[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Rules and Regulations]
[Pages 4588-4741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1322]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 417 and 422



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

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

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 417 and 422

CMS-4069-F
RIN 0938-AN06


Medicare Program; Establishment of the Medicare Advantage Program

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

ACTION: Final rule.

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SUMMARY: This final rule implements provisions of the Social Security 
Act (the Act) establishing and regulating the Medicare Advantage (MA) 
program. The MA program was enacted in Title II of The Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
(Pub. L. 108-173) on December 8, 2003. The MA program replaces the 
Medicare+Choice (M+C) program established under Part C of title XVIII 
of the Act, while retaining most key features of the M+C program.
    The MA program attempts to broadly reform and expand the 
availability of private health plan options to Medicare beneficiaries.
    This final rule responds to public comments on a proposed rule 
published on August 3, 2004 (FR 69 46866).
EFFECTIVE DATE: These regulations are effective March 22, 2005 except 
for the following changes which will become effective on January 1, 
2006: amendment of Sec.  417.600(b); removal of Sec.  417.602 through 
Sec.  417.638; and amendments to Sec.  417.832(d); and Sec.  417.840.

FOR FURTHER INFORMATION CONTACT: Eligibility, Election, and 
Enrollment--Lynn Orlosky, 410-786-9064 or Randy Brauer, (410) 786-1618.
    Benefits and Beneficiary Protections--Frank Szeflinski, 303-844-
7119.
    Quality Improvement Program--Tony Hausner, 410-786-1093.
    Submission of Bids, Premiums, and Plan Approval--Anne Hornsby, 410-
786-1181.
    Payments to MA Organizations--Anne Hornsby, 410-786-1181.
    Special Rules for MA Regional Plans--Marty Abeln, 410-786-1032.
    Contracts with MA Organizations--Mark Smith, 410-786 8015.
    Beneficiary Appeals--Chris Gayhead, 410-786-6429.
    General Information--410-786-1296.

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Table of Contents

I. Background
    A. Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003
    B. Relevant Legislation
    1. Balanced Budget Act of 1997
    2. Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    3. Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA)
    C. Codification of Regulations
    D. Organizational Overview of Part 422

II. Analysis of and Responses to Public Comments

    A. Overview
    1. Comments on the August 3, 2004 Proposed Rule
    2. Organization of the Final Rule
    B. General Comments
    1. Administrative Procedure Act (APA) Issues
    2. Other General Comments

III. Provisions of the Proposed Rule, Analysis of and Responses to 
Comments on the Proposed Rule, and Final Decisions

IV. Provisions of the Final Rule

V. Collection of Information Requirements

VI. Regulatory Impact Analysis

Regulations Text

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

ABN                                 Advance beneficiary notice
ACR                                 Adjusted Community Rate
ACRP                                Adjusted Community Rate Proposal
ADL                                 Activities of Daily Living
AHRQ                                Agency for Healthcare Research and
                                     Quality
AI/AN                               American Indian and Alaska Native
ALJ                                 Administrative law judge
APA                                 Administrative Procedure Act
BBA                                 Balanced Budget Act of 1997
BBRA                                Medicare, Medicaid and SCHIP [State
                                     Children's Health Insurance
                                     Program] Balanced Budget Refinement
                                     Act of 1999, (Pub. L. 106-113)
BIPA                                Medicare, Medicaid, and SCHIP
                                     Benefits Improvement and Protection
                                     Act of 2000 (Pub L. 105-33)
CAH                                 Critical Access Hospitals
CCPs                                Coordinated Care Plans
CMPs                                Competitive Medical Plans
CORF                                Comprehensive outpatient
                                     rehabilitation facility
DSH                                 Disproportionate Share Hospital
EGPH                                Employer and Union Group Health
                                     Plans
EOC                                 Evidence of coverage
ESRD                                End-Sage Renal Disease
FEHB                                Federal Employees Health Benefits
FFS                                 Fee-for-Service plans
FI                                  Fiscal Intermediaries
HCPP                                Health care prepayment plan
HHA                                 Home health agency
HMO                                 Health Maintenance Organizations
HOS                                 Health Outcomes Survey
ICF/MR                              Intermediate Care Facilities for
                                     Mentally Retarded
IHS                                 Indian Health Service
IPA                                 Independent Physician Association
ISAR                                Intra-Service Area Rate
I/T/U                               Indian Health Service, Tribal and
                                     Urban Health Program
LEP                                 Limited English Proficiency
LMRP                                Local Medical Review Policy
M+C                                 Medicare+Choice
MA                                  Medicare Advantage
MA-PD                               Medicare Advantage Prescription Drug
MAC                                 Medicare Appeals Council
MCOs                                Managed Care Organizations
MMA                                 Medicare Prescription Drug,
                                     Improvement, and Modernization Act
                                     of 2003
MSA                                 Medical Savings Account
MYBE                                Mid-year Benefit Enhancement
OACT                                Office of the Actuary
OPM                                 Office of Personnel Management
PACE                                Program All-Inclusive Care for the
                                     Elderly
P4P                                 Pay for Performance
PCP                                 Primary Care Physician
PDP                                 Prescription Drug Plan
PFFS                                Private Fee-For-Service
POS                                 Point of Service
PPOs                                Preferred Provider Organizations
PSOs                                Provider Sponsored Organizations
QI                                  Quality Improvement
QIO                                 Quality Improvement Organization
RFB                                 Religious Fraternal Benefit
SAE                                 Service Area Expansion
SEP                                 Special Election Period
SHIP                                State Health Insurance Programs

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SNF                                 Skilled Nursing Facility
SNPs                                Special Needs Plans
 

I. Background

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

    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. Title 
II of the MMA makes important changes to the current Medicare+Choice 
(M+C) program by replacing it with a new Medicare Advantage (MA) 
program under Part C of Medicare. On August 3, 2004, we published a 
proposed rule in the Federal Register (69 FR 46866) that set forth the 
provisions that would implement Title II of the MMA. Beginning in 2006, 
the MA program is designed to:
     Provide for regional plans that may make private plan 
options available to many more beneficiaries, especially those in rural 
areas.
     Expand the number and type of plans provided for, so that 
beneficiaries can choose from Health Maintenance Organizations (HMOs), 
Preferred Provider Organization (PPO) plans (the most popular type of 
employer-sponsored plan), Fee-for-Service (FFS) plans, and Medical 
Savings Account (MSA) plans, if available where the beneficiary lives.
     Enrich the range of benefit choices available to enrollees 
including improved prescription drug benefits, other benefits not 
covered by original Medicare, and the opportunity to share in savings 
where MA plans can deliver benefits at lower costs.
     Provide incentives to plans, and add specialized plans to 
coordinate and manage care in ways that comprehensively serve those 
with complex and disabling diseases and conditions.
     Use open season competition among MA plans to
    improve service, improve benefits, invest in preventive care, and 
hold costs down in ways that attract enrollees.
     Enhance and stabilize payments to organizations, improve 
program design, introduce new flexibility for plans, and reduce 
impediments to plan participation.
     Advance the goal of improving quality and increasing
    efficiency in the overall health care system. Medicare is the 
largest payer of health care in the world. Medicare can drive changes 
in the entire health care system.
    With these new and improved choices, Medicare beneficiaries, like 
Federal employees and retirees in the Federal Employees Health Benefits 
(FEHB) Program, will have the opportunity to obtain improved benefits, 
improved services, and reduced costs. However, beneficiaries will still 
be able to remain in traditional Medicare (referred to throughout as 
``original'' Medicare), enhanced by the new Part D drug benefit. All 
will have the opportunity to switch among plans, or to or from original 
Medicare, during the annual election period (or ``open season'') in 
November and December.
    Over time, participating plans will be under continued competitive 
pressure to improve their benefits, reduce their premiums and cost 
sharing, and improve their networks and services, in order to gain or 
retain enrollees. In addition, we expect plans to use integrated health 
plan approaches such as disease prevention, disease management, and 
other care coordination techniques. In doing so, integrated plans that 
combine the original Parts A and B of Medicare and the new Part D drug 
benefit and apply these innovative techniques must pass on savings that 
may result from these care coordination techniques to the enrollee 
through reduced premiums or additional benefits.
    Beginning in 2006, payments for local and regional MA plans will be 
based on competitive bids rather than administered pricing. MA 
organizations will submit an annual aggregate bid amount for each MA 
plan. An aggregate plan bid is based upon the MA organization's 
determination of expected costs in the plan's service area for the 
national average beneficiary for providing non-drug benefits (that is, 
original Medicare (Part A and Part B) benefits), Part D basic 
prescription drugs, and supplemental benefits if any (including 
reductions in cost sharing). Our payment to an MA organization for an 
MA plan's coverage of original Medicare benefits depends on the 
relationship of the plan's basic A/B bid to the plan benchmark. For a 
plan with a basic A/B bid below its benchmark, we will pay the MA 
organization the basic A/B bid amount, adjusted by the individual 
enrollee's risk factor, plus the rebate amount. (The rebate is 75 
percent of the difference between the plan bid and benchmark, and is 
used to provide mandatory supplemental benefits or reductions in Part B 
or Part D premiums. The government retains the other 25 percent.) For a 
plan with a bid equal to or above its benchmark, we will pay the MA 
organization the plan benchmark, adjusted by the individual enrollee's 
risk factor. In addition, we would pay the bid amount, if any, for Part 
D basic coverage. The MMA also requires other adjustments to payments. 
See the subpart G preamble for a discussion of the geographic Intra-
Service Area Rate (ISAR) adjustment and the government premium 
adjustment (referred to in the MMA as the ``adjustment relating to risk 
adjustment'').
    We will be able to negotiate bid amounts with plans in a manner 
similar to negotiations conducted by the Office of Personnel 
Management(OPM) with FEHB plans. We will work with plans to ensure 
benefit packages meet the needs of our population and that information 
is made available to beneficiaries so that they can make decisions 
about which plans best meet their needs.
    Finally, in conjunction with the new drug benefit required under 
Title I of MMA, which is addressed in separate rulemaking found in part 
423, changes made in the MMA to the M+C program (now called the MA 
program) are intended to bring about broad-based improvements to the 
Medicare program's benefit structure, including improved prescription 
drug coverage under the MA program. Organizations offering local and 
regional coordinated care MA plans must offer at least one plan with 
the Medicare prescription drug benefit or an actuarially equivalent 
drug benefit.
    In addition to the changes because of the MMA, we identified many 
areas in the proposed rule where we believed we could prevent or reduce 
unnecessary burden, duplication, or complexity either in interpreting 
the new MMA provisions or in modifying existing rules to accommodate MA 
reforms.

B. Relevant Legislation

1. Balanced Budget Act of 1997
    Section 4001 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33) added sections 1851 through 1859 to the Social Security Act (the 
Act) establishing a new Part C of the Medicare program, known as the 
Medicare+Choice (M+C) program. Under section 1851(a)(1) of the Act, 
every individual entitled to Medicare Part A and enrolled under 
Medicare Part B, except for individuals with end-stage renal disease 
(ESRD), could elect to receive benefits either through the original 
Medicare program or an M+C plan, if one was offered where he or she 
lived.
    The primary goal of the M+C program was to provide Medicare 
beneficiaries with a wider range of health plan choices through which 
to obtain their Medicare benefits. The BBA authorized

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us to contract with private organizations offering a variety of private 
health plan options for beneficiaries, including both traditional 
managed care plans (such as those offered by HMOs that had been offered 
under section 1876 of the Act), and new options that were not 
previously authorized. Four types of M+C plans were authorized under 
the new Part C, as follows:
     M+C coordinated care plans, including HMOs (with or 
without point-of-service options (POS)), provider sponsored 
organizations (PSOs), and PPOs.
     M+C MSA plans (combinations of a high deductible M+C 
health insurance plan and a contribution to an M+C MSA).
     M+C private fee-for-service (PFFS) plans.
     M+C religious and fraternal benefit (RFBs)plans.
    The BBA changed the payment methodology to Medicare health plans 
and initially afforded beneficiaries more choice of plans nationally. 
However, payment rates grew modestly in relation to the costs health 
plans incurred, resulting in fewer health plans participating in the 
M+C program, decreased choice of plans available to beneficiaries, and 
fewer extra benefits available to enrollees. Although there were large 
payment increases in rural areas as a result of the BBA provisions, 
access to Medicare coordinated care plans declined significantly in 
rural areas after 1997.
    To implement these changes, we published an interim final rule in 
the Federal Register on June 26, 1998 (63 FR 34968); a final rule on 
February 17, 1999 (64 FR 7968); and a final rule with comment on June 
29, 2000 (65 FR 40170).
2. Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113 (BBRA) amended the M+C provisions of the BBA. 
Many of these amendments were reflected in the June 29, 2000 final rule 
with comment period. In addition, the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 
(BIPA), enacted December 21, 2000, further amended the M+C provisions 
of the BBA and BBRA. A final rule containing BIPA provisions was 
published in the Federal Register on March 22, 2002 (67 FR 13278), as 
well as on August 22, 2003 (68 FR 50855).
    These laws enacted subsequent to the BBA made incremental changes 
to M+C payments and provided financial incentives to plans to 
participate in the M+C program. While these efforts helped stabilize 
the M+C program, they did not generally improve plan participation in 
the M+C program nor did they increase overall beneficiary enrollment or 
access to plans in rural areas.
3. Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA)
    The specific sections of Part C of the Social Security Act that 
were impacted by the MMA are as follows:
    Section 1851--Eligibility, election and enrollment.
    Section 1852--Benefits and beneficiary protections.
    Section 1853--Payments to MA organizations.
    Section 1854--Premiums.
    Section 1855--Organizational and financial requirements for MA 
organizations.
    Section 1856--Establishment of standards.
    Section 1857--Application procedures and contracts with MA 
organizations.
    Section 1858--Special rules for MA regional plans [added by the 
MMA].
    Section 1859--Definitions; Miscellaneous provisions.
    This final rule addresses the new MA provisions in Title II of MMA. 
The requirement in 1858(a)(2)(D) of the Act to conduct a market survey 
and analysis before establishing MA regions took place concurrent with 
the publication of the MA proposed rules. The announcement of the 
establishment of the MA and Prescription Drug Plan (PDP) regions 
occurred on December 6, 2004. The regions may be found at http://cms.hhs.gov/medicarereform/mmaregions.
    Provisions of the MMA addressed in this final rule outside of Title 
II of the MMA include Section 722--Medicare Advantage Quality 
Improvement Program, of Title VII. Quality improvement provisions in 
this final rule may be found under Subpart D--Quality Assurance.

C. Codification of Regulations

    The final provisions set forth here are codified in 42 CFR Part 
422, The Medicare Advantage Program.
    The regulations for managed care organizations (MCOs) that contract 
with CMS under cost contracts will continue to be located in 42 CFR 
part 417, Health Maintenance Organizations, Competitive Medical Plans, 
and Health Care Prepayment Plans.

D. Organizational Overview of Part 422

    The MMA amended the existing provisions of the Medicare statute 
found in Part C of Title XVIII, sections 1851 through 1859 of the Act, 
and added a new section 1858 to the Act. This final rule covers a wide 
range of topics included in the existing part 422, including 
eligibility and enrollment, benefits and beneficiary protections, 
payment, contracting requirements, and grievances and appeals. We have 
generally retained the organization of the sections from part 422, 
except for reordering subparts F and G to place the bidding and payment 
provisions in sequential order.
    Where the MMA did not amend existing statute, this final rule does 
not set forth unchanged regulations text from the previous part 422. 
Thus, this final rule contains only the necessary revisions to existing 
part 422. In some subparts of part 422, the only changes are in 
nomenclature, that is, the replacement of M+C references with MA 
references. The regulations in that subpart H are not set forth in this 
final rule. The subparts with substantive changes are as follows:
    Subpart A--General provisions, establishment of the Medicare 
Advantage Program, definitions, types of MA plans, and cost-sharing in 
enrollment-related costs (user fees).
    Subpart B--Requirements concerning beneficiary eligibility, 
election, and enrollment and disenrollment procedures.
    Subpart C--Requirements concerning benefits, access to services, 
coverage determinations, and application of special benefit rules to 
PPOs and regional plans.
    Subpart D--Quality improvement program, chronic care improvement 
program requirements, and quality improvement projects.
    Subpart E--Relationships with providers.
    Subpart F--Submission of bids, premiums, and related information 
and plan approval.
    Subpart G--Payments for MA organizations.
    Subpart I--Organization compliance with State law and preemption by 
Federal law.
    Subpart J--Special rules for MA regional plans, including the 
establishment of MA regions, stabilization fund, and risk sharing.
    Subpart K--Application and contract requirements for MA 
organizations.
    Subpart L--Effect of change of ownership or leasing of facilities 
during term of contract.

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    Subpart M--Beneficiary grievances, organization determinations, and 
appeals.
    Subpart N--Medicare contract determinations and appeals.
    Subpart O--Intermediate sanctions.
Each of these subparts is discussed below in section II of this 
preamble.

II. Analysis of and Responses to Public Comments

A. Overview

1. Comments on the August 3, 2004 Proposed Rule
    We received 186 items of correspondence containing more than a 
thousand specific comments on the August 3, 2004 proposed rule. 
Commenters included MCOs and other industry representatives, 
representatives of physicians and other health care professionals, 
beneficiary advocacy groups, representatives of hospital and other 
providers, insurance companies, employers, States, accrediting and peer 
review organizations, members of the Congress, Indian Health Service 
(HIS), Indian Health Service, Tribal and Urban Health Programs (I/T/U), 
American Indians and Alaska Natives (AI/AN), and others. Consistent 
with the scope of the August 3, 2004 proposed rule, most of the 
comments addressed multiple issues, often in great detail. We received 
many comments expressing concerns unrelated to the proposed rule. Some 
commenters expressed concerns about Medicare unrelated to the MA 
program, 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 August 3, 2004 proposed rule we 
will be unable to address comments and concerns that are unrelated to 
the proposed rule. Listed below are the six areas of the proposed 
regulation that generated the most concern:
     Bidding and Payment.
     Access issues, including network adequacy and access 
providers, including rural providers.
     Specialized Medicare Advantage Plans.
     Establishment of MA Regions.
     Eligibility and enrollment issues, including disenrollment 
for failure to pay cost sharing and lock in.
    In addition, we received many comments on the proposed rule 
relating to Part 417 for Health Maintenance Organizations; Competitive 
Medical Plans, and Health Care Prepayment Plans that contract with CMS 
under cost contracts. A discussion of those comments may be found 
separately at that Part.
2. Organization of the Final Rule
    In this final rule, we address all comments received on the 
proposed rule. We are addressing issues according to the numerical 
order of the relative regulation sections.

B. General Comments

1. Administrative Procedure Act (APA) Issues
    We received several comments on various aspects of the rulemaking 
process, as discussed below:
    Comment: One commenter suggested that we waive the APA provision 
that requires at least 30 days notice prior to a final regulation 
becoming effective in order to allow applicants applying to become 
specialized MA plans for special needs individuals, or ``SNPs,'' to 
have the new requirements apply as soon as possible. The commenter made 
this recommendation in the event that this final regulation was not 
issued prior to the MMA statutory deadline for issuing a final 
regulation for SNPs that was 1 year following the date of enactment, or 
December 8, 2004.
    Response: The first two categories of special needs individuals, 
institutionalized persons and dual eligibles, were specified in the 
statute, and we have already begun working with plans wishing to become 
specialized MA plans for these categories of special needs individuals. 
We discuss in subpart A below our approach to allowing for the 
additional category of special needs individuals--those with severe or 
disabling chronic conditions. This final rule will take effect March 
22, 2005, except where otherwise noted. We do not believe it is 
necessary to waive the 30-day notice period because it likely will take 
longer than the 30-day period for a plan's application and approval 
process to occur. However, we intend to work with applicants who wish 
to offer specialized MA plans to ensure that the approval process is as 
efficient and timely as possible.
    Comment: We received a number of comments on the timing of the 
regulation and the short timeframe between issuance of the final 
regulation and preparation of applications and bids early in 2005 for 
contract year 2006. One commenter stated that the time required to re-
contract with its commercial provider networks to ensure that the PPO 
contracts contain the Medicare required language and rate structure 
that are reflective of CMS reimbursements, is substantial. The 
commenter indicated that it needed more time to build the system 
infrastructure to support a new systems platform than would be required 
for commercial enrollees. The commenters suggested that plans may have 
to limit the number of regions in which they participate because of the 
short timeframes between issuance of the regulation and the application 
filing deadline.
    Response: We agree that working within the statutory constraints of 
the MMA, including the relatively short period of about 13 months 
between enactment of the legislation and issuance of final regulations, 
there is little time between issuance of the regulation and the 
preparation of applications and bids in 2005 for contract year 2006. 
With respect to the short time frame in applications and submission of 
bids, please refer to the comments and responses related to bidding at 
Sec.  422.254 and Sec.  422.502 related to application requirements. 
Our goal beginning on the date of enactment of the MMA was to issue 
final regulations as soon as possible so that prospective MA plans 
would have the necessary information to be able to make business 
decisions before bids are due mid 2005.
    Comment: Several commenters recommended that CMS issue a final rule 
with comment period prior to implementation of the final rules. The 
commenters expressed concern that certain aspects of the proposed rule 
that would impact rural providers have not been specified in sufficient 
detail. One commenter recommended that CMS conduct a second notice of 
proposed rulemaking incorporating changes from the first round of 
comments and allowing for public comment on the additional details that 
are currently under development, or issue the regulations on an interim 
basis with a second comment period on the additional, important details 
that are currently under development or that reflect decisions made 
following this round of comments.
    Response: Under the APA, we are required to provide the public with 
the opportunity to review and comment upon proposed regulations. We 
have done this through the publication of the August 3, 2004 proposed 
rule and its corresponding comment period. We believe that allowing for 
a second round of comments or publishing interim regulations would make 
it difficult for MA organizations wishing to offer MA plans in 2006 to 
prepare to meet the new requirements imposed by the MMA and implemented 
by this final rule.
2. Other General Comments
    Comment: A number of commenters stated that the final regulation 
must

[[Page 4592]]

address the unique state of AI/AN people and the Indian health program. 
In particular, these comments raise concerns about the implications of 
the proposed rules on the Indian health care delivery system. For 
example, there is concern that the proposed rules will jeopardize 
significant revenues the Indian health system now collects from 
Medicaid for ``dual eligibles,'' that is, those individuals who are 
eligible for both Medicare and Medicaid. They ask for substantial 
modifications to the proposed rules to enable voluntary enrollment by 
AI/AN populations in MA plans. Some of the suggested modifications 
include: (1) encouraging MA enrollment by AI/AN by removing financial 
barriers, such as waiving AI/AN cost sharing for all plans; (2) 
ensuring that I/T/U Health Programs are held harmless financially, and 
are fully reimbursed for covered services provided to AI/AN who enroll 
in a MA plan.
    Response: We appreciate the numerous comments that provided 
information on unique health needs for the AI/AN populations. As noted 
elsewhere, we are implementing the MMA statute through this rulemaking. 
We do not have the flexibility to include language that would carve out 
a subset of Medicare beneficiaries, such as AI/AN populations, if it is 
not provided for in statutory language. Specific comments raised by the 
AI/AN and I/T/U organizations will be addressed in the respective 
subparts under which the comments were submitted. In general, however, 
we believe that the newly created regional plans will create new 
choices for the AI/AN populations, and that access to MA plans will be 
improved. Similarly, because MA regional plans must reimburse for all 
covered benefits in and out of network, IHS facilities may receive 
reimbursement for out of network care provided to a regional MA plan 
AI/AN beneficiary by that MA regional plan. Under provisions designed 
to protect the Medicare program from fraud and abuse, a broad waiver of 
beneficiary cost sharing of the type the commenter requests would not 
be permitted. However, we make no statement regarding the applicability 
of existing statutory and regulatory provisions that may allow for the 
waiver of cost sharing in certain cases.
    Comment: One commenter recommended that CMS develop and conduct 
educational and informational activities on the differences in the 
various MA options, particularly in areas where there are choices of 
original Medicare, managed care plans, PPOs, MSAs and PPFs plans. The 
commenter believes that there is a potential for confusion and error 
for beneficiaries with so many choices.
    Response: We agree that strong outreach to beneficiaries about 
their new choices of MA plans, as well as the drug benefit, is critical 
to the success of these new programs. We will be devoting more 
resources to providing new information and education on the new plan 
choices and drug benefit.
    Comment: We received a number of general comments on specialized MA 
plans for special needs individuals, sometimes referred to as ``SNPs'' 
or ``special needs plans''. Comments relating to definitions of SNPs 
may be found in subpart A and comments on enrollment may be found in 
subpart B below. Among the general comments was a suggestion to 
disseminate a set of guiding principles for SNPs and further refine 
them as experience increases. We also received a comment that network 
adequacy for SNPs should be evaluated to ensure timely, accessible, and 
appropriate care and that all necessary specialists are represented. 
Further, it was suggested that the provider network should be broad 
enough to ensure that vulnerable populations served have timely access 
to all necessary specialists required to address special needs.
    Additionally, several commenters stated that CMS should incorporate 
into regulation the authority to waive or modify MA requirements that 
conflict with the intent of the SNP provision. Finally, some commenters 
requested that CMS provide guidance with regard to the States' role in 
developing and approving SNPs for dual eligibles. It was recommended 
that CMS give states maximum flexibility in using waiver authority to 
integrate Medicare and Medicaid benefits for dual eligibles under SNP 
programs. A commenter suggested that CMS consult with State Medicaid 
agencies where Home and Community-based waivers are operating before 
allowing these populations to be enrolled in SNPs because this could 
add to the cost and complexity of providing services.
    Response: We provided Interim Guidance for SNPs in the 2005 Call 
Letter in June 2004 and will provide additional operational guidance 
for SNPs after publication of the final rule. Interim guidance may be 
obtained at www.cms.hhs.gov/healthplans/specialneedsplans/qaspecneeds06-23.pdf. Consistent with current policy for network 
adequacy for MA plans as found at Sec.  422.112, we will require that 
MA organizations submit information about their provider network and 
will review this information as part of the application and approval 
process to ensure that timely, accessible, and appropriate care is 
provided. We will be particularly interested in the availability of 
care designed to address the needs of the enrolled special needs 
population. While the MMA allows SNPs to limit enrollment to a defined 
population, as described in Sec.  422.52, the law does not provide for 
waiver of other MA requirements for SNPs. We encourage States and MA 
plans to work cooperatively in developing programs to serve dual 
eligibles and will help to coordinate these efforts where appropriate. 
We believe that SNPs can be appropriate for care and services to those 
in the community and lead to the coordination of the complex services 
they need.
    Finally, we note that program oversight is an essential government 
function that is an integral component of implementing the MA program. 
Throughout this rulemaking, we refer to government activity necessary 
to implement this section, which includes program oversight authority.

III. Provisions of the Proposed Rule, Analysis of and Responses to 
Comments on the Proposed Rule, and Final Decisions

    Part 417--Health Maintenance Organizations, Competitive Medical 
Plans, and Health Care Prepayment Plans
    Subpart J-Qualifying Conditions for Medicare Contracts Extension of 
Reasonable Cost Contracts (Sec.  417.402)
    Authority for cost HMOs/CMPs (cost plans) was due to expire on 
December 31, 2004. Section 234 of the MMA provides an initial extension 
of cost plans through December 31, 2007. It also provides for a 
continued extension of cost plans beyond December 31, 2007, under 
specific conditions.
    Effective for contract years beginning on or after January 1, 2008, 
cost plans may be extended where there are fewer than two coordinated 
care plan-model MA plans of the same type available to Medicare 
beneficiaries in the same service area. Both of the ``competing'' MA 
plans of the same type must meet minimum enrollment requirements for 
the entire previous year in order to trigger mandatory cost plan non-
renewal or service area reduction. We interpreted the statute to 
require cost plan service area reduction where there are two or more MA 
plans of the same type meeting minimum enrollment requirements 
competing for Medicare members in a portion of the cost plan's service 
area. We asked for comment on our interpretation in the proposed rule 
related to mandatory service area reductions, saying that an 
alternative

[[Page 4593]]

reading of section 234 of the MMA might permit renewal of a cost plan 
in all parts of its service area until there was competition from two 
(or more) MA coordinated care plans throughout the cost plan's service 
area. After reviewing comments and responding (below), we are adopting 
the proposed policy as final.
    At Sec.  417.402, we proposed to permit existing cost plans to 
expand their service areas through September 1, 2006. Thereafter, 
service area expansion applications by cost HMOs/CMPs will be initially 
evaluated and accepted only when there are not two or more MA plans of 
the same type meeting minimum enrollment requirements in the area in 
which the cost plan proposes to expand. After reviewing comments and 
responding (below), we are adopting the proposed policy as final.
    We received the following comments on the proposed provisions for 
subpart J of part 417 and have provided our responses:
    Comment: Many commenters supported the non-renewal of cost HMOs/
CMPs as proposed in the proposed rule. These commenters made reference 
to the statutory and Conference Committee Report language that 
indicated the Congressional intent that cost plans are to be required 
to operate under the same provisions as other private plans to the 
extent other private plans are willing to enter the cost plan's service 
area. Many other commenters objected to the partial non-renewal 
proposal made in the proposed rule. Many stated that competition from 
MA coordinated care plans was more likely in urban areas, where most 
cost plan enrollment is concentrated. These commenters stated that even 
where there is no MA coordinated care plan competition in rural areas, 
the viability of a cost plan without an urban ``core'' would likely be 
threatened. To the extent CMS non-renewed cost plans in urban areas, 
the financial viability of the organization offering the cost plan 
would be undermined in rural areas as well because of the loss of 
economies of scale. Such a result would be contrary, these commenters 
said, to an underlying concept of the MMA, which is to increase choices 
for Medicare beneficiaries in rural areas. Finally, many of these 
commenters stated that continuity of care would be needlessly lost for 
members in urban areas enrolled in cost plans that were partly non-
renewed, because the members would be forced to change Medicare plans 
and providers.
    Response: We generally support the notion of continuity of care. 
However, we believe that when competing MA coordinated care plans are 
available in an area that will be non-renewed for a cost plan, non-
renewed cost members are able to continue to receive services from 
current providers through either enrollment in one of the competing MA 
coordinated care plans or by returning to FFS Medicare. We recognize 
that when a cost plan is non-renewed in an urban area with MA 
coordinated care plan competition, the financial viability of the cost 
plan in rural areas without MA coordinated care plan competition may be 
undermined. However, we believe that allowing a cost plan to continue 
to compete for members in areas of MA competition would unfairly 
undermine the financial viability of the competing MA coordinated care 
plans. Therefore, we have not modified our regulation. We believe that 
this interpretation is consistent with the statutory intent that cost 
plans will not be permitted to compete for new members under different 
provisions from those applicable to other private plans that have 
entered the cost plan's service area.
    Comment: Some commenters stated that the proposed regulation text 
at Sec.  417.402(c)(1) and (2) did not specify what kind of ``year'' 
was meant--calendar year, 12 month period, or something else. All of 
these commenters also recommended that CMS specify in regulation text 
that the ``year'' referred to is a calendar year.
    Response: We agree with this comment and have modified the 
regulation text to specify that the ``year'' in question is a calendar 
year. This is consistent with the statute, in that MA and cost plan 
offerings are for calendar years. To the extent that competition has 
been present for the entire previous calendar year, it should mean the 
calendar year immediately prior to the year in which the cost plan will 
be required to non-renew in a portion of its service area or have its 
contract non-renewed.
    Comment: Many commenters recommended that CMS distinguish between 
the meaning of ``plan'' within the section 1876 cost program and the 
meaning of ``plan'' within the MA program. Under the section 1876 cost 
program, each CMS-contracting HMO/CMP is allowed to offer a single 
Medicare cost ``plan''--see section 1876(c)(2)(A)(I) of the Act. On the 
other hand, under the MA program, each CMS-contracting MA organization 
is permitted to offer many MA ``plans''--see Sec.  422.4(b).
    Response: We disagree with the commenters. Section 234 of the MMA 
expressly provides that a cost contract may not be extended or renewed 
for a service area if such service area during the previous year was 
within the service area of two or more coordinated care plans of the 
same type (that is, regional or local) that meet the relevant 
enrollment requirements. Because a single MA organization may offer two 
different MA coordinated care plans within a cost plan's service area, 
a single MA organization can trigger the non-renewal of the cost 
contract, if the other requirements of Section 1876(h)(5)(C)(ii) of the 
Act are met.
    Comment: Several commenters submitted comments stating that 
specialized MA plans for special needs individuals (special needs plans 
or SNPs) (defined at Sec.  422.2) should not count in the MA 
coordinated care plan competition tests in Sec.  417.402(c)(1) through 
(3), because they are not available to the general public and therefore 
not a true test of the availability of MA coordinated care plans in the 
service area of a cost plan.
    Response: We agree with the commenter that the Congress intended to 
permit cost plans to remain in place in an area until the enrollees in 
that cost plan have at least two local or two regional MA plan options 
to choose from in the area. Because in many cases cost enrollees would 
not be eligible to enroll in a SNP, we do not believe that the 
existence of a SNP in a service area should automatically count as an 
option available in that service area. We note that the statute refers 
to a cost plan's service area being within the ``service area'' of two 
local or regional MA plans. The MA regulations at Sec.  422.2 define a 
plan's service area as an area within which an MA-eligible individual 
may enroll in a particular MA plan offered by an MA organization. 
Although a SNP's service area is open to all individuals in the service 
area who are in the special needs category served by the plan, it may 
not be open generally to MA-eligible individuals (for example, if it is 
a SNP that exclusively, rather than disproportionately, enrolls special 
needs individuals). For this reason, we believe that a cost plan may 
not be ``within the service area'' of a SNP, as this term is used in 
the competition test, in some cases. We will therefore apply the 
competition test on a case-by-case basis with respect to SNPs. If the 
SNP is an option available to the cost plan's enrollees, and the SNP 
meets the requirements of section 1876(h)(5)(C)(ii) of the Act and 
Sec.  417.402(c), it will be taken into account in determining whether 
the cost plan may be renewed. Similar considerations apply to MA plans 
that exclusively enroll employer/labor group members under authority 
provided in section 1857(i) of the Act

[[Page 4594]]

and Sec.  422.106(c) and (d). To the extent the employer/labor group MA 
plan is available to the cost plan's enrollees, and the MA plan meets 
the requirements of section 1876(h)(C)(ii) of the Act and Sec.  
417.402(c), it will be taken into account in determining whether the 
cost plan may be renewed. Thus, we will also apply the competition test 
on a case-by-case basis with respect to employer/labor group MA plans.
    Comment: One commenter suggested that implicit in the 
``competition'' tests was the fact that the MA coordinated care plans 
that caused the non-renewal in a portion of the service area, or that 
caused the non-renewal of the cost plan in its entire service area, 
would be available in the coming year. The commenter was concerned that 
CMS might enforce this section of the cost regulations, even if one of 
the MA plans used in establishing the ``competition'' threshold were 
non-renewing or withdrawing from the service area in the year in which 
enforcement would occur.
    Response: Because such a result would be contrary to statutory 
intent, CMS will not proceed with enforcement when fewer than two MA 
coordinated care plans will be offered to Medicare beneficiaries in the 
affected area at the time of enforcement.
    Comment: One commenter asked CMS to state its clear intent in 
regulatory text that we will allow cost plans to expand service areas 
after September 1, 2006.
    Response: As we said in the preamble of the proposed rule and 
repeated in this preamble: ``We will permit existing cost plans to 
expand their service areas through September 1, 2006. Thereafter, 
service area expansion applications by cost HMOs/CMPs will be initially 
evaluated and accepted only when there are not two or more MA plans of 
the same type meeting minimum enrollment requirements in the area in 
which the cost plan proposes to expand.'' We specifically included the 
first sentence in regulation text at Sec.  417.402(b). However, service 
area expansions are not guaranteed after that date. Please note that 
the regulation text at Sec.  417.402(b) specifically authorizing 
service area expansions through September 1, 2006, does not preclude 
them thereafter. Additionally, the new language replaces identical 
language in this section of the regulation (and which language first 
appeared in section 634 of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA)) which provided service 
area expansion authority for cost plans through September 1, 2003. The 
commenter should note that we have previously interpreted the language 
in BIPA and in our regulations to be permissive in this area, rather 
than proscriptive. We will continue to apply it permissively in this 
area to the extent that the conditions for non-renewal under Section 
1876(h)(5)(C) and Sec.  417.402(c) are not present.

Subpart Q--Beneficiary Appeals

    Changes to subpart Q are addressed in the preamble discussion for 
subpart M, which deals with appeals policy for MA plans, cost plans and 
HCPPs.

A. Subpart A--General Provisions (Sec.  422.1)

1. Conforming Changes
    Subpart A of the August 3, 2004 proposed rule set forth several 
general and conforming changes dictated by MMA. Below is a summary of 
the provisions in subpart A. (For a broader discussion of the 
provisions, please refer to our proposed rule.) The provisions are as 
follows:
     Section Sec.  422.1 lists the statutory authority that is 
implemented in part 422. In Sec.  422.1, we have added the new section 
1858 of the Act that pertains to ``Special rule for MA Regional 
Plans.''
     We removed provisions relating to application requirements 
and evaluation and determination procedures in Sec.  422.6 and Sec.  
422.8 and added them to Sec.  422.501 and Sec.  422.502 of subpart K, 
so that all application and contracting information is in one place.
     We redesignated and amended Sec.  422.10 as Sec.  422.6 
and amended newly redesignated Sec.  422.6. Section 422.6 (formerly 
Sec.  422.10) described the user fees associated with the Medicare 
Beneficiary Education and Information Campaign, required under section 
1857(e)(2) of the Act.
2. Definitions (Sec.  422.2)
    The majority of the proposed changes in subpart A concerned new, 
revised, and obsolete definitions for the new MA Program in Sec.  
422.2. The MMA required several new and broad definitions; ``MA 
regional plans,'' ``specialized MA plans,'' ``ACR,'' ``Additional 
benefits,'' ``Adjusted community rate,'' and ``M+C'' obsolete after 
2006.
    In proposed Sec.  422.2, we also revised several existing 
definitions to make them consistent with the MMA statute. For example, 
Mandatory supplemental benefits are redefined to incorporate language 
reflecting that these benefits may be paid for through premiums and 
cost sharing or through the application of a rebate, or both. 
Therefore, mandatory supplemental benefits are defined as health care 
services not covered by Medicare that an MA enrollee must purchase as 
part of an MA plan. Benefits may include reductions in cost sharing for 
benefits under the original Medicare FFS program, and are paid for in 
the form of premiums and cost sharing, or by an application of the 
beneficiary rebate rule in section 1854(b)(1)(C)(ii)(I) of the Act, or 
both.
    However, optional supplemental benefits retained the same 
definition as under the M+C program as health services not covered by 
Medicare that are purchased at the option of the MA enrollee and paid 
for in full, directly by (or on behalf of) the Medicare enrollee, in 
the form of premiums or cost-sharing. (Throughout the regulation, the 
phrase ``supplemental benefits'' refers to both mandatory and optional 
supplemental benefits.) The terms ``mandatory supplemental'' and 
``optional supplemental'' are used when referring specifically to one 
of the types of supplemental benefits.
    We removed ``additional benefits'' from the definition of ``basic 
benefits'' because MA plans will no longer offer additional benefits. 
In addition, we replaced the word ``ACR'' process with the words 
``annual bidding'' process in the definition of ``benefits'' to reflect 
the new bidding process for submission and approval of benefits. 
Finally, we revised the definition of ``service area'' to incorporate 
the concept of the new MA regional plan's service area that consists of 
an entire region.
    Under section 1851(a)(2)(A) of the Act, two new types of 
coordinated care plans were established; MA Regional plans, which are 
regional PPO plans, and specialized MA plans for special needs 
individuals, or SNPs. We defined an ``MA local area'' as a county or 
other area specified by us because it is important to distinguish an MA 
local area from an MA region. We defined an ``MA regional plan'' 
because it is a new type of coordinated care plan choice for 
beneficiaries. While PPOs first became a choice for beneficiaries under 
the BBA, they operated as ``local'' plans on a county (including multi-
county) or partial county basis. The MA regional plan functions like a 
local PPO but must serve an entire region.
    A regional MA plan's service area is one or more entire MA regions; 
thus, we defined an ``MA regional plan'' as a private health plan that 
operates as a PPO, but serves an entire CMS-designated region. Local 
PPOs that may offer MA plans under the MA program, the regional PPOs 
must have a network of contracting providers that have agreed to a 
specific reimbursement for covered benefits that are offered by the MA 
regional plan, and must also provide for reimbursement for all

[[Page 4595]]

covered benefits regardless of whether the covered benefits are 
provided through the network providers or outside of the network.
    We defined an ``MA local plan'' as one that is not an MA regional 
plan. Also defined under part 422 are the ``Prescription Drug 
Sponsor,'' ``PDP,'' and a ``MA Prescription Drug (MA-PD) plan.'' A 
sponsor must be a private entity that meets our requirements and 
standards. PDP sponsors may offer multiple plans throughout the country 
or in a region, but sponsors must submit an individual bid for each 
plan.
    An MA-PD plan is an MA plan that also provides qualified 
prescription drug coverage as found in Part D of the Act. An 
organization offering a coordinated care MA plan must have an MA-PD 
plan in each of the service areas in which it operates, as required 
under section 1860D 21(a)(1) and (2) of Part D of the Act.
    In section 1859(b)(6)(A) of the Act, specialized MA plans for 
special needs individuals or SNPs are defined to be MA plans that 
exclusively serve special needs individuals defined in section 
1859(b)(6)(B) of the Act. The establishment of specialized MA plans 
allows MA plans to exclusively enroll special needs individuals in MA 
plans that have targeted clinical programs for these individuals.
    Section 1859(b)(6)(B) of the Act identifies three types of special 
needs individual as: (1) institutionalized individuals; (2) individuals 
entitled to medical assistance under a State plan under Title XIX; and 
(3) other individuals with severe or disabling chronic conditions as 
the Secretary determines would benefit from enrollment in a SNP plan.
    Comment: One commenter supported a broad definition that tracks 
section 1859(b)(6) of the Act in order to provide CMS with the 
flexibility needed to approve a wide range of proposals to meet the 
unique needs of special populations and expand their choices.
    Response: We agree with the commenter. We are providing general 
guidelines in our regulations in order to maintain the flexibility to 
approve a wide range of proposals, while also protecting the interests 
of special needs beneficiaries.
    The Secretary may also designate an MA plan as a specialized MA 
plan for special needs individuals, ``SNP,'' if the plan 
``disproportionately'' serves special needs individuals.
    Comment: Several commenters responded to the question in the 
proposed rule as to whether CMS should allow specialized MA plans that 
disproportionately enroll special needs individuals, or 
``disproportionate percentage'' plans and how they should be defined. 
Most commenters supported including ``disproportionate percentage'' 
plans in the definition of SNPs. One of the reasons given was to allow 
married beneficiaries, or children of special needs individuals, to 
enroll in the same plan as the spouse or parent, even if only one 
individual meets the definition of a special needs individual.
    Many commenters suggested that CMS not establish detailed criteria 
to define disproportionate percentage, particularly at the outset. It 
was felt that enrollment thresholds might act as a barrier to plan 
participation and limit choices available to Medicare beneficiaries. 
Some commenters suggested that CMS identify ``exclusive'' and 
``disproportionate'' plans at the time of each application. Some 
commenters recommended that the criteria be national, not regional or 
local.
    Several commenters agreed that the criteria should be quantitative, 
for example, an MA plan risk score in the upper quintile of all MA 
plans, or a frailty score in the upper quintile of all MA plans as 
measured by Activities of Daily Living (ADL) scores on the Health 
Outcomes Survey (HOS).
    Some commenters recommended that a ``disproportionate percentage'' 
SNP enroll fifty (50) percent or more special needs individuals. 
Another commenter suggested that SNPs remain exclusive, but if plans 
were able to enroll those without special needs, at least eighty-five 
(85) percent of the plan's enrollees should be individuals with special 
needs. Another commenter stated that requiring an upper limit of more 
than seventy-five (75) percent of special needs individuals would be 
problematic. One commenter believes that ``redesignated'' SNPs, that 
is, regular MA plans that become SNPs, be allowed to continue enrolling 
non-special needs individuals as long as overall enrollment contains a 
higher proportion of special needs individuals than exist in the plan's 
service area. One commenter suggested that--(1) an annual certification 
and compliance process; (2) that new plans have a 3-year startup period 
to attain the threshold, and (3) that CMS annually publish risk score 
distributions. Another commenter recommended that non-exclusive plans 
be defined as having a higher than average enrollment of one or more of 
the special needs individuals groups as estimated for MA plans and/or 
the FFS population.
    Response: We agree that a special needs individual's family members 
may want to join the same plan. We acknowledge that MA plans do not 
have to be exclusive to provide quality specialized programs for 
special needs individuals. We received a wide range of recommendations 
for defining a ``disproportionate percentage'' SNP. We acknowledge that 
there are numerous ways to define and identify disproportionate 
percentage SNPs and agree with those commenters who felt the parameters 
should not be overly restrictive, particularly at the outset. SNPs are 
a new type of coordinated care plan and we believe that plans and CMS 
might not anticipate all factors that should be considered in 
determining an acceptable percentage. We also want to encourage plans 
to develop programs to more effectively care for special needs 
individuals. In order to ensure flexibility, and take into 
consideration the experience gained by plans and CMS as SNPs mature, we 
will define a ``disproportionate percentage'' SNP as one that enrolls a 
greater proportion of the target group (dually eligible, 
institutionalized, or those with a specified chronic illness or 
disability) of special needs individuals than occur nationally in the 
Medicare population based on data acceptable to CMS. We will provide 
further guidance as to what data sources may be used to determine a 
national percentage for a special needs group being targeted by the 
disproportionate percentage plan. Under our authority as provided in 
section 231(d) of the MMA, we are revising the definition of 
specialized MA plan to include ``disproportionate percentage'' plans.
    Comment: Several comments were received regarding how CMS should 
identify those with severe or disabling chronic conditions that would 
make them eligible for enrollment in a SNP. Several commenters 
suggested using broad flexibility, reflecting the language in section 
1858(b)(6) of the Act. Other commenters recommended that SNPs should 
serve as laboratories for developing population-based management 
protocols, not single-disease State management protocols for diagnoses 
that could be well-served by a standard MA plan. Another commenter 
recommended limiting enrollment to those with late-stage chronic 
conditions, those with co-morbidities, adult disabled, and frail 
elderly. Some commenters suggested basing the definition on conditions 
for which alternate care delivery models, such as disease management 
and evidence-based medicine, exist, and also take into consideration 
conditions that are expensive and prevalent for

[[Page 4596]]

there to be savings and risk-management potential.
    Commenters also recommended that conditions should be those 
associated with recognized quality measures, so that CMS may carefully 
monitor specialized MA plans. None of the commenters objected to 
including those individuals who are not institutionalized but require 
an equivalent level of care. ESRD, diabetes, congestive heart failure, 
Alzheimer's and other dementias along with one or more other serious 
conditions, HIV/AIDs, and frail elderly and adult disabled with 
multiple chronic conditions requiring complex medical management were 
among the specific conditions suggested for specialized MA plans.
    Another commenter suggested that on an interim basis CMS restrict 
the definition to those who are nursing home certifiable, as defined by 
each State; ESRD patients; and those diagnosed with AIDs, and, in the 
meantime, collect ADL data through the Health Outcomes Survey (HOS) and 
use this measure in conjunction with Activities of Daily Living (ADL) 
measures to identify high-risk groups. Other commenters suggested 
additional detailed formulas for identifying groups eligible for 
specialized MA plans.
    Response: Because this is a new ``untested'' type of MA plan, we 
are not setting forth in regulation a detailed definition of severe and 
disabling chronic condition that might limit plan flexibility. We will 
review and evaluate proposals for specialized MA plans that serve 
severe or disabling chronic disease categories, including HIV/AIDs, on 
a case-by-case basis. Among the criteria to be considered will be the 
appropriateness of the target population, the existence of clinical 
programs or special expertise to serve the target population, and 
whether the proposal discriminates against ``sicker'' members of the 
target population.

