
    (ii) Transition rule. For plan years that end in 2006, an 
application must be submitted by September 30, 2005 unless a request 
for an extension has been filed and approved under procedures 
established by CMS.
    (6) Updates. The sponsor (or the designee) must provide updates to 
CMS in a manner specified by CMS of the information required in 
paragraph (c)(2) of this section on a monthly basis or at a frequency 
specified by CMS.
    (7) Data match. Once the full application for the subsidy payment 
is submitted, CMS--
    (i) Matches the names and identifying information of the 
individuals submitted as qualifying covered retirees with the Medicare 
Beneficiary Database (MBD) to determine which retirees are Part D 
eligible individuals who are not enrolled in a Part D plan.
    (ii) Provides information concerning the results of the search in 
paragraph (c)(7)(i) of this paragraph (such as names and other 
identifying information, if necessary) to the sponsor (or to a 
designee).
    (d) Actuarial attestation-general. The sponsor of the plan must 
provide to CMS an attestation in a form and manner specified by CMS 
that the actuarial value of the retiree prescription drug coverage 
under the plan is at least equal to the actuarial value of the defined 
standard prescription drug coverage (as defined at Sec.  423.100). The 
attestation must meet all of the following standards.
    (1) Contents of the attestation include the following assurances:
    (i) The actuarial gross value of the retiree prescription drug 
coverage under the plan for the plan year is at least equal to the 
actuarial gross value of the defined standard prescription drug 
coverage under Part D for the plan year in question.
    (ii) The actuarial net value of the retiree prescription drug 
coverage under the plan for that plan year is at least equal to the 
actuarial net value of the defined standard prescription drug coverage 
under Part D for the plan year in question.
    (iii) The actuarial values must be determined using the methodology 
in paragraph (d)(5) of this section.
    (2) The attestation must be made by a qualified actuary who is a 
member of the American Academy of Actuaries. Applicants may use 
qualified outside actuaries, including (but not limited to) actuaries 
employed by the plan administrator or an insurer providing benefits 
under the plan. If an applicant uses an outside actuary, the 
attestation can be submitted directly by the outside actuary or by the 
plan sponsor.
    (3)The attestation must be signed by a qualified actuary and must 
state that the attestation is true and accurate to the best of the 
attester's knowledge and belief.
    (4) The attestation must contain an acknowledgement that the 
information being provided in the attestation is being used to obtain 
Federal funds.
    (5) Methodology. (i) Basis of the attestation. The attestation must 
be based on generally accepted actuarial principles and any actuarial 
guidelines established by CMS in this section or in future guidance. To 
the extent CMS has not provided guidance on a specific aspect of the 
actuarial equivalence standard under this section, an actuary providing 
the attestation may rely on any reasonable interpretation of this 
section and section 1860D-22(a) of the Act consistent with generally 
accepted actuarial principles in determining actuarial values.
    (ii) Specific rules for determining the actuarial value of the 
sponsor's retiree prescription drug coverage.
    (A) The gross value of coverage under the sponsor's retiree 
prescription drug plan must be determined using the actual claims 
experience and demographic data for Part D eligible individuals who are 
participants and beneficiaries in the sponsor's plan, provided that 
sponsors without creditable data due to their size or other factors, 
may use normative databases as

[[Page 4579]]