Other Comments on Sec.  422.2

    We requested comments on Sec.  422.2 on the development of an HIV/
AIDS special needs plan that would address the special health needs, 
including prescription drugs, of the Medicare-eligible population 
living with HIV/AIDS.
    We received several comments supportive of the development of an 
HIV/AIDS special needs plan. Therefore, we will consider this type of 
plan application to become a special needs plan for Medicare-eligible 
individuals living with HIV/AIDs.
    For purposes of specialized MA plans, we proposed to define 
``institutionalized'' in the proposed rule as residing in a long-term 
care facility for more than 90 days as determined by the presence of a 
90-day assessment in the Minimum Data Set (MDS).
    Comment: Several commenters suggested that the 90-day residence 
requirement (as determined by a 90-day assessment in the minimum data 
set) be modified. One commenter suggested determining institutional 
status based on the discharge potential at admission. Another commenter 
suggested changing the requirement to 30 days. One commenter did not 
object to 90 days, but recommended changing the language to allow CMS 
to approve exceptions in case the institution failed to perform the 
assessment. In addition, one commenter suggested that 
``institutionalized'' also include those residing in Intermediate Care 
Facilities for the Mentally Retarded (ICF/MR). Several commenters 
recommended that those living in the community while requiring an 
institutional level of care be considered institutionalized.
    Response: In response to comments, we are clarifying and broadening 
the definition of institutionalized for purposes of defining a special 
needs individual to take into consideration those with chronic mental 
conditions and other chronic conditions. For purposes of defining a 
special needs individual, ``institutionalized'' means residing in or 
expected to reside in a long-term care facility which is a skilled 
nursing facility (SNF) as defined in section 1819(a) of the Act; a 
nursing facility (NF) as defined in section 1919(a) of the Act; a SNF/
NF; an intermediate care facility for the mentally retarded (ICF/MR) as 
defined in section 1905(d) of the Act; or an inpatient psychiatric 
facility as defined in section 1861(f) of the Act for 90 days or 
longer.
    A SNP may enroll special needs individuals prior to a 90-day stay 
based on an assessment of the potential for a stay of that length as 
long as the assessment is of a type approved by CMS.. For example, a 
SNP for individuals with serious mental conditions may show us that the 
State requires a plan of care or similar assessment prepared by a 
health professional upon admission. We recognize that this definition 
is not the same as the definition of ``institutionalized individual'' 
in 42 CFR Sec.  423.772. That provision is an income and resource-based 
definition for the purpose of determining Part D premiums and cost-
sharing subsidies for low-income individuals. The term 
``institutionalized'' as used for purposes of defining a special needs 
individual under this Part is for the purpose of identifying a 
vulnerable population that might benefit from enrollment into a SNP. We 
also wish to clarify that our definition of institutionalized for 
purposes of defining a special needs individual does not relate to the 
MA payment methodology.
    For purposes of SNPs, we may also consider as institutionalized 
those individuals living in the community but requiring a level-of-care 
equivalent to that of those individuals in the aforementioned long term 
care facilities. We believe that 90 days is the most appropriate and 
accurate timeframe for determining long-term residence in an 
institution. We base this on information we collected showing that, 
once a beneficiary is institutionalized for 90 or more days, it is less 
likely that that individual will return to a community setting. 
However, SNPs may enroll institutionalized beneficiaries based on a 
CMS-approved assessment (as described in further operational guidance 
following publication of this rule) showing the beneficiary is expected 
to reside in the institution for 90 days or more. Given the latitude 
provided under the disproportionate percentage criteria, we do not 
think that the 90-day definition for institutionalized will adversely 
affect specialized MA plans' ability to enroll eligible beneficiaries.
    Comment: Several commenters supported the proposed approach to 
require all specialized MA plans to provide Part D coverage.
    Response: We agree with the commenters, especially in light of the 
fact that special needs individuals in particular need access to 
prescription drugs to manage and control their severe or disabling 
chronic conditions. Therefore, we are including the Part D coverage 
requirement for all specialized MA plans at Sec.  422.2 in the 
definition of a specialized MA Plan.
    Comment: One commenter recommended that CMS change the definition 
of PDP as it is incorrect and not consistent with the Medicare 
Prescription Drug Benefit Program proposed rule.
    Response: We agree with the recommended change to the definitions 
of PDP and PDP sponsor found at Sec.  422.2. To avoid any confusion, we 
are revising the definitions in Title II to cross-reference the 
definitions of PDP and PDP sponsor found in part 423, the Medicare 
Prescription Drug Benefit.
    Comment: Several commenters recommended that CMS make a revision to 
the basic benefits definition found at Sec.  422.2 to add ``including 
covered services received through an IHS

[[Page 4597]]

program.'' Other commenters recommended that CMS add to the special 
needs individual definition ``AI/IN are exempt from mandatory 
enrollment in Title XIX plans but would qualify for optional enrollment 
in an AI/AN specialized need plan.''
    Response: We do not believe there is a statutory basis in the MMA 
to include non-covered Medicare services received through an IHS 
program in the definition of basic benefits. We also do not believe it 
is necessary to include a specific reference to Medicare covered 
services provided through an IHS program in the definition of basic 
benefits. If a service is a covered service, it is already included in 
the definition. Therefore, we are not making the requested change. 
Similarly, the MMA does not authorize us to revise the definition of 
special needs individual as suggested. The statute defines special 
needs individuals who are defined as those who are Medicaid, 
institutionalized or those with severe or disabling chronic conditions. 
Clearly, AI/AN individuals who fit any of those definitions could 
choose to enroll in a specialized MA plan if one were offered in their 
area. The suggested change to the definition of special needs 
individuals to add optional enrollment in an AI/AN specialized MA plan 
suggests that some AI/AN organizations may be interested in offering a 
specialized MA plan. Under the statute, a specialized MA plan must be 
open to all eligible Medicare beneficiaries who are within the class of 
special needs individuals the plan serves. We see no statutory basis 
for allowing a plan to limit enrollment only to AI/AN Medicare 
beneficiaries. Conceptually, supplemental benefits could be offered in 
the specialized MA plan to assist chronically ill enrollees to prevent 
or treat illnesses that affect AI/AN populations and others enrolled in 
the plan. As described at Sec.  422.501, a prospective SNP would need 
to submit an application to CMS detailing its plan for treating those 
with severe or disabling chronic conditions. Finally, we would note 
that we are not adding language exempting AI/AN from mandatory 
enrollment in Title XIX plans as it is not within the scope of this 
rulemaking. We note however, that under sections 1115 and 1915(b) of 
the Act, mandatory enrollment under Medicaid for such populations is 
permitted.
    Comment: Several commenters suggested that CMS add a new definition 
to Sec.  422.2 to afford specialized MA plans the status of regional MA 
plans for most purposes (including special rules and incentives 
applicable to regional MA plans), without having to cover multiple 
States. The commenters suggested that plans may be reluctant to take on 
multiple State regions with enrollment limited to Medicaid eligibles in 
the region.
    Response: As described in section 1858(a)(1) of the Act and as 
reflected in Sec.  422.455(a), a MA plan must cover an entire region, 
including offering enrollment to all eligible Medicare beneficiaries 
within that region whether the region is a single State or multiple 
State area. Therefore, a special needs plan may receive the 
stabilization fund payments and other incentives for its participation 
as a regional plan only if the plan would comply with all requirements 
in section 1858 of the Act applicable to Regional MA plans. This means, 
that it would have to be open to enrollment for every member of the 
special needs category in the entire region in question, meet access 
standards for the individuals in all areas of the region, market to all 
areas of the region, and offer uniform benefits and cost-sharing in all 
areas of the region.
    Comment: A commenter recommended that CMS revise the definition of 
service area as found in Sec.  422.2. The commenter indicated that as 
proposed, the language of Sec.  422.2 appears to have established a 
lower standard for approval of regional PPO service areas. The 
commenter recommended that CMS separately define service area 
requirements for HMOs and PPOs and that the requirements for approval 
of a PPO apply to both local and regional PPO plans alike.
    The commenter also recommended that CMS consider the more flexible 
design of a PPO and in turn allow for more flexibility with respect to 
service area approval. The commenter understands that local PPOs are 
not required to cover an entire region, but also indicated that it is 
difficult even in small States to meet the availability and 
accessibility requirements by the time the service area application is 
due.
    Response: We appreciated the comment to clarify this definition as 
we found it had been improperly numbered and created some confusion. 
Therefore, we have renumbered the sub-definitions and included language 
that makes clear that we may consider whether the contracting provider 
network meets the access and availability standards set forth in Sec.  
422.112, for all MA coordinated care plans and network MA MSA plans. We 
also have made technical corrections because the distinction between 
non-network and network MSA plans is no longer applicable, as discussed 
in further detail below. We believe this change will further reduce 
confusion.
3. Types of MA Plans (Sec.  422.4)
    The MA program is intended to provide beneficiaries access to a 
wider array of private health plan choices than under the M+C program 
and to increase the number of areas in which private health care 
options are available to Medicare beneficiaries. Entities can contract 
with us to provide five general categories or types of plans: (1) local 
MA coordinated care plans; (2) MA MSA plans; (3) MA PFFS plans; (4) 
regional PPO coordinated care plans; and (5) specialized MA coordinated 
care plans.
    In the August 3, 2004 proposed rule, we proposed to clarify that 
the PPO definition that was in existence before (defined by the BBRA) 
was solely for purposes of the application of the more limited quality 
assurance requirements. For PPO-type plans that are offered by MA 
organizations that are licensed or organized under State law as HMOs, 
the quality assurance requirements that apply to all other coordinated 
care plans in section 1852(e) of the Act also apply to those PPO-type 
plans.
    Effective January 1, 2006, MA organizations that offer MA local 
plans that are PPOs will need to provide only for the collection, 
analysis, and reporting of data that permit the measurement of health 
outcomes and other indices of quality insofar as services are furnished 
by providers that have contracted with the MA organization under those 
PPO plans. However, a local PPO offered by an MA organization that is 
licensed or organized under State law as an HMO will be required to 
meet the normal data collection, analysis, and reporting requirements. 
We proposed to modify the definition of PPOs in Sec.  422.4 to account 
for this more limited interpretation of State licensure requirements 
and modified headings in Sec.  422.152(b) and (e).
    Under section 233 of the MMA, MA organizations are authorized to 
offer MSA plans as a permanent option. MMA also eliminated the limits 
imposed on MSA plans by the BBA, including a time limit on enrollment 
and a limit on the number of beneficiaries who could enroll in the 
plans, and exempted MSA plans from certain quality assurance 
requirements that the BBA applied to ``network'' MSA plans.
    To conform with MMA's changes to MSAs, we proposed to delete the 
descriptions of the M+C network MSA plan and M+C non-network MSA plan 
as different types of plans at

[[Page 4598]]

Sec.  422.4(a)(2)(ii), since the distinction between network and non-
network MSAs for the purpose of quality assurance requirements was no 
longer applicable. As noted above, we are making similar changes to the 
definition of service area at Sec.  422.2.
    We are making a technical correction to the final MA regulation. 
Our current regulations at Sec.  422.2 read ``Religious and Fraternal 
Benefit (RFB) Society.'' We are amending the definition of ``Religious 
and Fraternal Benefit (RFB) Society'' by removing the words ``Religious 
and fraternal'' and adding the words ``Religious fraternal'' in their 
place. We are making this change to the definition as it is potentially 
confusing and is not consistent with the statutory definition of 
``Religious Fraternal Benefit Society'' at section 1859(e)(3) of the 
Social Security Act. We are also making a technical change to Sec.  
422.4(a) to clarify that RFB Society plans may be any type of MA plan, 
and are not restricted to being a type of coordinated care plan only, 
as implied by the inclusion of ``RFBs'' exclusively in Sec.  
422.4(a)(1)(iii). Thus, we are removing the reference to RFBs from that 
section. We also are deleting the word ``network'' from the 
parenthetical at the end of Sec.  422.4(a)(1)(iii) because the 
distinction between network and non-network MSAs no longer applies.
    Comment: Many commenters suggested that CMS more clearly coordinate 
between the Medicare Prescription Drug Benefit Rule at part 423 and the 
MA Program Rule at part 422.
    Response: In response to this comment, we are making several 
changes to clarify the interaction between Part C and Part D. 
Specifically, we are clarifying the language at Sec.  422.4 on types of 
MA plans and Part D prescription drug coverage. We are adding a new 
paragraph (c), Rule for MA Plans' Part D Coverage. This paragraph 
clarifies the requirements for MA coordinated care plans, MA MSAs, and 
MA PFFS plans by stating that a coordinated care plan must offer 
qualified Part D coverage meeting the requirements in Sec.  423.104 in 
that plan or in another MA plan in that area. We also added language 
that MSAs cannot offer drug coverage, other than that required under 
Parts A and B of Title XVIII of the Act. Finally, we added language 
that MA organizations offering PFFS plans can choose to offer qualified 
Part D coverage meeting the requirement in Sec.  423.104 in that plan.
    Comment: One commenter recommended that CMS clarify the language at 
Sec.  422.4(a)(1)(v). The commenter wants to ensure that an 
organization that wants to apply as a local HMO, but does not have an 
HMO license in its State, but is otherwise licensed as a risk-bearing 
entity in its State, will not be considered a PPO and thus subject to 
the 2-year moratorium on local PPOs as found at section 221(a)(2) of 
the MMA and proposed at Sec.  422.451.
    Response: We do not believe that a clarification of Sec.  
422.4(a)(1)(v) is required as Sec.  422.400 already provides that an MA 
organization must be licensed under State law, or otherwise authorized 
to operate under State law, as a risk-bearing entity (as defined in 
Sec.  422.2) eligible to offer health insurance or health benefits 
coverage in each State in which it offers one or more MA plans. 
Therefore, an organization that wishes to apply as a local MA plan HMO 
and has a State-risk bearing license would be considered an HMO and not 
be considered as a local MA plan PPO nor subject to the PPO moratorium 
described at Sec.  422.451. However, a plan would have to market itself 
as an HMO or an HMO with a POS option. A plan could not market itself 
as a PPO because of the potential for confusion.
    Comment: Several commenters recommended that CMS include new 
language in the final regulation that ensures that the type of denial 
of covered services as described in the Government Accountability 
Office (GAO) report entitled ``Medicare Demonstration PPOs: Financial 
and Other Advantages for Plans, Few Advantages for Beneficiaries (GAO-
04-960)'' never happens again. One commenter, also referring to the GAO 
report, expressed concern that the Agency is not effectively enforcing 
current law, based on the recent GAO findings.
    Response: In response to the GAO evaluation, we agreed to implement 
the GAO recommendation for us to instruct Medicare PPO Demonstration 
plan participants to remove impermissible restrictions on an enrollee's 
access to providers for all covered plan benefits. We are committed to 
assuring that local and regional PPOs provide reimbursement for all 
covered benefits regardless of whether the benefits are provided within 
the network of providers as found in Sec.  422.4(a)(1)(v).
    Comment: Several commenters recommended that CMS require non-
contracted providers to accept Medicare fees as payment in full with no 
balance billing to the beneficiary. The commenters believe that this 
approach will protect beneficiaries from excessive payment liability 
for out of network services.
    Response: As discussed in further detail in subpart C of the 
preamble to this final rule, there are several existing limitations on 
balance billing that apply to protect Medicare beneficiaries regardless 
of whether they are enrolled in an MA plan. Further, under existing 
rules, beneficiaries may not be held liable for more than the amount of 
out-of-network cost sharing for the service specified in the plan. For 
these reasons, we do not believe the changes requested by the commenter 
are necessary.
    Comment: Several commenters supported the amendment found in the 
proposed rule that clarifies that a plan licensed as an HMO may still 
become a PPO under its HMO license as long as the State allows the HMO 
to offer a PPO under its HMO license. However, the commenters suggested 
that CMS revise Sec.  422.4(a)(1)(v) in the following two ways: (1) 
clarify that PPOs may establish before authorization requirements for 
services obtained out-of-network that would allow for a review based on 
medical appropriateness; and (2) modify the provision to indicate that 
PPOs are not obligated to make available out of network certain types 
of programs, like health and wellness programs, for which no non-
network counterpart is available.
    The commenters also recommended that CMS clarify that only original 
Medicare benefits must be covered both in and out of network and that 
covered benefits that are not part of original Medicare need not be 
covered out of network. The commenters opposed CMS' requirement that 
for 2005, PPO plans must offer all benefits both in and out of network. 
The commenters stated that many plans in the private sector and in the 
FEHB program limit out-of-network coverage for some services. The 
commenters believe that requiring coverage of all non-original Medicare 
benefits in and out of network implies that there is a standard 
allowance or price reference upon which to base payments for these 
services. The commenters also suggest that there are no balance billing 
protections for the beneficiary who seeks care out of network. The 
commenter expressed similar concerns around the Medicare drug benefit 
and the lack of specificity regarding coverage of non-original Medicare 
benefits. The commenter also believe that covering certain benefits out 
of network (for example, disease management, 24-hour advice nurse 
lines, and wellness programs) will pose a significant challenge.
    Response: To respond to the first recommended change to Sec.  
422.4(a)(1)(v)requesting that MA plans be allowed to impose pre-
authorization

[[Page 4599]]

requirements on out-of-network care by PPOs, section 
1852(e)(3)(A)(iv)(II) of the Act states that a PPO plan must provide 
for reimbursement for all covered benefits, regardless of whether the 
benefits are provided within the plan's network of providers. 
Similarly, section 1859(b)(4)(B) of the Act, which defines MA regional 
PPOs, includes the same requirement to provide for reimbursement for 
all covered benefits regardless of whether the benefits are provided 
within the network of providers. These provisions indicate the 
Congress's clear intent to ensure that PPOs provide coverage for all 
plan-covered benefits both in and out of network. Further, although 
other coordinated care plans may include mechanisms to control 
utilization, such as referrals from gatekeepers for an enrollee to 
receive services within the plan, the definition of PPO contained in 
sections 1852(e)(3)(A)(iv) and 1859(b)(4)(b) of the Act indicates that 
local and regional PPOs may not use similar mechanisms, such as pre-
authorization, to restrict enrollee access to out-of-network services. 
However, there are several ways PPOs can appropriately seek to promote 
the use of in-network services. For example, PPOs may encourage 
beneficiaries to notify them before seeking care out of network, so 
that care is coordinated in and out of network. PPO plans may offer 
incentives to beneficiaries to provide notice of their intent to seek 
out-of-network services by discounting out-of-network cost sharing when 
beneficiaries provide notice before receiving services. Further, MA 
organizations are required to have procedures for making determinations 
of whether an enrollee is entitled to receive a health service and the 
amount that the enrollee will be required to pay for the service. Thus, 
a PPO plan enrollee and provider may seek an advance determination of 
coverage before receiving the service, and we encourage PPO enrollees 
to avail themselves of this option.
    On the commenters' request to clarify in Sec.  422.4(a)(1)(v) that 
only original Medicare benefits must be covered in and out of network, 
we believe that the clear language in the statute at section 
1859(b)(4)(B) of the Act relating to regional MA plans and section 
1852(e)(3)(A)(iv)(II) of the Act relating to local PPOs, does not 
permit us to limit the requirement that PPOs provide for reimbursement 
for all plan-covered benefits both in and out of network. Therefore, we 
are not modifying the definition of PPOs at Sec.  422.4(a)(1)(v). 
However, to respond to some of the concerns raised in the comment, we 
again note that plans can reduce the regular cost sharing for out-of-
network benefits for beneficiaries who voluntarily seek pre-
authorization for those benefits. As described by another response to 
comment above, we disagree with the commenter that there are no balance 
billing protections for beneficiaries. There are limitations on balance 
billing to protect beneficiaries regardless of whether they are 
involved in an MA plan or not. Finally, on the issue of benefits, such 
as nurse advice lines, which plans believe should not be made available 
out of network, we believe that as a practical matter, most of these 
types of benefits will be unattainable out of network because they are 
designed to be provided exclusively to plan members. Additional 
discussion of these types of out-of-network benefits can be found in 
the subpart C preamble.
    Comment: Comments were received on Sec.  422.4(a)(1)(v). Several 
commenters suggested that CMS address perceived inconsistencies in 
licensing requirements for PPOs as compared to HMOs by confirming the 
scope of State licensure requirements that apply to entities offering 
MA PPO plans, as State licensing laws may restrict an HMO's ability to 
offer a PPO plan.
    Response: We do not believe there are inconsistencies. All MA plans 
must be licensed by the State as a risk-bearing entity. State law 
controls whether the MA organization is licensed or authorized to offer 
the type of MA plan it proposes to offer. As we explained in the 
preamble discussion in subpart A of the proposed rule, the fact that MA 
organizations offering local PPOs that are (or are not) licensed as 
HMOs is pertinent to the MA program solely for purposes of the 
application of quality improvement standards in section 1852(e) of the 
Act, and has no specific bearing on whether an MA organization has 
State authority under applicable State law to offer an HMO or PPO under 
the MA program. Whether an MA organization (licensed either as an HMO 
or otherwise) can offer a specific type of MA plan continues to rest 
upon whether the organization has State licensure or authority to offer 
such a type of MA plan.
    Comment: One commenter requested that CMS consider enabling the 
PFFS model as an option under the regional preferred provider 
organization structure. The PFFS model in the MA program enables 
broader geographic coverage without the specific provider contracting 
requirements. This option could expand participation in the regional 
program by enhancing participation and access in rural areas without 
specific provider contracting access requirements as is currently 
available under the existing MA PFFS plans.
    Response: Since a PFFS plan is not defined as a type of coordinated 
care plan under section 1851(a)(2)(A)(i) of the Act, it would not be 
possible to allow an MA organization to offer a PFFS plan as an MA 
regional plan. Additionally, MA PFFS plans are defined at section 
1859(b)(2) of the Act, while MA regional plans are defined at section 
1859(b)(4) of the Act. The definitions are mutually exclusive.
    Comment: A few commenters asked whether SNPs could be any type of 
coordinated care plan.
    Response: We believe that section 1851(a)(2)(A)(ii) of the Act 
clearly states that SNPs can be any type of coordinated care plan.
4. Expansion of the Beneficiary Education and Information Campaign 
``User Fees'' (Sec.  422.6, formerly Sec.  422.10)
    The last section of subpart A contained regulations implementing 
the user fees provided for in section 1857(e)(2) of the Act. MMA 
expanded the user fee to include PDP sponsors as well as MA plans as 
contributors. The expansion of the user fee recognizes the increased 
Medicare beneficiary education activities that we would require around 
the new prescription drug benefit.
    As before, the user fee would pay for the ongoing costs of the 
national beneficiary education campaign that includes developing and 
disseminating print materials, the 1-800 telephone line, community 
based outreach to support 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).
    As indicated in the proposed rule and in this final rule (Sec.  
422.6), in fiscal year 2006 and thereafter, the MMA authorizes up to 
$200,000,000, reduced by the fees collected from MA organizations and 
PDP sponsors in that fiscal year. (The total amount is not indexed in 
any way.) In each year, the total amount of collected user fees may not 
exceed the estimated costs in the fiscal year for carrying out the 
enrollment and dissemination of information activities in the MA and 
Part D prescription drug programs or the applicable portions of 
$200,000,000, whichever is less.
    These user fee provisions establish the applicable aggregate 
contribution portions for MA organizations and PDP

[[Page 4600]]

sponsors. The applicable portion of the user fee for MA organizations 
will be based on the total proportion of expenditures for Medicare Part 
C as well as for payments under Part D that are made to MA 
organizations as a percent of Title XVIII expenditures. The PDP 
sponsor's applicable portion is the estimate of the total proportion of 
expenditures under Title XVIII that are attributable to expenditures 
made to PDP sponsors for prescription drugs under Part D. The fees 
charged to individual MA plans and PDP sponsors would continue to be 
determined by CMS. These fees are calculated by a percent of plan's 
revenue to avoid over-burdening smaller plans.
    Comment: One commenter supported CMS' efforts to increase user fees 
to support beneficiary education. The commenter recommended that CMS 
collect the entire amount authorized under the statute and work with 
the Congress to either index it or otherwise lift the cap if needed to 
adequately inform beneficiaries about the new complexities with private 
plans.
    Response: The changes the commenter requested are beyond the scope 
of this rulemaking. We do not intend for the user fee to be exclusively 
for education on MA plans. We anticipate that the user fee will also be 
used on the new Part D drug benefit, which we believe will consume a 
large portion of the user fees, due to the newness of the benefit.
    Comment: Two commenters believe that there is insufficient funding 
of the SHIP program and recommended that CMS use a portion of the MA 
and PDP user fees to support SHIPs.
    Response: Early in the implementation of the M+C program, SHIPs 
received some funding from the user fee. However, for the last several 
years, SHIP funding has been a specific line item appropriation by the 
Congress. We have some discretion regarding how the user fees are spent 
in terms of beneficiary education, so it is possible for SHIPs to get 
some of their funding from the user fee. However, decisions on how to 
spend user fees are internal management decisions relating to resource 
allocation, and therefore will not be included in this regulation.
    Comment: One commenter recommended that beneficiary educational 
materials be shared with Congressional committees of jurisdiction prior 
to releasing them.
    Response: The timelines for providing education materials are 
limited. Although we do not intend to seek Congressional authorization 
before the release of the education materials, the materials will 
comply with the provisions of the statute and regulations, and we will 
make every effort to ensure that they are useful to beneficiaries in 
making their choices. CMS' Office of Legislation works closely with the 
Congressional offices to ensure that they are aware of and have open 
access to copies of various educational materials either before or in 
the same timeframe as their constituents to help with education and 
outreach activities.
    Comment: One commenter expressed concern that the funds used to 
educate beneficiaries may be more focused on explaining the array of 
choices and not focused enough on encouraging beneficiaries to actually 
make a choice. The commenter encouraged CMS to work directly with 
experienced plans to conduct information campaigns that result in 
significant Part D uptake rates for PDPs and MA-PDs. The commenter was 
concerned that beneficiaries may be confused by the changes beginning 
in 2006.
    Response: We appreciate the commenter's suggestion for us to work 
with experienced plans to conduct information campaigns that could 
expand enrollment in MA-PDs and PDPs beginning in 2006 (especially in 
light of the new options that will be available at that time). We 
expect to engage a strong network of experienced plans, providers, and 
other stakeholders and partners to provide input and feedback on 
beneficiary education plans and to provide specific suggestions on ways 
to communicate the changes that will occur in the MA program in 2006.
    Comment: One commenter believes that CMS will require the 
resources, both financial and human, to help beneficiaries make choices 
about benefit and plan options that appropriately reflect their needs 
and preferences. The commenter recommended that CMS bolster programs 
such as one-on-one counseling, which beneficiaries prefer, and to 
design beneficiary materials in formats that make information easy to 
interpret and understand. The commenter also recommended that CMS 
create information resources, such as the 1-800 number, but also help 
beneficiaries understand the information that is being presented.
    Response: We agree that we will have to continue to educate 
beneficiaries on MA program changes in a way that helps the beneficiary 
to understand the program and understand what type of Medicare plan 
would best suit his or her individual health and financial needs. We 
routinely test education and outreach products with beneficiaries 
during development to ensure that they are broadly accessible and 
understandable to the appropriate target audiences.
    Comment: A commenter indicated that there are high costs to I/T/U 
for MMA implementation costs related to outreach, education and 
enrollment of an AI/AN individual. The commenter encouraged CMS to 
acknowledge the need for funding that is specifically directed to local 
I/T/U to support these activities where the work is done and where 
bearing the costs is the most difficult. The commenter believes that 
unlike other Medicare populations, AI/AN beneficiaries are unlikely to 
enroll in MA plans without specific information from their I/T/U.
    Response: We agree that education and outreach efforts should be 
tailored to the needs of specific populations interested in enrolling 
in MA plans, to the greatest extent possible. We will continue our 
collaboration with the IHS and other partners to identify the most 
effective ways to reach beneficiaries in the AI/AN population.

Subpart B--Eligibility, Election and Enrollment

    We proposed generally to retain the same eligibility, election and 
enrollment rules that currently apply to the Medicare Advantage 
program. We received numerous comments on this subpart in response to 
the August 2004 proposed rule. These comments and our responses are 
presented below.
1. Eligibility to Elect an MA Plan (Sec.  422.50)
    In this section, we specified the following:
     Reference to an ``MA plan'' includes both MA local and MA 
regional plans, unless specifically noted otherwise in the text.
     We reserve the authority to allow additional optional 
mechanisms for elections (for example, website enrollment) to provide a 
more efficient and simplified election process for beneficiaries and 
partner organizations.
    Comment: Several commenters supported the proposal to retain the 
authority to allow additional optional MA election mechanisms, stating 
that this change will promote the development of more efficient and 
simplified processes for beneficiaries. One commenter requested 
clarification that any such alternate election mechanism would be 
optional for individual MA organizations to use. Another commenter 
supported the change, but stated that CMS should not mandate that MA 
organizations accept electronic elections.
    Response: The revision made to this section is intended only to 
permit us to

[[Page 4601]]

approve alternate optional election mechanisms (in addition to paper 
election forms) in the future. We anticipate that such mechanisms will 
be available at the option of each MA organization. Furthermore, we 
believe it is important to clarify that, as other election mechanisms 
are approved and implemented, we do not intend to permit MA 
organizations to require beneficiaries to use any such election 
mechanism. We will require all MA organizations to establish a minimum 
standard process, which, at this time, will be a paper process, and 
will be made available to prospective enrollees and plan members in 
conjunction with any optional election mechanism. In the future, as 
technology evolves, another process may be a more appropriate minimum 
standard. To ensure that these points are clear, we are amending Sec.  
422.50(a)(5) to provide that beneficiaries may make elections by 
completing an enrollment form or by completing another CMS-approved 
election mechanism offered by the MA organization.
    Comment: One commenter requested that CMS clarify the use of 
alternate election mechanisms with respect to employer or union group 
MA plans.
    Response: Section 422.50 applies equally to all beneficiaries 
making MA elections and therefore applies to those individuals making 
an election to or from an MA plan sponsored by an employer or union as 
well. Current processes already established in our manual guidance for 
MA plans offered by employer or union groups are not changed by this 
revision.

Subpart B--Eligibility, Election and Enrollment

2. Eligibility to Elect a Special Needs MA Plan (Sec.  422.52)
    Section 231 of the MMA authorized the creation of a new type of MA 
coordinated care plan, called a ``Specialized MA Plan for Special Needs 
Individuals.'' These plans will be referred to throughout as SNPs.
    We believe the new requirements regarding SNPs are primarily 
intended to encourage more choices for certain populations by allowing 
organizations that specialize in the treatment of beneficiaries with 
particular needs to have MA contracts. These organizations could 
provide and coordinate services for these individuals and would be 
permitted to limit plan enrollment to such individuals, or to a certain 
proportion of such individuals. This provision could encourage 
organizations to develop new products in the marketplace by giving them 
the opportunity to develop expertise in efficiently serving special 
needs populations. Our overall policy goal will be to allow MA 
organizations as much flexibility as possible (within defined 
parameters), while maintaining beneficiary protections.
    SNPs may restrict enrollment solely to those who are entitled to 
Medicaid (dually eligible), institutionalized individuals who meet the 
definition in Sec.  422.2, and/or beneficiaries who have a severe or 
disabling condition, as defined by the Secretary in regulations. 
Section 231 of the MMA also gives the Secretary the authority by 
regulation to designate certain MA plans as SNPs if they 
``disproportionately serve(s) special needs individuals.'' Special 
needs individuals are defined in Sec.  422.2.
    In the proposed rule, we asked for comment as to whether SNPs 
should be allowed to exclusively enroll certain subgroups of those 
categories of special needs individuals described in Sec.  422.52(b)(1) 
and Sec.  422.52(b)(2) (dual eligible or institutionalized 
beneficiaries) and, if so, what categories would be appropriate.
    The MMA gave us the authority to waive section 1851(a)(3)(B) of the 
Act, which precludes beneficiaries with ESRD from enrolling in MA 
plans. In the proposed rule, we solicited comments as to whether we 
should waive this section of the Act and whether beneficiaries with 
ESRD should be considered to meet the requirement for special needs 
status.
    We also have the authority to apply to SNPs a provision under 
section 1894(c)(4) of the Act that applies to enrollees in the Program 
of All-Inclusive Care for the Elderly (PACE). This section provides for 
deemed continued eligibility in certain situations. Specifically, it 
allows an beneficiary enrolled in a PACE plan who no longer meets the 
eligibility criteria, but who can reasonably be expected to, in the 
absence of continued coverage under the PACE plan, meet the criteria of 
the plan within a period of time not to exceed 6 months. In the 
proposed rule, we proposed applying this provision to individuals 
enrolled in SNPs who longer meet a plan's unique eligibility criteria, 
who can reasonably expected to meet the plans criteria within a period 
of time not to exceed 6 months.
    In the proposed rule, we provided in Sec.  422.52(e) that 
individuals who are enrolled in MA plans that are subsequently 
designated as SNPs would be ``grandfathered,'' that is, allowed to 
continue to be enrolled or choose to elect another MA plan during 
appropriate election periods provided to all MA eligible individuals. 
We proposed this based on the belief that the Congress did not intend 
for individuals already enrolled in an MA plan to be involuntarily 
disenrolled. However, we also invited comment on an alternative 
approach wherein any non-special needs individuals in an MA plan that 
is subsequently designated as an SNP would have to be involuntarily 
disenrolled. In this situation, we proposed to establish, through 
further operational guidance, an SEP for these individuals. Statutory 
language also provided that a newly designated MA plan may restrict 
future enrollment of individuals to those specialized individuals it 
intends to serve.
    We also indicated in the proposed rule that, if we did allow 
``grandfathered'' members to remain in the SNP, we would distinguish 
them from those individuals who join a new SNP and then lose their 
special needs status on other than a temporary basis. Those special 
needs individuals would be involuntarily disenrolled after losing their 
special needs status (and after any period of deemed continued 
eligibility, if appropriate) and receiving proper notice. SNPs that 
exclusively enroll special needs individuals would be required to 
inform individuals before their initial enrollment that they could only 
remain enrolled in the plan for as long as they were considered special 
needs individuals as defined by CMS.
    Comment: One commenter felt that CMS should not allow SNPs to 
exclusively enroll certain subgroups of dual eligible or 
institutionalized beneficiaries. The commenter's rationale was that 
requiring MA organizations to accept all dual eligibles into its 
specialized MA plan would maintain the integrity of the dual-eligible 
risk pool and prevent the offering of an SNP plan to those who are the 
least poor (and presumably, most healthy) segment of duals. On the 
other hand, several commenters suggested that CMS allow SNPs that would 
enroll subgroups of dual eligibles if supported by a State Medicaid 
agency. The vast majority of commenters supported allowing SNPs to 
serve subsets of both the dual eligible and institutionalized 
populations.
    The most prevalent rationale for allowing subsets of dual eligibles 
was to allow States to develop specialized Medicaid programs to 
compliment Medicare coverage by SNPs. Most commenters described the 
difficulties and complexities of serving all dual eligibles as 
impediments and disincentives to developing a program to coordinate 
Medicaid managed care programs with Medicare. If required to serve all 
dual eligible beneficiaries, MA organizations would have to offer

[[Page 4602]]

Medicaid-covered benefits, such as long-term care, to individuals who 
are not eligible for full Medicaid benefits. One commenter stated that 
allowing subsets of dual eligibles would also facilitate transitioning 
full dual eligibles from Medicaid prescription coverage to Medicare 
Part D coverage in 2006. Another commenter suggested that CMS clarify 
that plans must uniformly offer the same set of benefits to all classes 
of dual eligibles as provided under the State's Medicaid program. 
Several commenters recommended that CMS let the MA organization propose 
eligibility criteria and then evaluate its plan, delivery systems, and 
related programs, possibly modifying them as part of the review and 
approval process. Some commenters noted the significant investment of 
time and resources required to develop targeted clinical programs for 
different subgroups with different, complex conditions.
    Commenters also suggested allowing specific subsets, including full 
benefit dual eligibles, the frail elderly, those who are nursing home 
certifiable, children or adults with physical disabilities, 
developmental disabilities or mental impairments, and community-based 
or institutional individuals.
    Two commenters recommended that CMS not include subsets of duals in 
the third category of specialized MA plan eligibles, those with severe 
or disabling conditions. The rationale given was that the identifying 
characteristics of subsets of duals are not appropriately described 
within the third category and these individuals should remain in the 
second category.
    Once commenter recommended allowing organizations to serve other 
subgroups of Medicaid eligible and institutionalized if there is a 
pervasive justification based on common characteristics of the 
subgroup, that is, institutionalized beneficiaries in a specified 
network of nursing homes.
    Several commenters stated that adverse selection would be mitigated 
by phase-in of risk adjustment because payment would take into 
consideration the individual's disease category.
    Response: Consistent with the majority of these comments, we do not 
intend to adopt a regulation that would preclude MA organizations from 
offering SNPs to appropriate subsets of the population in a plan 
service area, including subsets within the SNP populations identified 
in the statute. Thus, in the interest of facilitating the coordinated 
delivery of Medicare and Medicaid services, we will consider requests 
for SNPs that serve certain subsets of dual eligibles and 
institutionalized individuals on a case-by-case basis. Subsets of those 
two categories will be included in category one and category two 
respectively, rather than in the third category of special needs 
individuals, those with chronic or disabling conditions. In addition, 
because of the unique nature of some plans serving the 
institutionalized and dual eligibles, we will also consider subsets 
based on common characteristics, such as a specific network of 
facilities and Medicaid eligibility. We will provide further 
operational guidance following publication of this rule.
    Comment: The MMA allows for the enrollment of ESRD beneficiaries in 
SNPs designed for this population. One commenter said that CMS should 
delay enrollment of ESRD beneficiaries in MA plans until results of 
CMS' capitated ESRD Disease Management demonstration are available. The 
commenter also objected to allowing ESRD patients to enroll in managed 
care because, in the commenter's view, managed care plans disrupt 
existing relationships between patients and health care providers. The 
commenter expressed concerns that an ESRD patient who drops or declines 
Medigap insurance to join a managed care plan would permanently be 
locked into the managed care plan and could not switch to Original 
Medicare, since ESRD would make him/her ineligible for Medigap 
coverage. The remainder of those commenting on permitting ESRD SNPs 
supported the proposal.
    Response: Individuals with ESRD may choose to receive care under an 
MA plan for a variety of reasons, including coordination of care and 
lower out-of-pocket costs. Anecdotal experience with the MA program has 
shown that MA enrollees with ESRD generally remain enrolled in their 
plan, or join another existing plan if the one in which they are 
enrolled terminates. We believe that these beneficiaries should have 
the option of enrolling in an MA plan, if they so desire. Therefore, we 
will amend Sec.  422.50(a)(2) by adding language to allow SNPs to serve 
ESRD individuals.
    In order to mitigate the commenter's concerns, we would require 
that, prior to enrollment in an MA SNP, the organization notify 
potential enrollees that enrollment is fully optional and of the 
potential impact that their enrollment could have on their Medigap 
rights. In addition, MA Organizations will be required to provide clear 
and accurate provider information for potential enrollees so they may 
determine whether their current providers are part of the specialized 
MA plan's network.
    Comment: Many commenters supported the proposed approach at Sec.  
422.52(e) to allow individuals already enrolled in an MA plan that we 
subsequently designate as an SNP to remain enrolled or be allowed to 
elect another other MA plan. Most of these commenters also recommended 
that CMS allow for a Special Election Period (SEP) to facilitate 
selecting a new MA plan or Original Medicare. Several commenters 
remarked on the need to maintain adequate enrollment levels once an SNP 
gains a new designation. None of the commenters supported the 
alternative proposal under which non-special needs individuals would 
have to be involuntarily disenrolled if their MA plan became an SNP.
    Response: We will allow members of MA plans that are subsequently 
``redesignated'' as SNPs to be ``grandfathered,'' that is, remain 
enrolled in that plan indefinitely. These individuals may not be 
involuntarily disenrolled on the basis of not meeting the definition of 
special needs individual. However, once a grandfathered individual 
voluntarily disenrolls from the SNP, he or she would not be eligible to 
reenroll in that SNP unless he or she meets the definition of special 
need individual. We will establish an SEP for these individuals for 
exceptional circumstances in further operational guidance. An SNP that 
chooses to exclusively enroll special needs individuals will not be 
considered a ``disproportionate share'' SNP, as defined in Sec.  422.2, 
on the basis of serving ``grandfathered'' members.
    Comment: Many commenters supported not requiring plans to 
involuntarily disenroll beneficiaries who lose their special needs plan 
eligibility if it is reasonable to assume that they would again meet 
the special needs eligibility criteria within a certain period as 
determined by CMS. Some commenters stated that it is not uncommon for 
beneficiaries to have temporary lapses in eligibility, particularly in 
situations where a dual eligible loses Medicaid eligibility due to a 
temporary change in financial circumstances or failure to provide 
information for recertification. The commenters generally believed that 
continued eligibility leads to continuity of care and improved clinical 
outcomes. Two commenters requested an additional 6-month ``grace 
period'' (commenter's terminology) for individuals who lose their 
eligibility as well as retroactive payments for their care in the event 
that eligibility is established retroactively.