specified by CMS. Sponsors may use other actuarial approaches specified 
by CMS as an alternative to the actuarial valuation specified by this 
paragraph (d)(5)(ii)(A).
    (B) The net value of coverage provided under the sponsor's retiree 
prescription drug plan must be determined by reducing the gross value 
of such coverage as determined under paragraph (d)(5)(ii)(A) of this 
section by the expected premiums paid by Part D eligible individuals 
who are plan participants or their spouses and dependents. For sponsors 
of plans that charge a single, integrated premium or contribution to 
their retirees for both prescription drug coverage and other types of 
medical coverage, the attestation must allocate a portion of the 
premium/contribution to prescription drug coverage under the sponsor's 
plan, under any method determined by the sponsor or its actuary.
    (iii) Specific rules for calculating the actuarial value of defined 
standard prescription drug coverage under Part D.
    (A) The gross value of defined standard prescription drug coverage 
under Part D must be determined using the actual claims experience and 
demographic data for Part D eligible individuals in the sponsor's plan, 
provided that sponsors without credible data due to their size or other 
factors may use normative databases as specified by CMS. Sponsors may 
use other actuarial approaches specified by CMS as an alternative to 
the actuarial valuation specified by this paragraph (d)(5)(iii)(A).
    (B) To calculate the net value of defined standard prescription 
drug coverage under Part D, the gross value of defined standard 
prescription drug coverage under Part D as determined by paragraph 
(d)(5)(iii)(A) of this section is reduced by the following amounts:
    (1) The monthly beneficiary premiums (as defined in Sec.  423.286) 
expected to be paid for standard prescription drug coverage; and
    (2) An amount calculated to reflect the impact on the value of 
defined standard prescription drug coverage of supplemental coverage 
provided by the sponsor. Sponsors may use other actuarial approaches 
specified by CMS as an alternative to the actuarial valuation specified 
in this paragraph (d)(5)(iii)(B)(2).
    (C) The valuation of defined standard prescription drug coverage 
for a given plan year is based on the initial coverage limit cost-
sharing and out-of-pocket threshold for defined standard prescription 
drug coverage under Part D in effect at the start of such plan year. 
The attestation, however, must be submitted to CMS no later than 60 
days after the publication of the Part D coverage limits for the 
upcoming calendar year otherwise, such valuation is based on the 
initial coverage limit, cost-sharing amounts, and out-of-pocket 
threshold for defined standard prescription drug coverage under Part D 
for the upcoming calendar year.
    (D) Example. If a sponsor's retiree prescription drug plan operates 
under a plan year that ends March 30, the attestation for the year 
April 1, 2007-March 30, 2008 is based on the coverage limit, cost-
sharing and out-of-pocket threshold that apply to defined standard 
prescription drug coverage under Part D in 2007 provided the 
attestation is submitted within 60 days after the publication of the 
Part D coverage limits for 2008. If the attestation is submitted more 
than 60 days after the 2008 coverage limits have been published, the 
2008 coverage limits would apply.
    (iv) Employment-based retiree health coverage with two or more 
benefit options. For the assurance required under paragraph (d)(1)(i) 
of this section, the assurance must be provided separately for each 
benefit option for which the sponsor requests a subsidy under this 
subpart. For the assurance required under paragraph (d)(1)(ii) of this 
section, the assurance may be provided either separately for each 
benefit option for which the sponsor provided assurances under 
paragraph (d)(1)(i) of this section, or in the aggregate for all 
benefit options for which the sponsor provided assurances under 
paragraph (d)(1)(i) of this section.
    (6) Timing. (i) Annual submission. The attestation must be provided 
annually at the time the sponsor's subsidy application is submitted, or 
at such other times as specified by CMS in further guidance.
    (ii) Submission following material change. The attestation must be 
provided no later than 90 days before the implementation of a material 
change to the drug coverage of the sponsor's plan that impacts the 
actuarial value of the coverage.
    (e) Disclosure of creditable prescription drug 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 prescription drug 
coverage under Sec.  423.56 in accordance with the notification 
requirements under that section.
    (f) Access to records for audit. The sponsor (and where applicable, 
its designee) must meet the requirements of Sec.  423.888(d). Failure 
to comply with Sec.  423.888(d) may result in nonpayment or recoupment 
of all or part of a subsidy payment.


Sec.  423.886  Retiree drug subsidy amounts.