[[Page 4603]]

    One commenter recommended that CMS continue funding Part D and 
other benefits for the entire ``30-day notice period'' (commenter's 
terminology) regardless of an individual's eligibility to enroll in a 
SNP.
    One commenter requested continued eligibility for ``exclusive'' as 
well as ``non-exclusive'' plans (commenter's terminology), including MA 
plans that may temporarily fall below the required threshold for the 
special needs designation.
    Response: We believe that the Congress' goal was to encourage 
continuity of care for these at-risk individuals and that a period of 
deemed continued eligibility for a minimum of 30 days but no longer 
than 6 months is reasonable for beneficiaries who are likely to regain 
eligibility. The 6-month period is consistent with the PACE language at 
Sec.  460.160, which provides that a participant may be deemed to 
continue to be eligible if, in the absence of continued coverage, the 
participant reasonably would be expected to meet the requirement within 
the next 6 months. However, we will not include ``in the absence of 
continued coverage'' in Sec.  422.52(d).
    Our rationale is that this appears to reference ineligibility due 
to a health condition that could deteriorate without plan membership. 
In the case of an SNP for dual eligibles, a lapse in SNP eligibility 
could be due to a lapse of Medicaid eligibility, and such eligibility 
may be based on the beneficiary's financial circumstances, not his or 
her health condition.
    The MA organization may choose any length of time from 30 days 
through 6 months for deemed continued eligibility as long as it applies 
this period consistently among all members in its plan and fully 
informs its members of this time period. Further guidance on applying 
deemed eligibility will be provided in operational instructions 
following publication of this regulation.
    We believe that the ``30-day notice period'' referred to by one 
commenter is from our interim guidance for SNPs, issued as part of its 
2005 Call Letter. This guidance established a 30-day minimum timeframe 
for continued eligibility for an SNP enrollee who loses his or her 
special needs status. This individual is a member during the period of 
deemed continued eligibility and until his or her disenrollment becomes 
effective. Payments will continue on the enrollee's behalf until the 
period of deemed continued eligibility ends and the enrollee is 
involuntarily disenrolled. Retroactive payment will not be necessary in 
these instances.
    All SNPs, including ``disproportionate percentage'' SNPs, as 
defined in Sec.  422.2, may apply the deemed eligibility provision. 
Deemed eligibles would be counted toward the number of special needs 
individuals enrolled in the SNP rather than toward the number of non-
special needs individuals.
    Comment: Several commenters supported allowing SNPs to disenroll 
enrollees who no longer meet the special needs eligibility criteria. 
Two commenters wanted SNPs to have the choice of whether to continue to 
provide Medicare services to individuals who lose special needs status. 
Another commenter supported involuntary disenrollment for exclusive MA 
SNPs only, stating that this requirement would hinder disproportionate 
SNPs' ability to maintain enrollment at or above the regulatory 
threshold.
    Response: In our interim guidance and our proposed rule, we 
interpreted the statutory phrase ``exclusively serves special needs 
individuals'' to mean that the plan is exclusively marketed to special 
needs individuals and exclusively enrolls special needs individuals. 
This interpretation allowed us to permit existing non-special needs 
enrollees to remain enrolled in an MA plan that changed its status to 
an SNP.
    Thus, under this definition, existing enrollees who did not enroll 
when the plan was an SNP would not be affected by the plan definition, 
and we do not believe they should be disenrolled. Moreover, the 
existence of such enrollees does not preclude the plan from remaining a 
plan that ``exclusively serves(that is, markets to and 
enrolls) special needs individuals. As noted above, however, an 
individual who enrolls in an SNP as a special needs enrollee is 
different, since he or she would have no expectation of being enrolled 
in that plan if he or she were not in the special needs category. The 
case of an SNP that has never had non-SNP enrollees is also different, 
as any enrollee that it markets to or enrolls would have to be a 
special needs enrollee, if it is an ``exclusive'' plan.
    In order to address these latter situations, we will add a new part 
(iv) to Sec.  422.74(b)(2) to show that in these cases loss of special 
needs status (and of deemed continued eligibility, if applicable) is a 
basis for required disenrollment from an SNP that enrolls only special 
needs individuals.
    We have the authority to waive minimum enrollment requirements as 
necessary. Therefore, we do not envision the minimum enrollment 
requirements adversely affecting disproportionate share SNPs.
     Comment: One commenter recommended that CMS allow MA SNPs to 
charge an enrollee for benefits no longer covered by the State or 
Federal cost-sharing arrangements and to terminate coverage for 
nonpayment of premiums or cost sharing.
    Response: An SNP is the same as any other MA plan with respect to 
rules governing the charges that may be imposed on enrollees. Enrollees 
may be charged for benefits that would not otherwise be covered by 
Medicare. Under Sec.  422.74(d)(1), coverage may be terminated for a 
failure to pay premiums. As discussed below in connection with 
disenrollment for disruptive behavior, a failure to pay cost sharing is 
not in itself a basis for disenrollment.
    Comment: Two commenters asked for clarification of whether the 
regulation refers to Special Needs Health Plans or the Special Needs 
Health Options.
    Response: The regulation refers to a ``Specialized MA plan for 
special needs individuals'' (SNPs), as created by Section 231 of the 
MMA.
3. Continuation of Enrollment for MA Local Plans (Sec.  422.54)
    The MMA limits the offering of MA plan continuation areas to MA 
local plans only and we made this conforming change at Sec.  422.54. We 
received no comments on this section and adopted the conforming changes 
as proposed.
4. Enrollment in an MA MSA Plan (Sec.  422.56)
    Section 233 amended the Act to eliminate the cap on the number of 
individuals that may enroll in MA MSA plans removed the existing 
deadline for enrolling in such a plan. Because this deadline had 
already passed without anyone enrolling in an MSA plan, the original 
MSA plan provisions had become a nullity. The effect of section 233 was 
to make the authority to offer MSA plans permanent and unlimited. This 
change is reflected at Sec.  422.56, along with new language allowing 
the Secretary to permit enrollment in MSAs by enrollees of other 
Federal. We included this language to reflect the fact that, under the 
statute, such enrollment could be authorized contingent on the adoption 
of new policies by the OPM.
    Comment: Two commenters suggested deleting the language authorizing 
the Secretary to permit enrollment in MSAs by enrollees of the Federal 
programs specified. Both commenters contended that it was unlikely that 
OPM would ever be able to certify that MSA enrollment would not raise 
costs in the FEHB, Veterans' Administration, or

[[Page 4604]]

TRICARE programs and that, accordingly, the inclusion of this language 
is unnecessary.
    Response: The statute at section 1851(b)(2) provides for the 
potential for such individuals to become eligible to enroll in an MSA 
plan. Therefore, our clarification of Sec.  422.56(b) supporting this 
provision is appropriate.
5. Election Process (Sec.  422.60)
    In proposed Sec.  422.60, we set forth changes that would allow 
other election and notice mechanisms other than paper forms or written 
documents. We also clarified that MA organizations may submit requests 
to restrict enrollment for capacity reasons to CMS at any time during 
the year.
    Comment: Two commenters supported the conforming revisions to Sec.  
422.60 permitting us to approve alternate election mechanisms, as 
discussed in the comments on proposed Sec.  422.50(a)(5). The 
commenters also approved of the clarification to Sec.  422.60(b) 
regarding requests for enrollment limits due to capacity reasons.
    Response: We adopt these revisions as proposed.
    Comment: One commenter suggested that CMS make further amendments 
to the regulatory text to ensure that the current options we have 
established for individuals to elect MA plans sponsored by employer or 
union groups are retained, including the policy that documentation may 
be retained by an employer or union group rather than the MA plan.
    Response: As discussed above, we are confident that the proposed 
revisions provide us with sufficient flexibility to foster innovative 
election processes that use modern technology for all individuals, not 
just employer or union groups. Therefore, it is not necessary to 
reiterate that these alternative enrollment mechanisms are also 
available to employers or union groups. We will continue to retain 
current policy for employer or union group elections in our operational 
guidance and as an option for MA organizations.
    Comment: One commenter suggested that CMS require MA and MA-PD 
plans to accept AI/AN enrollees even if a plan has received CMS 
approval to close enrollment for capacity reasons.
    Response: The ability to request a capacity limit is an important 
element of the MA program that helps ensure that plan enrollees will 
have sufficient access to needed providers and services. CMS' approval 
of a capacity limit request indicates that we agree with the requesting 
MA organization that its defined network of providers is sufficient to 
deliver health care only to a limited number of plan members. Thus, we 
do not permit the MA organization to enroll any individual beyond the 
capacity limit of a given plan, and we do not believe it would be 
appropriate to undermine this protection by waiving capacity limits for 
the AI/AN population or any other group.
    Comment: Two commenters requested that CMS modify the regulations 
to more clearly allow for what the commenter referred to as ``passive 
elections.''
    Response: The elections to which the commenters are referring are 
those in which an individual is informed that the process for making an 
election of a particular plan is taking no action, while other options 
are exercised by declaring an affirmative intent to elect that option. 
CMS have limited such a process to situations when it can be reasonably 
concluded that an individual will clearly want to enroll in the MA plan 
offered by the same organization.
    We do not believe that a regulatory change is needed to continue to 
allow such elections. The revisions made to Sec.  422.50(a)(5) and the 
conforming revisions to Sec.  422.60 provide us with appropriate 
flexibility to define and approve MA election mechanisms, including 
allowing such ``passive elections'' as described above in specific 
limited circumstances.
6. Election of Coverage Under an MA Plan (Sec.  422.62)
    Similar to the election periods in place in past years, the MA 
Annual Coordinated Election Period will run from November 15 through 
December 31 of each year. For 2006, the annual coordinated election 
period is extended through May 15, 2006.
    Based on our interpretation of the MMA, we proposed revising Sec.  
422.62 to ensure that an individual who is newly eligible for MA has 
the full opportunity to elect an MA plan as part of their Initial 
Coverage Election Period. In developing the proposed rule, we 
determined that the intent of the Congress was to provide for an 
initial coverage election period for MA that ends on the later of the 
day it would end under pre-MMA rules or the last day of the Medicare 
Part B initial enrollment period. This approach extends an individual's 
MA initial election period in some instances, and never reduces or 
eliminates it.
    Through 2005, the Open Enrollment Period extends throughout the 
year, providing unlimited opportunities for MA eligible beneficiaries 
to enroll in, disenroll from, and or change enrollment in an MA plan. 
This change was reflected in Sec.  422.62(a)(3) of our proposed 
regulations.
    Section 1851(e)(2)(B)(1) of the Act was revised to establish that 
the open enrollment period in 2006 will be the first 6 months of the 
year. In addition, individuals who are newly eligible for MA in 2006 
are provided an open enrollment period that consists of the first 6 
months the individual is MA eligible, but cannot extend past December 
31, 2006.
    Under revised section 1851(e)(2)(C)(i) of the Act, the open 
enrollment period for 2007 and subsequent years will be the first 3 
months of each year. In addition, individuals who first become MA 
eligible during 2007 and subsequent years will be provided an open 
enrollment period that consists of the first 3 months the individual is 
MA eligible, not to extend past December 31, 2006. Although this 
specific period does not extend past December 31, 2006, it is important 
to remember that all individuals will be provided a 3-month open 
enrollment period from January through March 2007, as discussed in this 
section.
    Section 1851(e)(2)(C) of the Act limits a change of election made 
during an open enrollment period in 2006 and later years to the same 
type of plan in which the individual making the election is already 
enrolled. Specifically, an individual in an MA plan that does not 
provide drug coverage may change only to another similar MA plan, or to 
original Medicare, but may not enroll in an MA plan that provides Part 
D coverage, or enroll in a Part D plan. Similarly, an individual 
enrolled in an MA plan that includes Part D coverage may enroll only in 
another MA plan with Part D coverage, or change to original Medicare 
coverage with an election of a Part D plan. As noted in the proposed 
rule, we clarified a conflict between clause I and II of section 
1851(e)(2)(C)(iii) of the Act. Clause (I) of section 1851(e)(2)(C)(iii) 
states that an individual who is ``enrolled in an MA plan that does 
provide qualified prescription drug coverage,'' may only elect a plan 
that does not provide that coverage. A literal reading of this language 
would be in direct conflict with clause (II) of that same section, 
which says that an individual who is enrolled in an MA plan that 
provides qualified prescription drug coverage may not enroll in an MA 
plan that provides no Part D coverage.
    This contradiction, plus (1) the fact that section 
1851(e)(2)(C)(iii)(I) of the Act refers to a ``another'' MA plan that 
``does not'' provide Part D coverage, (2) the fact that clause (I) is 
contrasted with

[[Page 4605]]

clause (II) with the word ``or'', and (3) committee report language, 
make it clear that the word ``not'' was inadvertently omitted from the 
first clause of section 1851(e)(2)(C)(iii) of the Act.
    Comment: Numerous commenters opposed the ``lock-in'', that is, the 
statutory provisions that limit beneficiaries from choosing a different 
type of coverage to certain times of the year. Several commenters 
stated that these provisions severely limit the choice of 
beneficiaries. Others commented that implementing lock-in under the MA 
program at the initiation of the new Part D program would be confusing 
to beneficiaries. Commenters also noted that such a provision would 
have a negative impact on the MA organizations, by making it difficult 
to maintain a dedicated sales staff and increasing the administrative 
costs and burden of educating beneficiaries about both Part D and MA 
changes.
    Response: The provisions that limit the times in which an 
individual may change his or her election were originally created by 
the BBA, and were to become effective during 2002. However, because of 
subsequent statutory changes, these provisions have never taken full 
effect (except for a temporary period during 2002). These provisions 
were modified by the MMA to incorporate the Part D prescription drug 
benefit and the statute is clear on their applicability. Thus, we have 
no authority to modify these requirements.
    Comment: One commenter suggested that CMS develop appropriate 
procedures to administer these election restrictions and inform 
organizations as to what type of plan an individual is eligible to 
elect (for example, an MA only or an MA-PD plan). Another commenter 
recommended that the organization have access to information about 
whether an individual is eligible to elect a certain plan, both in 
advance of an enrollment application and upon receipt of an enrollment 
application.
    Response: We understand that we will need to maintain data history 
of the number of times an individual has made an election during a 
specific election period, as well as the type of plan an individual is 
eligible to elect. Such information will be necessary in order to 
determine whether an individual is eligible to elect an MA plan at a 
given time. We will work with plans to establish a reliable process to 
determine the eligibility of an individual based on these requirements.
    Comment: Several commenters responded to the request for comments 
on the provision that an enrollee may only change to the same type of 
plan (either with drug coverage or without) during the open enrollment 
period. Some commenters opposed the interpretation that restricts a 
beneficiary from switching plans, even when life circumstances had 
changed. Others supported the interpretation and indicated that such a 
provision reinforced the overall integrity of the program. Others 
believe that we need to maintain flexibility with employer-sponsored 
plans.
    Response: After review of the statutory provisions and the 
comments, we believe that the Congress clearly intended that a 
beneficiary may obtain or discontinue Part D coverage ONLY during the 
annual coordinated election period that begins in November each year. 
Notwithstanding SEPs established by the statute and in our regulations 
and subsequent guidance, it is only during the Annual Coordinated 
Election Period that all Medicare beneficiaries are free to elect among 
all available options, whether original Medicare, MA plans, MA-PD plans 
or PDPs. The statutory provisions governing Part D in 1860D-1 do not 
provide for an open enrollment period that would allow beneficiaries to 
elect the prescription drug benefit outside of the AEP. Permitting 
beneficiaries to discontinue Part D coverage at any time during the 
year, without a corresponding election period to enroll in such 
coverage, could result in a gap in coverage that may result in a late 
enrollment penalty. Therefore, we believe that it is appropriate to 
interpret the statute to require that individuals may not make an 
election that would result in adding or dropping prescription drug 
coverage except during the annual election period.
    Comment: One commenter recommended that CMS clarify how the annual 
coordinated election period and the open enrollment period will be 
administered in 2006, since these periods overlap from January 2006 
through May 15, 2006.
    Response: In 2006, we envision that the annual coordinated election 
period will provide each individual with the ability to choose either 
an MA plan or original Medicare, with or without drug coverage. The 
open enrollment period will provide individuals the opportunity to 
change their election from the MA program to original Medicare (or vice 
versa), but not to obtain or discontinue drug coverage. We will provide 
information about these election periods in beneficiary materials, such 
as the Medicare & You Handbook.
    Comment: A few commenters submitted comments regarding the special 
election periods (SEPs), as described at Sec.  422.62(b). One commenter 
asked if CMS expected to apply the SEPs established under the M+C 
program to the MA program. Another commenter requested confirmation 
that the current SEP for PACE enrollees (described in manual guidance) 
would be applied to the MA program. One commenter suggested that CMS 
consider an exception to the Open Enrollment Period for SNPs and for 
individuals eligible for both Medicare and Medicaid.
    In addition, a commenter asked CMS to consider the creation of an 
SEP for beneficiaries in markets with MA market penetration rates below 
20 percent; such an SEP would allow time for educating beneficiaries on 
MA plans and how they operate. Many commenters submitted comments on 
establishing SEPs for special needs plans. The commenters generally 
approved of a permissive special election period policy to allow 
special needs individuals to change plans at any time. Others believe 
that the enrollment periods established in Sec.  422.62 do not provide 
sufficient opportunity for beneficiaries to enroll in a special needs 
plan.
    Response: We have historically included in our regulations those 
SEPs that have been specifically named in the statute, and established 
SEPs for exceptional circumstances in our operational guidance. We will 
review the SEPs in current MA guidance and consider their applicability 
for the MA program in 2006, as well as consider new SEPs that may be 
necessary to coordinate the new Part D program. We appreciate the 
suggestions provided by the commenters and will consider these in 
developing guidance following publication of the rule.
    Comment: Several commenters addressed the AI/AN population and the 
need to modify the regulations to allow AI/AN individuals to switch 
between MA or MA-PD at various times rather than be limited to changing 
only at certain times during the year.
    Response: We recognize the need to coordinate between the IHS, 
Tribe, or Tribal organization, or Urban Indian (I/T/U) programs. We 
have the authority to recognize certain circumstances as exceptional 
and provide special election periods. Providing such exceptions, 
however, would not always benefit an individual, as we discussed in our 
response to a previous comment under Sec.  422.50 regarding capacity 
limits. Such limits are necessary to ensure that health plans have the 
appropriate number of providers and are able to provide access to all 
beneficiaries enrolled in their plan. As discussed in the previous 
comment regarding

[[Page 4606]]

establishment of SEPs in operational guidance, we are not establishing 
any non-statutory SEPs in the regulation, but retain the authority to 
establish an SEP in the future under exceptional conditions. This same 
policy applies to the AI/AN population.
7. Coordination of Enrollment and Disenrollment through MA 
Organizations (Sec.  422.66)
    In keeping with our proposed clarification at Sec.  422.50(a)(5) 
regarding election mechanisms other than, and in addition to, paper 
forms, we proposed conforming changes at Sec.  422.66. We also proposed 
similar changes in Sec.  422.66(b) to provide for a more efficient 
notice process, including eliminating the requirement for MA plans to 
send a copy of the individual's disenrollment request back to the 
individual.
    Section 1860D-21(b) provides the Secretary with the authority to 
implement default enrollment rules at 1851(c)(3)(A)(ii) for the MA-PD 
program, which begins in 2006. This provision permits the establishment 
of procedures whereby an individual currently enrolled in a health plan 
offered by an MA organization at the time of his or her Initial 
Coverage Election Period is deemed to have elected an MA-PD plan 
offered by the organization if he or she does not elect to receive 
coverage other than through that organization. In our proposed rule, we 
discussed the requirement for individuals to make affirmative elections 
upon becoming entitled to Medicare as provided under Sec.  422.66. 
Affirmative elections may ensure that individuals have the ability to 
remain with the organization that offers their health plan and protects 
beneficiary choice by requiring an individual to make an affirmative 
election. However, based upon comments received, we will revise the 
regulatory language to retain the ability to allow for default 
enrollment, as discussed in our responses below.
    At Sec.  422.66(e) we also proposed to add language that 
implemented new rules for continuing MA coverage for individuals 
enrolled in MA plans as of December 31, 2005. Under section 1860D-
21(b)(2), individuals enrolled in an MA plan that, as of December 31, 
2005, provides any prescription drug coverage would be deemed to be 
enrolled in an MA-PD plan offered by that same organization as of 
January 1, 2006. If an individual is enrolled with an MA organization 
that offers more than one MA plan that includes drug coverage, and is 
enrolled in one of those plans as of December 31, 2005, the individual 
would be deemed to have elected to remain enrolled in that plan on 
January 1, 2006 if it becomes an MA-PD plan on that date. An individual 
enrolled in an MA-PD plan on December 31 of a year would be deemed to 
elect to remain enrolled in that plan on January 1 of the following 
year (that is, the next day).
    Comment: Several comments were received regarding the revisions to 
the disenrollment process described above. Several commenters supported 
the change in language allowing optional mechanisms for disenrollment 
elections. Several commenters also supported the elimination of the 
requirement that organizations return a copy of the disenrollment 
request to the individual.
    Response: We received no opposing comments to these provisions and 
adopt these provisions as proposed.
    Comment: One commenter recommended that CMS clarify that MA plan 
members who have selected prescription drug coverage as an optional 
supplemental benefit, and are receiving such benefits as of December 
31, 2005, will be deemed to have enrolled in an MA-PD plan.
    Response: Individuals who are enrolled in an MA that offers any 
prescription drug coverage, including coverage offered as an optional 
supplemental benefit, as of December 31, 2005, will be deemed to have 
enrolled into an MA-PD plan offered by that organization.
    Comment: Several commenters stated that additional information is 
needed to implement the deemed enrollment provision for MA enrollees 
who do not make an affirmative election into an MA-PD plan. If the MA 
organization offers more than one MA-PD plan, it is unclear into which 
plan the individual will be deemed enrolled.
    Response: We will provide further guidance to MA organizations on 
this issue, as we do at the end of each contract year through our plan 
``cross-walk'' guidance. Under this guidance, the existing policy, 
under which the MA organization may designate the plan that is 
``continuing'' into the next year, would apply to this situation.
    Comment: Several commenters supported and opposed the 
implementation of default enrollment rules as discussed at section 
1851(c)(3)(A)(ii) of the Act for the MA-PD program.
    Several commenters support implementing the default enrollment 
provision and believe that it would simplify the enrollment process for 
beneficiaries. They believe that such a process could be coupled with 
advanced notice that would also give the member the opportunity to 
``opt-out'' of the ``default'' enrollment. Other commenters stated that 
the MA organization should have the option of applying ``default'' 
enrollment in certain situations, for example, with its employer group 
members. Commenters stated that if the MA organization chose to 
implement the option, each beneficiary would also be provided the 
option to decline prior to enrollment.
    Several commenters opposed default enrollment and supported 
requiring an affirmative election by the beneficiary. These commenters 
believe that a default enrollment process would be difficult and 
confusing for beneficiaries. They do not believe that beneficiaries 
should be ``defaulted'' into the same health plan that provided pre-
Medicare coverage. Many commenters recommended that MA plans obtain 
accurate information from prospective enrollees through the affirmative 
election process, and, without such a process, MA plans may not have 
up-to-date information about the beneficiary. Finally, there are those 
who neither support nor oppose the default enrollment process, but 
instead suggest that we modify the regulatory language to allow us to 
implement such a provision in the future.
    Response: The commenters raise several good points regarding the 
implications of default enrollment. The intent of default enrollment is 
not to reduce beneficiary choice, but rather to ensure continuity of 
care. At this time, we will retain the flexibility to implement this 
provision through future instructions and guidance to MA organizations. 
We do not envision mandating that organizations use default procedures, 
but instead would give organizations the option of implementing such a 
process for its enrollees. Any such process would require that advance 
notice be provided to an individual, and that affected individuals have 
the ability to ``opt out'' of such an enrollment. We believe that we 
can achieve the same flexibility provided with respect to default 
enrollment that exists at Sec.  422.60(b)(3)(c), which allows for 
elections using alternative mechanisms. Thus, we have revised proposed 
Sec.  422.66(d)(5) to allow us to offer default enrollment as an option 
in the future, in a form and manner specified by CMS.
    Comment: One commenter suggested that, rather than prohibit default 
enrollment, CMS should develop a method to allow enrollees in an MA 
plan with or without prescription drug coverage, who do not make an 
election by December 31, 2005 to remain with their current MA 
organization in an MA-PD plan. Another commenter assumed that CMS 
intends that

[[Page 4607]]

individuals enrolled in an MA plan without drugs who do not make a plan 
election into an MA-PD plan for January 1, 2006 will be defaulted into 
original Medicare.
    Response: The statute provides for an individual in an MA plan with 
drug coverage on December 31, 2005, to be deemed enrolled in an MA-PD 
plan as of January 1, 2006. However, the statute does not allow an 
individual who is in an MA-only plan that continues in January 2006 to 
be deemed to make an MA-PD election. The statute is clear that those 
individuals will remain in an MA-only plan unless those individuals 
take an action to elect an MA-PD plan. Pursuant to section 1861(b)(3) 
of the Act, individuals may be deemed to have elected Original Medicare 
only if the MA-only plan in which they are enrolled is terminated. 
Thus, in general, we would not be defaulting MA plan members into 
original Medicare.
    Comment: Several commenters recommended that CMS coordinate the 
enrollment of full benefit dual eligible individuals. A few commenters 
suggested that CMS apply the default enrollment provisions for dual 
eligible individuals who have not otherwise elected an MA-PD or PDP 
into an MA-PD that is administered by an MA organization that operates 
the Medicaid managed care organization in which the individual is 
enrolled. Another commenter supports the inclusion of sufficient 
flexibility in our regulations to enable us to develop solutions that 
best meet the needs of beneficiaries and are coordinated with the MA 
organizations.
    Response: As discussed above, we will consider requests to adopt 
such default enrollment processes only with respect to a newly-Medicare 
eligible individual who is enrolled with an organization as a Medicaid 
enrollee at the time he or she becomes eligible for Medicare. In such a 
case, the individual could be considered by default to have elected 
that organization for purposes of Medicare benefits upon the 
individual's becoming eligible for Medicare. The default authority in 
1851(c)(3)(A)(ii) of the Act would not, however, permit an individual 
to be considered by default to have elected an MA-PD plan if he or she 
was already a Medicare beneficiary and had elected not to receive 
Medicare benefits through an MA organization. Therefore, we decline to 
enroll by default existing full-benefit dual eligible individuals into 
an MA-PD if they are currently in Original Medicare and only receive 
Medicaid benefits through that organization. We will continue to 
evaluate alternatives to facilitate enrollment in Part D for this 
population.
    Comment: Several commenters suggest that each MA plan that becomes 
an MA-PD plan send a notice to their enrollees that the enrollees will 
be automatically enrolled in the MA-PD plan unless they choose to 
change plans. Further, it is suggested that CMS create a model letter 
for this purpose.
    Response: MA plans are required to send out notices in October of 
every year to their members, also known as the annual notice of change 
(ANOC). We will revise the language in the ANOC for MA plans to provide 
to members in October 2005 in order to reflect this policy.
    Comment: Several commenters recommend that CMS establish a default 
enrollment process for AI/AN if a certain plan meets AI/AN needs.
    Response: CMS recognizes the need to coordinate between the I/T/U 
programs. Given the new regulatory language at Sec.  422.66(d)(5), 
which allows us to offer default enrollment as an option to MA 
organizations, we could consider requests by MA organizations to offer 
default enrollment to the AI/AN population in the case of newly-
Medicare eligible individuals who are enrolled in a non-Medicare 
product of an MA organization at the time they become Medicare 
eligible.
8. Effective Dates of Coverage and Change of Coverage (Sec.  422.68)
    To coordinate the effective date of elections with the 2006 special 
annual coordinated election period (to be held November 15, 2005 
through May 15, 2006), section 1851(f)(3) of the Act was amended by the 
MMA to provide that the effective date of elections for the annual 
coordinated election period does not apply during the 2006 special 
annual election period, when enrollment will be effective on the first 
day of the month following the month in which an election is made. We 
proposed to revise Sec.  422.68(b) to provide for this coordination and 
to make the effective date of elections in the annual coordinated 
election period for 2006 that are made in 2006 (that is, from January 1 
through May 15, 2006) the first day of the calendar month following the 
month in which the election is made. We received no comments on this 
section and adopted the proposed language as final.
9. Disenrollment by the MA Organization (Sec.  422.74)
    Under the current regulations at Sec.  422.74(d)(1), MA plans are 
required to provide, at a minimum, a 90-day grace period before 
disenrolling individuals for failure to pay plan premiums. Thus, MA 
plans must maintain enrollment for individuals who do not pay their 
premiums for more than 90 days.
    We proposed to provide greater flexibility to MA organizations by 
replacing the 90-day grace period in Sec.  422.74(d)(1) with the long-
standing approach under Sec.  417.460(c)(1), which governs 
disenrollment from HMOs with cost contracts under section 1876. Under 
this proposal, we would instead specify that a disenrollment could be 
effectuated no sooner than 1 month from the date the premium was due.
    We have also proposed revisions to the regulations at Sec.  
422.74(d)(2) regarding disenrollment of an individual for disruptive 
behavior. Our goal was to create a more objective definition that is 
based upon an individual's behavior, rather than upon the application 
of such subjective terms as ``unruly,'' ``abusive,'' and 
``uncooperative.'' We also recognized that, in revising this 
definition, we needed to strike a balance that would ensure all 
individuals are afforded protection from unwarranted disenrollment 
actions while protecting the health and safety of all those concerned 
including the individual. The best solution is to create a definition 
of disruptive behavior based on objective criteria, ensure that MA 
organizations make serious efforts to resolve problems with 
beneficiaries who are disruptive, and to require MA organizations to 
make ``reasonable accommodations'' for vulnerable beneficiaries, 
including those with serious mental illness. Furthermore, we will 
ensure that CMS staff with appropriate clinical or medical expertise 
will be involved in the review of the MA organization's request before 
we make a final decision. We will work with organizations that ask to 
disenroll these individuals on a case-by-case basis to ensure that they 
are not left without Part D coverage. We will also remove the provision 
for an expedited disenrollment we had proposed and ensure that MA 
organizations provide due process before disenrolling an individual.
    Comment: Several commenters supported the proposed revisions to 
Sec.  422.74(d)(1) regarding procedures for involuntary disenrollment 
for failure to pay plan premiums. Other commenters opposed these 
revisions as ``overly broad'' and felt the lack of a specific time 
frame could be a disadvantage for plan enrollees.
    Response: Our proposed changes to this section were intended to 
provide flexibility for MA organizations in addressing the issue of 
plan members who fail to pay required plan premiums. Under the existing 
rule, MA organizations were obligated to provide

[[Page 4608]]

all plan benefits to an individual who has failed to pay required plan 
premiums for a full 90-day period. This period often exceeded 90 days 
because the notice requirements we imposed fell after the end of the 
90-day period, but must still be met by the organization before the 
individual could be disenrolled. Our experience and feedback from MA 
organizations indicated that these requirements, while intended to 
protect beneficiaries enrolled in MA plans, may instead artificially 
inflate plan premiums because MA organizations are required to continue 
to provide services to these beneficiaries for up to 4 months, even 
though they have not paid the required plan premiums.
    After reviewing the comments and feedback we received on the 
proposed rule, we determined that it would be prudent to include a 
minimum grace period in the revisions we are making to address this 
issue. Therefore, we have revised this section to include a 1-month 
grace period during which an enrollee who has failed to pay required 
premiums must be notified of the impending disenrollment action and 
afforded the opportunity to pay past due premiums in full or under 
payment terms agreed upon by the beneficiary and the MA organization, 
as the organization allows. This period will begin on the first day of 
the month for which the premium was unpaid. For example, the grace 
period for a March premium will begin March 1\st\ and, if the 
organization does not receive payment by March 31\st\, the individual 
will be disenrolled effective April 1\st\. We will provide specific 
time frames for required notices in additional guidance to ensure 
beneficiaries have adequate time to respond before disenrollment takes 
effect. Since we are establishing this 1-month grace period as a 
minimum requirement, MA organizations still have the option of 
lengthening this period.
    Comment: Three commenters suggested that CMS allow MA organizations 
to ``move'' or ``default'' plan members who have failed to pay premiums 
in one MA plan to another MA plan in the same organization that is 
offered at a lower or no premium, so that beneficiaries do not suffer 
an interruption in MA benefits.
    Response: This suggestion is inconsistent with the statute. Section 
1851(g)(3)(C)(i) of the Act clearly provides that individuals who are 
disenrolled from an MA plan for failing to pay premiums are deemed to 
have elected original Medicare.
    Comment: Several commenters submitted comments on the proposed 
revisions to Sec.  422.74(d)(2) concerning the disenrollment of 
individuals who exhibit disruptive behavior. Some commenters supported 
the proposed approach, noting that the inability to effectuate such 
disenrollment has been an ongoing issue for MA plans. Other commenters 
recommended that CMS further clarify the meaning of the term 
``decision-making capacity,'' and one commenter in particular suggested 
that CMS adopt a definition based on legal conservatorship.
    Several commenters, on the other hand, expressed concern that the 
expanded definition of disruptive behavior does not adequately protect 
individuals whose behavior is induced by a mental illness, a medical 
condition, or certain prescribed drugs. These commenters were concerned 
about the loss of protection for individuals with diminished mental 
capacity. Several commenters expressed concern that the definition of 
disruptive behavior was overly subjective, particularly the use of 
terms such as ``unruly'', ``abusive'' and ``uncooperative.''
    Response: In the final rule, we aim to strike a balance between 
allowing MA organizations to disenroll individuals who exhibit 
disruptive behavior and creating adequate protections for individuals 
who face involuntary disenrollment from a plan. Since the statute (at 
section 1851(g)(3)(B)(ii) of the Act) permits an MA organization to 
disenroll an individual who engages in disruptive behavior, we must 
establish a process for allowing these types of disenrollments. At the 
same time, we recognize that such a process must include adequate 
safeguards for individuals whose disruptive behavior is due to mental 
illness or a medical condition, especially in light of the crucial 
importance of prescription drug therapy for these individuals. It is 
also important to recognize that some prescription drug therapies may 
well induce such behavior.
    Therefore, we are revising our proposed definition of disruptive 
behavior in Sec.  422.74(d)(2)(i) of the final rule to focus on the 
behavior that substantially impairs the plan's ability to arrange or 
provide care for the individual or other plan members. We recognized 
that terms such as ``unruly'', ``abusive'', ``uncooperative'', as well 
as an assessment of the enrollee's ``decision-making capacity'' are 
subjective terms that make reviewing and approving such requests 
difficult.
    In addition, we 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 warrants special 
consideration. Therefore, we are revising Sec.  422.74(d)(2)(v) to also 
require MA organizations to provide a ``reasonable accommodation'' to 
individuals in such exceptional circumstances that we deem necessary. 
Such accommodations could include providing the individual with a SEP 
to choose another plan, or requiring the plan to maintain the 
individual's enrollment until the end of the year, when the individual 
could choose 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 CMS' existing review 
and approval process required under Sec.  422.74(d)(2)(v). The 
regulations (at Sec.  422.74(d)(2)(iii)), will continue to require that 
that before an organization can request to disenroll a member for 
disruptive behavior, it first must make a serious effort to resolve the 
problems presented by the individual's behavior, including the use of 
the organization's grievance procedures. The MA organization must then 
document the individual's behavior, its own efforts to resolve the 
problem, and the use or attempted use of its internal grievance 
procedures.
    We believe that these policies will achieve the twin goals of 
permitting involuntary disenrollment when appropriate due to an 
individual's disruptive behavior, while also establishing necessary 
protections for beneficiaries in certain circumstances.
    Comment: One commenter stated 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 or by 
seeing their primary care physician rather than a specialist and 
subsequently experience an adverse reaction that triggered the 
disruptive behavior. Another commenter believed that, in cases where an 
individual is unstable, disruptive behavior could be related to 
unsuccessful attempts to find the proper medication or due to a plan's 
step therapy requirement.
    Response: We agree with the commenter, and clarify in the final 
rule at Sec.  422.74(d)(2)(i) that an individual's behavior 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. For example, an individual who chooses to disregard medical 
advice, such as not heeding the advice to stop using tobacco products, 
is not exhibiting disruptive behavior.

[[Page 4609]]

    Comment: Several commenters supported the flexibility afforded by 
allowing MA organizations to limit re-enrollment for individuals who 
are disenrolled for disruptive behavior. One commenter however, opposed 
the provision on the grounds that prohibiting an individual from re-
enrolling in a plan for a specified period could cause undue harm.
    Response: In the proposed rule, we specified that, under Sec.  
422.74(d)(2)(vi), an MA organization had the option to decline future 
enrollment by an individual who had been disenrolled for disruptive 
behavior. Although a prohibition on re-enrollment would still be 
possible under this final rule, we are not leaving this matter to the 
discretion of the MA organization. Instead, we are providing that an 
organization must request any future conditions on re-enrollment with 
their disenrollment request. We will then review each request on a 
case-by-case basis, consistent with Sec.  422.75(d)(2)(v).
    Comment: Several commenters submitted mix comments on the proposed 
expedited disenrollment process. Some commenters felt that the 
expedited process undermines the standards and requirements that are in 
place to protect beneficiaries, while other commenters supported the 
greater flexibility in cases where such behavior poses an immediate 
threat of health or safety to others.
    Response: We believe that all individuals facing involuntary 
disenrollment for disruptive behavior must have sufficient opportunity, 
as provided by the notice requirements, to change their behavior and/or 
grieve the MA organization's decision to request involuntary 
disenrollment from CMS. Although we recognize that threatening behavior 
is a real, if rare, problem, we do not believe that expedited 
disenrollment is the appropriate remedy. Rather, we would recommend 
either a medical approach or, if warranted, a law enforcement solution 
for truly threatening situations. Therefore we are removing this 
provision from the final regulation.
    Comment: One commenter recommended that the process for 
disenrolling AI/AN from MA organizations that contract with the HIs, an 
Indian Tribe or Tribal organization, or an I/T/U include direct 
communication with the I/T/U entity with adequate documentation of and 
steps taken to resolve the problem as well as adequate timelines.
    Response: MA organizations have the statutory authority at Section 
1851(g)(3)(B)(ii) of the Act to disenroll an individual from a plan if 
the individual has engaged in disruptive behavior and are required to 
provide sufficient notice to the individual in accordance with the 
timeframes specified in manual instructions. Because an individual is 
an enrollee of MA plan, the individual's relationship with the plan is 
primary. The MA organization, not the health care provider, is 
obligated to communicate with the individual or the individual's 
authorized representative as defined under State law. We believe that a 
provision requiring consultation with I/T/U entities would not be 
within the scope of the authority in section 1851(g)(3)(B)(ii) of the 
Act.
    Comment: Several commenters submitted comments on whether 
nonpayment of cost-sharing should constitute disruptive behavior. Many 
commenters supported this interpretation, noting the negative impact 
that non-payment of cost sharing has on an MA organization's ability to 
provide or arrange for services for the individual. These commenters 
generally recommended that CMS establish a clear and uniform process 
for plans to follow. Another commenter suggested that such 
disenrollments be permitted only for certain types of services that 
represent significant portions of a member's overall cost-sharing 
responsibility. One commenter suggested that CMS establish a threshold 
of $2,000 of outstanding cost sharing, including two or more failures 
to pay cost sharing.
    Other commenters, however, opposed including nonpayment of cost 
sharing as a basis for disenrollment. Some commenters stated that this 
policy would be discriminatory, placing very ill patients with high 
medical costs at a severe disadvantage and leading plans to cherry pick 
healthier patients. Another commented that CMS needed to take into 
account an individual who experiences a change in circumstances that 
may affect his or her ability to pay cost sharing.
    Several commenters raised questions about how CMS would treat low-
income individuals. Some commenters were supportive of a low-income 
exception for such disenrollments, while other commenters noted the 
administrative difficulty in applying the exception, since plans do not 
have mechanisms in place to determine beneficiary income levels or 
intervene on behalf on the enrollee with the provider.
    Response: We appreciate the feedback provided on whether the 
nonpayment of cost-sharing should constitute disruptive behavior. We 
continue to believe that disenrollment for failure to pay cost-sharing 
may be disruptive under certain circumstances. At the same time, we 
believe that all the protections, such as notice requirements and case-
by-case CMS review, should apply in these situations. Thus, we are not 
ruling out such disenrollment in certain cases, and we will consider 
these comments in developing guidance for the disruptive behavior 
provisions.
    Comment: Other commenters recommended that CMS institute specific 
protections for individuals facing involuntary disenrollment, including 
an appeals process.
    Response: Although we agree with the commenter that CMS 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, they may contact 
the MA organization. We provide assistance to MA organizations to 
handle beneficiary inquiries and complaints regarding enrollment 
through staff assigned to each MA organization. We envision a similar 
process being established under the PDP program.
10. Approval of Marketing Materials and Election Forms (Sec.  422.80)
    We proposed to codify at Sec.  422.80(a)(3) the ``file-and- use'' 
program already in place. This provision recognizes an MA 
organization's consistent compliance with marketing guidelines by 
providing for streamlined approval of marketing materials submitted by 
that organization. Organizations that have demonstrated to us that they 
continually meet a specified standard of performance are allowed to 
have certain types of marketing materials deemed to be approved by us 
if they are not disapproved within 5 days of submission to us for prior 
approval. In addition, the time frames under Sec.  422.80(e)(5) were 
made consistent with those provided under Sec.  422.80(a)(1). Lastly, 
we proposed clarifying changes to the discussion of prohibited 
marketing activities for MA plans.
    Comment: Several commenters submitted comments regarding the 
``file-and-use'' provisions. Many commenters supported incorporating 
this provision into the regulation and suggested that CMS consider even 
further flexibility as plans transition to the new Part D benefit in 
2006. One commenter in support of the provision did note,

[[Page 4610]]

however, that small plans are more affected by the process since these 
plans submit fewer materials and a smaller number of errors impact 
their ability to participate. This commenter recommended that CMS 
consider this issue with regard to smaller organizations.
    Many commenters opposed this provision and believe that the 
provision weakens the marketing rules and that MA organizations have 
not demonstrated that they deserve such a process. Given the new 
upcoming options and diversity of plan benefits, many believe stronger 
marketing requirements are needed. They were concerned that this 
process would perpetuate the perceived inconsistency in the marketing 
material approval process within CMS. Others were concerned that the 
short timeframe for CMS to review and approve would result in 
essentially CMS ``rubber stamping'' materials. One commenter suggested 
that plans present all marketing materials at least 30 days before 
proposed distribution.
    Response: The ``file-and-use'' program streamlines the marketing 
review process while assuring that beneficiaries marketing materials 
are of a high quality and clarity. While we understand the concerns 
raised by smaller organizations, this program was developed to be 
available to those MA organizations that demonstrate they can 
consistently achieve a high level of performance with respect to 
producing accurate and clear marketing materials over a sustained 
period of time, regardless of the size of the organization.
    It is also important to note that there are marketing materials 
that are not ``eligible'' to be considered under this program. Any 
marketing materials that describe benefits, cost sharing or plan rules 
are not eligible for the file-and-use status.
    We retain the right to rescind file-and-use status from an MA 
organization if the organization fails to meet the rigid standards of 
compliance laid out in the file-and-use guidelines. We do not believe 
that the beneficiary is at greater risk as a result of the file-and-use 
program, but may actually benefit from being able to receive certain 
educational and outreach materials in a timely manner.
    In response to the commenters seeking greater marketing 
flexibility, we also are providing in Sec.  422.80(a)(2) of this final 
rule for organizations that are not currently eligible for the file-
and-use method to use this method with respect to materials that pose 
the lowest risk of confusing or misleading beneficiaries. With respect 
to these materials, any MA organization may follow the file-and-use 
procedures if it certifies that it followed all applicable marketing 
guidelines, or that it used, without modification, model language 
specified by CMS.
    Comment: One commenter expressed disappointment that CMS retained 
the prohibition on door-to-door solicitation. The commenter did not 
believe that retaining this ban was justified and the ban is outdated, 
since it was added 20 years ago when this activity was more difficult 
to monitor.
    Response: We understand the need by MA plans to have additional 
flexibility in developing their marketing strategies. The purpose of 
this prohibition was to provide beneficiaries with appropriate 
beneficiary protections. Some individuals may not welcome unsolicited 
visits or may not be prepared to discuss their options, yet may feel 
pressured to do so. Given the complexity of the new programs and the 
upcoming limitations when individuals are able to make choices in their 
coverage, as well as increased competition, we believe that prohibition 
of door-to-door solicitation remains to be in the best interest of the 
beneficiary.
    Comment: One commenter did not believe the regulatory language 
addressed the CMS timeline for review when materials are submitted 
after CMS' initial 45-day review period. Current guidance allows for an 
additional 45-day review period for CMS to review a document after it 
has been resubmitted. The commenter recommends instituting a 10-day 
review period for resubmitted materials.
    Response: We appreciates this feedback and will take this under 
further consideration.
    Comment: One commenter supported the extension of file and use to 
SNPs.
    Response: Since SNPs are MA plans, all MA rules will apply to SNPs 
unless otherwise provided by us. Therefore, SNPs will qualify to 
participate in the file-and-use program provided the necessary 
requirements are met.
    Comment: Several comments requested clarification from CMS that 
outreach workers employed by tribal and IHS facilities will continue to 
be encouraged to provide information about Medicare alternatives to the 
AI/AN elderly and this outreach would not fall under the prohibition 
against door-to-door marketing.
    Response: We appreciate these concerns and will work with Tribal 
and IHS organizations to find solutions that both meet the needs of the 
AI/AN population and satisfy the requirements of the MA program.

Subpart C--Benefits and Beneficiary Protections

    In the areas of benefits and beneficiary protections, we proposed 
regulatory reforms based on our program experience, as well as 
provisions implementing new requirements in the MMA. We tried to 
integrate new requirements in the MMA with existing regulations, while 
at the same time removing impediments in the existing rules that have 
tended to stifle innovation by M+C organizations. We believe our 
proposals addressed the paramount task of ensuring that beneficiaries 
continue to be fully informed and protected in their receipt of 
essential health care services under the Medicare program.
    The regulatory reforms we proposed included: (1) New beneficiary 
protections related to receipt of covered health care services from 
contracted providers; (2) revisions to the rules limiting beneficiary 
cost sharing related to emergency episodes; (3) new rules affording 
additional protections to MA regional plans enrollees; (4) incentives 
for MA organizations to offer MA regional plans that would serve all 
beneficiaries in all areas; (5) the elimination of administratively 
burdensome requirements on MA organizations that are duplicative of 
other activities already conducted by us; and (6) the elimination of a 
number of unnecessary, duplicative, or overly burdensome access to care 
provisions.
    We received hundreds of comments on subpart C from approximately 
150 commenters in response to our August 3, 2004 proposed rule. Below 
we provide a brief summary of the proposed provisions and respond to 
public comments. (For a broader discussion of the proposed provisions, 
please refer to our proposed rule.)
1. General Requirements (Sec.  422.100)
    MA MSAs are ``high deductible'' MA plans and are defined at section 
1859(b)(3) of the Act. Until the deductible is met, the MA MSA enrollee 
is generally responsible for payment for all covered services. Once the 
MA MSA deductible is met, the MA organization offering the MSA plan is 
responsible for payment of 100 percent of the expenses related to 
covered services. In both cases, whether it is the enrollee or the MA 
organization offering the MSA that assumes responsibility for payment, 
providers and other entities are required to accept the amount that FFS 
would have paid (including permitted beneficiary cost sharing) as 
payment in full.

[[Page 4611]]

    Section 233(c) of the MMA amended the Act to include enrollees in 
MSA plans offered by an MA organization with MA coordinated care plans 
as having protection from balance billing by noncontracting providers. 
In our proposed rule, we stated that for covered services provided to 
an MA MSA plan enrollee, a physician or other entity that does not have 
a contract with an MA MSA plan must now accept as payment in full the 
amount they could have collected had the individual not been enrolled 
in the MA MSA plan.
    In the proposed rule, we specified that:
     The proposed provision applied to physicians and other 
entities. (Note that ``providers of services,'' as defined in section 
1861(u) of the Act, are similarly restricted from balance billing MA 
MSA enrollees under section 1866(a)(1)(O) of the Act.)
     In cases in which Medicare participating physicians do not 
have an agreement with an MA organization in place governing the amount 
of payment, they must accept the amount they would have received under 
FFS Medicare as payment in full (including permitted beneficiary cost 
sharing).
     In cases in which Medicare non-participating physicians do 
not have an agreement with an MA organization in place governing the 
amount of payment, they also must accept the amount they would have 
received under FFS Medicare as payment in full (including permitted 
beneficiary cost sharing). (Medicare non-participating physicians are 
permitted to accept assignment on a case by case basis. For non-
assigned claims, Medicare non-participating physicians are subject to 
the ``limiting charge.'')
    These FFS charge limits have always applied to the charges that 
providers and other entities could impose when providing covered 
services to enrollees in MA coordinated care plans and private FFS 
plans, when there is no agreement with an MA organization in place 
governing the payment amount. The MMA added the same protections for MA 
MSA plan enrollees and we proposed conforming changes in subpart C and 
at Sec.  422.214.
    In addition to the new MA MSA ``charge'' protections, we proposed 
amending Sec.  422.100 to provide for other changes for purposes of 
administrative simplification and clarification:
     We deleted the parenthetical ``(other than an M+C MSA 
plan)'' from the first sentence of Sec.  422.100(b)(2) and replaced it 
with ``(and an MA MSA plan, after the annual deductible in Sec.  
422.103(d) has been met).''
     We modified the reference to ``additional benefits'' in 
Sec.  422.100(c), as those benefits are no longer applicable to MA 
plans offered on or after January 1, 2006.
     We removed Sec.  422.100(e) because it was duplicative, 
and we made the necessary redesignation changes.
     We removed the reference to operational policy letters in 
Sec.  422.100(f).
     We added ``or encourage disenrollment'' to Sec.  
422.100(f)(2), after ``discourage enrollment,'' as one of the 
prohibitions on the design of benefit packages.
    Comment: One commenter recommended that CMS clarify whether the 
proposed provider rules will now require providers accepting Medicare 
assignment to limit their charges to 100 percent of Medicare allowable 
costs for members of an MA MSA plan.
    Response: The protections from physician balance billing that are 
described in section 1848(g) of the Act apply to all Medicare 
beneficiaries, including those enrolled in any type of MA plan. This 
includes enrollees of MA MSA plans. This means that for a Medicare 
participating physician, for instance, the billed charges cannot exceed 
the Medicare participating fee schedule amount for a Medicare-covered 
service. For Medicare non-participating physicians that do not accept 
Medicare assignment in a specific case, the charges cannot exceed 115 
percent of the Medicare non-participating fee schedule amount for a 
Medicare-covered service.
    Similarly, for providers of services, as defined at section 1861(u) 
of the Act, the participation agreement with Medicare requires the 
provider to accept the FFS payment amount as payment in full for 
services provided to Medicare beneficiaries, including those enrolled 
in any type of MA plan (see section 1866(a)(1)(O) of the Act).
    Comment: A few commenters stated that CMS should clarify regulatory 
language to require MA plans to include statutory add-on payments under 
FFS Medicare to the noncontracting provider payments they are required 
to make under Sec.  422.100(b)(2). Some commenters specifically 
mentioned such add-on payments (for example, DSH, outliers, GME, and 
IME payments) as part of the total payment amount that the provider 
would have received under original Medicare, and also including the 
balance billing permitted under Part A and Part B. Some commenters 
specifically mentioned the ``special'' hospital category payments for 
sole community hospitals, Medicare dependent hospitals, and critical 
access hospitals. Another commenter recommended that CMS clarify this 
``new'' provision and asked why CMS made a distinction between 
providers of services, physicians, and other entities.
    Response: This section of the regulation has been in place since 
the original M+C interim final regulation was published on June 26, 
1998. In our August3, 2004 proposed rule, we simply added the billing 
protections for MA MSAs based on the amendment to section 1852(k)(1) of 
the Act provided in section 233(c) of the MMA. Otherwise, the 
distinction between providers of services, physicians, and other 
entities is statutory and based on the fact that noncontracting 
providers of services are required to accept Medicare payment rates 
from MA organizations based on section 1866(a)(1)(O) of the Act, while 
noncontracting physicians and other entities are required to accept 
Medicare payment rates from MA organizations based on section 1852(k) 
of the Act.
    Additionally, we believe our regulation already requires FFS ``add-
on'' payments (including those to both providers of services, 
physicians, and other entities), because they are generally considered 
part of the FFS payment that an MA organization must make to 
noncontracting providers, physicians, and other entities for covered 
services. However, an MA organization is not required to include IME 
and GME payments to noncontracting hospital providers to the extent the 
hospital providers receive IME and GME payments for MA plan enrollees 
directly from the fiscal intermediary (see Sec.  422.214(b)). The 
fiscal intermediary's direct payments to hospitals of IME and GME 
amounts for MA enrollees are based on sections 1886(d)(11) and 
1886(h)(3)(D) of the Act, respectively. Finally, Sec.  422.100(b)(2) 
references the balance billing permitted under Part A and Part B of 
Medicare, which represents the maximum required payment due from the MA 
organization, less applicable MA enrollee cost sharing.
    Comment: Several commenters recommended that CMS adopt blanket 
policies that would require MA and MA-PD plans to pay I/T/U facilities 
that serve AI/AN in a special manner. Among other proposals, these 
commenters suggested that CMS require MA organizations to waive cost 
sharing for AI/AN and that CMS require MA organizations to pay the 
``full IHS Medicaid'' rate to I/T/U facilities, or that we establish 
other special payment methodologies related to MA reimbursement to I/T/
U facilities.
    Response: We are implementing the MMA statute through this 
rulemaking. The MMA did not provide for special