    (a) Amount of subsidy payment. (1) For each qualifying covered 
retiree enrolled with the sponsor of a qualified retiree prescription 
drug plan in a plan year, the sponsor receives a subsidy payment in the 
amount of 28 percent of the allowable retiree costs (as defined in 
Sec.  423.882) in the plan year for such retiree attributable to gross 
retiree costs between the cost threshold and the cost limit as defined 
in paragraph (b) of this section. The subsidy payment is calculated by 
first determining gross retiree costs between the cost threshold and 
cost limit, and then determining allowable retiree costs attributable 
to the gross retiree costs. For this purpose and where otherwise 
relevant in this subpart, plan year is the calendar, policy, or fiscal 
year on which the records of a plan are kept.
    (2) Transition provision. For a qualified retiree prescription drug 
plan that has a plan year which begins in calendar year 2005 and ends 
in calendar year 2006, the subsidy for the plan year must be determined 
in the following manner. Claims incurred in all months of the plan year 
(including claims incurred in 2005) are taken into account in 
determining which claims fall within the cost threshold and cost limit 
for the plan year. The subsidy amount is determined based only on costs 
incurred on and after January 1, 2006.
    (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 plan years that end in 2006.
    (2) Subject to paragraph (b)(3) of this section, the cost limit 
under this section is equal to $5,000 for plan years that end in 2006.
    (3) The cost threshold and cost limit specified in paragraphs 
(b)(1) and (b)(2) of this section, for plan years that end in years 
after 2006, are 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.  423.104(d)(1)(ii) and (d)(5)(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 requirements to provide information necessary to ensure 
accurate subsidy payments, govern payment under

[[Page 4580]]

Sec.  423.886 except to the extent the provisions in this section 
specify otherwise.
    (b) General payment rules. Payment under Sec.  423.886 is 
conditioned on provision of accurate information. The information must 
be submitted, in a form and manner and at the times provided in this 
paragraph and under other guidance specified by CMS, by the sponsor or 
its designee.
    (1) Timing. Payment can be made on a monthly, quarterly or annual 
basis, as elected by the plansponsor under guidance specified by CMS, 
unless CMS determines that the options must be restricted because of 
operational limitations.
    (i) Monthly or quarterly payments. If the plan sponsor elects for 
payment on a monthly or quarterly basis, it must provide information 
described in paragraph (b)(2)(i) of this section on the same monthly or 
quarterly basis, or at such time as CMS specifies.
    (ii) Annual payments. If the sponsor elects an annual payment, it 
must submit to CMS actual rebate and other price concession data within 
15 months after the end of the plan year.
    (2) Submission of cost data. (i) Monthly or quarterly payments. If 
the plan sponsor elects to receive payment on a monthly or quarterly 
basis, it must submit to CMS, in a manner specified by CMS, the gross 
covered retiree plan-related prescription drug costs (as defined in 
Sec.  423.882) incurred for its qualifying covered retirees during the 
payment period for which it is claiming a subsidy payment and any other 
data CMS may require. Except as otherwise provided by CMS in future 
guidance, the sponsor must also submit, using historical data and 
generally accepted actuarial principles, an estimate of the extent to 
which its expected allowable retiree costs differs from the gross 
covered retiree plan-related prescription drug costs, based on expected 
rebates and other price concessions for the upcoming plan year. The 
estimate must be used to reduce the periodic payments for the plan 
year. Final allocation of price concession data must occur after the 
end of the year under the reconciliation provisions of paragraph (b)(4) 
of this section
    (ii) Annual payments. If the plan sponsor elects a one-time final 
annual payment, it must submit, in a manner specified by CMS, within 15 