[[Page 4612]]

treatment under the MA program for AI/AN beneficiaries. For this 
reason, we do not see a statutory basis to apply different rules to a 
subset of Medicare beneficiaries, such as AI/AN populations. In 
general, however, we believe that MA regional plans will create new 
choices for beneficiaries, including AI/AN populations, and that access 
to MA plans will be improved. Similarly, because MA regional plans must 
reimburse for all covered benefits in and out of network, IHS 
facilities may receive reimbursement for out-of-network care provided 
to an MA regional plan AI/AN enrollee that they may otherwise not have 
been entitled to under the M+C program. However, the rate of 
reimbursement actually paid to an I/T/U facility for an AI/AN enrollee 
will vary based on the type of plan, type of service, and the plan-
required level of enrollee cost sharing. For instance, for emergency 
department services, an MA plan enrollee's cost sharing would be 
limited to $50 and the MA organization (regardless of plan type) would 
be responsible for payment of the rest of the billed amount, up to the 
full Medicare rate. Similarly, an I/T/U, for an AI/AN MA PPO enrollee, 
could expect MA organization reimbursement for routine covered services 
provided to such an enrollee, although the amount of reimbursement 
directly provided by the MA organization would be limited to the full 
Medicare rate, less applicable enrollee cost sharing.
    Finally, a broad waiver of beneficiary cost sharing of the type the 
commenters requested would not be permitted under provisions designed 
to protect the Medicare program from fraud and abuse. However, existing 
statutory and regulatory provisions may allow for the waiver of cost 
sharing in certain cases.
    Comment: One commenter suggested that CMS require pre-approval 
before permitting an MA organization to adopt a local coverage 
determination for an MA regional plan under Sec.  422.101(b)(4). This 
commenter also suggested that CMS require public comment on the choice 
of local coverage determination by an MA organization for either a 
local MA plan under Sec.  422.101(b)(3) or an MA regional plan under 
Sec.  422.101(b)(4).
    Response: We do not interpret the statute at section 1858(g) to 
require CMS pre-approval of the local coverage determination an MA 
organization sponsoring an MA regional plan selects to apply to all 
enrollees of the MA regional plan. The statutory provision also does 
not include a requirement for public notice, but rather allows the MA 
organization to elect to have a local coverage determination apply to 
all enrollees of the MA regional plan. The MA organization must comply 
with applicable statutory and regulatory requirements in making such 
election, including the requirement, discussed below, that all local 
coverage determinations of the contractor selected by the MA 
organization be applied to the MA regional plan's enrollees.
    Comment: One commenter recommended that CMS clarify whether or not 
MA organizations are required to provide all Medicare covered benefits 
in the MA plans they offer to Medicare beneficiaries. This commenter 
had specific concerns related to outpatient occupational therapy and 
whether a home visit by an occupational therapist to evaluate for 
safety and function post stroke, for instance, is a Medicare benefit 
that MA organizations have to offer enrollees of MA plans.
    Response: Occupational therapy is a Medicare-covered outpatient 
benefit under section 1861(s)(2)(D) of the Act. Under section 1852(a) 
of the Act, an MA organization must provide all benefits under the 
original Medicare FFS program option. Therefore, MA plans must cover 
all services covered under Medicare Parts A and B.
    Comment: One commenter stated that CMS is directed to ``replace'' 
Medicare carriers and fiscal intermediaries with Medicare 
Administrative Contractors (MACs) by section 911 of the MMA. The 
commenter asked what impact such a ``replacement'' would have on MA 
plans, which will likely cover larger areas than current FFS 
contractors.
    Response: Transition from Medicare carrier and fiscal intermediary 
contractors to MACs is to occur between 2005 and 2011. We have modified 
the regulatory language in Sec.  422.101(b)(3) to account for the 
transition to MACs by removing specific reference to Medicare carriers 
and fiscal intermediaries. We expect the impact this ``replacement'' 
will have on MA plans related to this section of the regulation will be 
insignificant. To the extent MACs will cover larger geographic areas 
than current FFS contractors, and to the extent MACs will apply local 
coverage determinations across those larger geographic areas, the 
opportunity for MA organizations to elect to apply uniform coverage 
rules in Sec.  422.101(b)(3) or (b)(4) will also be likely to decline.
2. Requirements Relating to Basic Benefits (Sec.  422.101)
    Section 221 of the MMA added a new section 1858(g) to the Act that 
provided for a special rule related to the way local coverage 
determinations (for example, ``local medical review policies,'' or 
``LMRPs'') will be applied by MA regional plans. MA regional plans are 
permitted to elect any one of the local coverage determinations that 
applies to original Medicare FFS beneficiaries in any part of an MA 
region to apply to its enrollees in all parts of the MA region. Based 
on our interpretation of the statute, we proposed at Sec.  
422.101(b)(4) that an MA regional plan, if it chooses this option, must 
elect a single FFS contractor's local coverage determination that it 
will apply to all members of an MA regional plan. The MA organization 
would not be permitted to select local coverage policies from more than 
one FFS contractor that it would apply to all members of an MA regional 
plan.
    Comment: A number of commenters recommended that CMS clarify the 
proposed language in Sec.  422.101(b)(4). Some commenters recommended 
that CMS ensure that the understanding comported with ``the common 
understanding'' that regional plans can select coverage determinations 
issued by different intermediaries and carriers within the region. Some 
commenters also suggested that CMS extend the same flexibility to local 
MA plans. Others suggested that CMS allow MA organizations that 
sponsored multiple local MA plans to apply one FFS contractor's 
coverage determinations to its entire MA population.
    Response: We disagree with the commenters who have requested the 
ability to select coverage determinations of multiple intermediaries or 
carriers within a region. As we stated in the proposed rule, our 
interpretation of section 1858(g) of the Act is that an MA regional 
plan exercising this option must elect a single FFS contractor group of 
local coverage determinations or policies that it will apply to all 
members of an MA regional plan and that an MA regional plan may not 
select local coverage policies from more than one FFS contractor. We 
are adopting this interpretation in the final rule.
    The reason for this interpretation is two-fold. First, to the 
extent that local carrier and intermediary medical directors apply 
uniform experience to a broad range of coverage policies, it would be 
inappropriate to allow selection of a specific coverage policy from one 
carrier medical director and a different coverage policy on a different 
medical item or service from another carrier medical director. Second, 
to the extent that local carrier and intermediary coverage policies are 
generally statements of non-coverage, restricted coverage, or 
conditions for receipt of a specific health care item or service, it 
would be inappropriate to

[[Page 4613]]

allow an MA regional plan to adopt coverage policies issued by more 
than one carrier or intermediary. This interpretation would permit MA 
regional plans to deny coverage for what would otherwise be Medicare-
covered services at a frequency and under conditions that no individual 
FFS beneficiary would ever face. For example, carrier ``X'' might have 
decided that Medicare coverage was not available for ``A'' in a local 
coverage area. Carrier ``Y'' might have decided that Medicare coverage 
was not available for ``B'' in a local area. In such a situation, were 
we to permit an MA regional plan to adopt the coverage policies of both 
carrier X and carrier Y, an MA plan enrollee of that regional plan 
would not have coverage for either A or B, while original FFS enrollees 
residing in carrier X's service area would have coverage for B, and 
those residing in carrier Y's service area would have coverage for A. 
Therefore, to emphasize these points and to correct the apparently 
common misunderstanding mentioned in the comment, we are modifying the 
language in Sec.  422.101(b)(4). Further, the statutory language will 
not permit an extension to local MA plans of the requirement we are 
codifying in regulation at Sec.  422.101(b)(4). Local MA plans whose 
service areas encompass more than one local coverage policy area will 
continue to be required to follow rules previously established for them 
in Sec.  422.101(b)(3) based on statutory authority at section 
1852(a)(2)(C) of the Act.
    Finally, we respond to the commenters that asked whether an MA 
organization could apply a single FFS contractor's coverage 
determinations to its entire MA population and across local MA plans. 
Such a policy would not be in accord with the statute, which is 
specific as to both local and MA regional plans. The selection of a 
uniform coverage determination policy for both MA local and regional 
plans is available only at the plan level.
    Comment: A commenter recommended that CMS revise the regulation at 
Sec.  422.101(b)(4) in order to permit MA organizations that offer MA 
regional plans in more than one MA region to apply local coverage 
policies across regional boundaries.
    Response: We are interpreting section 1858(g) of the Act as 
generally preventing such an interpretation or revision to the 
regulation. The statute specifically allows MA regional plans to apply 
coverage policies only from 'any part of such region.'' It would only 
be where one FFS contractor had a uniform coverage policy that 
straddled two regions, and where an MA organization offered MA regional 
plans in both of those regions, that such a result would be possible.
    Comment: A commenter recommended that CMS allow an MA organization 
offering multiple local MA plans to apply the rule in Sec.  
422.101(b)(3) across MA local plans, or if local MA plans could adopt 
the new rule in Sec.  422.101(b)(4) related to MA regional plans.
    Response: The specific language at section 1851(a)(2)(C) of the Act 
is clear in not permitting such an interpretation or revision to the 
regulation. The statute specifically allows an MA organization 
sponsoring a local MA plan to apply the coverage determination most 
beneficial to enrollees from the service area of that local MA plan to 
all enrollees of that local MA plan, and subjects that to pre-CMS 
review before implementation.
    Comment: A number of commenters pointed out the difficulty 
noncontracting providers will have ascertaining the local coverage 
policy that will apply to a specific MA regional plan enrollee. Some 
commenters suggested that CMS require MA regional plans to notify both 
enrollees and potential noncontracting providers of the LMRP that will 
apply to specific MA regional plan enrollees. Others stated that 
providers are most familiar with LMRPs that apply in the area in which 
they primarily practice medicine or provide services and that it will 
be difficult, if not impossible, to know whether a specific service 
will be covered for a specific MA regional plan enrollee when LMRPs are 
applied from different, and possibly remote, geographic areas. Some 
commenters pointed out the potential impact this would have on MA 
regional plan enrollees who could incur financial liability for 
services that are otherwise Medicare-covered in the geographic location 
in which they are provided. Many commenters stated that the problems 
related to knowing what LMRP applies to a specific MA regional plan 
enrollee are compounded by the fact that MA regional plan enrollees, as 
MA PPO enrollees, have the right to access all covered benefits (albeit 
at potentially higher cost sharing) from out-of-network providers.
    Response: We have added a new paragraph to the regulation at Sec.  
422.101(b)(5) that will require MA organizations that elect to apply 
local coverage policies uniformly across a local MA plan's service 
area, or across an MA regional plan's service area, to inform enrollees 
and potential providers, including through the Internet, of the 
applicable local coverage policy that applies to the MA plan enrollees. 
This means that MA organizations choosing to avail themselves of the 
option of applying uniform LMRPs to a local or regional MA plan must 
create a web site upon which to post links to or copies of the 
applicable LMRPs. We believe that this requirement will not create a 
significant burden on MA organizations and will provide convenient 
access for both providers and enrollees to such information. We are 
also making a conforming change to Sec.  422.111(f)(11) that requires 
MA organizations to notify providers through the Internet that such an 
election has occurred and what local coverage policy will apply to MA 
plan members.
    We proposed to add a new Sec.  422.101(d) to provide for new cost-
sharing requirements mandated by MMA related to MA regional plans. 
There were three specific requirements:
    1. MA regional plans, to the extent they apply deductibles, are 
required to have only a single deductible related to combined Medicare 
Part A and Part B services. Applicability of the single deductible may 
be differential for specific in-network services and may also be waived 
for preventative services or other items and services.
    2. MA regional plans are required to have a catastrophic limit on 
beneficiary out-of-pocket expenditures for in-network benefits under 
the original Medicare FFS program.
    3. MA regional plans are required to have a total catastrophic 
limit on beneficiary out-of-pocket expenditures for in-network and out-
of-network benefits under the original Medicare FFS program. (This 
total out-of-pocket catastrophic limit, which would apply to both in-
network and out-of-network benefits under original Medicare, could be 
higher than the in-network catastrophic limit, but may not increase the 
limit applicable to in network services.)
    MA regional plans would be responsible for tracking these 
beneficiary out-of-pocket limits and for notifying members when they 
have been met. We also proposed to require MA regional plans to track 
and limit incurred rather than paid out-of-pocket expenses.
    Comment: Many commenters recommended that CMS explain the 
significance of requiring MA regional plans to track ``incurred'' 
rather than paid expenses related to the deductible and caps on 
beneficiary cost sharing.
    Response: There are two reasons for requiring MA regional plans to 
track incurred rather than paid beneficiary cost-sharing expenses. The 
first is that

[[Page 4614]]

we foresee a potential for disputes arising between providers and MA 
organizations related to the ``full'' reimbursement the MA organization 
will owe, once a cap had been met. If ``full'' reimbursement were not 
required until cost sharing had been paid (rather than incurred), then 
disputes might arise over what amount a beneficiary had actually paid 
in cost sharing, and when. Administratively, it is more feasible and 
less burdensome for plans to track incurred cost-sharing amounts than 
amounts actually paid, if for no other reason than the latter would 
require a feedback mechanism to the MA organization whenever an 
enrollee makes a payment of cost sharing. Second, it is possible that 
in many instances a beneficiary will be unable to pay full cost sharing 
for a service at the time of service. Many MA organizations, for 
instance, require inpatient hospital copays of more than $100 per day, 
even when in-network hospitals are used. Beneficiaries might need to 
pay cost sharing to providers over a period of time. Such delays in the 
actual payment of cost sharing should not affect the MA organization's 
responsibility for timely payment of claims.
    Comment: A number of commenters recommended that CMS require MA 
organizations to make deductible and out-of-pocket information readily 
available to providers to facilitate billing at the time of service. 
Some commenters suggested requiring MA organizations to send notices of 
additional financial liability to enrollees on a monthly basis. Others 
suggested requiring that a standardized notice be used to ensure 
consistent reporting across all plans. Commenters also suggested 
requiring MA organizations to post enrollee deductible and catastrophic 
cap information on the Internet, so providers could easily and quickly 
determine enrollee liability at the time of service.
    In addition, commenters suggested that CMS require MA organizations 
offering MA regional plans to provide information on deductible and 
out-of-pocket limits related to specific MA regional plan enrollees to 
hospitals, similar to the method by which hospitals are notified of 
Medicare beneficiary eligibility and Part A deductible status under the 
original FFS system. Others suggested that we require MA organizations 
offering MA regional plans to supply deductible and catastrophic cap 
information when health care providers and/or hospitals notify the MA 
organization that an MA plan member has presented for services.
    Response: In response to these comments, we have modified Sec.  
422.101(d)(4) to indicate that notification to providers of enrollee 
status related to a deductible (if any) and catastrophic caps is also 
required. To the extent an MA regional plan enrollee is not aware of 
his or her deductible and/or cap status, the enrollee or a provider 
should have reasonable access to such information at the time of 
service.
    Comment: A number of commenters recommended that CMS add a special 
provision for AI/AN to Sec.  422.101(d) that would have the affect of 
requiring all MA regional plans to provide ``full reimbursement'' to 
all I/T/U facilities that treated enrollees of that MA regional plan.
    Response: The MMA did not provide for special treatment under the 
MA program for AI/AN beneficiaries. For this reason, we do not see a 
statutory basis to apply different rules to a subset of Medicare 
beneficiaries, such as AI/AN populations.
    Comment: A commenter generally supported the requirement at Sec.  
422.101(d)(4) that MA regional plans will be responsible for tracking 
the incurred beneficiary cost sharing related to the deductible and the 
catastrophic caps on beneficiary out-of-pocket expenses. The commenter 
expressed disappointment that a specific dollar amount or limit had not 
been set related to the caps on out-of-pocket expenses in Sec.  
422.101(d)(2) and (d)(3). The commenter also asked that we provide a 
definition of ``incurred'' costs that ensures that all cost sharing, 
whether paid by the beneficiary, or on his or her behalf, is counted 
and tracked.
    Response: We did not establish maximum deductible or cap-levels in 
regulation, since the statute does not set such limits. We interpret 
the statute to allow for flexibility in plan design, within the 
constraints of statutory language, to promote competition. However, 
under our authority at section 1852(b) of the Act to disallow the 
offering of an MA plan where we determine that the plan design or its 
benefits are likely to substantially discourage enrollment by certain 
MA eligible individuals, we will review deductible and cap-levels to 
ensure that they do not substantially discourage enrollment. 
Additionally, as required by section 1854(e)(4) of the Act, beginning 
in 2006 (and for all MA plans other than MSA plans), the actuarial 
value of the deductible, coinsurance, and copayments applicable on 
average to individuals enrolled in an MA plan related to benefits under 
the original Medicare program may not exceed the actuarial value of the 
deductibles, coinsurance, and copayments that would be applicable on 
average to FFS Medicare enrollees related to benefits under the 
original Medicare program. As provided for in statute at section 
1852(a)(1)(B)(ii) and in our regulation at Sec.  422.101(e)(2), while 
the catastrophic limit on in-network receipt of benefits under the 
original Medicare program applies to the overall cost-sharing limit 
that an MA regional plan can impose per Sec.  422.256(b)(3), the out-
of-network catastrophic limit is not likewise constrained.
    Finally and related to the tracking of incurred costs, we will 
require MA regional plans to track incurred as opposed to paid enrollee 
cost sharing. We will require MA regional plans to provide 
reimbursement to providers for covered services once the deductible or 
caps have been incurred regardless of who has actually paid the cost 
sharing, or for that matter, regardless of whether the deductible or 
other cost sharing has been paid at all. An MA organization with 
financial liability to reimburse a provider for covered services may 
not delay reimbursement until an enrollee first pays deductible or 
cost-sharing amounts.
    The MMA also added a new section 1859(b)(4) to the Act requiring MA 
regional plans to provide reimbursement for all covered benefits, 
regardless of whether the benefits are provided within or outside of 
the network of contracted providers. As PPOs, MA regional plans are 
permitted to impose differential cost sharing related to non-emergency 
services received from non-network providers. To the extent 
differential cost sharing is part of the benefit package, the MA 
regional plan will generally be responsible for its portion of payment 
to a non-network provider, and the enrollee will be responsible for the 
remainder, up to the limits discussed above. We accommodated these 
requirements in the proposed rule at Sec.  422.101(e).

MA PPO Benefits

    We received many comments on Sec.  422.101(d) and (e) related to 
the benefits and cost-sharing protections enrollees in MA regional 
plans can expect to receive. We also received comments specifically 
related to the definition of MA PPOs provided at Sec.  422.4(a)(1)(v), 
which we responded to in the subpart A preamble above. Because of the 
interaction of the statutory and regulatory definitions of PPO (for 
both local MA plans and MA regional plans, which are offered as PPOs), 
and the benefits they must provide, we address a number of comments 
related to MA PPO benefits

[[Page 4615]]

in this section of the preamble that have a close bearing on the 
definition of MA PPOs.
    As we stated in the subpart A preamble of the August 3, 2004 
proposed rule: ``Section 520(a)(3) of the Medicare, Medicaid and SCHIP 
Balanced Budget Refinement Act of 1999 (BBRA) added section 
1852(e)(2)(D) of the Act and defined PPO plans under the MA program for 
purposes of quality assurance requirements. As we discussed in the 
preamble to the final rule with comment period titled, ``Medicare 
Program; Medicare+Choice,'' published on June 29, 2000 (65 FR 41070), 
the definition of PPOs at section 1852(e)(2)(D) of the Act was 
explicitly for purposes of applying quality assurance requirements in 
1852(e)(2)(B) of the Act and was limited in its applicability to 
paragraph (2) of section 1852(e) of the Act. Before the enactment of 
the BBRA, PPOs had been treated under the M+C statute and regulations 
in the same manner as all other M+C coordinated care plans for purposes 
of applying quality assurance requirements. In the June 29, 2000 final 
rule with comment period, we incorporated this new definition into the 
M+C regulations at Sec.  422.4 and by revising Sec.  422.152.
    The PPO plan definition added by section 520 of the BBRA included 
three elements, they were as follows: (1) has a network of providers 
that have agreed to a contractually specified reimbursement for covered 
benefits with the organization offering the plan; (2) provides for 
reimbursement for all covered benefits regardless of whether those 
benefits are provided within the network of providers; and (3) is 
offered by an organization that is not licensed or organized under 
State law as a health maintenance organization.
    Because the definition of PPO plan in section 1852(e)(2)(D) of the 
Act only applies for the limited purpose of eligibility for PPO quality 
improvement requirements, we do not believe that the limitations in 
this definition should have been set forth in a generally applicable 
definition of PPO plan in Sec.  422.4, as is currently the case. We 
propose to clarify in regulation that it is solely for purposes of the 
application of the more limited quality assurance requirements in 
section 1852(e)(2)(B) of the Act that PPOs must be offered by MA 
organizations that are not licensed or organized under State law as a 
HMO. For PPO-type plans that are offered by MA organizations that are 
licensed or organized under State law as HMOs, the quality assurance 
requirements that apply to all other coordinated care plans in section 
1852(e) of the Act also apply to those PPO type plans.''
    Based on this better interpretation of section 520(a)(3) of the 
BBRA, we proposed to modify the third element (related to State 
licensure) of the definition of MA PPO plan at Sec.  422.4 to read as 
follows: ``A PPO plan is a plan that has a network of providers that 
have agreed to a contractually specified reimbursement for covered 
benefits with the organization offering the plan; provides for 
reimbursement for all covered benefits regardless of whether the 
benefits are provided within the network of providers; and, only for 
purposes of quality assurance requirements in Sec.  422.152(e), is 
offered by an organization that is not licensed under State law as an 
HMO.''
    We also proposed to define MA regional plan at Sec.  422.2 based on 
the definition in section 1859(b)(4) of the Act, which was added by 
section 221(b) of the MMA. The first and second elements of the 
definition of MA regional plan at section 1859(b)(4)(A) and (B) of the 
Act are identical to the first two elements of the definition of MA PPO 
plan at sections 1852(e)(3)(A)(iv)(I) and (II) of the Act , which was 
added by section 722(a) of the MMA. Note that the definition of MA PPO 
plan in section 1852(e)(3)(A)(iv)(I) of the Act is identical the 
definition of MA PPO plan that had appeared at section 1852(e)(2)(D) of 
the Act, as added by section 520(a)(3) of the BBRA. Therefore, the 
statute requires that both local MA PPOs and MA regional plans (which 
are offered as PPOs) must provide reimbursement for all covered 
benefits regardless of whether such benefits are provided within the 
network of providers.
    Comment: Although some commenters supported, as a beneficiary 
protection, the fact that MA regional plans are required to provide 
reimbursement for all covered benefits, regardless of whether those 
benefits are provided within or outside the network of contracted 
providers. Many commenters suggested that statutory language requiring 
PPOs to provide reimbursement for all covered benefits should simply 
mean that PPOs need to provide out-of-network coverage for Medicare 
Part A and Part B services. The commenters also stated that they 
believe the statute never intended out-of-network coverage to apply to 
supplemental benefits, which are not part of the original Medicare 
benefit package.
    Response: We disagree. The placement of the definition and other 
requirements related to MA regional plans in the MMA is instructive in 
this regard. As we noted earlier, section 221(b) of the MMA added the 
definition of MA regional plan, which includes the second element of 
the definition, ``that provides for reimbursement for all covered 
benefits regardless of whether such benefits are provided within such 
network of providers,'' at section 1859(b)(4)(B) of the Act. Section 
221(c) of the MMA establishes ``Rules for MA Regional Plans'' by 
inserting a new section 1858 into the Act. In both, section 1858(b)(1) 
of the Act related to the single deductible that MA regional plans are 
permitted to apply, and section 1858(b)(2) of the Act related to the 
catastrophic limits that MA regional plans must apply, the statute is 
clear in stating that only ``benefits under the original Medicare FFS 
program'' are included. Where the intent is to limit application of MA 
plan requirements to only benefits under the original Medicare program 
(Parts A and B), the statute states such a limitation. Because no such 
limitation appears in either section 1852(e)(3)(A)(iv) of the Act, 
related to all PPOs, nor in section 1859(b)(4) of the Act, related to 
MA regional plans, we cannot apply such a limitation in the 
regulations.
    Comment: Several commenters stated that benefits such as gym, 
eyewear, dental discounts, discounts on hearing aids, massage, 
acupuncture, weight control programs, or health-related magazines are 
unavailable out-of-network because as a practical matter, such benefits 
and discounts are negotiated and offered to MA organizations primarily 
in consideration of the guaranteed volume the exclusive service 
provider believes it will receive. Many commenters stated that, to the 
extent such discounted benefits are available from out-of-network 
service providers, the basis for the negotiated discount (guaranteed 
volume) becomes null and void.
    One commenter stated that discount arrangements such as these, 
which secure a larger volume of business for the entity providing the 
discount, provide financial profits and are a common business model not 
limited to the world of health insurance. The commenter also stated 
that in these arrangements, there is typically no payment by the plan, 
and no cost sharing by the enrollee.
    Response: Although we fully support discounts and volume purchasing 
where appropriate, it is important to note that discounts are not 
benefits under the MA program unless they meet the definition of 
``benefits'' contained in the regulations. The definition of MA 
benefits is found at Sec.  422.2 and reads as

[[Page 4616]]

follows: ``Benefits are health care services that are intended to 
maintain or improve the health status of enrollees, for which the MA 
organization incurs a cost or liability under an MA plan (not solely an 
administrative processing cost). Benefits are submitted and approved 
through the annual bidding process.'' Note that unless an MA 
organization actually pays for a health care item or service, the item 
or service is not a ``benefit'' of the MA plan. Therefore, negotiated 
discounts for services for which the plan incurs no cost or liability 
are not MA benefits, and are not subject to the requirement that PPOs 
provide reimbursement for all benefits, whether or not they are 
provided within the network of providers. That said, it is important to 
note that we have termed these types of negotiated discounts ``value 
added items and services,'' which are discussed in Chapter 3 
(Marketing) of the CMS Medicare Managed Care Manual.
    Comment: Some commenters stated that MA organizations frequently 
subcapitate ancillary provider networks (such as dental providers) and 
that such subcapitated arrangements make it difficult for the MA 
organization to provide reimbursement for all benefits, in- and out-of-
network.
    Response: The statute is clear that all MA organizations offering 
PPOs (local and regional) must provide reimbursement for all plan 
benefits in- and out-of-network. A number of MA organizations 
subcapitate Independent Practice Associations (IPAs), Physician-
Hospital Organizations (PHOs), and similar subnetworks of providers, 
for most (or all) original Medicare Part B and/or Part A services. Such 
subcapitation arrangements are permitted within the MA program, subject 
to Sec.  422.208 (the physician incentive plan requirements and 
limitations) and other statutory and regulatory provisions. However, to 
the extent an MA organization wants to offer a PPO (either local or 
regional), it will also need to make arrangements for providing 
reimbursement for all out-of-network benefits in such a subcapitated 
environment, or it will need to make arrangements with its subcapitated 
contractors for providing reimbursement for out-of-network benefits 
directly. Two points need to be made. First, the cost sharing that an 
enrollee will be required to pay when obtaining covered benefits out-
of-network can be higher than the cost sharing that applies when 
services are obtained in-network. Second, to the extent that 
subcapitated arrangements make the provision of reimbursement for all 
benefits out-of-network impractical, an MA organization might consider 
offering an HMOPOS product, where out-of-network coverage and 
reimbursement can be limited in a number of ways.
    Comment: Commenters stated that it would be impossible for plans to 
provide reimbursement for out-of-network receipt of benefits such as 
24-hour nurse hotline services or disease management services.
    Response: These services are not likely to be available from out-
of-network providers because of the unique nature of the services and 
the integration between the plan and the service provider necessary for 
the delivery of such services. To illustrate, a provider of in-network 
disease management services to a plan's enrollees is likely to need 
access to plan and patient information in order to provide services to 
enrollees. An out-of-network disease management services provider would 
not have such access, and so would be unlikely to be able to provide 
the service out-of-network. Finally, to the extent that such services 
are available without cost sharing from in-network providers, the 
imposition of cost sharing of any amount for their receipt out-of-
network should deter virtually all enrollees from seeking them out-of-
network.
    Comment: Some commenters pointed out the difficulty inherent in 
requiring MA-PDs that are offered as PPOs to provide reimbursement for 
mail-order drugs or Part D (prescription drug) benefits received by 
enrollees from out-of-network providers.
    Response: As a practical matter, an MA PPO plan that offers Part D 
coverage as an MA-PD will need to provide out-of-network coverage of 
Part D drugs consistent with the requirements of the Part D program and 
the regulations at part 423.
    Comment: A commenter stated that further complications might arise 
were CMS to interpret ancillary services (for example, dental and 
eyewear) as being services subject to the catastrophic limit on out-of-
pocket expenses. The concern was that once an enrollee has met the out-
of-network cap, cost sharing would no longer act as a deterrent to the 
unrestricted and ``free'' access by PPO enrollees to these benefits 
from out-of-network providers.
    Response: The statute and our implementing regulations at Sec.  
422.101(d)(2) and (d)(3) are clear in limiting application of the 
catastrophic caps to Part A and Part B benefits. To the extent dental 
or eyewear benefits of an MA PPO plan are not also original Medicare 
benefits, cost sharing can continue to apply, even after the out-of-
network additional catastrophic limit in Sec.  422.101(d)(3) has been 
met.
    Comment: A number of commenters recommended that we revise the 
proposed rule to clarify that MA regional plans may establish prior 
authorization requirements for services obtained out-of-network and 
that both MA regional plans and local PPOs should be permitted to offer 
certain services only through network providers, where, for instance, 
the services have unique characteristics. The commenters stated that 
private sector PPO benefits are commonly offered in this manner. 
Therefore, the commenters believe that by providing this flexibility, 
CMS would allow the offering of MA PPO plans and benefits in a 
comparable manner to those generally available to consumers, and that 
this will make it possible for them to continue to offer certain 
services that add value for beneficiaries.
    Response: Although we support the offering of added value to 
beneficiaries where possible, as we have previously discussed, there is 
a clear statutory requirement that all covered benefits of an MA PPO 
plan (regional or local) must be available out-of-network. The statute 
provides a definition of PPO that may not, in all respects, conform 
with business models that might be present (or even prevalent) in the 
commercial sector. Unlike plans serving commercial populations, the 
Medicare program is primarily intended to serve aged and vulnerable 
beneficiary populations. Therefore, the dynamics of the MA program may 
not match those in the commercial market. Also, for all MA plans they 
offer, MA organizations are required to follow FFS coverage rules 
related to items and services covered under FFS Medicare. Although MA 
organizations are permitted to adopt a single local coverage policy 
that will apply to all enrollees in an MA plan, in accordance with 
Sec.  422.101(b), MA organizations are not permitted to impose a more 
stringent test related to medical necessity determinations for 
Medicare-covered services than the one that applies under the FFS 
program.
    For items and services not covered by Medicare that the MA 
organization provides under section 1852(a)(3) of the Act, similar 
considerations apply. In other words, to the extent and under the 
conditions that a non-Medicare supplemental benefit would be available 
to a plan enrollee within the network of providers, such a service 
would also need to be available to an MA PPO enrollee out-of-network. 
That is not to say that differential cost sharing cannot be applied to 
out-of-network receipt of covered services, nor does it mean that

[[Page 4617]]

out-of-network cost sharing cannot be differentially applied to 
specific services or types of services. We believe that MA 
organizations offering MA PPOs (both local and regional) can accomplish 
their business strategies while still working within the statute.
    For instance, an MA PPO can warn enrollees that to the extent that 
an item or service is not a covered benefit of the plan, the enrollee 
would be required to pay the full cost of the service. This warning 
might have the desired effect of encouraging the enrollee to call the 
MA plan before seeking care out-of-network, as a means of ensuring that 
a specific item or service is actually a covered benefit of the plan. 
Similarly, for specific services for which the plan has established 
substantial out-of-network cost sharing, the enrollee can be encouraged 
to contact the plan for pre-authorization that would reduce cost 
sharing. For instance, for out-of-network receipt of a specific 
inpatient hospital service the normal cost sharing might be 40 percent 
of charges. To the extent an enrollee or provider calls and receives 
plan pre-authorization for a specific out-of-network hospitalization of 
this type, the MA plan might reduce enrollee liability to 20 percent 
(or less) of charges. MA PPOs must be able to provide coverage and 
medical necessity determinations to enrollees (and providers) before 
the enrollee receives out-of-network services. This will act as a 
beneficiary protection.
    A prudent enrollee will have reason to ensure that such services 
are medically necessary and covered by the plan before self-referring 
to out-of-network providers. Similarly, a prudent provider will have a 
means of ensuring that plan coverage will be provided. However, the 
idea that a gatekeeper must provide a referral or that an MA plan must 
pre-authorize a service before it will be covered at all, or that such 
a referral or plan pre-authorization is a necessary condition for 
receipt of any medically necessary out-of-network plan covered service 
is not in accord with the statutory language pertaining to MA PPOs.
    Our belief is that the statute precludes requiring a medical 
necessity determination, a plan pre-certification or pre-authorization, 
or a coverage decision before receiving a covered service out-of-
network. As long as an MA PPO enrollee is willing to pay the higher 
cost sharing associated with out-of-network care, there can be no 
additional barrier to receipt of plan covered benefits. If an MA 
organization offering an MA PPO is particularly concerned with over-
utilization or inappropriate utilization of services (or of a 
particular service) out-of-network, the organization has the authority 
to impose relatively high out-of-network cost sharing overall, or 
related to a specific service. Also note that to the extent a referral 
or plan pre-authorization has been provided for in-network care, the 
enrollee has the right to use the referral or plan pre-authorization 
for receipt of the same care out-of-network (with applicable out-of-
network cost sharing).
    Comment: A commenter recommended that CMS offer alternative 
regional PPO product designs, which the commenter called ``Performance 
Risk PPOs.'' The commenter included a proposal that would, offer plan 
incentives for higher quality, better customer service and benefits, 
improved outcomes and program savings, and penalize plans that do not 
perform well on these measures. The commenter explained that such a 
model would offer a range of out-of-network benefits, but not all 
Medicare-covered services would be available out-of-network. In 
addition, the commenter stated that although referrals would not be 
required for accessing out-of-network care, pre-certification might be 
required.
    Response: Under the definitions of regional PPO contained in the 
MMA, the MA regional plan must provide for reimbursement for all 
covered benefits, regardless of whether such benefits are provided 
within the plan's network of providers. Therefore, a plan of the type 
that the commenter proposes would not meet the statutory definition of 
MA regional plan. Further, as we have stated above, plan pre-
certification or pre-authorization may not be a necessary condition for 
receipt of out-of-network covered services.
3. Supplemental Benefits (Sec.  422.102)
    In the August 3, 2004 proposed rule, we stated that an MA plan 
could reduce cost sharing below the actuarial value specified in 
section 1854(e)(4)(B) of the Act as a mandatory supplemental benefit. 
Beginning in 2006, an MA plan can reduce the cost sharing that applies 
to plan members below the actuarial value of the cost sharing that 
would apply to those members if they were enrolled in the original 
Medicare program. This amount is not just the limit on the amount of 
cost sharing that an enrollee can be charged in the plan's bid for 
Medicare Part A and Part B services (and for which and when such plan 
cost sharing exceeds FFS cost sharing, a supplemental premium is 
necessary), but it also expresses the value of the bid-based cost 
sharing when the bid is below the benchmark. When we reference section 
1854(e)(2)(B) of the Act in Sec.  422.102(a)(4), we are referring to 
the latter value, not the former. This reduction in cost sharing can be 
included as a mandatory supplemental benefit and was proposed at Sec.  
422.102(a)(4).
    We also proposed the following conforming changes to Sec.  422.102:
     We removed the reference to ``additional benefits,'' as 
those benefits are no longer applicable to MA plans offered on or after 
January 1, 2006.
     We removed the reference to operational policy letters 
(OPLs) in Sec.  422.102(a)(3), as guidelines related to benefits that 
had been contained in OPLs have been incorporated into regulation, into 
the Medicare Managed Care Manual, or into other instructions.
    We received no comments on this section, so we finalize it as 
proposed.
4. Benefits Under an MA MSA Plan (Sec.  422.103)
    For clarification purposes, we proposed to remove the extraneous 
word ``under'' from paragraph (a) of Sec.  422.103.
    We received no comments on this section, so we finalize it as 
proposed.
5. Special Rules for Self-Referral and Point of Service Option (Sec.  
422.105)
    ``Point of Service'' (POS) is an option in some plans that allows 
enrollees to obtain non-network services, with the plan providing some 
limited level of reimbursement for such services. To clarify an issue 
that has created confusion for both beneficiaries and MA organizations, 
we proposed to clarify at Sec.  422.105 that if an MA organization does 
not offer a POS benefit to members of a plan (or if it offers a POS 
benefit as an optional supplemental benefit and the member has not 
selected that benefit), the member cannot be financially liable for 
more than the normal in-plan cost sharing for covered items or services 
from contracted providers.
    We stated that we believed that indemnifying the Medicare member in 
such a situation conforms with normal industry practice and also 
clarified our long-standing policy that members cannot be held 
financially liable when contracting providers fail to follow or adhere 
to plan referral or pre-authorization policies before providing covered 
services. If a plan member insisted on receiving what would otherwise 
be covered services from a contracted provider (but for the lack of a 
referral or plan pre-authorization), then the contracted provider would 
be required to inform the member that those services would not be 
covered under the plan. We proposed to require

[[Page 4618]]

the provider to document the medical record as to why the services are 
medically necessary but not available through the plan.
    In addition, an MA regional plan might choose to provide for a POS-
LIKE benefit where beneficiary cost sharing would be less than it would 
otherwise be for non-network provider services, but where it still 
might be greater than it would be for in-network provider services, if 
an enrollee follows pre-authorization, pre-certification, or pre-
notification rules before receiving out-of-network services. Note that 
such pre-authorization, pre-certification, or pre-notification cannot 
be a necessary condition for receipt of, or required MA plan 
reimbursement for, out-of-network covered services by a PPO enrollee; 
however, it can act as a financial incentive (by lowering the normal 
out-of-network cost sharing that would otherwise apply) to an enrollee 
to voluntarily participate.
    In this final rule, the title of this section is being changed to 
emphasize the fact that it contains not only rules related to POS 
options or benefits, but that it also contains a rule related to 
enrollee self-referral to plan contracted providers in all MA plans.
    Comment: Many commenters recommended that we clarify the meaning of 
the introductory statement proposed to Sec.  422.105(a). Other 
commenters suggested that the statement was misplaced, because the 
proposed regulation would apply to plans with and without POS 
offerings. Others commenters stated that in plans in which a POS option 
was provided as a mandatory supplemental benefit, the introductory 
statement we proposed to add would have no effect and would therefore 
be confusing.
    Response: We agree with the comments regarding potential confusion 
and have renamed the title of this section of the regulation and 
reorganized it to indicate that it covers not only POS offerings, but 
that it also applies to all situations in which an MA plan member self-
refers to a plan-contracting provider, whether or not a POS benefit is 
involved.
    Comment: One commenter stated that while some types of services may 
not be covered under any circumstances, other services might not be 
covered by an MA plan because they are not medically necessary or 
appropriate for the enrollee. The commenter suggested that CMS clarify 
the applicability of the introductory statement to circumstances in 
which a service does not meet coverage criteria based on medical 
necessity.
    Response: Many commenters responded to our request for comment in 
the subpart M preamble of the August 3, 2004 proposed rule related to 
whether or not we should permit or require (and under what 
circumstances) advance beneficiary notices (ABNs) to be issued by 
network or non-network providers to MA plan enrollees. Many of the 
commenters opposed such a requirement as being overly intrusive on the 
patient and doctor relationship and other commenters supported it as 
being a valid and necessary beneficiary protection. We address the 
specific comments related to ABNs in the subpart M preamble of this 
rule.
    Although we decided not to incorporate an ABN requirement into the 
MA program at this time, we believe that there is an important 
beneficiary protection at stake, especially in light of the projected 
growth in MA PPO enrollment due to the advent of the MA regional plan 
program. MA organizations have a responsibility to ensure that 
contracting physicians and providers know whether specific items and 
services are covered in the MA plan in which their patients are 
enrolled. If a network physician provides a service or directs an MA 
beneficiary to another provider to receive a plan covered service 
without following the plan's internal procedures (such as obtaining the 
appropriate plan pre-authorization), then the beneficiary should not be 
penalized to the extent the physician did not follow plan rules. MA 
plan enrollees cannot be held to a higher standard than plan 
contracting providers. To the extent a contracting provider performs a 
service or refers a patient for health care services that an enrollee 
reasonably believes would be covered services of the plan, then an MA 
plan enrollee cannot be liable for more than applicable plan cost 
sharing for those services. To the extent an MA organization does not 
properly inform contracted providers, or to the extent an MA contracted 
provider does not properly enforce referral procedures, then to that 
same extent, an MA plan enrollee cannot be held financially liable for 
the organization's or provider's failure. Under its contract with the 
MA organization, a provider is contractually bound to look solely to 
the MA organization for reimbursement for covered services (see Sec.  
422.502(g)(1) and Sec.  422.502(i)(3)). Similarly, MA organizations are 
required to communicate clear and consistent coverage guidelines and 
medical management procedures to contracting physicians (see Sec.  
422.202(b)).
    Comment: Some commenters recommended that CMS be more flexible and 
not require the network contracted physician or provider to document 
the medical record as to why the items or services were medically 
necessary but not available through the plan. These commenters 
suggested that it was inflexible to require that such documentation 
appear only in the medical record.
    Response: We agree with this comment that it was overly 
proscriptive to require that such documentation could only appear in 
the medical record and will permit flexibility regarding where such 
information is documented. We have added language at the end of Sec.  
422.105(a) that does not specify where such documentation must reside.
    Comment: A few commenters asked us to clarify the issue of the 
provider's ability to bill the beneficiary, if all actions specified in 
Sec.  422.105(a) have taken place. Commenters stated that the 
clarification should specify the conditions under which they are 
permitted to bill a beneficiary. One commenter asked whether the rules 
established in this section of the regulation also apply to hospitals 
and other types of contracted providers.
    Response: The intent of our revision to Sec.  422.105 is to clarify 
a beneficiary protection and not necessarily to clarify under what 
conditions an MA-contracting provider may or may not bill an MA plan 
enrollee. As mentioned above, all contracting providers are bound to 
look solely to the MA organization for reimbursement for services 
covered under the MA plan in which a Medicare beneficiary is enrolled. 
To the extent an MA-contracting provider provides a non-covered service 
to an MA enrollee, then payment for such a service is not generally 
within the regulatory purview of the MA program.
    However, where the enrollee is notified in advance by the 
contracted provider that a service will not be covered unless the 
beneficiary receives a referral or takes some other action, and that 
notification is documented, and the beneficiary receives the service 
without obtaining the referral or taking the necessary action, then the 
enrollee can be billed and may be held financially liable for the 
service. Additionally, even if a beneficiary is informed (either 
verbally or in writing) that a specific service will not be covered by 
the MA plan in which the beneficiary is enrolled, that beneficiary is 
entitled to appeal such a determination, whether or not the service is 
actually provided after such notification. Finally, Sec.  422.105(a) 
applies to all contracted providers, including physicians, hospitals, 
and other provider types.

[[Page 4619]]

    Comment: One commenter suggested that CMS was proposing an odd and 
fundamentally misguided rule governing members of MA plans who self-
refer. Another commenter stated that the requirement was unnecessary, 
inflexible, and burdensome for contracted providers. The first 
commenter stated that the proposed rule contradicted fundamental 
managed care principles and that the proposed rule would shift payment 
responsibility from the self-referring member to the contracted 
provider and/or the MA organization.
    The first commenter asserted that enrollees who self-refer should 
be required to pay the entire cost of the service and should not be 
rewarded by having to pay only the normal, in-network cost sharing. The 
second commenter stated that both contracting providers and MA plan 
enrollees are well aware when there is a requirement to secure a 
referral from a PCP before receipt of specialty care. Finally, both 
commenters stated that the proposed rule was flawed by not 
contemplating, or providing exceptions for, situations in which the 
service is not covered by the MA plan in which the individual is 
enrolled, or situations in which the service is not medically 
necessary.
    Response: We do not agree. The language in Sec.  422.105 states 
that only covered items and services are subject to the regulatory 
provision. Covered plan services do not include services that are 
inappropriate or not medically necessary for a specific individual in a 
specific situation. The intent of the regulatory provision is to limit 
patient liability in situations where a contracted provider provides a 
covered service, but for which certain technical, non-medical 
conditions of coverage have not been met.
    Although we agree that the enrollee should not be ``rewarded'' for 
failing to follow proper plan pre-authorization or referral procedures, 
we also believe that the contracted provider and the MA organization 
also should not be ``rewarded'' by shifting financial responsibility to 
the enrollee for covered services that are actually the financial 
responsibility of the MA organization. The contracting provider is, or 
should be, aware of the MA plan's technical requirements for referral 
and/or plan pre-authorization related to covered services. If the 
contracted provider believes the covered service is medically 
necessary, then the contracted provider needs to explain the plan 
referral/pre-authorization process and should consider assisting the 
enrollee in obtaining necessary plan pre-service documentation. 
Finally, the contracted provider needs to inform the enrollee in 
instances when a service will not be covered unless the enrollee 
obtains a referral or plan pre-authorization and in which that enrollee 
will have full financial liability absent such referral or pre-
authorization.
6. Coordination of Benefits With Employer Group Health Plans and 
Medicaid (Sec.  422.106)
    Section 222(j) of the MMA revised section 1857(i) of the Act in 
order to facilitate employer sponsorship of MA plans. The MMA allowed 
us to waive or modify requirements that hinder the design of, the 
offering of, or the enrollment in an MA plan offered directly by an 
employer, a labor organization, or the trustees of a fund established 
by one or more employers or labor organizations to furnish benefits to 
the entity's employees, former employees, or members or former members 
of labor organizations. Section 222(j) of the MMA further stated that 
such an employer-labor organization sponsored MA plan may restrict 
enrollment to individuals who are beneficiaries and participants in 
such a plan. We proposed a new Sec.  422.106(d) to account for this new 
statutory authority. (The August 3, 2004 proposed rule also contained a 
number of clarifying, conforming, and editorial changes to this 
section.)
    Comment: One commenter recommended that CMS use the authority 
provided in section 1857(i)(2) of the Act to waive requirements related 
to MA regional plans. The commenter wanted to know if CMS would permit 
employer/labor sponsored MA plans that have been created for the sole 
enrollment of the sponsors' own employees, retirees, or members to 
participate in the MA regional plan stabilization fund or in risk-
sharing through risk corridors, both described in regulation at Sec.  
422.458. The commenter was concerned that these special ``incentive'' 
payments for organizations sponsoring MA regional plans were primarily 
intended to foster the growth of MA regional plans for the enrollment 
of all eligible Medicare beneficiaries, and that it would be 
inappropriate to make such special payments to organizations offering 
plans that are only available for enrollment to employer/labor group 
members.
    Response: We agree and have exercised this discretion under section 
1857(i) of the Act to waive program requirements that facilitate 
employer/labor group enrollment. For instance, we have waived the 
requirement that MA organizations offer MA plans for enrollment to all 
Medicare Part A and Part B enrollees, and have allowed MA organizations 
to create plans that exclusively enroll employer/labor group members. 
We will continue to do so. However, we will not waive the ``general'' 
enrollment requirement that MA plans enroll all MA eligible individuals 
(see section 1851(a)(1)(A) of the Act) for either MA organizations or 
for employer/labor MA plan sponsors, if these entities seek to offer an 
MA regional plan solely to employer/labor group members.
    Comment: The same commenter asked whether specialized MA plans for 
special needs individuals could be offered as MA regional plans.
    Response: The statute is clear in saying that specialized MA plans 
for special needs individuals can be offered as any type of MA 
coordinated care plan (see section 1851(a)(2)(A)(ii) of the Act). MA 
regional plans are a type of MA coordinated care plan (see section 
1851(a)(2)(A)(i) of the Act).
    Comment: One commenter asked whether CMS would exercise the waiver 
authority under section 1857(i) of the Act in order to allow MA 
organizations to offer non-actuarially equivalent prescription drug 
coverage to MA plan enrollees who do not purchase Part D.
    Response: We will not. Section 1860D-21(a)(1)(B)(ii) of the Act 
states that MA organizations may not offer prescription drug coverage 
(other than that required under Parts A and B of Medicare) to an MA 
plan enrollee unless it is qualified Part D prescription drug coverage.
    Comment: One commenter asked if CMS would use the waiver authority 
to provide for special enrollment or conversion of enrollment rules for 
Medicaid beneficiaries enrolled in special needs plans, similar to what 
CMS have provided for employer/labor group members.
    Response: As previously stated, we have waived the requirement that 
MA organizations offer MA plans for enrollment to all Medicare Part A 
and Part B enrollees, and have allowed MA organizations to create plans 
that exclusively enroll employer/labor group members. The authority for 
such waivers is contained in section 1857(i) of the Act and does not 
apply to individuals entitled to Medicaid. Note that section 1857(i) of 
the Act waiver authority is exclusive in its application to employees 
or former employees of an employer, or members or former members of a 
union, or a combination thereof. Waivers for individuals entitled to 
Medicaid are not provided for under the waiver authority in section 
1857(i) of the Act. SNPs for Medicaid eligibles are authorized in 
section 231 of the

[[Page 4620]]

MMA. Finally, note that Sec.  422.106(a) and (b) do not discuss 
employer/labor groups in the context of section 1857(i) waiver 
authority. Regulations related to employer/labor group waiver authority 
are exclusively discussed in Sec.  422.106(c) and (d).
    Comment: A number of commenters asked whether CMS would apply the 
new waiver authority in section 222(j)(2) of the MMA to AI/AN 
beneficiaries. The commenters stated that such a waiver might permit I/
T/Us to sponsor MA plans exclusively designed for AI/AN beneficiaries.
    Response: Section 222(j)(2) of the MMA added a new paragraph to the 
Act at section 1857(i)(2). This new provision created the opportunity 
for directly-sponsored employer/labor group MA plans. Section 1857(i) 
of the Act waiver authority is exclusive in its application to 
employees or former employees of an employer, or members or former 
members of a union, or a combination thereof. Waivers for AI/AN 
beneficiaries are not provided for under the waiver authority provided 
in section 1857(i) of the Act.
    Comment: One commenter, in relation to a comment on Sec.  
422422.560 through Sec.  422.626 (subpart M), recommended that CMS 
include benefits that are separately negotiated between the MA 
organization and an employer/labor group in the benefits governed by 
the MA regulations and therefore subject to the MA appeals and 
grievance processes.
    Response: This comment has been addressed at greater length in the 
subpart M preamble. However, it is important to note that for purposes 
of subpart C, separately negotiated benefits between MA organizations 
and employer groups, labor organizations, and Medicaid (and as 
discussed in Sec.  422.106(a)(a) and (b)) are not part of any MA plan. 
Such employer/labor/Medicaid benefits are discussed only in terms of 
the fact that they complement the benefits of an MA plan.
    Comment: A commenter requested CMS to clarify that employer groups 
or labor organizations that become MA organizations may retain the 
services of entities to assist in the development and operation of the 
employer-sponsored MA plan. The commenter asked CMS to implement the 
waiver authority under Section 1857(i)(2) of the Act in a way that does 
not inadvertently hinder the efficient operation of support services 
for employer groups and labor organizations.
    Response: We agree with the commenter that our waiver authority 
under 1857(i)(2) of the Act should be applied to allow employers and 
labor organizations to offer MA plans through arrangements with 
entities (such as existing MA organizations) that will facilitate the 
offering and efficient operation of such MA plans. We have revised 
Sec.  422.106(d) to clarify this point and to clarify that, as provided 
in section 1857(i)(2) of the Act, we may exercise this authority on our 
own initiative as well as upon written request from an applicant. In 
each case, as specified in Sec.  422.106(d)(3), our waivers and 
modifications will apply to all similarly situated MA plans.
    Comment: A few commenters asked for specific waivers. Some 
commenters recommended waivers already provided, such as a waiver that 
would allow MA organizations to create separate MA plans solely for 
employer/labor group members.
    Response: As we have done in the past, we will continue to provide 
specifics on approved waivers in guidance and in direct communication 
with waiver recipients, rather than in formal rulemaking.
7. Medicare Secondary Payer (MSP) Procedures (Sec.  422.108)
    Section 232 of MMA amended section 1856(b)(3) of the Act to remove 
all ambiguity related to State authority over the MA program. The 
Congressional intent is now unambiguous in prohibiting States from 
exercising authority over MA plans in any area other than State 
licensing laws and State laws relating to plan solvency. We proposed to 
amend Sec.  422.108(f) to remove language that suggests States can 
limit the amount an MA organization can recover from liable third 
parties under Medicare secondary payer procedures.
    We received no comments on this section, so we finalize it as 
proposed.
8. Effect of National Coverage Determinations (NCDs) (Sec.  422.109)
    Section 1853(c)(7) of the Act requires us to ``adjust'' MA payments 
when a national coverage determination (NCD) or legislative change in 
benefits will result in a significant increase in costs to MA 
organizations sponsoring MA plans. We historically interpreted what 
constituted ``significant'' costs in regulation at Sec.  422.109, where 
the costs of a coverage change are considered ``significant'' if either 
the average cost of providing the service exceeds a specified 
threshold, or the total cost for providing the service exceeds an 
aggregate cost threshold.
    In a final rule published in the Federal Register on August 22, 
2003 (68 FR 50839), we amended Sec.  422.109 to refine the definition 
of ``significant'' cost to include a new test. By adding a new 
paragraph at the end of Sec.  422.109(a)(2), we provided that, for 
purposes of determining whether to make an additional payment 
adjustment under Sec.  422.256, the tests for reaching the 
``significant'' cost threshold were to include the aggregate costs of 
all NCDs and legislative changes in benefits made in the prior calendar 
year.
    Under that new test, the ``average cost'' of every NCD and 
legislative change in benefits for the contract year would have been 
added together. If the sum of these average amounts exceeded the 
threshold under Sec.  422.109(a)(l), then an adjustment to payment 
would have been made in the following contract year under Sec.  422.256 
to reflect this ``significant'' cost. Alternatively, if the costs of 
the NCDs and legislative changes in benefits, in the aggregate, 
exceeded the level set forth in Sec.  422.109(a)(2), an adjustment to 
payment would also have been made under Sec.  422.256 on that basis.
    Among the reasons for the above change was that even when the 
``significant'' cost threshold had been met under the existing 
definition, the methodology then employed for making a payment 
adjustment under section 1853(c)(7) of the Act did not result in an 
adjustment in the capitation rate in those counties with the 
``minimum'' update rate (the ``2 percent minimum update'' counties paid 
under section 1853(c)(l)(C) of the Act.) In accordance with section 
1853(c) of the Act, the CMS Office of the Actuary (OACT) used the 
annual growth rate to update only the floor and blended rates, so the 
``minimum'' 2 percent update rate, which was 102 percent of the prior 
year's rate, did not reflect the costs of new benefits effective in the 
middle of the previous payment year. Therefore, we decided that 
payments in counties in which payment was based on the ``minimum'' 2 
percent update rate were not appropriately adjusted to reflect new 
coverage costs as required by section 1853(c)(7) of the Act.
    The MMA changed the ``minimum'' percentage payment prong of the 
former M+C payment methodology by adding a new basis for a minimum 
update. The ``minimum'' percentage increase rate is changed, effective 
January 2004, as follows: Instead of being set at 102 percent of the 
prior year's rate, the minimum increase rate will now be the greater of 
102 percent of the prior year's rate, or the annual MA growth 
percentage. This means that under the MMA payment methodology, the 
minimum percentage increase will now reflect the cost of mid-year NCDs 
and legislative changes in benefits. These

[[Page 4621]]

costs are now automatically built into the annual MA growth percentage 
and will no longer require an additional adjustment under Sec.  
422.256.
    As a result of these MMA changes to the MA payment methodology we 
proposed in the August 3, 2004 proposed rule to remove the portion of 
Sec.  422.109(a)(2) after Sec.  422.254(f).
    We also proposed clarifying language in Sec.  422.254(f) and Sec.  
422.109(c)(3).
    We received no comments on this section, so we finalize it as 
proposed.
9. Discrimination Against Beneficiaries Prohibited (Sec.  422.110)
    We proposed to correct Sec.  422.110(b) to bring it into 
conformance with Sec.  422.50(a)(3)(ii). Specifically, we proposed to 
modify the language of Sec.  422.110(b) to state that if an MA 
organization chose to apply the rule in Sec.  422.50(a)(3)(ii), and 
allowed individuals who are enrolled in a health plan at the time of 
first entitlement to Medicare, but residing outside the MA plan's 
service area to remain enrolled, the MA plan must also allow this for 
individuals with ESRD.
    We also proposed to remove Sec.  422.110(c), since it is 
duplicative of a requirement now appearing in Sec.  422.502(h).
    We received no comments on this section, so we finalize it as 
proposed.
10. Disclosure Requirements (Sec.  422.111)
    Section 1851(d)(2)(A) of the Act and Sec.  422.111(d)(2) establish 
disclosure requirements. MA plans must provide notice to plan members 
of impending changes to plan benefits, premiums, and copays in the 
coming year so that plan members will be in the best position to make 
an informed choice on continued enrollment in or disenrollment from 
that plan. We proposed to amend this section to reflect that notice 
must be provided at least 2 weeks before the Annual Coordinated 
Election Period commences, instead of listing a specific date in order 
to provide flexibility in the event that the beginning date of the 
Annual Coordinated Election Period changes in the future.
    We also proposed to remove Sec.  422.111(f)(4), as the requirement 
to provide information on Medigap and Medicare Select plans is a 
Secretarial responsibility under section 1851(d)(2)(A)(i) and (d)(3)(D) 
of the Act and is to occur as part of the ``open season notification'' 
required by section 1851(d)(2)(A) of the Act.
    In addition to an ``open season'' notification, information on 
Medigap and Medicare Select is available year-round from the Federally 
funded SHIP and the 1-800 MEDICARE telephone number. Both the local 
SHIP and the 1-800 MEDICARE telephone numbers are prominently displayed 
in MA plan literature. In addition, we stated that we would continue to 
require MA plans to publicize the availability of information on 
Medigap, Medicare Select, and other MA plans through appropriate CMS 
information channels (for example, www.Medicare.gov, 1-800-MEDICARE). 
This not only would remove an unnecessary administrative burden, but 
also would ensure that reliable, accurate, and complete information is 
made available to those seeking it.
    To accomplish the above proposed changes, we proposed conforming 
organizational changes to Sec.  422.111. We also proposed the following 
disclosure requirement changes:
     We removed the requirement that MAs and MSAs provide 
comparative information related to other MA plans.
     To prevent what might otherwise be the unreasonable result 
that MA regional or national plans would be required to provide 
comprehensive lists of contracting providers to all enrollees, we 
modified paragraph (b)(3). (We specifically proposed to require MA 
organizations, however, to provide information on contracted providers 
in other parts of the plan's service area upon request in Sec.  
422.111(f)(10). Note that we changed the specific wording of this 
paragraph to more plainly express our intent and in response to 
comments, as described in further detail below.)
     We modified paragraph (b)(3) to read: ``The number, mix, 
and distribution (addresses) of providers from whom enrollees may 
reasonably be expected to obtain services;
     We added a new paragraph (f)(10), which reads: ``The 
names, addresses, and phone numbers of contracted providers from whom 
the enrollee may obtain in-network coverage in other parts of the 
service area.''
     At Sec.  422.111(b)(11), we proposed to require MA 
regional plans to provide members an annual description (at the time of 
enrollment and annually thereafter) of the catastrophic stop-loss 
coverage and single deductible (if any) applicable under the plan.
     We changed the existing paragraph (f)(11) (the new 
paragraph (f)(9)) related to supplemental benefits.
     We also said that we were considering a requirement that 
all MA organizations sponsoring MA plans would be required to maintain 
plan-specific information on Internet web sites. We discuss this in 
more detail below.
    In Sec.  422.112(a)(1)(ii), we provide an ``exception'' to the 
requirement in Sec.  422.112(a)(1) related to contracted provider 
networks in MA regional plans. We received a number of comments on this 
``exception'' and address them later in this section of the preamble. 
We also explain later in this preamble why we are establishing a new 
beneficiary notification requirement related to enrollees of MA 
regional plans in Sec.  422.111(b)(3)(ii). This new MA regional plan 
notification requirement is intended to parallel a similar OPM 
requirement imposed on the FEHB Blue Cross and Blue Shield Basic Option 
plan, which addresses similar circumstances and situations encountered 
by Federal employees and annuitants when seeking health care.
    We have added a new paragraph to the regulation at Sec.  
422.101(b)(5) that will require MA organizations that elect to apply 
local coverage policies uniformly across a local MA plan's service 
area, or across an MA regional plan's service area, to inform enrollees 
and potential providers of the applicable local coverage policy that 
applies to the MA plan enrollees. We make conforming changes to Sec.  
422.111.
    Comment: A commenter recommended that CMS explicitly state in the 
disclosure requirements related to MA plans that there were additional 
disclosure requirements under Part D with which MA-PD plans would also 
need to comply.
    Response: We accept this comment. Although such a requirement is 
implicit in Sec.  422.111(a)(2), where we require MA plans to disclose 
the ``benefits offered under the plan,'' we will explicitly state the 
requirement at Sec.  422.111(a)(2). To the extent an MA plan offers 
Part D to its MA enrollees as an MA-PD plan, it will also be required 
to follow the disclosure requirements in Sec.  423.128 related to the 
disclosure of its Part D offering.
    Comment: A commenter recommended that CMS more directly address the 
``free access'' MA enrollees have to Medicare hospice services and the 
fact that MA enrollees have the right to continue to receive non-
hospice services, unrelated to the terminal illness, from the MA plan. 
The commenter wanted to ensure that MA enrollees knew that they could 
continue to receive from the MA plan non-hospice services unrelated to 
the terminal illness, as long as enrollees remain members of the plan.
    Response: We do not believe a specific disclosure requirement of 
the type the commenter requests is necessary because our existing 
regulations already require disclosure of Medicare hospice 
availability, rules related to receipt of care, and financial 
responsibility, in Sec.  422.111(b)(2)(iii) and

[[Page 4622]]

Sec.  422.320(a) (formerly codified at Sec.  422.266(a)). Otherwise, 
because non-hospice benefits of an MA plan continue to be available 
after hospice election and while an individual remains enrolled in an 
MA plan, such availability must be disclosed under Sec.  422.111(b)(2).
    Comment: Several commenters recommended that CMS require MA 
organizations to inform beneficiaries about their benefits or 
restrictions on those benefits. For example, one commenter suggested 
providing information on the average number and type of home health 
visits per episode that were covered by an MA plan during the prior 
year and beneficiaries' average cost sharing; the names of home health 
providers in the plan's network and the number of years the provider 
has operated as a Medicare home health agency.
    Response: We agree that disclosure of MA plan benefits continues to 
be an important feature that permits beneficiaries to make informed 
decisions on enrollment. As previously stated, MA plans are obligated 
to disclose information on benefits, including applicable conditions 
and limitations on their receipt, the plan premiums, and the cost 
sharing related to specific benefits when obtained both in- and out-of-
network. We also require MA organizations to disclose information on 
the number, mix, and distribution (including addresses) of providers 
from whom enrollees may obtain services. These disclosure requirements 
are described in regulation at Sec.  422.111 and have not materially 
changed. Although MA plans are not required to specify the average 
number of visits or types of visits per episode from the prior year, as 
the comment suggests, the plans are required to provide all covered 
home health services, which include, at a minimum, the Medicare FFS 
level of benefits. We will not require MA plans to specify the number 
of years a home health agency has operated, nor the other specifics 
that the comment suggests because this would impose an additional 
burden upon plans that we think in unnecessary in light of the existing 
ways in which beneficiaries can obtain such information.
    The requirement that a plan disclose the name(s) and address(es) of 
the contracting home health agency or agencies is already set forth in 
our regulations at Sec.  422.111(b)(3), redesignated as subparagraph 
(i). The additional information about which the commenter suggests 
requiring disclosure may be available, upon request, from either the MA 
plan or through a direct request to the contracting home health agency 
or agencies.
    Comment: Several commenters noted the deletion of the word 
``written'' from the first sentence of Sec.  422.111(e). One commenter 
stated that removing the word might allow an MA organization to meet 
this disclosure requirement by simply posting information on its web 
site.
    Response: The deletion of the word ``written'' was unintentional. 
We have reinserted it in the regulations text at Sec.  422.111(e). We 
will continue to require MA organizations to make a good faith effort 
to notify members in writing of changes in provider networks.
    Comment: A commenter recommended that we convey the language in 
Sec.  422.111(f)(10). The commenter asked if the intent of paragraph 
(f)(10) was to complement the requirement in Sec.  422.111(b)(3)(i) 
that routine disclosure of contracting providers was limited to those 
from whom an enrollee would ``reasonably be expected to obtain 
services.'' The commenter suggested that the language in paragraph 
(f)(10) was imprecise, if that was our intent, since it required 
disclosure, upon request, of other providers ``in other areas,'' 
although we may have actually meant to convey the disclosure, upon 
request, of contracted providers ``in other parts of the service 
area.''
    Response: We agree with this comment and have corrected the 
language in Sec.  422.111(f)(10). Our intent was to make information on 
the availability of other contracted providers in other parts of the 
service area of the MA plan available to plan enrollees upon request, 
to the extent such information was not provided at the time of 
enrollment, because of the large geographic area encompassed within the 
service area of the MA plan.
    Comment: Some commenters opposed the deletion of Sec.  
422.111(f)(7)(i) through (iv) that eliminates the requirement that MA 
PFFS and MSAs plans provide comparative information related to other MA 
plans that are available in the geographic area in which the PFFS and 
MSAs plans are offered. These commenters stated that potential MA 
enrollees should be able to easily see how these plans compare to other 
MA plans and original FFS Medicare.
    Response: We agree that individuals considering enrollment in an MA 
MSA or PFFS plan should have comparative information regarding their 
choices for receiving Medicare coverage. All MA plans, including MA MSA 
and PFFS plans, must continue providing comparative information on FFS 
Medicare through pre-enrollment materials including the Summary of 
Benefits. The Summary of Benefits contains a matrix that provides a 
comprehensive comparison of the benefits of an MA plan with the 
benefits of original FFS Medicare. As we discussed in the August 3, 
2004 proposed rule, we believe that the Medicare and You Handbook in 
conjunction with other CMS information channels (such as the 1-800 
MEDICARE call center and direct beneficiary counseling provided through 
federal SHIP grants to the states) provides the best opportunity for 
Medicare beneficiaries considering MA plan enrollment to receive clear, 
impartial, and complete information on the choices available to them. 
Therefore, we will delete these requirements, as they represent an 
unnecessary administrative burden on MA MSA and PFFS plans.
    Comment: Some commenters suggested including a provision in Sec.  
422.111(e) that would allow AI/AN to switch to another MA plan whenever 
there is a change to the provider network of the MA plan in which the 
AI/AN is enrolled.
    Response: We cannot accommodate this request because there is no 
statutory basis for differentiating between AI/AN and non-AI/AN 
beneficiaries. However, to the extent that conditions in Sec.  
422.62(b), where special election periods are discussed, are present 
for any MA plan enrollee, the opportunity to switch plans or to return 
to original FFS Medicare is available.
    Comment: One commenter recommended that CMS remove the annual 
requirement for distribution of network provider directories. The 
commenter stated that for a vast majority of enrollees, the provider 
directory is not referenced and the information could more reasonably 
be made available on an ``as requested'' basis after initial provision 
upon enrollment.
    Response: Under section 1852(c)(1)(C) of the Act, MA organizations 
are required to provide annually, in clear, accurate and standardized 
form, detailed information about the number, mix and distribution of 
plan providers. We have interpreted this requirement in regulations to 
include annual disclosure of plan providers' addresses.
    Comment: Most commenters supported the new language in Sec.  
422.111(b)(3)(i). A few commenters recommended that CMS define or 
explain the statement, ``MA organizations would be responsible for 
providing the number, mix and addresses ``of providers from whom

[[Page 4623]]

enrollees may reasonably be expected to obtain services.'' One 
commenter suggested that the language was unclear, subject to broad 
interpretation and would result in confusion and an inconsistent 
application by MA organizations.
    Response: We believe that the standard of ``reasonable'' disclosure 
of network providers is both appropriate and sufficiently clear within 
our current regulatory standards. We believe that MA organizations are 
in the best position to determine what would be ``reasonable'' in this 
context, based on service usage and community patterns of care. In 
order to preserve flexibility for MA organizations to provide 
information appropriate to the needs of their enrollees, we do not 
intend to change the proposed language in Sec.  422.111.
    Comment: A number of commenters recommended that CMS apply special 
disclosure requirements to AI/AN beneficiaries, stating that such 
special disclosure requirements should include a right by AI/AN 
beneficiaries to select another MA plan at any time without penalty.
    Response: We cannot accommodate this request because there is no 
statutory basis for differentiating between AI/AN and non-AI/AN 
beneficiaries.

Internet

    In the August 3, 2004 proposed rule, we asked for comments on 
whether or not we should require all MA organizations for all MA plans 
they offer to set up an Internet web site that would make basic MA plan 
information and materials available to interested Medicare 
beneficiaries and other parties. The basic information and materials 
could include the Evidence of Coverage, the Summary of Benefits, and 
information (names, addresses, phone numbers, specialty) on the network 
of contracted providers. Those Internet materials and information would 
duplicate materials already produced in print format and made available 
by MA organizations relative to the MA plans they offer.
    Comment: Many commenters stated that it would be difficult for 
providers to know whether an MA organization had chosen to adopt one of 
the uniform coverage policies in Sec.  422.101(b)(3), related to local 
MA plans, or Sec.  422.101(b)(4)--related to MA regional plans.
    Response: As we discuss at more length earlier in this preamble 
related to Sec.  422.101(b)(3) and (b)(4), we agree with this comment 
and therefore have added a requirement at Sec.  422.111(f)(11) that MA 
organizations must make uniform coverage policies related to an MA plan 
readily available to members and providers, including through the 
Internet.
    Comment: Many commenters were supportive of the proposed 
requirement that all MA organizations provide basic materials, such as 
the Evidence of Coverage, Summary of Benefits, and information (names, 
addresses, phone numbers, specialty) on the network of contracted 
providers. Some commenters suggested that CMS not be overly 
prescriptive in the requirements for what MA organizations post to a 
web site. Some suggested that the provision of information over the 
Internet should relieve MA organizations of their responsibility to 
provide identical information to enrollees in hard-copy format. One 
commenter suggested that CMS make plan enrollees ``opt-in,'' if they 
want plan information sent to their homes.
    Other commenters stated that most Medicare beneficiaries do not 
have access to the Internet, and that regardless of whether an MA 
organization provides plan information electronically, we should 
continue to require MA organizations to send enrollees required 
information through the mail. One commenter stated that it did not want 
its member handbook or Evidence of Coverage to appear on the Internet. 
The commenter stated that it would prefer to have the documents 
available only to members. Other commenters stated that requiring an MA 
organization to duplicate materials such as the Evidence of Coverage or 
the Summary of Benefits on the Internet would be administratively 
redundant, costly, and burdensome to maintain. One commenter suggested 
leaving the decision on an Internet web site to the discretion of the 
MA organization. This commenter stated that although it supports use of 
the Internet, MA organizations should not be required to post specific 
documents to the Internet, since they are already provided to enrollees 
in hard copy.
    Response: Based on these comments, we will be as flexible as 
possible, while still ensuring that beneficiaries receive the 
information necessary to make informed choices. We will require MA 
organizations exercising options under Sec.  422.101(b)(3) or (b)(4) to 
communicate, via the Internet and through other means, the fact that a 
specific local coverage determination is in effect for its plan 
members. We have placed this requirement at Sec.  422.111(f)(11). Use 
of the Internet in this way will ensure that potential providers have 
access to plan coverage information to the extent that it differs from 
the Medicare coverage policy in the geographic area in which the 
provider is actually treating an MA plan enrollee. Similarly, we will 
require MA organizations that have Internet web sites to post the 
Evidence of Coverage, the Summary of Benefits, and information on the 
network of contracted providers at Sec.  422.111(f)(12). Because we 
apply this requirement only to organizations that otherwise maintain 
Internet web sites, we do not believe that such a requirement is overly 
burdensome or that it will entail a significant administrative effort. 
In addition, because the Evidence of Coverage and the Summary of 
Benefits do not change during the course of a calendar year, 
maintaining or updating the information in them will be a once-a-year 
activity, which will coincide with the update of the hard copy version 
of these documents. Updating of the provider directory might entail 
additional administrative effort; however, to the extent that MA 
organizations are already required to update provider information in 
written materials, we do not believe that extending this requirement to 
an electronic version of the same document would entail a great deal of 
additional administrative effort.
    In response to the commenters that asked if the use of Internet 
versions of required documents would eliminate (or mitigate) the 
requirement for hard copy documents, we have added a final sentence to 
Sec.  422.111(f)(12) that states that we will maintain our current 
requirement that MA organizations provide to enrollees written, hard 
copy materials providing information at the time of enrollment and 
annually thereafter as required by Sec.  422.112(a) and (b). Most 
Medicare beneficiaries do not routinely use the Internet. To the extent 
they do and do not wish to receive hard copy plan materials, they can 
and will indicate such a preference. In response to commenters who did 
not believe it appropriate to post plan materials to the Internet, we 
respond that we believe it is an important feature of beneficiary 
choice to be fully informed regarding the benefits and features of an 
MA plan before enrollment. Plan materials, including the Evidence of 
Coverage, the Summary of Benefits, and a list of contracting providers 
are essential pre-enrollment materials that allow Medicare 
beneficiaries an opportunity to compare MA plans and to make an 
informed decision on enrollment.
11. Access to Services (Sec.  422.112)
    There are no new access standards for MA regional plans, and 
existing MA standards will generally apply. We

[[Page 4624]]

reviewed our existing regulatory requirements related to network 
adequacy and proposed to remove some that are either duplicative or, in 
our view, overly onerous. We stated we expected competition to be the 
best method for ensuring network adequacy, as enrollees will favor and 
enroll in plans with more extensive networks and tend to avoid those 
without. Furthermore, Medicare beneficiaries can always choose to 
remain enrolled in the original Medicare FFS program.
    We proposed to remove or modify some the requirements from Sec.  
422.112 of the regulation, none of which were required by statute, and 
some of which became unnecessary as they were replaced or superseded by 
requirements in the MMA:
     We proposed to delete Sec.  422.112(a)(4), because we 
believed it would be redundant to suggest a specific approach to 
quality improvement activities in the context of, and as a means of 
ensuring, enrollee access to care. After reviewing and responding to 
comments (below), we will implement as proposed and delete Sec.  
422.112(a)(4).
     We proposed to remove the written standards requirements 
in Sec.  422.112(a)(7) since they were duplicative of other provisions 
in the regulation. Based on a comment we received, we will not delete 
the requirement.
    In the final rule we make editorial corrections to Sec.  422.112(a) 
heading and introductory text to remove reference to ``network M+C MSA 
plans'' and ``additional'' services, neither of which terms have 
relevance in the MA program.
    Comment: We received a few comments related to our proposal to 
remove requirements in Sec.  422.112(a)(7). One commenter asked us to 
articulate what tools, other than written standards, an MA plan should 
use to ensure adequate access to medically necessary health care items 
and services. Other commenters objected to removal of written 
standards.
    Response: Written standards are simply one aspect of an MA 
coordinated care plan's guarantee of access to care. Such written 
standards do not, in and of themselves, constitute a sufficient 
guarantee of access to care. To the extent that written standards are 
not enforced, they guarantee little. However, we agree with the 
commenters and believe that the requirement for written standards will, 
at the very least, prompt plans to affirmatively address and 
memorialize how they intend to provide access to care. In light of the 
comments we received and upon further consideration, we will retain the 
requirement for written access standards in Sec.  422.112(a)(7).
    Comment: One commenter recommended that CMS modify the rules to 
create waivers that would allow ESRD patients to be referred to 
nephrologists, dialysis centers, or vascular surgeons who are out-of-
network if the patient prefers another physician or center, or if the 
referring nephrologist believes that the vascular access outcomes would 
be better with the out-of-network surgeon. The commenter also suggested 
allowing self-referrals to specialists, such as allowing ESRD patients 
to self-refer to nephrologists, dialysis centers, or vascular surgeons 
who were out-of-network. Another commenter suggested including certain 
benefits in the MA benefit package, such as medical nutrition therapy 
(MNT) benefits for diabetes and renal diseases.
    Response: To respond to the first comment on the provision of 
benefits to ESRD beneficiaries out-of-network, PPOs are a type of 
coordinated care plan, as described in Sec.  422.4(a)(1)(iii), that are 
required to provide reimbursement for all covered benefits regardless 
of whether they are provided in- or out-of-network. Therefore, a 
beneficiary with ESRD who is enrolled in an MA PPO plan may go out-of-
network for all covered services, albeit with a potentially higher 
cost-sharing liability. Coordinated care plans are permitted to use 
mechanisms to control utilization, such as requiring referrals from a 
``gatekeeper'' PCP, before an enrollee can receive in-network specialty 
services at in-network cost sharing levels, as codified in regulations 
at Sec.  422.4(a)(1)(ii)and Sec.  422.112(a)(2). Therefore, access to a 
specialist at in-network cost-sharing levels can generally be limited 
to contracted providers in coordinated care plans. When an individual 
beneficiary chooses a coordinated care plan, information is available 
about the availability of providers, including specialists, and under 
what conditions they are available in-network. Information on the 
routine availability of out-of-network care (either because the plan is 
an HMOPOS or a PPO, for instance) is also provided at the time of 
enrollment and annually thereafter. On the second point related to 
requiring MNT benefits for diabetes and renal diseases in MA plans, we 
remind the commenter that all MA plans are required to include all 
Medicare FFS benefits in their MA plan benefit packages.
    Comment: One commenter recommended that CMS require all MA plans to 
include podiatric physicians in their networks to ensure that the 
necessary and vital services provided by these physicians continue to 
be available to patients. The commenter stated that Sec.  422.205(a) 
prohibits MA organizations from discriminating against providers on the 
basis of license or certification.
    Response: We do not see a basis for requiring MA organizations to 
contract with a specific provider type. As the commenter stated, our 
existing regulations prohibit discrimination on the basis of license or 
certification. Further, our existing regulations, as amended in this 
final rule, require MA organizations to ensure that covered services 
are available and accessible within an MA plan's network consistent 
with applicable access standards. However, Sec.  422.205(b), which is 
not being amended in this rule, allows MA organizations to refuse to 
grant participation to health care professionals in excess of the 
number necessary to meet the needs of an MA plan's enrollees (with the 
exception of PFFS plans).
    Comment: One commenter agreed that the requirements in Sec.  
422.112(a)(4) are duplicative of the proposed chronic care improvement 
requirements in Sec.  422.152(c), and therefore generally agreed that 
it should be deleted. However, the commenter also stated that deletion 
of requirements at Sec.  422.112(a)(4) should be made contingent on our 
addition of a requirement in Sec.  422.152(c) that chronic care 
improvement programs be based on objective and evidence-based criteria, 
such as clinical practice guidelines.
    Response: We address comments related to Sec.  422.152(c) in the 
subpart D section of the preamble (below). Because chronic care 
improvement programs will be regulated under the provisions in subpart 
D of the 42 CFR part 422, we believe it remains appropriate to delete 
regulatory requirements concerning complex or serious medical 
conditions from Sec.  422.112(a)(4).
    Comment: One commenter asked whether access to covered MA plan 
services can be denied, if the MA plan enrollee does not pay plan 
required cost sharing at the time of service.
    Response: The MA organization's responsibility for provision of 
plan covered services supersedes the member's responsibility for 
payment of cost sharing at the time of service. Therefore, the MA 
organization cannot deny provision of a medically necessary covered 
service for want of the payment of applicable cost sharing at the time 
of service.

[[Page 4625]]

    Comment: One commenter stated that CMS should add a provision in 
the regulation that would apply section 1861(s)(2)(H) of the Act to MA 
plans offered by MA organizations.
    Response: We do not agree. Both section 1861(s)(2)(H)(i) and (ii) 
of the Act are specific in their applicability to contracts under 
section 1876 of the Act. Contracts with MA organizations for MA plans 
are under section 1857 of the Act.

Continuity of Care

    Section 422.112(b) requires all MA organizations for all MA plans 
they offer to ensure continuity of care through integration of health 
care services. Additional requirements in Sec.  422.112(b)(1) through 
(b)(6) require specific methods by which MA organizations are to ensure 
an effective continuity and integration of health care services. 
Although all of the enumerated services and processes are clearly 
desirable, it is not as clear that the responsibility for them is 
appropriately or reasonably placed on organizations whose business is 
primarily insurance coverage. Although it may be reasonable to expect 
coordinated care plans to undertake these coordination, continuity, and 
integration requirements, it is less clear that MA PFFS plans, MSAs, 
and (to a lesser extent) local PPO plans and MA regional plans (which 
will be offered as PPOs) should also be expected to. One might argue 
that continuity of care rules cannot apply in the same manner to MA 
plans in which the enrollee is free to choose his or her own providers 
without restraint, such as MSAs and PFFS plans. We stated that we were 
considering eliminating most of the requirements in Sec.  422.112(b) 
for MSAs and PFFS plans. We also stated that we were considering 
eliminating or modifying many of the requirements in Sec.  422.112(b) 
for local PPOs and regional MA plans. Finally, we stated that we were 
considering the continued appropriateness of these continuity of care 
standards for all other coordinated care plans. We specifically 
welcomed input on the extent to which requirements similar to those in 
Sec.  422.112(b)(1) through (b)(6) are established for commercial 
health insurers offering HMOs, PPOs or indemnity plans.
    Based on comments we received, we will continue to apply existing 
continuity of care requirements in Sec.  422.112(b)(1) through (b)(6), 
but we will limit their scope of applicability to coordinated care 
plans and then only to the services provided and coordinated by 
contracted, network providers.
    Comment: Many commenters provided input on this issue. A large 
number of commenters stated that continuity of care and integration of 
services is a key aspect of managed care. To the extent the original 
FFS Medicare program has been perceived to be deficient in this aspect 
of health care delivery, many commenters believe that CMS should ensure 
that a similar ``failure'' in managed care is not allowed. A number of 
commenters supported the removal of continuity of care requirements 
related to MA MSA and PFFS plans in recognition of the fact that these 
types of MA plans are primarily in the business of paying claims and 
not in the business of coordinating health care through contracted 
networks of health care providers. Other commenters stated that it was 
especially for MA plans that did not have contracted provider networks, 
such as PFFS plans or MSA plans, that continuity of care requirements 
were most needed.
    Some commenters agreed with CMS proposal to eliminate and/or reduce 
continuity of care requirements for open network MA plans, such as PFFS 
plans and PPO plans. Other commenters suggested removing all continuity 
of care requirements for all MA plans, saying that such requirements 
were duplicative of QI program activities required under section 
1852(e) of the Act.
    Response: Based on the comments, and because PPOs operate as both 
coordinated care plans and ``open network'' plans at the same time, we 
will modify this portion of the regulation. We will specify in Sec.  
422.112(b) that the enumerated coordination of care requirements in 
Sec.  422.112(b)(1) through (6) are applicable only to coordinated care 
plans. We will also limit applicability of coordination of care 
requirements to only contracting, in-network providers, thus limiting 
applicability for MA PPOs to only those services provided by contracted 
providers. We believe such an approach strikes the appropriate balance 
between the need for coordination and continuity of care and the burden 
associated with seeking to undertake such activities in the absence of 
contractual relationships with providers.
    Finally, we do not agree that continuity of care requirements are 
duplicative of QI program activities required under section 1852(e) of 
the Act. QI activities will generally and primarily be focused on 
individuals with multiple or severe chronic conditions. Access to an 
initial health assessment, on the other hand, as provided in Sec.  
422.112(b)(4)(i), should include all enrollees of an MA coordinated 
care plan, and not only those with multiple or severe chronic 
conditions.
    Comment: A few commenters stated that CMS appeared to be deleting a 
paragraph (i) from paragraph (b)(4) in the regulations text at Sec.  
422.112, but had no corresponding discussion in the preamble of the 
proposed rule.
    Response: We thank the commenters for identifying this oversight 
and have corrected the regulations text related to Sec.  422.112(b)(4) 
to show that none of the subparagraphs is to be deleted and that 
renumbering is unnecessary.

Access ``Exception'' for MA Regional Plans

    The MMA created a special access rule for MA regional plans in the 
form of an ``essential hospital'' payment. Section 1858(h) of the Act 
and implementing regulations related to ``essential hospitals'' are 
discussed in greater detail later in this section of the preamble.
    We noted that in attempting to create region-wide networks, MA 
regional plans will be forced to bargain with hospitals that may be the 
only hospital (or the only hospital with a particular service or 
services) in a broad area. We believed that such a hospital would have 
a ``monopoly power'' in negotiating with plans that are, in effect, 
forced to contract with it in order to secure an adequate network of 
contracted providers with which to serve anticipated Medicare 
enrollees. The MMA attempted to partly address this situation through a 
provision that would make limited funds available to supplement 
payments to such ``essential hospitals.'' We proposed an additional 
special access requirement that also would only apply to MA regional 
plans at Sec.  422.112(a)(1)(ii).
    In Sec.  422.112(a)(1)(ii), we proposed an ``exception'' to the 
normal access requirements that would otherwise apply to MA regional 
plans by adding language that provided for a relaxation of 
comprehensive network adequacy requirements, but only to the extent 
that beneficiaries were not put ``at risk'' for high cost sharing 
related to services received from non network providers. We believed 
that flexibility did not need to apply on a plan-wide basis, but rather 
could be applied in a county or a portion of a region where, for 
example, the MA regional plan was unable to secure contracts with an 
adequate number of a specific type of provider or providers to satisfy 
our comprehensive network adequacy requirements that

[[Page 4626]]

would otherwise apply to coordinated care plan models.
    We considered two forms of beneficiary cost sharing. One was the 
cost sharing related to a specific item or service--for instance, a 
hospital coinsurance charge. Another was the ``catastrophic limits'' 
that MA regional plans must apply to original Medicare FFS benefits. MA 
regional plans are required to provide reimbursement for all covered 
benefits regardless of whether those benefits are received from network 
providers (see section 1859(b)(4)(B) of the Act and the new Sec.  
422.101(e)(1)). MA regional plans are also required to apply a 
catastrophic out-of-pocket limit on beneficiary cost sharing for 
covered in-network services and another on all covered services (in and 
out-of-network). See section 1858(b)(2)(B) of the Act and the new Sec.  
422.101(d)(2) and (d)(3).
    We proposed to permit MA regional plans with lower out-of-network 
cost sharing to have less robust networks of contracted providers and 
to permit MA regional plans with more robust networks of contracted 
providers to impose higher cost sharing charges for out-of-network 
services. This was because to the extent the plans' networks were 
robust, we would not expect beneficiary access to be unduly limited by 
higher cost-sharing requirements when care was sought from non-network 
providers. However, for plans with less robust networks, we proposed to 
limit the plans' ability to impose higher cost-sharing requirements for 
out-of-network care. We believed that higher cost-sharing requirements 
imposed by plans with limited provider networks could unduly limit 
access and that more equitable cost-sharing requirements would serve as 
a safety valve to ensure that beneficiary access is not compromised. We 
discussed various methods for testing the robustness of MA regional 
plan provider networks. Along similar lines, we would require MA 
regional plans with a less robust network of contracted providers to 
have ``catastrophic limits'' on out-of-pocket expenditures for in-
network and for all services that are closer in value. For plans with 
more robust contracted networks, we would allow the in-network and 
total ``catastrophic limits'' to differ to a greater degree.
    Based on the comments we received and which we respond to (below), 
we will not be prescribing specific levels of cost sharing based on 
robustness of contracted provider networks. Rather, we will require MA 
organizations sponsoring MA regional plans to ensure enrollees have 
access to in-network levels of cost sharing for covered services. We 
will require MA organizations sponsoring MA regional plans to reduce 
cost sharing to in-network levels for the receipt of out-of-network 
services in cases in which covered services cannot be readily obtained 
from contracted, network providers.
    In this part of the preamble of the proposed rule we also discussed 
the OPM requirement imposed on the FEHB Blue Cross and Blue Shield 
Basic Option plan, which addresses similar circumstances and situations 
encountered by Federal employees and annuitants when seeking health 
care. We stated that the ``exception'' process related to access to 
care requirements for MA regional plans might require the MA regional 
plan enrollee to contact the sponsoring MA organization when seeking a 
specific service that is not otherwise available from a contracted 
provider. We are adopting that proposal. We will require MA 
organizations sponsoring MA regional plans to designate a non-
contracted provider from whom (or from which) the enrollee can obtain 
covered services at network cost-sharing levels, to the extent that 
such services are not available and accessible from a contracted, 
network provider. Alternatively, the MA organization can allow the 
enrollee to seek the service from any qualified provider and guarantee 
that in-network cost sharing limits will apply. We have established a 
new beneficiary notification requirement related to enrollees of MA 
regional plans in Sec.  422.111(b)(3)(ii). We add this requirement to 
ensure that the access ``exception'' in Sec.  422.112(a)(1)(ii) does 
not disadvantage beneficiaries seeking in-network care.
    Comment: Several commenters were received on this proposed 
provision. Many of the commenters suggested that the ``exception'' 
should also apply to all local MA coordinated care plans, or even all 
local MA plans, while others suggested limiting it to local and MA 
regional PPOs.
    Response: Local MA plans of all types have discretion to limit 
their service areas based on their network of contracted providers. 
Unlike local MA plans, MA regional plans are required, as a condition 
of offering an MA regional plan, to include the entire geographic area 
of an MA region in the service area of the plan. In some ways, the 
``exception'' we provide at Sec.  422.112(a)(1)(ii) for MA regional 
plans is comparable to the ``partial county'' provision provided for 
local MA plans in the service area definition at Sec.  422.2. Under 
Sec.  422.2, we permit an MA organization to contract with CMS for a 
local MA plan where the organization has a contracted network in only a 
portion of a county and when such a ``partial county'' is necessary, 
nondiscriminatory, in the best interests of the beneficiaries and where 
other conditions are met. We will also permit MA organizations to 
contract with CMS for an MA regional plan where beneficiaries are not 
put ``at risk'' even though the MA organization does not have contracts 
with robust networks of providers throughout the MA region. For these 
reasons, it is both inappropriate and unnecessary to provide such an 
``exception'' for local MA plans.
    Comment: Other commenters were opposed to allowing an ``exception'' 
to the normal access to care requirements to any MA coordinated care 
plan, including MA regional plans. One commenter suggested limiting the 
``exception'' to only an initial start-up period, the first contract 
year, for instance even for MA regional plans.
    Response: As noted above, we believe the ``exception'' we proposed 
for MA regional plan access to care requirements is essential to foster 
the growth of the MA regional plan program, a goal consistent with the 
Congressional intent in creating the program. We are concerned that in 
the absence of this ``exception,'' the provisions we discuss below 
related to beneficiary access to ``essential hospitals'' would not be 
sufficient to allow MA regional plans to meet access to care 
requirements for coordinated care plans.
    The ``exception'' we provide at Sec.  422.112(a)(1)(ii) is 
necessary because ``essential hospitals'' will not be contracting with 
MA organizations for MA regional plan members, but will be a necessary 
part of the MA regional plan's network in order for the MA regional 
plan to meet the applicable provider access requirements under section 
1852 of the Act. Section 422.112(a)(1)(ii) acknowledges that some 
providers, such as ``essential hospitals,'' will not have a contract, 
but will be considered part of the network because they will be 
providers at which beneficiaries can seek care at in-network cost 
sharing levels. We do not believe it is appropriate to limit the 
``exception'' to an initial start-up period, particularly because the 
``essential hospital'' provision is not so limited. On the other hand, 
we agree that it would be appropriate to annually evaluate the 
``subsection d'' hospitals that have been designated as ``essential 
hospitals'' by MA regional plans to ensure that the

[[Page 4627]]

conditions that permitted such designation continue to exist.
    Therefore, we have added a requirement at Sec.  422.112(c)(7) under 
which we will evaluate the continued applicability of ``essential 
hospital'' status on an annual basis at the time of annual contract 
renewal. Please see below for a more extensive discussion of 
``essential hospitals.''
    Comment: A few commenters suggested that CMS subject MA 
organizations offering MA regional plans to review by external entities 
and the general public to ensure that MA regional plans meet community 
access standards.
    Response: We do not believe a mandatory external review of network 
adequacy is appropriate because the delay and burden associated with 
such a process could negate the competitive and market forces that the 
Congress intended should apply in the regional MA program. Ultimately, 
such a result could have the very effect the commenters are seeking to 
avoid, an adverse impact on beneficiary access. Section 1852(e)(4) of 
the Act provides for a private accreditation organization's external 
review of MA organizations in specific areas, including access to 
services. Nothing in section 1852(e)(4) can be construed as imposing 
mandatory external review on an MA organization of the type the 
commenters propose. Otherwise, the time frame between an organization's 
submission of an application for an MA contract year and CMS' approval 
or denial of that application would be too short to permit sufficient 
time for a formal, public comment period.
    Comment: Many commenters expressed concern that CMS seemed to be 
relaxing the community access standards with the ``exception'' process 
we provided for MA regional plans in Sec.  422.112(a)(1)(ii). Some 
commenters stated that to the extent CMS will pay MA regional plans 
more through various mechanisms, such as the ``stabilization'' fund, 
risk corridors in 2006 and 2007, and the new MA payment formula, 
therefore CMS also has reason to hold them to the same access standards 
to which CMS holds local MA plans. Other commenters supported the 
``exception'' process and suggested that it be extended to local MA 
PPOs.
    Response: As we have previously said, we will not permit local MA 
coordinated care plans to take advantage of the ``exception'' process 
in Sec.  422.112(a)(1)(ii). The exception process is necessary 
precisely because we will require MA regional plans to meet community 
access standards. We explained in the proposed rule that to the extent 
an MA regional plan is unable to secure contracts with specific 
providers in specific areas of an MA region, beneficiaries would 
nonetheless be protected from excessive out-of-network cost sharing. In 
other words, it is exactly because we will continue to enforce 
community access standards that we will require MA regional plans to 
reduce cost sharing to in-network levels where covered services cannot 
be readily obtained from contracted, network providers. We establish a 
new beneficiary notification requirement related to enrollees of MA 
regional plans in Sec.  422.111(b)(3)(ii) to reinforce this concept.
    Comment: Some commenters stated that CMS should require hospitals 
to treat MA regional plan enrollees when they are offered the Medicare 
FFS payment rate that is payable under section 1886 of the Act by an MA 
regional plan, as long as in-network cost sharing levels are applied to 
enrollees that seek care at such non-contracting hospitals. One 
commenter stated that sole community hospitals, or hospitals serving 
medically underserved areas or non-urban areas should be required to 
treat MA regional plan enrollees if they refused to contract for FFS 
rates. One commenter recommended that CMS reevaluate the non-
discrimination obligation of hospitals under the Medicare program and 
suggested that CMS establish a policy that would promote access to 
services at hospitals participating in the Medicare program on the same 
basis for all Medicare beneficiaries, regardless of whether they are MA 
enrollees or receiving coverage under the Medicare FFS program. One 
commenter recommended that CMS develop further regulations that would 
require providers to treat MA patients in all cases, even for elective 
services.
    Response: We do not necessarily agree that we should establish a 
policy that would require Medicare participating hospitals to treat MA 
enrollees or to contract with MA organizations under specific terms or 
conditions. Were we to establish a specific price relative to FFS 
inpatient hospital payment rates as a baseline that would compel a 
hospital to treat MA plan enrollees, for instance, we would also be 
administering inpatient hospital pricing. We do not believe that a 
requirement to treat for an administered price is consistent with the 
overall intent of the MMA to increase plan choices for Medicare 
beneficiaries through competitive market forces. However, we 
acknowledge that MA provider contracting, especially in areas where 
there are few available providers, is a concern. We will continue to 
evaluate our current authorities outside of the MMA as a means of 
ensuring reasonable access at reasonable prices to medical services for 
all Medicare enrollees, including those electing to receive their 
coverage through an MA plan.
    Comment: Some commenters stated that the ``exception'' CMS proposed 
in Sec.  422.112(a)(1)(ii) would tend to put providers at a 
disadvantage vis-[agrave]-vis MA regional plans. The commenters stated 
that MA regional plans would offer reimbursement rates below FFS rates 
and as such, unilaterally dictate the terms of the contract. The 
commenters stated that this would be unfair to physicians and other 
providers. The commenters also stated that this would create an unfair 
playing field, especially because MA regional plan enrollees in such an 
area would then be required to go out-of-network at higher cost sharing 
levels, to receive covered medically necessary care.
    Response: We disagree. MA regional plans will be required to make 
all covered services available at in-network cost sharing levels, even 
if an MA regional plan fails to reach mutually agreeable contracting 
terms with a specific provider or group of providers. In other words, 
MA regional plan enrollees will have access to medically necessary 
covered health services at in-network cost sharing levels. The MA 
regional plan must meet the access requirements either through 
contracted providers or through the ``exception'' process discussed 
above. Because section 1852(a)(2) of the Act requires MA organizations 
that use a contracted network to pay non-contracting providers at the 
Medicare FFS rate, once the MA regional plan enrollee pays in-network 
cost sharing, the MA organization will be financially responsible for 
the rest.
    Comment: One commenter stated that CMS should adopt URAC, NCQA or 
JACHO standards related to MA PPO network adequacy requirements and 
privacy of beneficiary information requirements. The commenter stated 
that for network adequacy requirements and privacy requirements, as for 
all other federal regulatory requirements, to the extent that any 
accreditation standard of any of the three accrediting bodies applies 
to the same activity, compliance should be deemed for the PPO to be in 
compliance with the federal requirement.
    Response: We do not necessarily agree. Under section 1852(e)(4) of 
the Act, when a private accrediting organization applies and enforces 
certain enumerated requirements that meet or exceed CMS standards, CMS 
can deem that an MA plan has met such

[[Page 4628]]

requirements. These enumerated requirements include access requirements 
under section 1852(d) of the Act and confidentiality requirements under 
section 1852(h) of the Act. To the extent the one of the three named 
parties has applied to CMS and been approved in accordance with 
statutory and regulatory requirements to be a private accrediting 
organization for external review of PPO access and/or confidentiality 
requirements, then deeming would be permissible. Note, however, that 
this deeming mechanism applies only for the purposes of CMS' 
enforcement of this regulation and neither CMS' enforcement of the 
regulation nor accreditation by an accrediting body supersedes the 
jurisdiction of the HHS Office for Civil Rights to enforce the HIPAA 
privacy rule.
    Comment: One commenter asked whether the access ``exception'' in 
Sec.  422.112(a)(1)(ii) for MA regional plans would preempt State 
licensing laws related to HMO access requirements.
    Response: MA regional plans are offered as PPOs and not HMOs. We 
responded to a similar inquiry in the June 2000 M+C final rule with 
comment (65 FR 40257). An entity does not have to have a commercial 
license of the same type of MA plan it seeks to offer under the MA 
program. Rather, the entity must demonstrate that it is authorized by 
the State to assume the risk involved in offering the type of plan it 
wishes to offer. Thus, an entity that is licensed by the State to 
assume risk commercially as an HMO would need to demonstrate that it is 
authorized by the State to offer a PPO product. The access standards 
that would apply to such an MA product would be the MA PPO access 
standards.
    Comment: Two commenters stated that CMS should rely on MA regional 
plans to demonstrate access to covered services throughout their 
service areas at in-network cost sharing amounts and that should CMS 
continue to review cost sharing levels to ensure that they are not 
discriminatory.
    Response: We agree with this comment and will continue to review 
cost sharing levels as a means of ensuring beneficiary access to care 
and that cost sharing is not discriminatory. When we evaluate access to 
care for an MA regional plan that relies, in part, on the ``exception'' 
in Sec.  422.112(a)(1)(ii), we will evaluate the means by which the MA 
regional plan proposes to ensure that access requirements are met. Such 
means might include the designation of ``essential hospitals'' in 
accordance with Sec.  422.112(c), the designation of other 
noncontracting providers from which an MA plan enrollee can obtain 
covered plan services at in-network cost sharing levels (including the 
catastrophic limit described in Sec.  422.101(d)(2)) in a timely 
manner, and the manner in which MA regional plan enrollees will be 
notified as to how they can secure in-network cost sharing when covered 
services are not readily available from contracted providers, in 
accordance with Sec.  422.111(b)(3)(ii).
    Unlike local coordinated care plans, such as MA local HMOs and MA 
local PPOs, where we have historically required comprehensive 
contracted networks of providers as a condition for meeting our access 
requirements, we will allow MA regional plans to contract with CMS with 
less robust networks of contracted providers. As long as an entity 
proposing to offer an MA regional plan pays noncontracted providers at 
the Medicare FFS rate, and as long as they can guarantee access through 
such payment to non-contracting providers, and as long as they limit 
enrollee cost sharing liability to in-network levels, then we will 
contract with such an entity for an MA regional plan as long as other 
non-access requirements are met.
    Comment: One commenter stated that the ``exception'' at Sec.  
422.112(a)(1)(ii) is not in the best interest of beneficiaries and that 
neither the preamble nor the regulation text in the proposed rule said 
how promptly an MA regional plan would be required to respond to a 
request for access to non-network sources of care, or the basis upon 
which such a request could be denied, or the penalty to the MA regional 
plan for not acting in a timely manner on such a request, or finally, 
what recourse the member would have if a denial or non-response from 
the MA regional plan occurred.
    Response: An MA regional plan would be required to provide 
assurances of reasonable response times, if it proposed to use the 
``exception'' in Sec.  422.112(a)(1)(ii) in such a manner. Reasonable 
response times proposed by the MA regional plan would need to be 
consistent with community patterns of care. Where a routine or follow-
up specialist visit might ordinarily be available within 30 days, an MA 
regional plan would be expected to respond in such a manner that the MA 
regional plan enrollee could secure covered specialist services within 
a similar time frame. Similarly, as part of the MA plan's disclosure to 
both CMS and an MA regional plan enrollee, we would require a full 
explanation of the denial process (where services are readily available 
from contracting providers, for instance) and the appeal process the 
enrollee should follow in cases of disagreement. The potential penalty 
to the MA regional plan for not acting in a timely manner on such a 
request is explained in our current regulation at Sec.  422.750 and 
Sec.  422.758 for a violation of Sec.  422.752(a)(1) and Sec.  
422.510(a)(10), respectively.