months, or within any other longer time limit specified by CMS, after 
the end of the plan year, the total gross covered retiree plan-related 
prescription drug costs (as defined in Sec.  423.882) for the plan year 
for which it is claiming a subsidy payment, actual rebate and other 
price concession data described in paragraph (b)(1)(ii) of this 
section, and any other data CMS may require. The alternative is that 
the sponsor can elect an interim annual payment, in which case it must 
submit the following to CMS, at a time and in a manner specified by 
CMS: the gross covered retiree plan-related prescription drug costs (as 
defined in Sec.  423.882) incurred for all of its qualifying covered 
retirees during the payment period for which it is claiming a subsidy 
payment; an estimate (using historical data and generally accepted 
actuarial principles) of the difference between such gross costs and 
allowable costs (based on expected rebates and other price concessions 
for the upcoming plan year); and any other data CMS may require.
    (3) Payment by CMS. CMS makes payment after the sponsor's 
submission of the cost data at a time and in a manner to be specified 
by CMS.
    (4) Reconciliation. (i) Sponsors who elect either monthly, 
quarterly or an interim annual payment must submit to CMS, within 15 
months, or within any other longer time limit specified by CMS, after 
the end of its plan year, the total gross covered retiree plan-related 
prescription drug costs (as defined in Sec.  423.882), in a manner 
specified by CMS; actual rebate and other price concession data for the 
plan year in question; and any other data CMS may require.
    (ii) Upon receiving this data, CMS adjusts the payments made for 
the plan year in question in a manner to be specified by CMS.
    (5) Special rule for insured plans. (i) Interim payments. Sponsors 
of group health plans that provide benefits through health insurance 
coverage (as defined in 45 CFR 144.103) and that choose either monthly 
payments, quarterly payments or an interim annual payment in paragraphs 
(b)(1) and (b)(2) of this section , may elect to determine gross 
covered plan-related retiree prescription drug costs for purposes of 
the monthly, quarterly or interim annual payments based on a portion of 
the premium costs paid by the sponsor (or by the qualifying covered 
retirees) for coverage of the covered retirees under the group health 
plan. Premium costs that are determined, using generally accepted 
actuarial principles, may be attributable to the gross prescription 
drug costs incurred by the health insurance issuer (as defined in 45 
CFR Sec.  144.103) for the sponsor's qualifying covered retirees, 
except that administrative costs and risk charges must be subtracted 
from the premium.
    (ii) Final payments. At the end of the plan year, actual gross 
retiree plan-related prescription drug costs incurred by the insurer 
(or the retiree), and the allowable costs attributable to the gross 
costs, are determined for each of the sponsor's qualifying covered 
retirees and submitted for reconciliation after the end of the plan 
year as specified in paragraph (b)(4)of this section. The data for the 
reconciliation can be submitted directly to CMS by the insurer in a 
manner to be specified by CMS. Upon receiving this data, CMS adjusts 
the payments made for the relevant plan year in a manner to be 
specified by 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 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 (or a designee), as applicable, must 
maintain, and furnish to CMS or the 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 for 
the records enumerated in paragraph (d)(3) of this section in the event 
of an ongoing investigation, litigation, or negotiation involving 
civil, administrative or criminal liability. In addition, the sponsor 
of the qualified retiree prescription drug plan (or a designee), as 
applicable, must maintain the records enumerated in paragraph (d)(3) of 
this section longer than 6 years if it knows or should know that the 
records are the subject of an ongoing investigation, litigation or 
negotiation involving civil, administrative or criminal liability.
    (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