Essential Hospitals

    We proposed at Sec.  422.112(c) that if an MA organization 
certifies that it was unable to reach an agreement with an ``essential 
hospital,'' under specific circumstances we are authorized to pay 
additional amounts to that hospital from the Federal Hospital Insurance 
Trust Fund. This additional payment to the ``essential hospital'' is in 
addition to and does not affect the normal monthly MA payment that we 
would make to the MA organization. The MA organization must provide 
assurances that it will make payment to the hospital for inpatient 
hospital services in an amount not less than the amount that would be 
payable under section 1886 of the Act and the ``essential hospital'' 
must demonstrate to our satisfaction that the amounts normally payable 
under section 1886 of the Act are less than the hospital's costs for 
providing services to MA regional plan enrollees.
    Comment: A number of general comments were received on potential 
contracting difficulties between rural providers and health plans. On 
the one hand, several commenters were concerned that MA organizations 
offering MA regional plans would not make a ``good faith'' effort to 
contract with hospitals, especially hospitals located in rural areas. 
On the other hand, several commenters suggested that MA organizations 
offering MA regional plans in areas with limited competition could be 
``held up'' for non-competitive or predatory payment rates as a 
condition of securing a contract with a specific provider. The 
commenters on both sides recommended various solutions, such as 
mandating the method by which MA organizations offering MA regional 
plans could show they have made a ``good faith'' effort to contract 
with providers.
    Response: In response to comments that an MA regional plan should 
be required to show that it made a ``good faith'' effort to contract 
with an ``essential hospital,'' we added a requirement at Sec.  
422.112(c)(3) that the MA regional plan will need to establish its 
``good faith'' effort by showing that the designated hospital refused 
to contract after it was offered a payment rate no less than the amount 
the

[[Page 4629]]

hospital would receive under section 1886(d) of the Act.
    We agree that in certain rural areas, difficulties may arise in 
obtaining contracts that will satisfy the providers or the health 
plans, or both. However, we do not have the statutory authority to 
mandate contracts between MA plans or providers, or to intervene in 
contract negotiations. Section 1854(a)(6)(B)(iii) of the Act prohibits 
us from intruding in the contractual relationships between MA 
organizations and health care providers. This prohibition is intended 
to ensure that free market conditions continue to promote competition 
and efficiency in the MA program. We believe that it is clear that the 
Congress provided incentives for MA regional plans in the form of 
additional payments through the stabilization fund and risk sharing in 
2006 and 2007, neither of which is provided for local MA plans.
    Additionally, the Congress also provided for payments for 
noncontracting acute care hospitals that provide inpatient hospital 
services to MA regional plan enrollees through the ``essential 
hospitals'' authority. As stated previously, we believe competition 
will be the best method of ensuring network adequacy because enrollees 
will favor and enroll in plans with more extensive networks and tend to 
avoid those without. Competition will also allow the more efficient 
health care providers to offer discounted rates to MA organizations, 
which will, in turn be able to pass these savings on to enrollees in 
the form of additional health care items and services or reduced 
premiums.
    Finally, we believe enrollees will be attracted to MA organizations 
that contract with efficient providers, because costs will be lower. 
Clearly, the competitive forces are more complex than we can address in 
this forum. We have been careful not to disturb the new competitive 
balance created by the MMA related to MA regional plans.
    Our access standards are found at Sec.  422.112, Sec.  422.114, and 
in other sections of subpart C of the MA regulation. These standards 
must be met before an MA organization will be allowed to offer an MA 
plan in an area. Continuing compliance with these requirements is an 
essential condition of maintaining an MA contract. For instance, CMS 
has the authority, provided at Sec.  422.502(a)(3)(ii) and Sec.  
422.512(a), to deny an application or to terminate a contract if an MA 
organization fails to establish or maintain adequate access to care for 
Medicare beneficiaries. In order to meet access standards, MA 
organizations offering coordinated care plans will generally need to 
secure contracts that they have negotiated with health care providers. 
This will require an effort by both parties to ensure a choice of 
health plans with strong provider networks that will be available to 
all beneficiaries, including those residing in rural areas.
    Comment: One commenter stated that in the State in which it 
operates, the contracts it has with hospitals for all lines of business 
(Medicare, Medicaid, and commercial) cause it to pay more on the 
Medicare side, that cost-shifting occurs from its Medicare line of 
business to its commercial line of business. The commenter expressed 
concern that to the extent the ``essential hospital'' provision permits 
an MA regional plan to ``deem'' a hospital into the MA regional plan's 
network, that it provides an unfair competitive advantage to MA 
regional plans. The commenter also suggested permitting hospitals to 
select a single Medicare contractor (section 1876 cost, MA local or 
regional plan) with which to contract, and through such a contract 
``immunize'' itself from all other MA regional plans' attempts to 
designate it as an ``essential hospital.''
    Response: We do not believe it would be appropriate or reasonable 
to so allow a hospital to ``immunize'' itself from designation as an 
``essential hospital'' by any MA regional plan. To the extent we 
accepted or adopted such an interpretation, we would also be nullifying 
the very intent of the ``essential hospital'' statutory provision. The 
intent of this provision is, simply put, to ensure access to hospital 
care for regional MA plan enrollees. The opening clause of section 
1858(h)(1) of the Act is instructive in this regard: ``For purposes of 
enabling MA organizations that offer MA regional plans to meet 
applicable provider access requirements under section 1852 with respect 
to such plans.'' Additionally, as we provide for in regulation at Sec.  
422.112(c), before a hospital can be designated as an ``essential 
hospital'' by an MA regional plan, there must be a showing by 
convincing evidence that such a hospital is uniquely able satisfy the 
access requirements for the MA regional plan. If we were to limit 
designation of a specific hospital as an ``essential hospital'' to the 
first PPO in an MA region, we would also likely limit MA regional plan 
competition in all MA regions with rural areas to a single MA regional 
plan per region. Such a result clearly was not the intent of the 
statute.
    In addition, the ``essential hospital'' provision partly addresses 
hospital financing issues, to the extent that we will pay additional 
costs to ``essential hospitals,'' up to the amount provided in statute 
at section 1858(h)(3) of the Act. Thus, the MA organization would not 
bear these additional costs for MA regional plan enrollees.
    Comment: One commenter asked for clarification on how payment will 
work under the ``essential hospital'' provision. While the statute is 
clear, the commenter stated, that the additional payment is limited to 
inpatient services, it is unclear to the commenter whether add-ons such 
as medical education or disproportionate share payments will also be 
made to ``essential hospitals.'' The commenter recommended that CMS 
encourage or even require plans to provide additional reimbursement to 
include these amounts, which are available under inpatient PPS, to 
qualifying hospitals because they would be available if the beneficiary 
were enrolled in FFS Medicare.
    Response: IME and GME payments will continue to be made by the 
Medicare fiscal intermediaries (FIs) to all appropriate hospitals for 
all Medicare beneficiaries (including MA plan enrollees). 
Disproportionate Share Hospital (DSH) payments are part of the normal 
FFS reimbursement amount and will be the responsibility of the MA 
regional plan, to the extent it is making a payment under Sec.  
422.100(d)(2), because, by definition, ``essential hospitals'' are 
defined as noncontracting hospitals per section 1858(h)(1) of the Act. 
In our regulation at Sec.  422.112(c), we clarify that ``essential 
hospitals'' are always noncontracting with the specific MA regional 
plan involved.
    Comment: Some commenters suggested that to the extent an MA 
regional plan offers to pay a hospital no less than the amount that 
would be payable to the hospital under section 1886 of the Act, that 
CMS consider this to be evidence that the MA regional plan has made a 
``good faith'' effort to contract with the hospital.
    Response: We agree with the commenters and have established the FFS 
payment level as the baseline for MA regional MA plans in establishing 
that they have made a ``good faith'' effort to contract with an 
``essential hospital'' at Sec.  422.112(c)(3).
    Comment: Many commenters recommended that CMS specify in regulation 
exactly how the ``essential hospital'' provision will work and whether 
or not (and how) it would apply to critical access hospitals (CAHs). 
Other commenters cautioned CMS not to disrupt the competitive balance 
between MA organizations and hospitals related to MA plan contracting. 
Many commenters also recommended that CMS clearly explain

[[Page 4630]]

that CAHs are not ``essential hospitals'' as defined in the MMA. Other 
commenters stated that CAHs are indeed essential providers and have 
been designated as such under the FFS Medicare program. Some commenters 
suggested requiring MA regional plans to pay CAHs the ``interim'' 
Medicare rate in effect at the time the service was furnished.
    In addition, one commenter stated that such an ``interim'' payment 
rate would put parties at risk that such a payment would be more (or 
less) than actual costs. The commenter also suggested that CMS devise a 
means of ensuring that MA regional plans are properly advised on the 
``interim'' payment rate, should CMS accept the commenter's proposal. 
Still other commenters stated that CMS should not permit MA 
organizations to bargain in ``bad faith'' with hospitals. However, 
other commenters stated that CMS should not permit hospitals to bargain 
in ``bad faith'' with MA organizations. In general, all expressed 
concern and cautioned CMS not to upset the delicate balance of 
competition and pointed to the scarce resources and fragile financial 
condition of health care delivery in rural areas.
    Generally, CMS was asked not to undermine the already precarious 
condition of rural providers, including rural health clinics, CAHs and 
others, while at the same time we were encouraged to increase the 
availability of MA plans in rural areas. One commenter recommended that 
CMS put in a ``hold harmless'' or ``cost-reimbursement'' requirement 
for insurers that contract with critical access hospitals. The 
commenter was concerned that as more Medicare beneficiaries opt for 
participation in private insurance plans, unless CAHs receive adequate 
funding for the services they provide, their continued existence (and 
consequently continued access to medical care for the beneficiaries 
they serve) will be greatly jeopardized. Another commenter suggested 
that CMS require MA plans to provide reimbursement to CAHs using a 
cost-based methodology similar to that required under FFS Medicare.
    Another commenter stated that as more Medicare beneficiaries enroll 
in MA plans that do not contract with CAHs, the marginal costs (per 
Medicare beneficiary) at CAHs will rise and so, consequently, will 
Medicare payments per FFS beneficiary to CAHs. A few commenters 
suggested extending the ``essential hospital'' payment to local MA 
plans. Other commenters called on CMS to require MA plans to pay claims 
from noncontracting providers in a ``timely'' manner and under the same 
rules that apply to original FFS claims processors, the Medicare 
carriers and intermediaries.
    In addition, several commenters expressed confusion with the 
following sentence from the subpart C preamble to the August 3, 2004 
proposed rule: ``In a specific case, the actual payment to an 
'essential hospital' from the Federal Hospital Insurance Trust Fund 
would be the sum of the difference between the amount that would have 
been paid to the hospital under section 1886 of the Act and the amount 
of payment that would'' have been paid for those services had the 
``essential hospital'' been a critical access hospital.''
    Response: We will address the last comment first. We need to 
clarify that the quoted sentence from the subpart C preamble of the 
August 3, 2004 proposed rule simply echoes the statutory language at 
section 1858(h)(2)(A) of the Act. The intent of the statutory 
``essential hospital'' provision and the implementing regulation at 
Sec.  422.112(c) is to provide an additional payment to the ``essential 
hospital'' of up to 101 percent of its actual costs for providing 
inpatient services to a specific MA regional plan enrollee. In other 
words, there was never an intent to designate or allow a CAH to become 
an ``essential hospital'' for purposes of the MA regional plan program. 
The definition of ``essential hospital'' in the statute prevents such 
an outcome. Section 1858(h)(4) of the Act is clear in defining an 
``essential hospital'' as a ``subsection (d) hospital,'' as that term 
is defined at section 1886(d)(1)(B) of the Act. CAHs are not included 
in this definition and therefore can never be ``essential hospitals'' 
for purposes of an MA regional plan offered by an MA organization.
    In Sec.  422.112(c)(1), we are clear in limiting the applicability 
of the ``essential hospital'' provision in a similar manner to only 
hospitals defined in section 1886(d) of the Act, and thus excluding 
CAHs. We have addressed concerns related to maintaining a ``competitive 
balance'' previously in our responses in this section of the preamble. 
We cannot intrude in the contracting relationships between MA 
organizations and providers because the statute prohibits us from doing 
so at section 1854(a)(6)(B)(iii) of the Act. Additionally, to the 
extent the statute provides the additional ``essential hospital'' 
payment only for inpatient hospital services provided by 1886(d) 
hospitals to MA regional plan enrollees, we cannot extend its 
applicability to local MA plans of any type.
    Comment: One commenter suggested that CMS maintain a comprehensive 
and accessible database of Medicare FFS reimbursement rates for all 
providers and allow MA plans access to the database so they would be 
better equipped to make the correct and full payment to out-of-network 
providers. The commenter also stated that there should be penalties or 
sanctions for plans that habitually under-pay out-of-network 
noncontracting providers. The commenter also suggested that CMS require 
MA organizations to follow FFS timely payment rules, including accrual 
of interest when claims are not paid in a timely manner. Some 
commenters stated that the additional difficulties inherent in paying 
CAHs timely and correctly, explaining that CAHs are paid on a ``cost 
plus'' basis.
    Response: We provide public access to the FFS fee schedules and 
reimbursement rates. We also assists MA organizations in pricing claims 
for out-of-network providers by making ``Grouper/Pricer'' software and 
other Medicare claims'' pricing tools available to them. However, with 
payment rates and computations varying by provider type, locality, 
provider ID, and service, and with the potential that an MA plan 
enrollee might access covered emergency services in any part of the 
United States, the task of correctly applying fee schedules that are 
generally updated on a quarterly basis can be daunting. When one 
considers the low volume of such claims that an MA organization would 
expect to receive and the administrative effort involved in correctly 
pricing them, one begins to understand that simply making such data and 
systems available to MA organizations does not ensure that correct 
payment calculations will always occur. We already have the authority 
to apply penalties and sanctions to MA plans that habitually fail to 
pay out-of-network noncontracting providers in a timely manner (see, 
for instance, Sec.  422.520). MA organizations are required to follow 
the same timely payment requirements related to con-contracting 
provider claims, including interest penalties, that apply to FFS 
carriers and intermediaries.
    Although MA organizations are required to pay noncontracting 
providers the amount that would otherwise be payable under original 
Medicare (Sec.  422.100(b)(2), and although Medicare providers are 
required to accept from noncontracting MA organizations the amount 
original Medicare would have made (Sec.  422.214), the amount original 
Medicare pays to CAHs is paid on a periodic interim

[[Page 4631]]

basis, is cost-based, and is subject to cost settlement. Additionally, 
section 405(c) of the MMA provides for development of alternative 
timing methods for the periodic interim payments already made to CAHs 
for inpatient services. This provision will further complicate the 
computation of amounts due CAHs under Medicare and will represent an 
additional administrative burden on MA organizations offering MA 
regional plans that will need to pay noncontracting CAHs based on a 
number of unique and changing factors. Similarly, to the extent CAHs 
are located in areas served by MA regional plans, they would 
potentially suffer a disruption in the normal cash-flow provided for 
them through periodic interim payments in the Act, even were MA 
regional plans able to provide correct reimbursement amounts in a 
timely manner. Although timely reimbursement for claims received from 
noncontracting providers by MA organizations is already required (see 
Sec.  422.520(a), the timely claims-payment standard (claims must be 
paid within 30 or 60 days, depending on whether they are clean claims), 
is not a substitute for the guaranteed cash-flow related to periodic 
interim payments made by the Medicare FFS intermediary to CAHs.
    Additionally, to the extent CAHs settle costs with CMS related to 
services they provide to Medicare beneficiaries, MA organization 
computation of payments due CAHs is further complicated, because of the 
potential difference between the Medicare interim payment and the final 
settlement.
    In light of the special status provided to CAHs in section 1820 of 
the Act and implementing regulations, and in recognition of the unique 
status of CAHs related to access to care for FFS beneficiaries, we also 
note a special concern for them related to the MA program and 
specifically to MA regional plans. While we are constrained by the non-
interference clause in section 1854(a)(6)(B)(iii) of the Act from 
requiring MA organizations to contract with CAHs, or from requiring 
contracts voluntarily entered into with CAHs to specify the level or 
manner of reimbursement, we will increase our level of monitoring of 
CAHs. For instance, we might review MA regional plan payment to non-
contracting CAHs during our routine biennial monitoring visits. We will 
use our authority in section 1857(f)(2) of the Act when needed to 
ensure MA organization compliance with existing non-contractor timely 
payment requirements. We do not interpret the statute to permit CMS 
enforcement of contracts voluntarily entered in to by MA organizations 
and health care providers. Although our regulations require that all MA 
organization contracts with providers and suppliers contain a prompt 
payment provision (see Sec.  422.520(b)), details of such prompt 
payment provisions and enforcement thereof would be as specified in the 
contract.
    Comment: One commenter requested clarification regarding the 
``essential hospital'' payment from the HI Trust Fund. The ``essential 
hospital'' must demonstrate that the amount of the MA plan payment is 
less than the cost of providing services to MA regional plan enrollees. 
The commenter asked whether this additional payment is equivalent to 
the full PPS rate, or to cost (which may be greater than the PPS rate), 
or cost plus one percent (because of the reference to CAHs at section 
1858(h)(2)(A)) of the Act. The commenter also recommended that CMS 
provide guidance on how the hospital will demonstrate it is eligible 
for an ``essential hospital'' payment. The commenter is concerned that 
the procedures that we establish not be too cumbersome so that the 
additional reimbursement is not sufficient to compensate for the 
reporting effort.
    Response: The ``essential hospital'' will need to establish that 
its actual costs for providing inpatient care to a specific MA regional 
plan enrollee actually exceeded the amount that is normally paid under 
FFS Medicare. The amount normally paid under FFS Medicare is the PPS 
payment normally made to the ``subsection d'' hospital under Part A of 
the Act for similar inpatient hospital services provided to an original 
FFS Medicare beneficiary. As we have already discussed in this part of 
the preamble related to Sec.  422.100, the normal PPS payment (less the 
amounts paid by the fiscal intermediary under sections 1886(d)(11) and 
1886(h)(3)(D) of the Act) will be the responsibility of the MA 
organization sponsoring the MA regional plan in which the beneficiary 
is enrolled. Thus, after the normal FFS amount has been paid to the 
``essential hospital,'' the ``essential hospital'' can seek additional 
funding from CMS for up to 101 percent of the inpatient costs it 
actually incurred in treating a specific MA regional plan enrollee. The 
availability of funds to make such an additional payment to ``essential 
hospitals'' is limited by section 1858(h)(3) of the Act. We have 
clarified in the regulatory text in Sec.  422.112(c)(6) that we will 
pay from funds appropriated in section 1858(h)(3) of the Act until such 
funds are exhausted. In other words, we will pay based on the order in 
which claims from ``essential hospitals'' are received. Finally, we 
have prescribed in regulation the method through which an ``essential 
hospital'' will establish that its costs for treating a specific MA 
regional plan enrollee exceeded the normal PPS payment amount. We will 
use the principles of reasonable cost reimbursement in part 412 of this 
chapter to determine whether costs in a specific case exceed the normal 
PPS payment amount in an individual case. To the extent an ``essential 
hospital'' can show, using methods of reasonable cost reimbursement, 
that the amount it reasonably expended in its treatment of an MA 
regional plan enrollee exceeded the normal PPS reimbursement amount for 
inpatient services, then CMS will make an additional payment to the 
``essential hospital,'' limited by the statutorily appropriated amount 
in section 1858(h)(3). The statute initially authorizes $25,000,000 in 
2006 and increases the annual amount available for ``essential 
hospital'' payments in subsequent years by the market basket percentage 
increase as defined in section 1886(b)(3)(B)(iii) of the Act.
    Comment: One commenter recommended that CMS eliminate ambiguity and 
to clearly define which types of hospitals are eligible for ``essential 
hospital'' designation.
    Response: Our regulation indicates that any ``subsection (d)'' 
hospital can qualify as an ``essential hospital.'' The regulation 
mirrors the statute in this respect. Note that ``subsection (d)'' 
hospitals are defined in statute at section 1886(d)(1)(B) of the Act 
and refer to hospitals paid under a ``prospective'' (PPS) method. We 
have added language to Sec.  422.112(c)(1) to clarify this issue. Also 
note that we have further defined ``essential hospital'' in regulation 
text at Sec.  422.112(a)(4) as one where there is no competing Medicare 
participating hospital in the area to which MA regional plan enrollees 
could reasonably be referred for inpatient hospital care. We believe MA 
organizations are in the best position to determine what is 
``reasonable'' in this context, based on service usage and community 
patterns of care. However, we will evaluate such claims based on 
standards that will include: an evaluation of the ownership and control 
of other hospitals in the area; the normal patterns of community 
access; the physical proximity of other inpatient facilities; the 
referral patterns to inpatient facilities in the area; and other 
factors pertinent to the analysis.
    Comment: A number of commenters recommended that CMS apply special 
rules to I/T/U hospitals so that all hospitals operated by I/T/U or the

[[Page 4632]]

Indian Health Service would be considered ``essential hospitals.''
    Response: We cannot accommodate this request because there is no 
statutory basis for including all hospitals operated by Tribes or the 
Indian Health Service as ``essential hospitals.'' Section 1858(h) of 
the Act is explicit in defining ``essential hospitals'' as subsection 
(d) hospitals as defined in section 1886(d) of the Act. To the extent a 
Tribal or IHS hospital is designated by an MA regional plan under 
section 1858(h)(1) of the Act and to the extent all other conditions in 
section 1858(h) of the Act are present, then such a hospital can be an 
``essential hospital.''
    Comment: Some commenters recommended that CMS establish rules for 
``essential hospitals'' that would require them to participate in the 
utilization management, discharge planning or quality improvement 
programs of the MA plans of the enrollees they treat.
    Response: We will not separately establish such requirements 
related to ``essential hospitals.'' As ``subsection d'' hospitals, 
``essential hospitals'' are already required to meet quality assurance, 
discharge planning and utilization management standards applicable to 
Medicare participating hospitals.
    Comment: One commenter asked who would be responsible for the 
``essential hospital'' payment, once the annual allocation specified in 
section 1858(h)(3) of the Act has been exhausted.
    Response: In response to this comment, we have clarified this 
section of the regulation to say that once ``essential hospital'' 
payments exceed the limit prescribed in statute in a calendar year, no 
additional ``essential hospital'' payment will be due from any party. 
The statute is clear in allocating up to $25,000,000 for calendar year 
2006 and a similar amount, adjusted for inflation, in subsequent years. 
We will make appropriate payments from the Part A Trust Fund on a 
``first come-first served'' basis. We have specified these requirements 
in regulation at Sec.  422.112(c)(6). Once the amount authorized in 
statute has been exhausted in a calendar year, no additional 
``essential hospital'' payment is due nor can one be made by us for 
inpatient hospital services received by an MA regional plan enrollee in 
that calendar year.
    Comment: One commenter asked if the in-network cost sharing 
requirement would still apply to services received in an ``essential 
hospital,'' even after the ``essential hospital'' allocation has been 
exhausted.
    Response: To the extent an ``essential hospital'' is needed to meet 
the access requirements in Sec.  422.112, we have added a requirement 
at Sec.  422.112(c)(7) that in-network cost sharing applies to covered 
inpatient services received by an MA regional plan enrollee in an 
``essential hospital.'' This is consistent with the ``exception'' in 
Sec.  422.112(a)(1)(ii) and the beneficiary notification requirement in 
Sec.  422.111(b)(3)(ii). The requirement for an MA regional plan to 
provide, or reimburse for, medically necessary inpatient hospital care 
(and to limit member liability to in-network cost sharing levels when 
reimbursing an ``essential hospital'') is independent of the 
``essential hospital'' payment provision. Section 422.112(c)(7), where 
cost sharing is limited to in-network amounts for covered inpatient 
care reimbursed to an ``essential hospital'' by an MA organization for 
an MA regional plan member, applies even when Sec.  422.112(c)(6) does 
not. Even if no ``essential hospital'' payment is due per Sec.  
422.112(c)(6) because conditions in Sec.  422.112(c)(5) are not met 
(rather than due to exhaustion of the ``essential hospital'' annual 
allocation), in-network cost sharing for covered inpatient services at 
an ``essential hospital'' is still required. In other words, once a 
hospital is designated as an ``essential hospital'' by the plan, in-
network cost sharing applies regardless of whether an ``essential 
hospital'' payment is due or paid.
    Comment: One commenter said that to the extent the ``exception'' in 
422.112(a)(1)(ii) is used, that not only normal per service in-network 
cost sharing should apply to services so obtained, but also that the 
in-network catastrophic limit on Medicare A/B services in Sec.  
422.101(d)(2) should also apply.
    Response: We agree and reference the in-network catastrophic cost 
sharing limit in Sec.  422.101(d)(2) as an additional limit on MA 
regional plan enrollee cost sharing liability in Sec.  422.112(c)(7) 
when covered inpatient care is received at an ``essential hospital.''
    Comment: One commenter asked whether we would permit or require MA 
regional plans to list ``essential hospitals'' in their provider 
directories. The commenter said that allowing an MA regional plan to so 
list ``essential hospitals'' would be inappropriate because such 
marketing would provide the hospitals with an advantage that should 
only accrue to contracting providers. We received a number of comments 
from other parties that objected to the listing of ``essential 
hospitals'' in MA regional plan provider directories on the basis that 
such a listing would provide the MA regional plan with an advantage 
that should only accrue to MA regional plans that actually have the 
``essential hospital'' under contract.
    Response: While we generally concur with both commenters that 
neither party is entitled to an undue advantage, MA regional plans are 
required to provide enrolled members a provider directory on an annual 
basis in accordance with Sec.  422.111(a)(3). Note that as part of that 
requirement a description of any out-of-network coverage is also 
required. So, while it would not be permitted to list ``essential 
hospitals'' in an MA regional plan's provider directory as if they were 
contracting providers, it is also true that a description of their 
status as ``essential hospitals'' would be required.
12. Special Rules For Ambulance Services, Emergency Services, and 
Urgently Needed Services, and Maintenance and Post-Stabilization Care 
Services (Sec.  422.113)
    We proposed to modify Sec.  422.113(b)(2)(v) to clarify that the 
$50 limit for ``emergency services'' applies only to the emergency 
department, and that while the limit on cost-sharing for ``post-
stabilization'' care at Sec.  422.113(c)(2)(iv) continues to apply, its 
application would always begin upon inpatient admission. Thus, 
emergency cost-sharing limits would shift from being tied to the type 
of service (emergency services) to being tied to the site of service 
(emergency department). We believe that making this clarification 
retained cost-sharing limits for both emergency services and post-
stabilization care, while eliminating the unanticipated complexities 
and administrative burden previously associated with this section of 
the regulation.
    Comment: A number of comments supported the clarification that the 
$50 limit on cost sharing for emergency services applied only to 
emergency department services. Commenters supported the notion that 
once an MA enrollee is admitted to a hospital, normal hospital cost-
sharing levels apply, even if the inpatient admission originates from 
the emergency department. On the other hand, many commenters 
recommended that CMS reexamine the $50 limit itself. Some commenters 
recommended that CMS set the limit higher (at $75, $100 or higher) and 
other commenters recommended that CMS index the emergency department 
cost-sharing limit for inflation.
    Response: We believe that the $50 limit on cost sharing for 
emergency

[[Page 4633]]

department services continues to provide the appropriate financial 
disincentive to MA plan enrollees not to frivolously use emergency 
rooms in non-emergency situations. For instance, there is no MA plan 
currently imposing cost sharing for in-network physician office visits 
that approach $50. Similarly, MA organizations are permitted to deny 
emergency department services as medically unnecessary, to the extent 
that the member can be shown to have acted in ``bad faith'' or not as a 
``prudent layperson'' in presenting at an emergency room for non-
emergency services.
    Finally, we do not set forth in regulation the maximum amount an MA 
organization can impose in cost sharing for receipt of urgently needed 
services. Because we have restricted the applicability of the $50 limit 
on enrollee cost sharing to emergency department services, we believe 
we have appropriately balanced the financial interests of MA 
organizations and MA plan enrollees requiring emergency services.
13. Access to Services Under an MA Private Fee-For-Service Plan (Sec.  
422.114)
    Section 211(j) of the MMA allows MA PFFS plans to charge higher co-
pays to members who receive services outside of a PFFS plan's 
contracted network. This provision does not apply to PFFS plans that 
meet access requirements solely through ``deemed'' networks as defined 
in Sec.  422.114(a)(2)(i). We proposed to add a new paragraph (c) to 
account for section 211(j) of the MMA.
    We received no comments on this section, so we finalize as 
proposed.
14. Return to Home Skilled Nursing Facility (Sec.  422.133)
    We proposed to extend the provisions in Sec.  422.133 (Return to 
home skilled nursing facility) to SNF services provided in cases in 
which an MA organization elects, as permitted under Sec.  422.101(c), 
to provide Medicare covered SNF care in the absence of a prior 
qualifying hospital stay. In such an instance, we proposed to require 
that an individual who would be eligible under section 1852(l) of the 
Act for admission to a ``home SNF'' upon discharge from a hospital 
stay, would nonetheless retain his or her right to receive ``home SNF'' 
benefits in the absence of such a hospital stay.
    We proposed to deem that a hospital discharge has always occurred 
before an admission for SNF services, and therefore provide all MA 
enrollees full rights to the ``home SNF'' benefit.
    We received no comments on this section, so we finalize as 
proposed.

Subpart D--Quality Improvement Program

1. Overview
    The MMA amended section 1852(e) of the Act in a number of 
significant ways that will affect how MA organizations pursue their 
quality improvement activities. Below we summarize the proposed 
provisions and respond to the public comments. (For a more in-depth 
discussion of the provisions, please refer to the preamble to the 
proposed rule.)
Quality Improvement Program (Sec.  422.152)
    To reflect the Congressional intent to refocus the section on 
quality improvement, rather than quality assurance, we changed the 
heading of Sec.  422.152 to ``Quality improvement program.'' Proposed 
Sec.  422.152 specified that each plan (except MA PFFS and MSA plans) 
offered by an MA organization must have an ongoing quality improvement 
program and that a chronic care program must be a part of this program.
    We believe that the broad requirements in proposed Sec.  422.152(d) 
for QI projects did not present an undue burden for MA organizations, 
as these organizations have significant experience in carrying out such 
projects under the current Sec.  422.152(d) requirements that we 
believe are more prescriptive than those we proposed in the August 2004 
proposed rule.
    Our previous quality improvement requirements for M+C coordinated 
care plans focused on attaining improvement in specific clinical topics 
and included specific performance measures for improvement. As a result 
of the MMA amendments, we proposed that MA organizations have the 
flexibility to shape their QI efforts to the needs of their enrolled 
population. In addition, we continue, based on our interpretation of 
section 1852(e)(3)(B)(i) of the Act, to require MA coordinated care 
plans to collect, analyze, and report their performance using 
measurements outlined by us or to participate in surveys administered 
by us (for example, HEDIS, HOS, and/or CAHPS).
    Proposed Sec.  422.152(b)(4) would require MA local PPO plans that 
are offered by an organization that is licensed or organized under 
State law as a HMO, to follow the same quality improvement requirements 
as other MA coordinated care plans.

A. General Comments

    Comment: A number of commenters made a variety of general comments 
about the proposed rule. These comments include: (1) require that plans 
disseminate educational materials to beneficiaries; (2) require that 
all plans review all problems that come to their attention; (3) CMS 
should recommend that plans seek Quality Improvement Organization (QIO) 
technical assistance; (4) require plans to have physician advisory 
committees, and that these committees advise CMS on performance 
measures; and (5) CMS should begin to provide information on MA quality 
starting in 2006.
    Response: MA plans are responsible for ensuring that beneficiaries 
are fully informed of the benefits covered under the contract as part 
of its marketing material, evidence of coverage, and summary of 
benefits. We do not have any requirements that plans conduct 
educational programs. While the dissemination of educational materials 
may be worthwhile in improving health outcomes, we do not believe it 
should be mandatory. Most plans already provide QI, for example, in 
marketing materials. Furthermore, we post HEDIS and CAHPS data on the 
www.Medicare.gov web site. To the extent an MA plan decides to furnish 
educational materials to its enrollees, the plan is responsible for the 
type of information it wishes to furnish, and it is in the best 
position to determine which information is most appropriate for the 
enrolled population.
    We agree with the commenter that plans should review all problems 
that are brought to their attention. Depending on the nature, extent, 
and substance of the problems, an MA plan may implement immediate 
corrective action, or may need to implement more systemic changes to 
address the identified problem.
    We agree with the commenters and encourage plans to seek technical 
assistance from QIOs. Plans should review the current scope of work to 
determine the areas for which the QIOs can provide assistance; a draft 
outline of the 8th scope of work is available on our web site. Plans 
that seek QIO assistance will receive it on both Part C and Part D 
services.
    We disagree with the commenters that propose that we require 
physician advisory committees. We do not believe this is necessary 
because most plans already have Medical Director committees that advise 
plans on QI measures. Moreover, at the national level, we have a 
physician advisory

[[Page 4634]]

committee. These bodies should ensure an appropriate level of physician 
input.
    We agree with the commenters with respect to our providing 
information on quality measures. HEDIS and CAHPS data are already on 
our website (www.Medicare.gov), and the data has been available for 
several years
    Comment: Several commenters stated that CMS should include PFFS and 
MSAs in all of the QI requirements. However, there were also commenters 
that supported the exclusion of these plans.
    Response: Because section 722(a) of the MMA specifically exempts 
these types of plans from the majority of QI requirements, we have 
excluded them from the same requirements in the regulations. These 
plans, however, must meet the following requirements: maintain health 
information systems; ensure information from providers is reliable and 
complete; make all collected information available to us' conduct 
quality reviews; and take corrective action for all problems that come 
to their attention.
    Comment: Several commenters have recommended that we provide 
payment incentives to MA plans for providing better quality care, also 
known as pay for performance (P4P).
    Response: We agree with the commenters concerning the merits of 
P4P. We are very interested in this approach and believe that we should 
pay not just for providing a service but for results. P4P should 
stimulate care that is efficient and effective for every patient while 
eliminating waste. We are currently working on four P4P demonstration 
projects. These are as follows:

The Premier Hospital Quality Incentive Demonstration

    The Premier Hospital Quality Incentive Demonstration is a 3-year 
project that will recognize and provide financial rewards to hospitals 
that demonstrate high quality performance in a number of areas of acute 
care. The demonstration involves a CMS partnership with Premier Inc., a 
nationwide organization of not-for-profit hospitals, and will reward 
participating top performing hospitals by increasing their payment for 
Medicare patients. Through the Premier Hospital Quality Incentive 
Demonstration, we aim to see a significant improvement in the quality 
of inpatient care by awarding bonus payments to hospitals for high 
quality in several clinical areas, and by reporting extensive quality 
data on our web site. Participation in the demonstration is voluntary 
and open to hospitals in the Premier Perspective system as of March 31, 
2003.

Section 646--Medicare Health Care Quality Demonstration Program.

    The MMA mandates a 5-year demonstration program to examine factors 
that encourage the delivery of improved patient care quality, including 
financial incentives, appropriate use of best practice guidelines, 
examination of service variation and outcomes measurement, shared 
decision making between providers and patients, appropriate use of 
culturally and ethnically sensitive care, and related financial effects 
associated with these factors. In the demonstration, Medicare may 
provide benefits not otherwise covered, but may not deny services that 
are otherwise covered against the wishes of beneficiaries. The 
demonstration is required to be budget neutral.

Section 649--Medicare Care Management Performance Demonstration.

    The MMA mandates a 3-year demonstration program where physicians 
will be paid to adopt and use health information technology and 
evidence-based outcome measures to promote continuity of care, 
stabilize medical conditions, prevent or minimize acute exacerbations 
of chronic conditions, and reduce adverse health outcomes. The statute 
limits the program to four sites meeting eligibility criteria. Payment 
can vary based on performance; however total payments must be budget 
neutral. QIOs could help enroll physicians, evaluate their performance, 
and provide technical assistance.

The Physician Group Practice (PGP) Demonstration.

    The PGP Demonstration rewards physicians for improving the quality 
and efficiency of health care services delivered to Medicare FFS 
beneficiaries. Mandated by Section 412 of the Benefits Improvement and 
Protection Act of 2000, the PGP Demonstration seeks to encourage 
coordination of Part A and Part B services, reward physicians for 
improving health outcomes, and promote efficiency through investment in 
administrative structure and process. Under the 3-year demonstration, 
physician groups will be paid on a FFS basis and may earn a bonus from 
savings derived from improvements in patient management. Annual 
performance targets will be established for each participating 
physician group equal to the average Part A and Part B expenditures of 
beneficiaries assigned to the group during a base period, adjusted for 
health status and expenditure growth.
    We are also paying close attention to P4P for managed care plans. 
We are aware that MEDPAC has developed proposals along these lines in 
its June 2004 report. Furthermore, many private sector organizations 
are sponsoring such projects. See, for example, a compendium developed 
by The Leapfrog Group (www.leapfroggroup.org). In addition, the Agency 
for Healthcare Research and Quality (AHRQ) has sponsored an evidence 
based report entitled ``Strategies to Support Quality-based Purchasing: 
A Review of the Evidence,'' published in fall 2004, which includes 
managed care plans. Finally, we have a contract with the Institute of 
Medicine to study P4P, which will also address managed care.

B. Measures

    This portion of the discussion addresses measures for all MA plans. 
A specific discussion of measures for PPOs appears below.
    Comment: Several commenters stated that CMS should include measure 
reporting requirements in regulations.
    Response: Based on past experience, we disagree with the commenters 
recommending that we include specific measure reporting systems in the 
regulation. We believe it is a better approach to provide specific 
guidance through the Medicare managed care manual rather than including 
specific requirements in the regulation. In this way, we have the 
flexibility to implement appropriate changes in the measure systems and 
individual measures in a more timely manner. The industry and 
accreditation organizations, are constantly making changes to these 
reporting systems. Thus, having more flexibility to change measures as 
well as add and delete measurements systems allows us to be more 
responsive to the state of the art as to measurement systems.
    Comment: A commenter stated that performance assessment data is 
outdated and that CMS should not use HOS to rank plans because there is 
no benchmark.
    Response: We disagree with the commenter. HEDIS, CAHPS, and HOS are 
updated on a regular basis. We recognize that there are no benchmarks 
currently available and therefore use relative ranking in the 
performance assessment data system. Benchmarks also refer to standards 
or minimum performance levels.
    Comment: A commenter stated that CMS should use a standardized core 
set

[[Page 4635]]

of performance measures, clinical and non-clinical that are applied to 
all MA plans. The commenter suggested that CMS not require MA plans to 
demonstrate that QI program size and scope are proportionate to plan 
size.
    Response: In general, we agree with the commenter that a 
standardized set of measures should be used across all plan types 
because it allows the greatest comparison among plans. The one 
exception as discussed later, is that we have decided to allow some 
variation in the early stages of the PPO program as compared to the HMO 
program. As also noted, MMA specifies a different set of requirements 
for PFFS plans and MSAs.
    Comment: One commenter stated that CMS should compare quality 
measures of MA plans to those for the FFS Medicare program.
    Response: On the www.Medicare.gov website, we provide consumer 
assessment data from CAHPS on FFS Medicare and the MA plans, as well as 
a comparison of an Original Medicare rate (on State and national 
levels) compared to the MA health plan rates on the HEDIS measure--
Access to Ambulatory Health Services.
    Comment: A commenter suggested that CMS reduce the burden on plans 
by reducing the number of measures or by conducting HEDIS by telephone.
    Response: We agree that it is important to minimize the MA plans' 
reporting burden and do so by using data submission tools, systems, and 
processes that are consistent with HEDIS reporting for the plan's 
commercial lines of business.
    We believe that it is not appropriate, however, to collect HEDIS 
measures by phone because information collected by phone is less 
reliable.

C. Special Needs Plans (SNPs)

    Comment: Many commenters suggested that CMS develop special 
measures for specialized MA plans for SNPs. Several commenters 
suggested that CMS use the ACOVE measures developed by Rand. They 
further suggested that quality oversight should take into account the 
populations being served by the SNP. In addition, they suggested that 
CMS should ensure that SNPs have comprehensive and coordinated care.
    Response: We agree with the commenters and have already indicated 
to several demonstration plans that have institutionalized populations 
and are converting to SNPs that HEDIS and HOS will not be required. 
Instead we will work with them to identify measures that are similar to 
the national nursing home quality measures reported on the Nursing Home 
Compare website at www.medicare.gov and the CHSRA quality indicators, 
both of which are derived from the Minimum Data Set (MDS). SNPs for 
dual eligibles will be required to meet the requirements of other MA 
plans. We are also willing to explore special measures with other types 
of SNPs.
    We are certainly open to considering the ACOVE measures and will 
explore their feasibility. As to other aspects of quality oversight, we 
will apply the same basic types of quality requirements for all MA 
plans but take into account beneficiary needs for SNPs. As to 
comprehensive and coordinated care, SNPs will need to meet chronic care 
improvement program (CCIP) requirements.
    Comment: A commenter recommended that SNPs should not serve 
dialysis patients. The commenter stated that CMS cannot monitor the 
quality of care provided to dialysis patients in managed care plans 
because dialysis providers do not bill Medicare for services to MA 
beneficiaries, thus, the ESRD Clinical Performance Measures data, which 
are extracted from billing information, are not available.
    Response: We appreciate the concerns expressed by the commenter and 
will definitely take them into consideration. We anticipate that will 
be able to collect the data. However, at this time, we have not 
determined with certainty that we can and share the commenter's concern 
that we not approve the plans unless we can collect the data. In 
Subpart A of this preamble, we indicate that we are not setting forth a 
detailed definition of severe and disabling chronic condition for 
purposes of the definition of special needs individuals, and we will 
review and evaluate SNP proposals on a case-by-case basis. This 
evaluation will take into consideration whether we can collect 
sufficient quality of care monitoring data.

D. Report to the Congress

    Comment: Some commenters expressed concern that CMS could not add 
measures without issuing a Report to the Congress as required under 
Section 1852(e)(3)(A). They suggested that because of several of the 
unique populations that might be served in SNPs, that CMS extend the 
Report to the Congress, and that CMS form an expert panel, enhance 
clinical knowledge on high risk populations, disseminate best 
practices, enhance coordination care, and refine payment to support 
outcomes.
    Response: As indicated in the proposed rule, we interpret that this 
requirement does not prevent us from making changes within each of the 
existing measurement systems, such as HEDIS. Further, although we need 
to submit a Report to the Congress to add new systems, we do not 
interpret this to mean that we need the Congressional approval before 
we proceed to implement new systems.

E. Types of performance measures

    Comment: A commenter suggested that CMS develop clearly defined, 
nationally recognized quality measures based on objective criteria for 
all facets of the Medicare program to truly achieve the MMA's goal of 
offering Medicare beneficiaries a meaningful choice. It is feasible 
that the measures be based on pharmaceutical information, medical 
claims, and other routine administrative information already easily 
accessible across the Medicare program.
    Response: We will be pursuing the development of the measures and 
will take into consideration the commenter's suggestion.
2. Chronic Care Improvement Program Requirements (Sec.  422.152(c))
    At proposed Sec.  422.152(c), we would require that MA plans 
develop criteria for a chronic care improvement program. The criteria 
must-
     Include methods for identifying MA enrollees with multiple 
or sufficiently severe chronic conditions who would benefit from 
participating in a chronic care improvement program; and
     Provide mechanisms for monitoring MA enrollees that are 
participating in the chronic care improvement program.
    Comment: A commenter recommended that CMS use the standard 
definition of disease management adopted by the Disease Management 
Association of America (DMAA) for the CCIP. The commenter also 
recommended that the CCIP be population based and that CMS focus on 
congestive heart failure (CHF), diabetes, and chronic obstructive 
pulmonary disease (COPD). They further suggested that CCIPs be 
accredited, and be evaluated on clinical quality, beneficiary and 
provider satisfaction, and impact on cost. Other commenters recommended 
that CMS provide maximum flexibility for plans as to these 
requirements. A commenter suggested that plans can identify patients 
from claims, self-reports, by providers, socio-economic data primarily 
using existing measures, for example, HEDIS to monitor plus other 
evidence-based measures. A commenter also suggested plans should use 
clinical variables, for example, weight, use of ACE inhibitors, health 
and functional status, emergency room and hospital

[[Page 4636]]

use, satisfaction, total costs, as measures for CCIP.
    Response: We certainly encourage plans to consider the definition 
provided by Disease Management Association of America (DMAA), as well 
as the other aspects of the programs developed by DMAA. However, we 
believe it is premature to provide more prescriptive requirements. We 
will look for information on the CCIP pilot under section 721 of the 
MMA as well as the early stages of the MA plans' implementation of this 
section 722 CCIP to shape guidance for this component of the program.
3. QI Projects (Sec.  422.152(d))
    While we proposed to delete many of the prescriptive requirements 
for QI projects that appeared in Sec.  422.152(d), we still retained 
the basic requirements of the projects including the collection, 
analysis, and reporting of data. We believed, though, that MA plans 
should have the ability to select topic areas and proposed deleting the 
requirements of including the entire relevant population and having to 
do both national and statewide projects.
    In proposed Sec.  422.152(d)(1), we would require that QI projects 
be initiatives that include the entire organization and focus on 
clinical and non clinical areas. The projects would need to follow the 
current quality improvement process. We retained the provisions that QI 
projects must measure performance, and the interventions must be 
system-wide and include the establishment or alteration of practice 
guidelines. In addition, we propose to require that the projects focus 
on improving performance for the Medicare population and involve 
systemic and periodic follow-up on the effect of the interventions. To 
ensure that the measures (or quality indicators) used in QI projects 
are reliable and relevant for improving the health care and services 
furnished to MA enrollees, we proposed in Sec.  422.152(d)(2) to 
require that the quality indicators be objective, clearly and 
unambiguously defined, and based on current clinical knowledge or 
health services research. The measures must also be capable of 
measuring outcomes, such as changes in health status, functional 
status, and enrollee satisfaction, or valid proxies of those outcomes. 
Likewise, we proposed in Sec.  422.152(d)(3)to require that the data 
used in an MA plan's QI projects be valid and reliable and based on 
systemic ongoing collection and analysis of information. We also 
proposed in Sec.  422.152(d)(4) that the interventions achieve 
demonstrable improvement.
    Finally, in Sec.  422.152(d)(5), we proposed to retain the 
requirement that MA plans report the status and results of their 
projects when requested by us. We believe that this reporting and 
review burden would be much smaller than the process used in the M+C 
program. We intend to provide further guidance on the reporting 
requirements later.
    Comment: A commenter stated that QI should involve more than 
measure, intervene, and remeasure. The commenter also stated that it 
should set performance expectations, collect and analyze data, identify 
undesirable events, develop interventions, collect data to monitor 
improvement, and require that all plans meet the same QI requirements.
    Response: We agree that all HMOS and PPOs should have to meet the 
same basic requirements as to QI projects, and the regulation requires 
this. However, although we will encourage plans to adopt the 
commenter's other recommended steps, we do not believe that it is 
necessary to build them into mandatory requirements. The requirements 
that we have already specified should be sufficient, and to add 
additional requirements will create unnecessary burden.

A. National projects

    Comment: A commenter requested that CMS provide guidance to plans 
on the meaning of 'encouraging' physicians to participate in quality 
improvement initiatives. The commenter also proposed that CMS provide 
plans with the flexibility to design and conduct QI projects based on 
topics relevant to the plan's population. However, the commenter stated 
that CMS should continue to provide suggestions and examples of topics 
for QI projects that are relevant to the Medicare population. The 
commenter also suggested that CMS should provide guidance regarding 
meaning of ``sustained improvement,'' and consider evaluating clinical 
and non-clinical performance improvement using HEDIS and CAHPS 3.0H 
results.
    Response: As to encouraging physicians to participate in QI 
projects, we recommend plans to coordinate their efforts with their 
providers. Some possible options are that the plans will send letters 
to their providers encouraging participation or pay them a bonus. This 
will be up to the plans. As indicated, we will provide suggestions as 
to topics for plan consideration and guidance on these topics. We will 
give further consideration to the suggestion of using HEDIS and CAHPS 
for evaluating QI projects.
    Comment: Some commenters recommended that CMS require plans to 
participate in national projects.
    Response: The MMA specifically deleted the requirement for national 
projects. We interpret the Congress's deletion of this requirement as 
an indication of its intent that participation in national projects not 
be required. Therefore, we are not requiring the projects, and we 
believe the best alternative is to encourage plans to participate 
voluntarily in our proposed national projects.

B. Racial-ethnic QI projects

    Comment: Some commenters opposed elimination of the racial-ethnic 
QI projects, while one commenter supported its removal.
    Response: The MMA specifically eliminated this requirement. Again, 
we interpret the Congress's deletion of this requirement as indicating 
its intent that plans not be required to pursue these types of 
projects. However, we encourage plans to consider pursuing such 
projects voluntarily. We have a current racial-ethnic national project 
that started in 2003 and will not be completed until 2005. We will 
share results of this project when it is completed. Lovelace Clinic 
Foundation was selected by us to develop two cultural competency guides 
through an AHRQ Integrated Delivery System Network Funding task order. 
The first manual, ``Providing Oral Linguistic Services: A Guide for 
Managed Care Plans,'' provides a practical step-by-step process for the 
improvement of oral language services to patients with limited English 
proficiency (LEP). The second manual, ``Planning Culturally and 
Linguistically Appropriate Services: A Guide for Managed Care Plans,'' 
assists health plans in assessing the ethnically diverse populations 
they may serve, and assessing the cultural competency of the managed 
care plan. Lovelace recently completed a report ``Evaluation of 
Usefulness of CLAS Guides to M+CO Plans'' which is available from AHRQ.

C. Performance levels

    Comment: A commenter suggested that CMS set guidelines on the 
minimum percent of enrollees that are identified and managed. Others 
opposed the removal of requirements as to minimum performance levels, 
sustained improvement, and clinical-nonclinical requirements and 
external review.
    Response: We retain our view from the proposed rule that plans 
should select topics areas that best meet their needs rather than being 
required to select both clinical and nonclinical

[[Page 4637]]

topics. We do not believe that it is appropriate for us to specify 
minimum percent identified and minimum performance level. In the 
preamble discussion to Sec.  422.152(d), we proposed not to define 
demonstrable improvement, but indicated that we would look for some 
movement in the quality indicator in an upward or downward direction as 
appropriate.
    MMA eliminated the requirement that MA organizations contract with 
QIOs (external review organizations) to review appeals. However, QIOs 
are still involved in all appeals that they currently conduct such as 
hospital and nursing home discharges. Elimination of this requirement 
just means that the MA plans do not need to contract with the QIOs or 
other external review organizations.

D. Project selection

    Comment: A commenter suggested that CMS require all plans to 
participate in QI projects, as long as the projects are based on data 
to which the plan has reasonable access. When developing QI and data 
collection requirements, the commenter suggested consideration of the 
plan's experience in conducting the activities. Further, the commenter 
recommended using a standardized core set of performance measures, 
clinical and non-clinical that are applied to all Medicare Advantage 
plans. Commenters also stated that CMS should not require MA plans to 
demonstrate that QI program size and scope are proportionate to plan 
size.
    Response: We believe that plans should take these suggestions into 
consideration, but we are not requiring them. We agree that we should 
not require MA plans to demonstrate that QI program size and scope are 
proportionate to plan size. To do so will place unnecessary 
restrictions on plans and would be inconsistent with what we understand 
to be the Congressional intent to allow for more flexibility in this 
area.
4. Requirements for MA Regional Plans and MA Local Plans
    Section 1852(e)(3)(A)(ii) of the Act provided for us to establish 
separate regulatory requirements for MA regional plans relating to the 
collection, analysis, and reporting of data that permit the measurement 
of health outcomes and other indices of quality. Section 
1852(e)(3)(A)(ii) of the Act further provided that these requirements 
for MA regional plans could not exceed the requirements established for 
MA local plans that are PPO plans.
    In Sec.  422.152(e)(1), we proposed a definition for the term 
``local PPO plan'' as used in this section. The other requirements in 
this paragraph were the requirements that apply to PPOs under current 
regulations.
    In Sec.  422.152(f), we retained the provisions that address health 
information systems, QI program review, and remedial action. MA 
organizations will be required, for all the MA plans they offer, to 
maintain a health information system that collects, analyzes, and 
integrates the data necessary to implement their QI program. The 
organization will also be required to ensure that the information it 
receives from providers of services is reliable and complete. In 
addition, for each plan, there must be in effect a process for formal 
evaluation, at least annually, of the impact and effectiveness of its 
quality improvement program.
    Finally, for each plan it offers, we proposed that an MA 
organization will be required to correct all problems that come to its 
attention through internal surveillance, complaints, or other 
mechanisms. As noted above, as a result of MMA we also made conforming 
changes to remove the provision that each MA organization's quality 
assurance program include a separate focus on racial and ethnic 
minorities and the requirement that for each plan it operated the MA 
organization would have an agreement with an external quality review 
and improvement organization.
    The MMA provided that all the part D (Voluntary Prescription Drug 
Benefit) requirements are to be included as among those that could be 
deemed to be met through accreditation, and we accordingly proposed to 
add this provision to the list of deemable requirements in Sec.  
422.156(b).
    Comment: Many commenters recommended that CMS use the same metrics 
across plan types. Others commenters recommended that CMS develop 
future plans to make PPOs comparable to HMOs. They suggested that CMS 
convene key stakeholders to develop measures. They further suggested 
that CMS set goals and timetables for implementing the same measures 
across plan types.
    Response: For the most part, we will have uniform reporting 
requirements for HMOs and PPOs. For instance, we will require both 
types of plans to submit HEDIS and HOS data. Further, we will 
administer the CAHPS survey to both types of plans. The HEDIS measures 
will differ between the two plan types, as PPOs will not be required to 
submit HEDIS measures that require medical record review, because they 
have difficulty obtaining medical records from out-of-network 
providers. However, for PPOs, many of the HEDIS measures are available 
from administrative records. We are working with NCQA and other 
experts, MA organizations and other stakeholders to identify which 
HEDIS measures are most appropriate for quality performance measurement 
in PPO plans.
    We held an open door forum on December 10, 2004, to receive input 
from the public on the HEDIS measures for PPOs. We expect to publish a 
final set of measures for field testing in January 2005. Materials from 
the open door forum can be found at http://www.cms.hhs.gov/healthplans/performance/. We expect to field test these measures in the Spring 
2005, and we expect to finalize them in Fall 2005. In addition, we 
expect to disseminate the final list of measures for reporting, with 
detailed instructions, in the MA Manual in Fall 2005. In the near 
future, we expect that additional HEDIS measures that require PPOs to 
capture and submit data from medical records will also be required for 
reporting. We desire to measure performance and compare plans on as 
many dimensions of care as possible, so we plan to move progressively 
toward having all relevant HEDIS measures reported while allowing PPOs 
the opportunity to develop the capacity to collect information that 
requires medical record review.
    After we implement NCQA's recommendations on HEDIS measures for 
PPOs, we will make an assessment of the possibility of making HEDIS 
reporting even more comparable between HMOs and PPOs
5. Deeming Sec.  422.154
    We did not have a discussion on deeming in the preamble nor 
proposed changes to the regulation text. Nevertheless, we did receive 
comments on this section and are responding to those comments.
    Comment: Commenters suggested that CMS allow the American 
Association of PPOs (AAPPO) to be an Accreditation Organization (AO)and 
that CMS allow disease management associations to be AOs.
    Response: Any organization that wants approval as an AO for PPOs 
must meet our AO requirements for PPOs.

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

    The MMA made very limited changes to existing MA program 
requirements concerning MA organization relationships with providers. 
Since these aspects of the program have

[[Page 4638]]

worked well, we generally proposed to keep the existing provisions of 
subpart E as they were. The only exceptions, are modifications to the 
physician incentive plan requirements to reflect changes made by MMA to 
section 1852(j)(4) of the Act.
    Below is a summary of the proposed provisions in this subpart that 
were proposed in the August 3, 2004 proposed rule:
     We proposed to remove Sec.  422.208(h) that required that, 
where a physician incentive plan places physicians at substantial 
financial risk, M+C organizations conduct ``periodic surveys of both 
individuals enrolled and individuals previously enrolled with the 
organization to determine the degree of access of such individuals to 
services provided by the organization and satisfaction with the quality 
of such services.''
     We proposed to revise Sec.  422.210 to eliminate the 
requirement that information on physician incentive plans be disclosed 
to CMS.
    Comment: A commenter supported the changes made to the reporting 
requirements in the August 22, 2003 final rule (68 FR 50855). Other 
commenters requested that CMS require plans to submit assurances that 
they are in compliance with the requirements.
    Response: The MMA specifically requires that MA plans provide 
assurances to us that they are in compliance with the physician 
incentive plan requirements. We specified this requirement in the 
regulation text of the proposed rule at Sec.  422.210 and have retained 
it in this final rule. Further details on the assurances will be 
provided in subsequent guidance. As noted in the preamble of the 
proposed rule, the reporting requirement had already been eliminated in 
a final rule published on August 22, 2003 (68 FR 50855). The assurances 
required by MMA are a new requirement that helps to ensure that plans 
are meeting the various regulatory requirements of the physician 
incentive plan section. Plans must provide information on their 
physician incentive plans when requested by us.

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

    Under the current MA regulations, subpart F addresses payments to 
MA organizations, and subpart G discusses beneficiary premiums and cost 
sharing. Given the substantial revisions that the MMA makes to pricing 
and payment rules for MA organizations, we proposed to generally 
replace these subparts in their entirety. Subpart F will cover 
provisions addressing bid submissions and our review of bids and 
subpart G will describe the methodology and process for CMS' payment to 
MA organizations.
    This subpart addresses provisions related not only to submission, 
review, and approval of bids, but also ``bid-to-benchmark'' 
comparisons, including how local and regional benchmark amounts are 
determined and how beneficiary premiums and savings are calculated; how 
beneficiary savings are used for beneficiary rebates and Government 
savings; the various premium payment options available to 
beneficiaries; and the options for distributing the beneficiary portion 
of the rebate.
    We received 60 comments on subpart F in response to the August 2004 
proposed rule. Below we provide a summary of the provisions of this 
subpart and respond to comments. (For a broader discussion of the 
provisions, please refer to the proposed rule.)
1. Basis and scope (Sec.  422.250)
    Proposed Sec.  422.250 set forth the basis and scope of the revised 
subpart F, noting that it was based largely on section 1854 of the Act, 
but included provisions from sections 1853 and 1858 of the Act. Section 
422.250 indicated that subpart F addressed the bidding methodology upon 
which MA payments will be based beginning in 2006 and provisions for 
CMS' negotiation and approval of organizations' bids.
2. Terminology (Sec.  422.252)
    The proposed definitions throughout both subparts F and G were 
intended to reflect the statutory definitions they implement in a 
simplified manner. The following terms were defined in proposed Sec.  
422.252:
     The ``annual MA capitation rate'' is the county rate. As 
set forth at section 1853(c)(1) of the Act, capitation rates are called 
``MA local area'' rates, and references throughout the MMA to 
capitation rates are to county rates (or in the case of end-stage renal 
disease (ESRD) enrollees, to State rates).
     ``MA-PD plan,'' means an MA local or regional plan that 
offers prescription drug coverage under Part D of Title XVIII of the 
Act.
     ``Unadjusted MA statutory non-drug monthly bid amount'' is 
defined as the plan's estimate of its monthly required revenue to 
provide coverage of original Medicare Part A and Part B benefits.
     ``Monthly aggregate bid amount'' is defined as the total 
monthly plan bid for coverage of an MA eligible beneficiary with a 
nationally average risk profile. This bid is composed of: the 
unadjusted MA statutory non-drug monthly bid amount (also called the 
``basic A/B bid''); an amount for coverage of basic prescription drug 
benefits under Part D (if applicable), and an amount for provision of 
supplemental benefits, if any.
     ``Plan basic cost sharing'' means cost sharing that would 
be charged by a plan for benefits under the original Medicare FFS 
program option before any reductions resulting from mandatory 
supplemental benefits.
     ``Unadjusted MA area-specific non-drug monthly benchmark 
amount'' is defined, for local MA plans serving one county, as the 
county capitation rate. For local MA plans serving multiple counties, 
it is the weighted average of county rates in a plan's service area, 
where the weights are the plan's projected enrollment per county.
     ``Unadjusted MA region-specific non-drug monthly benchmark 
amount'' is the sum of two components: the statutory component and the 
plan bid component.
     ``MA monthly basic beneficiary premium'' is the amount 
that an MA plan (other than an MSA plan) charges an enrollee for 
original Medicare benefits if its basic A/B bid is above the benchmark.
     ``MA monthly prescription drug beneficiary premium'' is 
the base beneficiary premium, adjusted to reflect differences between 
the plan bid and the national average bid, less the amount of rebate 
the MA-PD plan elects to apply toward a reduction of the base 
beneficiary premium, as described in proposed Sec.  422.266(b).
     ``MA monthly supplemental beneficiary premium'' is the 
portion of the plan bid attributable to mandatory and/or optional 
supplemental health care benefits described in Sec.  422.102, less any 
rebate applied to a mandatory supplemental benefit under Sec.  
422.266(b)(2).
     ``MA monthly MSA premium'' is the amount of the plan 
premium for coverage of benefits under the original Medicare program 
through an MSA plan, as described in proposed Sec.  422.254(e).
    As a result of our policy decision on the geographic ISAR 
adjustment, presented in the G preamble discussion of Sec.  422.308(d), 
we are making a clarifying change to the definition of MA local area at 
Sec.  422.252.
3. Submission of Bids (Sec.  422.254)
    General rule. The MMA amended section 1854 of the Act to replace 
the adjusted community rate (ACR) proposal system currently in effect 
under the MA program with a bid

[[Page 4639]]

submission process. Proposed Sec.  422.254(a) implemented section 
1854(a)(1)(A) by requiring that no later than the first Monday in June, 
MA organizations must submit bids for each MA plan that they intend to 
offer in the following year (other than MSA plans, which have separate 
requirements), beginning for contract year 2006. Plan bids would be 
required to meet the requirements specified at proposed Sec.  
422.254(b), and bid submissions would be required to include the 
information listed in proposed Sec.  422.254(c).
    Under the previous M+C program, we permitted M+C organizations to 
offer new plans mid-year and to offer mid-year benefit enhancements to 
existing benefit packages. However, in order to maintain the integrity 
of the annual bidding process mandated in statute, we proposed that it 
is no longer appropriate to allow MA organizations to enter the program 
with a new plan mid-year (including service area expansions) or to 
offer mid-year enhancements to an existing plan (which essentially 
represents a redefinition of revenue needs, that is, a new bid).
    Program of All Inclusive-Care for the Elderly (PACE) organizations 
and the MMA bidding methodology. We proposed to exempt PACE 
organizations from the Title II bidding process, so payments for PACE 
plans would be based on MA capitation rates. However, this exemption 
does not apply to Part D drug coverage for PACE enrollees. PACE plans 
will be required to submit bids for providing Part D drug benefits 
(although PACE bids will not be included in the national average 
monthly bid amount), as indicated in Sec.  423.279(a).
    ESRD enrollees. Section 1853(a)(1)(H) of the Act gives us the 
authority to determine if ESRD MA enrollees should be included in the 
MMA bidding process. We proposed at Sec.  422.254(a)(2) that ESRD 
enrollees be fully incorporated into the plan's aggregate bid for 
contract year 2007 and succeeding years. For 2006, we proposed three 
options for pricing Part C benefits for ESRD beneficiaries: exclude 
ESRD costs from the basic A/B bid and the supplemental bid pertaining 
to Parts A and B benefits; exclude ESRD costs from the basic A/B bid 
but include them in the supplemental bid for A/B benefits; and fully 
include End Stage Renal Disease (ESRD) costs in the plan bid. We 
invited comments on specific proposed approaches. (We noted that ESRD 
costs must be included in the Part D bid at the outset, including the 
Part D supplemental bid amount.)
    We noted that regardless of whether or not ESRD enrollee costs are 
included in the plan bid, ESRD enrollees would be subject to the same 
premium and cost sharing as other plan enrollees under the uniformity 
of premiums provision in Sec.  422.262(c). That is, if ESRD enrollees 
were excluded from the plan bid, the rebate (or basic beneficiary 
premium, for a plan with the bid above the benchmark) would be 
determined based on costs for non-ESRD enrollees. ESRD enrollees would 
be subject to cost sharing and premium amounts based on estimated non-
ESRD enrollee costs. Finally, we stated in the proposed rule that if 
the policy chosen were to exclude ESRD enrollees from the 2006 bids, 
for any plan offering a Part B premium reduction to MA plan enrollees, 
the amount of this reduction also would be subtracted from the payment 
for each ESRD enrollee.
    Comment: Two commenters disagreed with any limitation on mid-year 
plan entry (including service area expansions) and mid-year benefit 
enhancement (MYBEs). One of these commenters asked if CMS' proposal 
were implementing statute. Another commenter stated that new mid-year 
plans should be allowed in a market if no other competitors existed in 
the market. One commenter acknowledged that an issue may exist with 
offering Part D benefits in any mid-year plan due to the formula used 
to calculate beneficiary premiums, but recommended that plans that do 
not offer Part D benefits should be allowed to enter at any time. This 
commenter added that nothing in the legislative history of the MMA 
supports CMS' position to limit mid-year plan entry and enhancements.
    Several commenters did not state an objection to the restriction on 
new mid-year plan entry, but believed service area expansions (SAEs) 
should be allowed, to expand the availability of MA plans to Medicare 
beneficiaries. Finally, a number of commenters expressed concern that 
any restriction on offering mid-year plans, including SAEs, would 
undermine the ability of MA organizations to negotiate with employers 
or unions.
    Response: We believe that the MMA both supports and requires the 
annual contracting methodology and the elimination of new mid-year 
plans, mid-year service area expansions and mid-year benefit 
enhancements (with exceptions that are listed below). We will require 
that organizations make their MA bid submissions once a year in June. 
We are retaining in regulation the language from the current MA 
regulations at Sec.  422.306(a)(2), which states that if the submission 
is not complete, timely, or accurate, CMS has the authority to impose 
sanctions under subpart O of this part or may choose not to renew the 
contract.
    We are doing as much as possible to support a competitive bidding 
process by removing uncertainty that would lead to inefficient bids, 
through mechanisms such as the design of the Intra-Service Area Rate 
(ISAR) adjustment, our models for risk adjustment of payments, and our 
policy on what plan expenditures we will include in risk sharing with 
regional plans, which by law must serve all of an MA region. (See the 
discussion on rebatable integrated benefits in subpart J.)
    We do not believe that we should reduce the kind of ``uncertainty'' 
that comes from not knowing what products competitors will offer. This 
type of uncertainty should be a feature of a competitive bidding 
system. An annual plan bidding and entry process supports competitive 
bidding by ensuring an equal playing-field for all organizations. For 
example, MA organizations should not be able to design new plan benefit 
packages open to all beneficiaries in new service areas with post hoc 
knowledge of the regional MA benchmarks and national average drug bid.
    However, after consideration of the public comments, we have 
identified certain exceptions to the end of flow contracting under the 
bidding methodology. (Mid-year plan entry is discussed in this comment, 
and MYBEs are discussed in the following comment.)
    Mid-year plan entry. In general, we will not allow mid-year entry 
of new MA organizations, and new contracts with MA organizations for MA 
plans will be effective only on January 1 of each year beginning on 
January 1, 2006. In general, current MA organizations may not offer new 
plans mid-year, either in a current or new service area. We will still 
allow for applications to be submitted throughout the year, and we will 
make an eligibility determination in time for the next required bid 
submittal date.
    However, we do not wish to discourage new plan offerings in areas 
where there are no MA options for beneficiaries. We also wish to 
support a competitive bidding process, as explained above. Therefore we 
will allow certain exceptions to the policy prohibiting new mid-year 
plans.
    MA plans. The Part D bid is based on a national average of plan 
bids for the year, and the regional plan A/B benchmark is partly based 
on the average of regional plan bids for the region for the year. 
Accordingly, to

[[Page 4640]]

ensure an equal playing-field for all organizations and maintain the 
integrity of the Part D and MA regional benchmarks, we cannot approve 
mid-year regional MA plans because the regional benchmarks are 
established during bid review. We can only make the following 
exceptions for local plans. We may approve a local mid-year MA plan 
whose Part D bid is not included in the national average bid (that is, 
PFFS and cost plans offering Part D benefits, and special needs plans), 
if the plan will be offered in counties where there are no other PDPs 
(except fallback plans) or MA-PD plans. We could also approve a local 
mid-year MA plan that does not offer Part D benefits, if the plan is 
offered in an area with no other MA competitors. We believe that 
allowing mid-year plans could reduce the incentive to bid 
competitively, so we will carefully review applications.
    PACE plans. New PACE organizations will be allowed to offer a PACE 
plan mid-year. As noted elsewhere in this preamble, PACE plans are 
governed by section 1894 of the Act. Under section 1894 of the Act, 
PACE plans must serve individuals who are ``nursing home certifiable,'' 
that is, require the level of care required under the State Medicaid 
plan for coverage of nursing facility services, and PACE plans have 
coverage requirements that differ from the coverage requirements for MA 
and MA-PD plans. Given the statutory requirements for defining the 
PACE-eligible individual, the PACE review and approval process is an 
extended process that requires intensive coordination with States and 
CMS. For this reason, new PACE plans will be exempt from the 
restriction on new-mid year plans, in order to promote coordination of 
Part C and Part D benefits with the benefits PACE plans are required to 
offer under section 1894 of the Act.
    Employer/union group health plans. EGHPs not open to general 
enrollment will be allowed to offer new mid-year plans. Group health 
plans not open to general enrollment include both the ``800-series'' 
employer-only plan and group plans where we directly contract with the 
employer/union offering an MA product. However, an MA plan that enrolls 
both individual beneficiaries and employer/union members (in other 
words, a plan open to general enrollment) will be subject to the rule 
not allowing new mid-year plans (except under limited circumstances). 
As we have done in the past, we will publish separate guidance on 
employer/union group health plans.
    Comment: Several commenters recommended that allowing mid-year 
benefit enhancements (MYBEs) would not affect the integrity of the 
bidding process, at least for original Medicare benefits. One commenter 
stated that plans sometimes find during the year that their benefit 
designs contain a problematic component, and seek to make mid-year 
changes. For example, an organization could discover that a plan co-
payment for a preventive service was the source of widespread enrollee 
dissatisfaction that the plan would like to address, or the 
organization could learn mid-year that the cost assumptions for a 
particular benefit may have been higher than actual costs proved to be, 
and the plan would like to enrich the benefits to account for the lower 
costs. The commenters believe that retaining the flexibility to make 
mid-year changes to adjust for the circumstances could be quite 
beneficial to enrollees and could be done in a way to protect the 
integrity of the bidding process. This commenter recommended that we 
not allow MYBEs during the first quarter of the calendar year to remove 
the incentive to manipulate the process by bidding in June with the 
intention of making later mid-year enhancements to improve the package. 
Finally, several commenters requested that MYBEs be allowed for 
employer group plans, because MA organizations need the flexibility to 
enter into contracts with employer groups at any time during the year 
because employer groups may have plan years that differ from Medicare's 
calendar year cycle.
    Response: We believe that in order to maintain the integrity of the 
bidding process, it is no longer appropriate to allow MA organizations 
to offer MYBEs at any time during the contract year, as they would be a 
de facto adjustment to the benefit packages for which bids were 
submitted earlier in the year. However, in response to public comments, 
we have designed an MYBE policy that we believe allows beneficiaries to 
receive the advantage of mid-year enhancements of non-drug benefits 
while protecting the integrity of the bidding process by reducing the 
incentive to overbid in June. The general rule is that we will allow 
MYBEs to non-drug benefits only under the following circumstances: (1) 
An MYBE can be effective no earlier than July 1 of the contract year, 
and no later than September 1 of the contract year; (2) MA 
organizations cannot submit MYBE applications later than July 31 of the 
contract year; and (3) 25 percent of the value of the MYBE will be 
retained by the government. The MA organization would submit, for each 
plan or segment, a revised bid and any supporting documentation related 
to the enhancement, including information on where the revenue 
requirements were overstated in the annual June bid submission. We will 
consider whether there is a current year MYBE request when analyzing a 
plan's bid for the following year. Continuing current practice, we will 
release guidance on the revised MYBE bid submission, including what 
types of non-drug MYBEs will be allowed and what documentation is 
required, in the annual Call Letter.
    We consider this an interim policy for the initial years of the 
competitive bidding system (when drug benefit and regional plan pricing 
will be new terrain). We will review whether there is a continuing need 
for this policy.
    We will allow the following exceptions to this policy of restricted 
MYBEs:
    PACE plans will be allowed to offer MYBEs to non-drug benefits on a 
flow basis (unrestricted MYBEs), given the special nature of these 
plans and for the reasons specified above with respect to the ability 
of these plans to contract on a flow basis. (Under sections 
1894(b)(1)(A) and 1934(b)(1)(A) of the Act, PACE plans are required to 
offer enrollees a package of benefits tailored to individual needs, as 
determined by the PACE interdisciplinary team. Because PACE enrollees 
may receive additional services at any point in the contract year, we 
note that an enrollee's access to additional benefits mid-year is in 
compliance with existing PACE statutory requirements and therefore in a 
technical sense is not the same as a mid-year expansion of benefits for 
MA plans.)
    Employer and union group health plans. We recognize that employers 
and unions offering group health plans through an MA organization may 
operate on different bidding and negotiation timelines. Employer and 
union group health plans not open to general enrollment will be allowed 
to offer MYBEs on a flow basis. This includes both the ``800-series'' 
employer-only plan and the new type of employer and union plan, where 
we directly contract with the employer and union offering an MA 
product. As noted above, consistent with past practice, we will publish 
separate guidance on employer/union group health plans.
    However, an MA plan will be subject to the restricted MYBE rule if 
it is a plan that enrolls both individuals and employer and union 
members, that is, a plan open to general enrollment. (``Plan'' in this 
context refers to the benefit offering of an MA organization

[[Page 4641]]

under an MA contract. MA organizations may offer multiple ``plans'' in 
a service area under one MA contract, including a mix of plans open to 
any Medicare beneficiary and plans open only to Medicare beneficiaries 
covered under an employer/union retiree plan.). Employers would still 
be free to enhance benefits mid-year for the part of the package that 
is a ``wrap-around'' to the MA plan and that is only available to 
employer and union members. However, it should be noted that ``wrap-
around'' benefits are not technically part of the MA plan.
    Comment: Several commenters were concerned that the MA bidding 
process is inappropriate for Special Needs Plans (SNPs), given the 
unique elements involved in managing the care of high risk and high 
cost beneficiaries. They compared SNPs to PACE organizations, which we 
are excluding from the Part A and B bidding process. They also 
indicated that the MMA explicitly excludes SNPs from the calculation of 
the Part D national average premium, and stated that this exclusion 
should be extended to bidding for Part A and B benefits. These 
commenters are concerned that including SNPs in the bidding process 
could affect participation rates by plans, thereby limiting access for 
beneficiaries to these types of plans. A few commenters also suggested 
that we could use a separate Part A and B benchmark for SNPs in 
recognition of the expanded benefits offered the enrollees in SNPs.
    Response: First, the comparison of PACE plans to SNPs is not 
accurate from a statutory perspective, because PACE plans are governed 
by section 1894 of the Act, which is separate from the statute 
governing the MA program. The fact that PACE plans are governed by a 
separate statutory authority gives us the discretion to exempt PACE 
plans from the MA bidding process. However, SNPs are created under the 
MA statute, at section 1859(a)(6) of the Act. SNPs are coordinated care 
plans, per section 1851(a)(2)(A)(ii) of the Act. SNPs are governed by 
the payment provisions that apply to all coordinated care plans in the 
MA program. Section 1854(a)(6) of the Act requires all MA plans (other 
than MSA plans) to submit aggregate bids: a basic A/B bid, a 
prescription drug bid if applicable, and a supplemental bid, if any. 
Therefore, SNPs cannot be excluded from the bidding process. Moreover, 
SNP are paid under section 1853 of the Act, the same provision as other 
MA plans.
    If the commenter is referring to Medicaid benefits when referring 
to the expanded benefits offered by SNP plans, we would like to 
emphasize that the basic A/B bid is only for coverage of original 
Medicare benefits.
    Comment: Several commenters stated that the actuarially equivalent 
cost-sharing requirement will cause difficulty for SNPs serving dual 
eligibles because the cost-sharing payments made by State Medicaid 
agencies on behalf of dual eligibles are not required to equal the full 
Medicare cost-sharing amount.
    Response: SNPs serving dual eligibles must show in their bids a 
level of cost sharing that is actuarially equivalent to the level of 
cost sharing charged to these beneficiaries under the original Medicare 
program option.
    Comment: Several commenters asked whether and how the MA bidding 
methodology would apply to demonstration plans, including but not 
limited to those serving dual eligibles.
    Response: The application of MA bidding rules to demonstration 
plans depends on the specific demonstration authority. Decisions about 
which demonstrations will be expected to submit bids will be announced 
in the Advance Notice of Methodological Changes for 2006 MA Payment 
Rates, which we expect to publish February 18, 2005 on our website at 
http://www.cms.hhs.gov/healthplans/rates/default.asp.
    Comment: Many commenters recommended that we exclude the costs for 
MA enrollees with ESRD from the bidding methodology for 2006, both for 
the Part A and B bids and the supplemental bids. Commenters stated that 
MA organizations would have inadequate experience with the new ESRD 
payment methodology to submit sound bids in June 2005. A delay in 
including these services in the bid is also desirable to these 
commenters because it removes an added degree of complexity from the 
bidding process at a time when MA organizations are initially becoming 
familiar with the new and otherwise complicated requirements. One 
commenter also stated that ESRD enrollee costs should be omitted from 
both the basic A/B bid and supplemental benefits bid because payment 
for ESRD MA enrollees is based on a different risk adjustment 
methodology such that the meaning of ``1.0'' is different for ESRD than 
non-ESRD enrollees. The commenter added that MA plans are paid for ESRD 
enrollees in accord with a different ``rate book'' that is based upon 
state rates rather than county rates.
    Response: The MMA amended section 1853(a)(1)(H) of the Act to state 
that we ``may apply'' the competitive bidding methodology to MA 
enrollees with ESRD, with appropriate adjustments made through 
application of the ESRD risk adjustment methodology. Since publication 
of the proposed rule, we have modeled bidding and payments under the 
new system, and have developed a way to apply the bidding method to 
ESRD enrollees. This ``merged bid'' method addresses commenters' 
concern that the ``1.0'' national average beneficiary does not mean the 
same under the non-ESRD and ESRD risk adjustment models. Our method 
involves converting non-ESRD and ESRD beneficiary risk scores (which 
are based on different risk adjustment models) into a common metric so 
that all costs for projected enrollees can be combined into a weighted 
average per capita benchmark and a weighted average basic A/B bid.
    Therefore, beginning contract year 2007, we will require that MA 
organizations include costs for ESRD enrollees in their plan bids. As 
discussed above, ESRD enrollees must be subject to the same premium and 
cost sharing as other plan enrollees under the uniformity of premiums 
provision in Sec.  422.262(c), for both original Medicare benefits and 
supplemental benefits. For this reason, we believe that the estimated 
costs for all enrollees should be included in plan bids. We will 
explain the ``merged bid'' method in the 2006 Call Letter for 2007 
contracts and in the 2006 Instructions for Completing the 2007 MA Plan 
Bid Form.
    However, we have concluded that we will not implement the merged 
bid method for incorporating ESRD beneficiary costs into plan bids for 
the 2006 contract year, because of the transition blend requirement for 
payments to aged and disabled MA enrollees. While 25 percent of aged/
disabled MA payments must be based on the demographic model and 75 
percent of payments on the risk adjustment model, 100 percent of ESRD 
payments must be based on the risk adjustment model. Under the bidding 
methodology, the transition payment blend must be reflected in the bid, 
since plans are paid either their bid (plus rebate) or part of their 
bid (benchmark, with the remainder of the bid coming from beneficiary 
basic premiums). We concluded, therefore, that exclusion of ESRD costs 
from plan bids for 2006 would reduce complexity in what will be an 
unfamiliar bidding process. Guidance on excluding ESRD costs from the 
2006 bid will be provided in the 2005 Instructions for Completing the 
2006 MA Plan Bid Form. See the subpart G preamble for information on 
payments for ESRD enrollees.
    Comment: Several commenters recommended that we consider further 
delaying inclusion of costs for ESRD

[[Page 4642]]

enrollees in the basic A/B bid and supplemental bids in years beyond 
2006.
    Response: We believe that, beginning in contract year 2007, it will 
be feasible to implement a merged bid methodology for MA plans where 
non-ESRD and ESRD costs are appropriately weighted together into a 
single bid because 100 percent of MA bids and payments can be based on 
the CMS-HCC risk adjustment models. Moreover, the uniformity 
requirement means that it is to the MA organization's advantage to 
include ESRD enrollees in its bid. ESRD enrollees would be subject to 
the cost-sharing rules and premium amounts based on the plan's 
estimated non-ESRD enrollee costs. For example, if plan bids are 
calculated based only on lower-cost non-ESRD enrollees, MA 
organizations would have their supplemental premium under-funded 
because ESRD beneficiaries are likely to use more of certain 
supplemental benefits such as cost-sharing reductions and drug 
coverage. A significant financial impact may result from plan pricing 
based only on unit costs for services and expected utilization for the 
plan's non-ESRD enrollees.

Bid requirements

    Proposed Sec.  422.254(a) and (b) implement sections 1854(a)(1)(A) 
and 1854(a)(6)(A) of the Act, which set forth requirements for plan 
bids. MA organizations must submit an aggregate monthly bid amount for 
each MA plan the organization intends to offer. We proposed that each 
bid submission for an MA plan represents the MA organization's estimate 
of its average monthly estimated required revenue to provide coverage 
in the service area of the plan for an MA eligible beneficiary with a 
nationally average risk profile; that is, the aggregate bid is a 
standardized bid. This aggregate bid is the sum of several amounts the 
plan estimates are its revenue requirements: (1) the ``unadjusted MA 
statutory non-drug monthly bid,'' to provide original Medicare benefits 
(which we also call the ``basic A/B bid''); (2) the amount to provide 
basic prescription drug coverage; and/or (3) the amount to provide 
supplemental coverage, if any.
    We proposed at Sec.  422.254(b)(2) that each bid would be for a 
uniform benefit package for the service area (or service area segment, 
if applicable, for local plans). Plan premiums and all applicable cost 
sharing would also be uniform.
    We stated in proposed Sec.  422.254(b)(3) that the bid submission 
contain all estimated required revenue, including administrative costs 
and return on investment (profit or retained earnings). We stated that 
a determination that supplemental benefits are appropriately priced is 
essential for the integrity of the bidding process. A plan could 
overstate its revenue needs for covered services with the intention of 
maximizing those payments while under-pricing supplemental benefits to 
make the offering attractive to enrollees. To prevent this kind of 
strategy, we indicated that the accurate pricing of Part A, Part B, and 
Part D benefits and supplemental benefits will have equal importance in 
the bid review process. We will verify the reasonableness of these 
projections as part of the bid review process (in the same way that we 
will verify the reasonableness of plans' projections of enrollment 
numbers and enrollment mix for an optional supplemental product).

Supplemental benefits

    We proposed at Sec.  422.254(b)(3) that when estimating required 
revenue, a plan will include adjustments for the effect that providing 
any non-Medicare benefit has on utilization. We proposed that this 
requirement would apply to both mandatory and optional supplemental 
benefits. In both the Title I and Title II proposed rules, we took the 
position that the basic portion of the bid should represent basic 
benefits only; it should not reflect the utilization impact on basic 
benefits induced by the presence in the benefit package of supplemental 
or enhanced benefits. We proposed that this utilization impact should 
be included in the pricing of supplemental benefits (Title II) or the 
enhanced portion of the bid (Title I). We took this position to ensure 
the integrity of the bid. In other words, when a plan offers a benefit 
package that includes reductions in cost sharing, the pricing of such a 
mandatory supplemental benefit would include not only the cost of 
``buying down'' the cost sharing (that is, the estimated revenue needed 
to cover the amounts enrollees would have otherwise paid as cost 
sharing), but also the cost of financing the expenditures associated 
with the additional utilization resulting from offering the cost-
sharing benefits.
    We also proposed to exercise our authority under section 1856(b) of 
the Act to establish a rule prohibiting MA organizations from offering, 
as optional supplemental benefits, reductions in Part A, Part B, and 
Part D cost sharing, or enhancements to Medicare Parts A and B 
benefits. Under the rule, MA organizations will still be permitted to 
offer non-Medicare benefits, for example, dental and optical services 
as optional supplemental benefits.
    We stated in proposed Sec.  422.254(b)(4) that the bid amount is 
for plan payments only but must be based on plan assumptions about the 
amount of estimated revenue required from enrollee cost sharing. The 
estimate of plan basic cost-sharing for plan basic benefits must 
reflect the requirement that the level of cost sharing MA plans charge 
to enrollees must be actuarially equivalent to the level of cost 
sharing (deductible, copayments, or coinsurance) charged to 
beneficiaries under the original Medicare program option.
    Comment: A number of commenters disagreed with CMS' proposal that 
MA organizations develop a supplemental bid reflecting the effects on 
utilization of Part A and B services of providing non-Medicare covered 
benefits. First, most commenters stated that the benchmark, which is 
the maximum amount we will pay for coverage of Part A and B benefits, 
reflects Medicare FFS costs. Medicare carriers and intermediaries make 
payments for Medicare Part A and B services based on fee schedules 
without regard to whether the beneficiaries have supplemental coverage. 
According to the commenters, because most Medicare beneficiaries have 
some form of private or governmental supplemental coverage that has an 
impact on these costs, the MA benchmark also reflects this impact. The 
commenters believe that because ``induced demand'' is already accounted 
for in the benchmark, requiring plans to shift these costs to the 
supplemental benefit package would result in a misalignment of the 
relationship between the basic A/B bid and the benchmark.
    Second, several commenters recommended that allocation of costs to 
the supplemental bid may have a tangible effect on the MA organization 
and on beneficiaries. To the extent that the MA plan's Part A and B bid 
is below the benchmark, moving these costs from the basic A/B bid to 
the supplemental bid increases the amount of savings, and increases the 
supplemental premium by the same amount. However, because we retain 25 
percent of the savings, the rebate dollars will not fund 100 percent of 
the increase in the supplemental premium attributable to these costs. 
Thus, the proposed policy is likely to produce an increase in the 
aggregate beneficiary premium. In contrast, if utilization is included 
in the basic portion of the bid, basic bids will be higher and bid and 
premiums for supplemental benefits will be lower.
    Third, commenters also were concerned that there are no existing 
standards to evaluate the effect that

[[Page 4643]]

providing non-Medicare benefits has on utilization and therefore on 
premiums and competition. For example, one commenter noted that 
frequently there are multiple impacts from a single benefit change. For 
example, lower primary care physician (PCP) copays may drive higher 
utilization among primary care physicians; however, it may also help 
result in lower specialist, hospital and prescription drug utilization. 
Several commenters concluded that it would be impossible to apply this 
requirement uniformly and therefore equitably.
    One commenter noted another barrier to uniform application of this 
requirement: a large portion of an MA plan's enrollment will have 
supplemental coverage through a source other than the MA organization 
(for example, Medicaid, other government programs, employee benefit 
plans, Medigap plans), and these incremental, additional costs will 
necessarily be reflected in the level of the basic A/B bid. Therefore, 
this requirement would result in an uneven playing field among 
competitors. Finally, another commenter asked where plans will obtain 
data to make these adjustments and whether additional adjustments would 
be needed for potential adverse selection.
    Response: We believe that the pricing of the supplemental benefit 
is critical to the integrity of the bidding process. For this reason, 
we proposed that when a plan offers a benefit package that includes 
reductions in A/B cost sharing, the price of the supplemental benefit 
would include not only the cost of ``buying down'' the cost sharing 
(that is, the estimated revenue needed to cover the amounts enrollees 
would have otherwise paid as cost sharing), but also the cost of 
financing the expenditures associated with the additional utilization 
resulting from offering the cost sharing benefits. We believe it was 
important to align pricing policies for medical benefits (in the MA 
rule) and drug benefits (in the Part D rule).
    We recognize, however, that it can be very difficult to disentangle 
the effects of induced utilization from the effect of plan management 
of utilization of medical benefits. For Parts A and B benefits, the 
effect of induced demand may be insignificant. For example, it is 
reasonable to recommend that there is no induced demand for hospital 
services or skilled nursing facility (SNF) (additional hospital 
admissions) because of plan utilization management of those services. 
Thus, it is unlikely that a change in cost sharing (up or down) would 
create or reduce utilization of hospital or SNF services. On the Part B 
side, induced demand here may also be quite limited due to plan 
utilization management. In contrast to Part A and B benefits, there is 
likely to be induced demand for Part D benefits, especially for those 
individuals who will be receiving new coverage. Also, there is likely 
to be some induced demand if supplemental benefit options are provided 
that reduce the initial deductible or fill in part of the what is 
lacking in the standard Part D package. We further recognize that there 
are no universal actuarial standards for separating these effects. 
Therefore, after discussion of the public comments and further 
analysis, at this time we will not require that the non-drug portion of 
the supplemental bid be adjusted to include expenditures associated 
with induced demand for Medicare-covered benefits resulting from 
offering cost sharing reductions.
    Therefore, in this final rule, we are deleting the sentence at 
proposed Sec.  422.254(b)(3) that plan assumptions about revenue 
requirements must include adjustments for the utilization effects of 
non-drug cost sharing reductions. As we indicate in responses to 
comments below, we will not implement this aspect of estimating revenue 
requirements for the Part A and B benefits through rule making. 
However, we have the authority to refine guidance in the future on how 
MA organizations should estimate their revenue requirements under Sec.  
422.254(b). For the Part D benefit, the bid amount must reflect an 
adjustment for the effect that providing alternative prescription drug 
coverage (rather than defined standard drug coverage) has on drug 
utilization. Costs associated with any increased utilization must be 
included in the price of the drug portion of the supplemental bid for 
MA-PD plans. (See proposed Sec.  423.265(d)(2) and the discussion in 
the F preamble of August 3, 2004 proposed rule for the Medicare 
prescription drug benefit.
    As discussed below, we intend to analyze the effects of induced 
demand in the near future and will review this policy.
    Comment: One commenter suggested that we delay implementation of 
this requirement concerning pricing induced demand in the supplemental 
package for a period of 2 years (until 2008) for both regional PPO and 
local plans. Another commenter was concerned about the short timeframe 
for a 2006 implementation of this proposal and made the following 
suggestions for implementation: (1) we develop a standard data set or 
set of utilization assumptions and distributions with which to quantify 
the utilization impact; and (2) plans should have the option of using 
those assumptions in their bid or plan-specific assumptions that are 
actuarially justified.
    Response: As indicated above, we are withdrawing our proposal. 
However, we believe that improvements can be made in the accuracy of 
pricing supplemental benefits. We intend to conduct analysis in the 
near future using accumulated bidding and payment data, because we 
believe that over time it is possible to develop factors for the MA 
program that could be applied to estimate the cost of induced demand.
    Comment: Some commenters stated that this requirement, coupled with 
the actuarially equivalent cost sharing requirement at section 
1852(a)(1)(A), would cause particular difficulty for Special Needs 
plans (SNPs). Attribution of ``induced demand'' costs to the A/B 
benefit package would increase the cost of the bid and reduce potential 
savings, and shifting these costs to the supplemental benefit package 
would result in increased premium costs for SNP beneficiaries, because 
SNP cost structures may limit opportunities for rebates. Limited 
rebates also could result in cost shifting to plans or, in the case of 
duals, to States that cover cost-sharing amounts.
    Response: As noted above, we are withdrawing this proposal. This 
withdrawal applies to all MA plans, including SNPs.
    Comment: Two commenters disagreed with our proposed rule 
prohibiting MA organizations from offering, as optional supplemental 
benefits, reductions in Part A, Part B, and Part D cost sharing, or 
enhancements to Medicare Parts A and B benefits. One commenter 
requested that we continue to permit the flexibility of offering 
reductions of Parts A, B, and D cost sharing as optional supplemental 
benefits, because offering separate plans requires separate bids, 
system enhancement, and modification of enrollment and eligibility 
procedures. The other commenter requested that we make an exception to 
this rule for employer group plans.
    Response: First, under Part D, optional supplemental benefits do 
not exist. Under Sec.  423.265(c), we are requiring that enhanced 
alternative coverage be a uniform package for all enrollees. Second, in 
terms of Part A and Part B benefits, we would exclude from this 
requirement employer and union group health plans that are not open to 
general enrollment, which includes both the ``800-series'' employer-
only plan and the new type of employer and union plan, where we 
directly contract with the employer and/or union offering an MA 
product.