[[Page 4581]]

utilized for calculating the amount of the subsidy payment made in 
accordance with Sec.  423.886, including the underlying claims data.
    (iii) Any other records specified by CMS.
    (4) CMS may issue additional guidance addressing recordkeeping 
requirements, including (but not limited to) the use of electronic 
media.


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) of this section.
    (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 is 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) Effect 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 exists that was not readily available 
at the time the initial determination was made;
    (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.
    (6) A decision by CMS not to reopen an initial or reconsidered 
determination is final and binding and cannot be appealed.


Sec.  423.892   Change of 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.
    (2) Asset sale. Transfer of all or substantially all of the assets 
of the sponsor to another party.

[[Page 4582]]

    (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.
    (c) Advance notice requirement. A sponsor that has a sponsor 
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 assigned 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 Part D 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 Part D 
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 Part D plan; or
    (2) Of higher actuarial value than the actuarial value of standard 
prescription drug coverage (as defined in Sec.  423.104(d)); 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 Part D 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 comprehensive Medicaid managed care plan per full-benefit dual 
eligible individual for 2003, as determined using data as the Secretary 
determines appropriate. This value will be established using data 
determined by the Secretary to be the best available among the 
following options:
    (1) State rate setting documentation for drug costs to the full 
dual eligible population;
    (2) State encounter and enrollment record databases including cost 
data; and
    (3) State managed care plan-specific financial cost data; and
    (4) Other appropriate data.
    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 Total Drug 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, as described in Sec.  
423.104(d)(5)(iv). CMS provides further detail regarding the sources of 
data to be used and how the annual percentage increase will be 
determined via operational guidance to States.
    Base year Medicaid per capita expenditures are 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 comprehensive capitated Medicaid managed care plan per 
full-benefit dual eligible for 2003. The per capita payments for full-
benefit dual eligibles with comprehensive managed care and non-managed 
care are weighted by the respective average monthly full dual eligible 
enrollment populations reported through the Medicaid Statistical 
Information System (MSIS).
    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 or under a section 1115 
of the Act demonstration that provides pharmacy only benefits to these 
individuals.) 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 reported in MSIS as having Medicaid drug benefit coverage 
and Medicare Part A or Part B coverage. Dual eligibility status will be 
established by CMS using an algorithm that incorporates the quarterly 
MSIS dual eligibility code for the prescription fill date and the dual 
eligibility code for the prior quarter.
    Gross base year Medicaid per capita expenditures are equal to the 
expenditures, including dispensing fees, made by the State and reported 
in MSIS 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 comprehensive Medicaid 
managed care plan. This amount is determined based on MSIS drug claims 
paid during the four quarters of calendar year 2003 and the 
corresponding dual eligibility enrollment status of the beneficiary. 
MSIS drug claims having National Drug

[[Page 4583]]

Codes determined by CMS to be in the Part D excluded drug class, and 
claims having a program type code indicating Indian Health Service or 
Family Planning will be excluded from the calculation.
    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 as 1/12th of the base 
year (2003) Medicaid per capita expenditures for prescription drugs 
(that is, covered Part D drugs) for full-benefit dual eligible 
individuals,
    (1) Multiplied by the State medical assistance percentage;
    (2) Increased for each year (beginning with 2004 up to and 
including the year involved) by the applicable growth factor;
    (3) Multiplied by the number of the State's full-benefit dual 
eligible individuals for the given month; and
    (4) Multiplied by the phased-down State contribution factor.
    Rebate adjustment factor takes into account drug rebates and, for a 
State, is equal to the ratio of 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.


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 subpart P of part 423.
    (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.
    (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 (d)(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. Medical assistance is 
not available to full-benefit dual eligible individuals, including 
those not enrolled in a Part D plan, 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 section 1935(e)(3) of the Act as described in 
paragraph (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 
section 1108 (f) of the Act as increased by section 1108 (g) of the Act 
for each territory with an approved plan for a year is 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(d)(5)(iv).

[[Page 4584]]

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 full-benefit dual eligible individual 
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 CMS 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 CMS on a monthly basis, as 
indicated in the following chart. 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 CMS.

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

    (2) Method of payment. Payments for the phased down State 
contribution begins in January 2006, and are made on a monthly basis 
for each subsequent month. State payment must be made in a manner 
specified by CMS that is

[[Page 4585]]

similar to the manner in which State payments are made under the State 
Buy-in Program except that all payments must be deposited into the 
Medicare Prescription Drug Account in the Federal Supplementary Medical 
Insurance Trust Fund. The policy on collection of the Phased-down State 
contribution payment is the same as the policy that governs collection 
of Part A and Part B Medicare premiums for State Buy-in.
    (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 June 2005, and 
each subsequent month, States must submit an electronic file, in a 
manner specified by CMS, identifying each full-benefit dual eligible 
individual enrolled in the State for each month. This file must include 
specified information including identifying information, a dual 
eligible type code, available income data and institutional status. The 
file includes data on enrollment for the current month, plus 
retroactive changes in enrollment characteristics for prior months. 
This file will be used by CMS to establish the monthly enrollment for 
those individuals with Part D drug coverage who are also determined by 
the State to be eligible for full Medicaid benefits subject to the 
phased down State contribution payment. This file is due to CMS no 
later than the last day of the reporting month. For States that do not 
submit an acceptable file by the end of the month, the phased down 
State contribution for that month is based on data deemed appropriate 
by CMS.
    (e) Data match. CMS 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. CMS 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. CMS 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.
    (Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare 
Supplementary Medical Insurance Program)

    Dated: January 10, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: January 14, 2005.
Tommy G. Thompson,
Secretary of Health and Human Services.
[FR Doc. 05-1321 Filed 1-21-05; 11:19 am]
BILLING CODE 4120-01-S