[[Page 4644]]

 However, an MA plan that enrolls both individuals and employer and 
union group health plan members (in other words, a plan open to general 
enrollment) would be subject to the restricted optional supplemental 
policy. Employers would still be free to fund ``wrap-around'' optional 
supplemental benefits that would be only available to employer/union 
members. The ``wrap-around'' benefits are not technically part of the 
MA plan.
    MA organizations would still be able to provide choice by offering 
multiple plans within the same service area that have different 
mandatory supplemental benefits. Many MA organizations take this route 
today.
    Comment: Several commenters support the proposed policy that MA 
bidders submit a single bid amount in 2006 based on the blending of the 
demographic and risk adjustment payments as required under Sec.  
422.308(c)(2)(ii)(B). The reasons cited are the administrative and 
analytic complexity of developing two bids to be compared against two 
different benchmarks.
    Response: We will provide instructions for determining a blended 
bid, in the Instructions for Completing the MA Plan Bid Form. 
Information regarding payments based on blended bids will be provided 
in the Advance Notice of Methodological Changes for MA Payment Rates.

Actuarial equivalence

    In the August 2004 proposed rule, we discussed at length how to 
implement the requirement at Sec.  422.254(b)(4) to determine an 
actuarially equivalent amount of cost sharing. MA plans must provide 
Medicare-covered benefits to enrollees. The MMA amended section 
1852(a)(1)(B) of the Act to include the term ``benefits under the 
original Medicare FFS program option,'' which are defined as those 
items and services (other than hospice care) for which benefits are 
available under Parts A and B to individuals entitled to benefits under 
Part A and enrolled under Part B, with cost-sharing for those services 
as required under Parts A and B or an actuarially equivalent level of 
cost-sharing as determined in this part.'' (Cost sharing refers to 
service-specific cost sharing for Part A and Part B benefits; it does 
not include a beneficiary premium.)
    First, we discussed the current approach, the national uniform 
dollar amount. The MMA provision on determining whether a rebate is 
applicable is similar to a provision that continues to apply to MA 
plans through 2005, dealing with the determination of ``excess 
amounts'' used to fund extra benefits. Before 2006, when Medicare 
payments (based on administratively-set amounts) exceed the revenue a 
plan needs for providing the Medicare benefit, the plan must ``return'' 
the excess amount to enrollees in the form of extra benefits (or cost 
sharing reductions). An excess amount exists if CMS' average capitation 
payment for the plan exceeds the adjusted community rate, taking into 
account cost sharing for Medicare services that is the responsibility 
of the enrollees. Through 2005, all plans are required to use a uniform 
national figure that we provide as the amount to be subtracted from 
their computed revenue needs for the Medicare benefit package to 
determine the excess amount. The uniform national dollar amount 
represents our projection of the monthly actuarial value of Medicare 
coinsurance and deductibles (that is, the amount, on average, of cost-
sharing expenses beneficiaries incur in receiving Medicare services 
across the nation).
    We recognized that this approach does not adequately recognize 
geographic variations in cost sharing, cost differences among private 
health plans, and utilization and price differences between private 
plans and FFS Medicare. It distorts the statement of revenue needs of a 
plan. If a plan operates in a high-cost area, the national actuarial 
value of cost sharing may understate cost sharing in the area, while in 
low cost areas, cost sharing is overstated.
    We proposed several alternative approaches to defining an 
actuarially equivalent amount of cost sharing for the basic A/B bid 
amount: (1) localized uniform dollar amount; (2) plan-specific 
approach; and (3) proportional approach. In this final rule, we also 
make a clarifying change to Sec.  422.254(c)(5) to reflect the 
statutory requirement.

Localized uniform dollar amount

    We would publish localized (for example, county-level or MSA-level) 
cost-sharing values, and an MA organizations would determine its basic 
A/B bid for a plan by subtracting the appropriate geographically 
weighted average of these cost sharing values for the plan's service 
area from the plan's stated revenue needs. The local cost sharing 
values would be based on actual per-beneficiary FFS cost sharing, 
projected to the contract year and standardized to a 1.0 risk score.

Plan-specific approach

    The MA organization would use its own pricing and utilization 
assumptions to determine a basic A/B bid for its plan, as if the plan 
were offering Medicare-only benefits under Medicare cost sharing rules 
or an actuarially equivalent structure. A cost-sharing structure would 
be actuarially equivalent if the projected average cost sharing as 
percent of the sum of average cost sharing and projected average plan 
payout equals the percentage using Medicare's cost-sharing rules, based 
on the projected experience of the same group and using the same 
pricing assumptions. The average amount of cost sharing and the average 
plan revenue requirements for the assumed basic A/B package would then 
be adjusted to reflect cost-sharing and plan requirements based on an 
enrollee with a national average risk profile. The adjusted plan 
revenue requirements would serve as the organization's basic A/B bid.

Proportional approach (including national, regional, or local 
proportions)

    Actuarial equivalence under this approach would be met if the ratio 
of a plan's cost sharing amount for the basic A/B bid to the total cost 
of plan benefits equals this proportion under original Medicare. For 
example, if the national average actuarial value of cost sharing under 
original Medicare in a year were 16.8 percent of the total (value of 
cost sharing plus value of benefits, using the actual 1999 figure for 
Medicare), then an MA plan would have to offer a basic A/B bid based 
upon a plan basic cost-sharing amount that is 16.8 percent of total 
costs. We would announce the projected percentage of total expenditures 
that represent cost sharing in the same way that we currently announce 
the national average actuarial value of Medicare cost sharing as part 
of the rate announcement for private health plans. To address the issue 
of geographic variation in cost sharing, we proposed regional or local 
proportions over national proportions. While a fixed national 
proportion recognizes variation in expenditures at the health plan 
level, even within FFS Medicare there is significant variation by area 
in the cost-sharing proportion, for example, for Part A ranging from 13 
to 20 percent in 1999 (compared to the national average of 16.8 
percent).
    We further proposed breaking regional or local proportions into 
service-specific proportions of cost sharing applied to the different 
categories of expenditures health plans would have (for example, Part A 
versus Part B, or further disaggregated into inpatient, SNF, home 
health, physician, and/or outpatient).

[[Page 4645]]

    We received a number of comments on the issue of actuarial 
equivalence, revealing a range of opinion. A few commenters recommended 
the local uniform dollar amount method, several recommended the plan-
specific method, and some preferred the proportional method. Some 
commenters did not specify a choice but recognized the importance of 
accounting for regional variation in costs, with some expressing 
concern about the plan-specific method.
    Comment: One commenter stated that CMS should retain the current 
uniform absolute dollar method. However, the commenter believes that 
CMS should adjust from national to local dollar amounts. The commenter 
believes that this aspect of the program, which is familiar to the 
industry, should remain constant given substantial changes to plan 
reimbursement under the MA program and the introduction of competitive 
bidding. The commenter also recommended that the plan-specific approach 
creates the possibility that the projections will be inaccurate and 
result in unfair cost-sharing burdens on members and hospitals. Thus, 
the proportional method may suffer from the same flaw, as it also 
relies on plan pricing assumptions.
    The plan-specific method drew the most commentary from those in 
favor of and those opposed to this approach. Several commenters felt 
the plan-specific method would be the most precise because it was based 
on each plan's own utilization and pricing estimates, reflects the 
different mix of services in managed care versus FFS Medicare, and 
would be most administratively efficient since it is based on data 
readily available.
    Several commenters objected to the plan-specific method. One 
commenter felt this approach would allow MA organizations to use 
unreasonable assumptions, and another commenter objected because it 
would disadvantage organizations that tightly manage care and/or have 
more efficient provider networks. Commenters objecting to the plan-
specific approach supported beneficiary cost-sharing rules that require 
the same dollar amount of cost sharing across all affected plans in a 
local geographic area rather than any method that would allow variation 
by plan.
    Response: There are two basic principles behind Section 
1852(a)(1)(B) of the Act. First, the MA program must reflect a feature 
of the Medicare program, that a certain share of the cost of covered 
care is to be borne by beneficiaries (or third parties paying on behalf 
of beneficiaries), and not the government. Therefore the MA enrollee's 
share of costs will not be financed by government funds in the bidding 
system, unless rebate dollars are available. Second, for competitive 
bidding, the determination of whether a rebate (bid below benchmark) or 
a premium (bid above benchmark) is applicable to a plan must be based 
on an ``apples-to-apples'' comparison of the same set of benefits (Part 
A and Part B benefits) reflecting a specific cost-sharing structure.
    Section 1852(a)(1)(B) of the Act affects how MA organizations 
develop their basic A/B bids. It does not determine what a plan's 
actual cost-sharing structure will be, because a plan can have an 
actuarial value of cost sharing that is less than that under original 
Medicare.
    However, actual average per-member-per-month (PMPM) cost sharing 
under any plan offered by an organization cannot exceed the actuarial 
value of the FFS average. (This limit on actual in-plan cost sharing is 
a continuation of the pre-existing M+C provision except that, unlike 
the earlier M+C provision, the limit on the cost sharing does not 
include the premium.) Also excluded from this limit, and excluded from 
the Part A and Part B cost-sharing computation in the bid, is any cost 
sharing for Part A and Part B benefits that enrollees of MA regional 
plans obtain from non-network providers (because section 
1852(a)(1)(B)(ii) of the Act specifically excludes out-of-network cost 
sharing (section 1858(b)(2)) from the determination of the 
``actuarially equivalent level of cost-sharing with respect to benefits 
under the original Medicare fee-for-service program option''). We have 
made a change to Sec.  422.254(b)(4) to conform the regulation to the 
statutory provision.
    After further analysis, we do not support the use of localized 
dollar amounts. This approach shares a key problem with the national 
uniform dollar amount. An average absolute dollar amount would be too 
small for some plans in a local area or region (leading to shortfalls 
in rebates that could otherwise be used to fund supplemental benefits), 
yet too large for other plans (leading to bids lower than a plan's 
estimated revenue requirements). In either case, the distortion we are 
seeking to minimize would remain.
    We believe the proportional approach is the best approach, based on 
local proportions that are service-specific. This approach supports the 
MMA goal of making ``apples to apples'' comparisons among basic A/B 
bids, which creates a level playing field because all MA organizations 
in a market area must apply the same standards.
    This approach has the advantage over the local uniform dollar 
amount because plan pricing assumptions are built into the total value 
of the benefit package. Also, plans that efficiently manage care would 
be disadvantaged by local uniform dollar amounts because these amounts 
would overstate cost-sharing revenue, thus lowering the plan bid and 
resulting in larger rebates than the plan could actually ``afford.''
    We believe the proportional approach is more straightforward to 
understand and implement than the plan-specific approach, which is 
crucial in the context of a bidding methodology that must build in 
several complex adjustments (for example, the geographic ISAR 
adjustment). The plan specific method is more precise (in that it 
reflects not only plan pricing but also plan utilization assumptions) 
but it is the most complicated method because it requires organizations 
to figure out the utilization effects of a cost-sharing structure they 
likely will not use in order to determine how plan payout and member 
cost sharing would change if the package were based on original 
Medicare cost sharing.
    Comment: Several commenters requested that we consider using, for 
each local area or region, proportions by service category. The 
commenters believe that this refinement would yield proportions more 
closely reflecting the cost sharing associated with the mix of services 
used in these areas and could, therefore, result in a more accurate 
projection of the actuarially equivalent costs sharing in each 
geographic area.
    Response: We agree with the commenters and intend to incorporate 
service-specific categories in the bid pricing tool. We are considering 
the following approach. Each year the Office of Actuary (OACT) would 
publish five proportions for each county representing average FFS cost-
sharing: Part A inpatient hospitalization; Part A SNF; Parts A & B home 
health; Part B outpatient facility; Part B, all other. We will provide 
guidance on the proportional method and details on the service 
proportions in the Instructions for Completing the MA Plan Bid Form.
    Comment: Two commenters also suggested that we allow MA 
organizations to choose whether to use the plan-specific or 
proportional method.
    Response: We do not support the idea of allowing MA organizations 
to choose which method to use when estimating their MA bids. This would 
create further complexity in a complex bidding process. For example, it 
could create

[[Page 4646]]

confusion in bidding because each method could interact differently 
with the other rate and payment adjustments required under the MMA. It 
also would make it difficult for us to apply consistent standards in 
our bid review process. We want to set a single standard that applies 
to all MA organizations because we believe that is the intent of the 
statute and it ensures everyone is subject to the same rules.
    Comment: Several commenters recommended that if we select the 
proportional method, the proportions should be established for each 
local area or region and also disaggregated by service category (for 
example, inpatient hospital cost sharing versus physician cost 
sharing). This refinement would yield proportions that will more 
closely reflect the cost sharing associated with the mix of services 
used in these areas and could, therefore, result in a more accurate 
projection of the actuarially equivalent costs sharing in each 
geographic area. If we select the proportional method, one commenter 
stated opposition to the development of proportions based on 
assumptions of how health plan enrollees generally use services, 
because it would be difficult for us to develop a distribution of 
services that would be consistent with the experience and practices of 
individual plans.
    Response: We agree that further disaggregation of local or regional 
proportions by service category would result in proportions that are 
more accurate. See the discussion above for our proposed approach. 
Details on the method and the proportions for 2006 will be published in 
the Advance Notice of Methodological Changes for MA Payment Rates, 
which we expect to be released on February 18, 2005 on the CMS website 
at http://www.cms.hhs.gov/healthplans/rates/default.asp

Information required

    Proposed Sec.  Sec.  422.254(c) and (d) would implement section 
1854(a)(6)(A) of the Act by setting out the information MA 
organizations must submit for coordinated care plans and PFFS plans. 
Proposed Sec.  422.254(e) specified information that must be submitted 
for MSA plans.
    Proposed Sec.  422.254(c) established that, in addition to 
submitting an aggregate bid amount, MA organizations must submit the 
proportions of the aggregate bid attributable to coverage of Part A and 
Part B benefits, Part D basic benefits, and supplemental coverage. They 
must also identify the plan type, projected enrollment, any capacity 
limits, the actuarial bases for determining the bid amounts and 
proportions, information on the plan's cost sharing, including the 
actuarial value of deductibles, coinsurance, and co-payments, and 
information required to calculate risk corridors for regional plans for 
2006 and 2007. Additional information required on drug coverage was 
proposed at Sec.  423.265, which implements section 1860D-11(b) of the 
Act.
    In the final rule, we added Sec.  422.254(c)(9) to address 
information requirements for the geographic Intra-Service Area Rate 
(ISAR) adjustment. See the G preamble discussion of Sec.  422.308(d) 
regarding our policy decision on the geographic ISAR adjustment.
    Under proposed Sec.  422.254(d), for MA organizations required to 
provide a monthly rebate because the plan bid is less than the plan 
benchmark, the organization must submit information to us about how 
this rebate would be allocated across the statutorily mandated options 
specified at Sec.  422.266(b). All rebate dollars must be applied to a 
mandatory supplemental benefit.
    Since MA regional plans may serve multiple regions, and each region 
is a separate service area, section 1854(a)(1)(C) of the Act requires 
us to encourage the offering of regional plans by developing procedures 
to allow MA organizations to file consolidated information for multi-
region MA plans (including national plans). We believe our new bid 
pricing tool will capture MA pricing information in an efficient manner 
and reduce filing burden for all MA organizations, including those 
offering national plans. Much of the supporting documentation required 
for the Adjusted Community Rate Proposal (ACRP) will no longer be 
required. Specifically, we will no longer collect commercial pricing 
and corporate financial data, and the number of cost-sharing categories 
has been reduced. In addition, the electronic bid form includes data 
elements that were filed paper format for the ACRP process, for 
example, actuarial utilization and cost data, trends in medical 
expenses, and non-medical expense projections. We are committed to 
working with organizations to reduce duplicative information in the 
application, bidding, and contracting process. For example, we would 
expect that a single legal organization offering an MA regional plan in 
more than one region would submit much the same legal and 
organizational information for all regions, with the main differences 
being the provider networks. We expect the application process to be an 
area where paperwork burden can be reduced. Ideas for consolidating 
regional filings that are under development include a master contract, 
a single actuarial certification covering multiple bids, and 
consolidated supporting exhibits across regional bids where there are 
common elements (for example, the development of manual rates). We will 
continue to identify ways to consolidated filing as the program 
develops.
    In addition, we will apply the projected revenue and medical 
expense values (including administrative expenses) captured by the MA 
bid pricing tool to calculate the risk corridor amounts used to 
determine risk-sharing payment adjustments for regional MA plans for 
contract years 2006 and 2007. See the subpart J preamble for the 
discussion of risk sharing on costs of providing original Medicare 
benefits and rebatable integrated benefits. See the Advance Notice of 
Methodological Changes for Medicare Advantage Payment Rates for 
guidance on information to submit for determination of risk sharing 
payments.
    Finally, section 1854(a)(6)(A)(iii) of the Act gives us the 
authority to require information in addition to that listed above to 
allow us to verify the actuarial bases for plan bids. We expect to use 
the authority given us under this provision in two ways. First, our 
review of an organization's bid submissions may identify problems that 
would trigger our request for additional, more detailed information 
(for example, data the MA organization used on average utilization and 
pricing to model the expected distribution of costs in the plan bid). 
We would not want to require such detail for every plan bid in the 
initial submission, and we are confident that forthcoming bid 
submission guidance (in the annual Instructions for Completing the MA 
Plan Bid Form) will limit the occurrences of our requests for 
additional data. Second, as we did with the ACRP tool for the M+C 
program, we expect to make annual updates to the bid pricing tool. The 
updates may or may not involve changes to the information required to 
verify actuarial bases of the bid. We will announce the updates in the 
annual Call Letter.

Special rules for MSA plans

    Proposed Sec.  422.254(e)(2) would implement sections 1854(a)(3) 
and 1854(b)(2)(D) of the Act by indicating that bids are not required 
for MA MSA plans. That is, MA organizations will not complete the bid 
pricing tool developed for non-MSA plans. However, for MSA plans MA 
organizations must file a bid submission with information on coverage, 
the

[[Page 4647]]

enrollment capacity, the monthly MSA premium amount, which is the 
amount of revenue the plan requires to offer original Medicare benefits 
(analogous to the basic A/B bid for other MA plans). MA organizations 
must also submit the amount of the MSA deductible, and the beneficiary 
supplemental premium, if any. MSA plans are prohibited from offering 
Part D coverage (although MSA enrollees may choose to enroll in a 
prescription drug plan).
    Comment: One commenter recommended that we consider allowing MA 
organizations to subsidize the Part D premium for dual eligible 
beneficiaries with revenue from the medical benefits part of the MA-PD 
plan.
    Response: We believe the commenter's phrase ``the medical benefits 
part'' is referring to Part A and B benefits. MA organizations offering 
the Part D benefit may fund a reduction in the Part D premium with 
rebate dollars, pursuant to section 1854(b)(1)(C)(ii)(II) of the Act, 
and as proposed at Sec.  422.266(b)(2). However, the resulting premium 
amount must be uniform for all members of the plan, in accordance with 
section 1854(c) of the Act. A plan may not offer an additional premium 
reduction only to a subset of members (for example, dual eligible 
beneficiaries).
    Comment: One commenter asked that we clarify the ``enrollment 
assumptions data requirement,'' that is, how these assumptions will be 
used in computations and how errors in them will be corrected over 
time. The commenter believes that our assumption about a plan's 
enrollment mix will be a critical competitive factor in determining how 
rebate dollars are used to buy mandatory supplemental benefits and/or 
how beneficiary premiums for mandatory supplemental benefits are set. 
Our oversight on this issue will be vital to ensure a level playing 
field.
    Response: See the discussion in the subpart G preamble on the 
geographic Intra-Service Area Rate (ISAR) adjustment, which takes into 
account the difference between the distribution of enrollment across 
counties in the plan's service area assumed in the plan's bid and the 
actual geographic mix of enrollment at the time payment is made. Also, 
we will release detailed guidance on the bidding methodology in the 
Instructions for Completing the MA Plan Bid Form and the Call Letter. 
Information on the payment methodology, including the ISAR adjustment, 
will be provided in the Advance Notice of Methodological Changes for 
Medicare Advantage Payment Rates, published annually on our website at 
http://www.cms.hhs.gov/healthplans/rates/default.asp.
    Comment: Several commenters supported development of procedures for 
MA organizations to file consolidated bid information for multi-
regional plans, including national plans, and believe that this will 
facilitate the offering of regional plans.
    Response: In light of the statutory mandate to allow consolidated 
bids for multi-regional plans, we are committed to allowing bid 
consolidation where appropriate. However, in order to maintain the 
integrity of the bid submission and review process, section 
1854(a)(1)(A) of the Act requires MA organizations to submit a bid for 
each MA region. However, we believe our new bid pricing tool will 
capture MA pricing information in an efficient manner and reduce filing 
burden for all MA organizations, including those offering national 
plans. See the discussion above for examples of burden reduction in the 
new bid pricing tool.
    Comment: A few commenters recommended that we establish streamlined 
documentation requirements for MA organizations to follow in supporting 
the actuarial basis of their bids. The commenter requested that these 
requirements strike a balance between providing us with sufficient 
information to review the bid and ensuring that MA organizations are 
not burdened with onerous requirements.
    Response: We support the commenters' position that the requirements 
built into the new bid pricing tool and supporting documentation should 
be thorough enough to allow a fair and accurate review of bids but 
should avoid undue burden. See the discussion above regarding the new 
bid pricing tool MA organizations will use for bid submission. Most of 
the supporting documentation required for the ACRP will no longer be 
required. For example, we will no longer collect commercial pricing and 
corporate financial data, and the number of cost-sharing categories has 
been reduced.
    Comment: Several commenters are interested in having bid formats, 
documentation requirements for submission and criteria for actuarial 
substantiation as early as possible to assist in the bid preparation 
and to minimize the uncertainty in dealing with employer retiree groups 
and other contractors, including providers. One commenter stated that 
our negotiation and approval process will be completed later than most 
plans' rate quotes to employer retiree groups for the following 
contract year. To the extent that MA organizations must negotiate 
changes to retiree premiums, benefit packages and our payments after 
these organizations have provided rate quotes to employer groups, this 
destabilizes the MA organization's relationship with, and reduces its 
appeal to, employer groups. The commenter indicated that early and 
clear expectations of plans' documentation requirements for submission 
would help to minimize this.
    Response: We have been working hard to develop all aspects of the 
new bidding methodology to ease the transition for all parties. In 
December 2004, we released for public comment drafts of the drug and 
non-drug bid pricing tools that will, with the plan benefit package, 
constitute the annual June bid submission, with the intention of 
developing the new program. We do recognize the special circumstances 
surrounding the offering of employer and union group health plans 
(EGHPs), and as noted above, we will release separate guidance 
regarding EGHPs.
    Comment: One commenter strongly objected to the proposed regulatory 
requirement that MA organizations that have Part B-only enrollees 
submit a separate bid for these enrollees. Some MA organizations have 
only a handful of these members and the cost of preparing a separate 
bid is very substantial. The commenter recommended that we identify a 
means for bidding organizations to submit their Part B-only enrollee 
bid in conjunction with another bid. The commenter recommended this 
approach so that MA organizations are relieved of the administrative 
burdens of submitting two bids for their enrollee population while the 
underlying objectives of the bid process are still accomplished.
    Response: The requirement at Sec.  422.254(f) is substantially the 
same language as the previous Sec.  422.310(a)(3) for the M+C program. 
Preparation of a separate adjusted community rate (ACR) for Part B-only 
enrollees is a long-standing policy, and we do not see a basis for 
changing the existing policy. We have made editorial changes to the 
text at Sec.  422.254(f) to conform it to the previous Sec.  
422.310(a)(3).
    There are two types of Part B-only enrollees: current members of 
employer or union group health plans and Part B-only enrollees 
``grandfathered'' from pre-1999 risk contracts. Since 1998, only those 
beneficiaries who are members of employer or union groups have been 
allowed to elect a Part B-only plan. However, section 1876(k)(2) of the 
Act created ``grandfathered'' Part B-only enrollees by permitting a 
Part B-only beneficiary enrolled with an

[[Page 4648]]

organization under a section 1876 risk contract on December 31, 1998 to 
continue enrollment with that organization if that organization had 
entered into an M+C contract effective January 1, 1999.
    Our operational policy has recognized that the number of 
``grandfathered'' beneficiaries has been decreasing over time, and in 
the past we have provided guidance on grandfathered enrollees in the 
annual Call Letter, including an option to simplify rate filing. Call 
Letters from prior years with guidance on grandfathered Part B-only 
enrollees can be found on our website at http://www.cms.hhs.gov/healthplans/acr/. We will continue to provide guidance regarding this 
policy in the Call Letter.
    Comment: A number of commenters asked questions about the 
procedures for bidding. For example, a few commenters asked how we will 
define administrative expenses in the bid pricing tool, and whether the 
definitions will be the same for Part C and Part D. Other examples are 
whether we would allow rounding of premiums after adjustments to the 
allocation of rebate dollars, and how MSA plans could provide risk 
adjustment data for payment.
    Response: As in the past, we will address questions on the 
procedural details of bidding in the Instructions for Completing the MA 
Plan Bid Form and the Call Letter.
4. Negotiation and Approval of Bids (Sec.  422.256)

Authority to review and negotiate bids

    The provisions in proposed Sec.  422.256 would implement section 
1854(a)(6)(B) of the Act, which provided us with the authority to 
negotiate the monthly aggregate bid amount and the proportions of the 
aggregate bid attributable to basic benefits, supplemental benefits, 
and prescription drug benefits. The MMA grants us the authority to 
negotiate bids that is ``similar to'' the statutory authority given the 
Office of Personnel Management (OPM) to negotiate with respect to 
health benefits plans under the FEHBP program.
    Chapter 89 of Title 5 gives OPM broad discretion to negotiate 
prices and levels of benefits. We believe that the Congress used 
``similar to'' in the statute to recognize the differences between the 
FEHBP and the MA program. For example, the OPM authority applies to 
negotiating the level of plan benefits, while MA plans must offer, at a 
minimum, benefits covered under the original Medicare program, which 
are defined in law. Also, the authority to negotiate payment rates 
would seem to be limited for the MA program by other provisions of the 
MMA (for example, statutory formulas for determining benchmarks, 
premium and rebate amounts, and payments to plans.)
    However, MA plans are able to modify the cost sharing for Medicare 
Parts A and B benefits via supplemental benefits. We have the authority 
to negotiate the level of the supplemental benefits as part of ensuring 
that the bid is not discriminatory, as described in section 1852(b)(1) 
of the Act and implemented at proposed Sec.  422.100(f)(2) and Sec.  
422.110. Further, in situations where we have questions about the 
assumptions used for a plan bid, we have the authority to negotiate 
with the MA organization regarding the appropriate assumptions and the 
resulting rebate and/or supplemental premiums, to ensure that the 
supplemental bid reasonably and equitably reflects revenue 
requirements.

Noninterference

    As proposed under Sec.  422.256(a)(2) and in accordance with 
section 1854(a)(6)(B)(iii) of the Act, we do not have the authority to 
require--(1) any MA organization to contract with a particular 
hospital, physician, or other entity or individual to furnish items and 
services under the Act; or (2) a particular price structure for payment 
under a contract to the extent consistent with our authority. Also, as 
under current law, we do not have the authority to review or negotiate 
bids for PFFS plans or any amounts submitted by MSA plans.

Standards of bid review

    Proposed Sec.  422.256(b) implements section 1854(a)(6)(B)(ii) and 
(iii) and section 1854(e)(4) of the Act, which together established 
three standards for our review of bids. First, the bid and proportions 
must be supported by the actuarial bases, which we determine based on 
information provided by the MA organization.
    Second, the bid amount and proportions must reasonably and 
equitably reflect the plan's revenue requirements for providing the 
benefit package, as the term revenue requirements is used for purposes 
of section 1302(8) of the Public Health Service Act. We interpreted 
this reference to mean that the Congress intends for a plan bid to 
reflect the plan's estimated required revenue in providing coverage 
(including any profit or retained earnings), and not other factors such 
as the relative lack of competition in the plan's market area or the 
level of annual capitation rates and benchmarks in the service area.
    Third, proposed Sec.  422.256(b)(3) implemented section 1854(e)(4) 
of the Act by providing for a limitation on applicable cost-sharing for 
coordinated care and PFFS plans: the actuarial value of plan cost 
sharing ``applicable on average'' to plan enrollees cannot exceed the 
actuarial value of cost sharing ``applicable...on average'' under 
original Medicare. We interpreted ``applicable'' to mean the level of 
cost-sharing in effect after any reductions to the level of cost 
sharing that a plan can make by offering a mandatory supplemental 
benefit, as specified under section 1852(a)(1)(B) of the Act. That is, 
we apply this third standard of review, as specified under section 
1854(e)(4) of the Act, in light of both the basic A/B bid and the 
application of any rebate toward reduced cost sharing of Medicare Parts 
A and B benefits included in the supplemental bid.
    We clarified that proposed Sec.  422.254(b)(4), which implements 
the requirement in section 1852(a)(1)(B)(i) of the Act), that the 
actuarial value of MA plan cost sharing for Medicare Part A and Part B 
benefits assumed in constructing the basic A/B bid must equal the 
actuarial value of original Medicare cost sharing, would affect how MA 
organizations develop their basic A/B bids. In contrast, the cap on 
actual enrollee cost-sharing liability for Medicare Parts A and B 
benefits is established at proposed Sec.  422.256(b)(3), which 
implements the requirement in section 1854(e)(4) of the Act. Before 
2006, the sum of applicable plan cost sharing for Part A and Part B 
services, and any cost sharing for Part A and Part B services that was 
collected as revenue in the form of a premium or portion of a premium, 
could not exceed the actuarial value of cost sharing in fee-for-service 
Medicare (section 1854(e)(1) of the Act). As of 2006, any Medicare cost 
sharing included in a premium (as well as any cost sharing that is 
``bought down'' through the use of rebate dollars) is not counted 
towards the limit (section 1854(e)(4)of the Act).
    We further clarified that, under the new bidding methodology, an MA 
organization cannot substitute a basic beneficiary premium for some 
portion of cost sharing under original Medicare. Section 
1854(b)(2)(A)(i) of the Act (proposed at Sec.  422.262(a)(1)) mandated 
that for plans with bids less than benchmarks, the premium for original 
Medicare benefits must be zero. Our understanding is that Congressional 
intent was to have the basic A/B bid be for a standardized package. 
This means MA organizations able to offer plans

[[Page 4649]]

with Medicare-covered benefits at a lower cost to the beneficiary than 
the benchmark will have a plan with zero premium for coverage of 
benefits under original Medicare.
    However, any MA organization can choose to structure the benefit 
package with a mandatory supplemental benefit that includes a reduction 
in Medicare Part A and B cost sharing. The premium for this 
supplemental package, as well as the Part D or Part B premium, can be 
offset by any rebates for which the plan is eligible. Thus, the 
aggregate bid would consist of: (1) a basic A/B bid amount for benefits 
available for either zero premium or a basic premium depending on 
whether the plan's bid is above or below the benchmark; (2) a mandatory 
supplemental bid amount for benefits available for a premium or no 
premium depending on the plan's use of rebates (and an optional 
supplemental benefit if offered); and (3) a drug bid amount for basic 
benefits, also available at a premium or no premium depending on use of 
rebates.
    Finally, we clarified that, under the MMA, an MA organization is no 
longer permitted to reduce the basic beneficiary premium amounts for 
original Medicare benefits by taking a negative adjustment on 
additional revenue, as was permitted under the M+C program in the ACRP 
process. In accordance with section 1854(a)(6)(B)(ii) of the Act, plan 
bids must reasonably and equitably reflect plan expected revenue 
requirements. MA organizations cannot submit plan bids that understate 
their revenue requirements for the basic A/B bid. When the basic A/B 
bid amount exceeds the benchmark amount, the difference is required to 
be charged as a basic beneficiary premium. If an MA organization were 
able to waive the plan's basic beneficiary premium, this would suggest 
that the MA organization had overstated the plan's expected revenue 
requirements for basic benefits. In essence, we do not have the 
authority under the statute to allow MA organizations to waive basic 
beneficiary premiums for plans with basic A/B bids greater than 
benchmarks.
    Comment: Several commenters requested clarification on how we would 
interpret the bid review standard that the bid amounts and proportions 
must ``reasonably and equitably'' reflect the MA plan's revenue 
requirements for providing the benefit package. Two commenters 
suggested that we should ensure that adequate flexibility is maintained 
throughout the bid review and approval process in order to allow MA 
organizations to pursue legitimate business strategies that promote the 
availability of viable choices for beneficiaries. One commenter 
recommended that we consider in its bid review process whether an 
organization is in a start-up phase and the intensity of the 
marketplace competition facing the plan. Another commenter suggested 
that in reviewing the revenue requirements of the plan, we should take 
into account that a variety of factors may affect anticipated rates of 
return for MA plans. For example, a new MA organization may reasonably 
anticipate budget deficits during its early years of operation in order 
to offer competitive plans while its fixed costs are high in relation 
to the number of enrollees and its enrollment and revenues grow toward 
break even. In addition, due to differing marketplace dynamics and 
other factors, the rates of return may differ for different products. 
The commenter acknowledged our concern about the integrity of bids from 
plans lacking competition in their service area, but stated strong 
opposition to any requirement we may consider that would force plans to 
have similar ``rates of return'' on Medicare and non-Medicare products 
as a way to measure bid accuracy. Also, the commenters cautioned 
against having standards that would skew actual bid amounts in order to 
avoid the appearance of not operating with maximum efficiency.
    Response: In the August 2004 proposed rule, we stated that we 
believe the Congress used the phrase ``similar to'' in section 
1854(a)(6)(B)(i) of the Act (which states that our authority to 
negotiate bids is similar to OPM's statutory authority to negotiate 
concerning health plans) to signal an understanding that the FEHBP and 
MA programs are not identical, but have some similarities. We gave two 
examples of differences between the programs: (1) MA plans must offer 
original Medicare benefits, which are defined in law; and (2) the 
formulas for determining MA rates are established in law. We then gave 
an example of an area where the OPM-like authority to negotiate bid 
amounts would be relevant to the MA program: pricing of supplemental 
bids. We then discussed the three proposed standards of bid review: (1) 
bids and proportions must be supported by actuarial bases; (2) bids and 
proportions must reasonably and equitably reflect the plan's revenue 
requirements for providing the benefit package; and (3) the standard at 
section 1854(e)(4) of the Act (implemented at proposed 422.256(b)(3)) 
has been met, which limits enrollees' liability for cost sharing.
    In addition to review of bid amounts and proportions under these 
three standards, we also are mandated to review other aspects of the 
annual bid submission. We must ensure that all benefits are covered, 
per the requirements at section 1852(a) of the Act. Section 1852(b)(1) 
of the Act requires us to review the plan benefit design, particularly 
the structure of premiums, deductibles, copayments, and coinsurance 
charged to beneficiaries to ensure it is not discriminatory, as 
implemented at Sec.  422.110.
    With regard to review of bid amounts, we will respond to the 
commenters' questions by discussing the statutory bases on which we 
formulated the first two bid review requirements. The first bid review 
standard, that bids be supported by actuarial bases, is mandated in two 
places in section 1854(a)(6)(B) of the Act. The first phrase of section 
1854(a)(6)(B)(i) of the Act states that subject to the noninterference 
clause and the exception for PFFS plans, the Secretary has the 
authority to negotiate bid amounts and proportions under subparagraph 
(A), including supplemental benefits. Section 1854(a)(6)(A) of the Act 
(the subparagraph (A) reference), which specifies what information MA 
organizations should submit with their annual bid submission, includes 
the requirement that MA organizations submit information demonstrating 
the actuarial basis for determining the monthly aggregate bid amount. 
In addition, section 1854(a)(6)(B)(ii) of the Act states that the 
Secretary can only accept bids if they are supported by the actuarial 
bases provided under subparagraph (A).
    Therefore, under the first review standard we may negotiate whether 
or not to accept a bid based on our determination that the MA 
organization submitted sufficient actuarial bases and that the 
actuarial bases support the submitted bid amounts and proportions. The 
specific elements for which we will require actuarial bases are not 
listed as part of the regulatory text, and are incorporated into the 
bid pricing tool. However, we expect MA organizations to submit the 
actuarial bases for medical costs and administrative costs (including 
return on investment) for all components of a plan's aggregate bid (the 
basic A/B bid, the bid for basic prescription drug coverage, and bids 
for mandatory and optional supplemental benefits). We will examine the 
actuarial analyses to ensure that bids have been prepared in accordance 
with our actuarial guidelines, and properly certified.

[[Page 4650]]

    The second bid review standard states that bids must reasonably and 
equitably reflect plan costs. This is also mandated in two places in 
section 1854(a)(6)(B) of the Act. The latter part of the sentence at 
section 1854(a)(6)(B)(i) of the Act states that when exercising the 
requirement to negotiate regarding bid amounts, the Secretary shall 
have authority similar to the authority the Director of OPM has under 
Chapter 89 of Title 5 to negotiate with respect to health benefits 
under the FEHBP program. In addition, section 1854(a)(6)(B)(ii) of the 
Act states that the Secretary can only accept bids if they reasonably 
and equitably reflect the revenue requirements (as used for purposes of 
section 1302(8) of the Public Health Service Act).
    We look to the FEHBP standard in 5 USC 8902(i) to interpret our 
authority to review bids in a manner similar to OPM's statutory 
authority. Section 8902(i) gives OPM the authority to require that 
rates should reasonably and equitably reflect the cost of the benefit 
provided. We see this provision as imposing upon us the responsibility 
to evaluate the appropriateness of the overall bid amount and each 
portion of the aggregate bid. Specifically, we intend to evaluate the 
reasonableness and appropriateness of the actuarial assumptions made 
for the aggregate bid. We would examine bids to determine whether the 
revenue requirements for coverage offered by the plan are reasonable, 
including examination of administrative costs and return on investment 
(profit) for reasonableness. (For a discussion of how we will evaluate 
the reasonableness and accurateness of the prescription drug bid, see 
subpart F of the preamble in the final rule for the Medicare 
prescription drug benefit.)
    There is no cap on administrative costs under Part C (or Part D) 
that is similar to the cap in effect for FEHBP experience-rated plans. 
We assume that competition among plans will generally assure 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 we are given negotiating 
authority to assure this result. The initial review of MA bid 
submissions will focus, in part, on low and high cost outliers, and on 
bids in areas with little competition. It should 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 the bids include outliers or not.
    A plan bid submission may meet the first review standard (because 
there is sufficient actuarial information and it supports the submitted 
bid amounts), but not meet the second review standard because a bid 
amount does not reasonably and accurately reflect plan costs.
    Finally, the commenters requested that our interpretation of the 
``reasonable and equitable'' standard allow enough flexibility for MA 
organizations to pursue legitimate business strategies. ``Flexibility'' 
seems to have different meaning for different commenters. We want to 
clarify that we do not intend to measure bid accuracy by forcing bids 
for Medicare products to have the same rates of return as non-Medicare 
products. We do not believe that cross-product line comparisons would 
be appropriate at this time.
    However, we do believe that it would be appropriate to develop 
criteria for review among Medicare products, such as the following for 
employer group health plans (EGHPs). We will release separate guidance 
for EGHP plans.
    Comment: Two commenters proposed that the standards of bid review 
in proposed Sec.  422.256(b), which they see as focusing on the 
statutory criteria, should be applied to review not only of the basic 
A/B bid and non-drug portion of the supplemental bid (if any), but also 
to the Part D basic bid and supplemental drug bid (if any). The 
commenters' concern is that, although the statutory basis for review 
and negotiation of bids is the same in Part C and Part D, the 
discussion in the Part D proposed rule includes broader language 
suggesting that we may challenge Part D bids with administrative costs 
(including rates of return) that are higher than those of other 
sponsors or MA-PD plans. In general, the commenters opposed standards 
that could lead us to require that MA organizations reduce their bids 
due to perceptions that their MA products could be operated more 
efficiently.
    Response: See subpart F preamble in the final rule for the Medicare 
prescription drug benefit, which clarifies that we are not adopting any 
of the OPM regulations at this time, and we will not apply the FEHBP 
concept of a Similarly Sized Subscriber Group (SSSG) to review of Part 
D bids. We believe the preamble discussions on bid review in the final 
rules for Parts C and D are more clearly aligned.
    Comment: One commenter recommended that we revise the language at 
Sec.  422.256(b)(2) ``as the term revenue requirements is used in 
section 1302(8) of the Public Health Service Act'' to read ``as the 
term revenue requirements is used for purposes of section 1302(8) of 
the Public Health Service Act.'' This tracks the statutory language. In 
addition, the commenter recommended that we explain in the preamble 
that the reference to ``revenue requirements'' does not indirectly 
require that MA organizations need to use the adjusted community rate 
methodology, which is found in that section of the Public Health 
Service Act.
    Response: We agree with the commenter and have revised the proposed 
language at Sec.  422.256(b)(2).
    Comment: One commenter asked us to clarify that under the MMA 
bidding methodology, MA organizations will no longer need to include 
information about commercial pricing.
    Response: For the purpose of bid submission, organizations will not 
be required to submit information about their commercial pricing 
experiences for purposes of trending. However, it should be noted that 
we are still statutorily mandated to audit a proportion of MA 
organizations. Within the scope of an audit, we believe that it is 
appropriate to request and review an MA organization's allocation of 
costs between its Medicare and commercial products in order to ensure 
that a disproportionate share of the expenses is not allocated to the 
MA line of business.
    Comment: One commenter recommended that we prevent MA plans from 
``cherry picking'' healthier beneficiaries and to review bids and plan 
benefit packages to ensure they are not discriminatory against sicker 
beneficiaries. The commenter cited studies by The Commonwealth Fund and 
Medpac that confirm that some MA plans have used co-payments and other 
devices to discourage enrollment of beneficiaries who have high 
utilization of services.
    Response: We will be evaluating bids for their actuarial soundness 
based on the documentation submitted by plans to support the submitted 
bid amount and associated proportions. As mandated by the MMA (and 
earlier statutory provisions), we will also be reviewing the benefit 
packages of each plan to guard against discrimination. In addition, we 
will continue to follow the standards described in the M+C final 
regulation of June 2000 at Sec.  422.110, which prohibit an 
organization from discriminating against beneficiaries by denying, 
limiting or conditioning

[[Page 4651]]

coverage to beneficiaries or offering of benefits to individuals 
eligible to enroll in a plan on the basis of any factor that is related 
to health status (for example, medical history or medical condition, 
with limited exceptions). We will be concerned about levels of cost 
sharing for dialysis and chemotherapy drugs, and cost sharing for 
medical categories (inpatient stays, outpatient facilities, and 
ambulatory surgical centers).

Negotiation process

    Proposed Sec.  422.256(a) would implement section 1854(a)(6)(B)(i) 
of the Act, which provides us the authority to negotiate with MA 
organizations. We have the authority to negotiate to ensure that the 
bid is not discriminatory; and in situations where we have questions 
about the assumptions used for a plan bid, we will negotiate with the 
MA organization regarding the appropriate assumptions and the resulting 
rebate and/or supplemental premiums. We expect that the process of bid 
negotiation between CMS and an MA organization could result in an 
agreement to adjust the bid's pricing, utilization, and/or enrollment 
assumptions. The MA organization would resubmit the bid information for 
the plan. The bid cannot be changed unless mutually agreed upon by the 
MA organization's representatives and CMS as a result of our review and 
negotiation process.
    Comment: A few commenters are concerned that we have a uniform 
process for conducting bid negotiations to ensure that there is 
consistency across negotiating teams as well as firm deadlines for 
ending negotiations.
    Response: We understand the concerns about the uniformity and 
timing of bid negotiations. We believe that the bid negotiations will 
be governed by the specific actuarial review principles that will be 
contained in the bid pricing tool. Bid negotiations will have to be 
complete before September in order for plans to have sufficient time to 
submit their plan benefit package materials for our website.
    Comment: One commenter wanted to know how our deadlines for 
negotiation compare with the deadlines established by OPM for its FEHBP 
negotiations.
    Response: OPM's rate filing and negotiation schedule is similar to 
that proposed by CMS. Rate proposals are due by May 31 each year, and 
by mid-August negotiations are generally complete. By law, the filing 
deadline for the MA program is the first Monday in June, and we expect 
to conclude negotiations by the end of August or early September.
    Comment: Several commenters wanted to confirm that organizations 
unable to reach agreement with us during the negotiation process will 
be permitted to withdraw their bids without penalty. The ability to 
withdraw a bid is significant to avoid an MA organization committing to 
providing coverage for a year that is not sustainable financially, 
potentially jeopardizing beneficiary coverage and the MA organization's 
long term success and viability.
    Response: This issue is still under consideration, and we will be 
issuing subsequent guidance.
    Comment: One commenter stated that in the past periodically MA 
organizations have identified errors in their ACRP after submitting 
them to us for the filing deadline. The commenter requested that we 
retain the current policy where MA organizations are allowed to correct 
these errors after the filing deadline and resubmit the ACRP provided 
that: (1) the MA organization can demonstrate that the information in 
fact was in error; (2) it is clear that the error was made 
inadvertently; and (3) the correction is made within a relatively short 
period of time following the submission.
    Response: We intend to retain the current practice of allowing 
corrections for inadvertent errors, for example, typographical errors 
and certain other types of errors that caused the submission to fail 
the initial front end edits. Guidance on this matter will be published 
as part of the guidance on filing the new bid pricing tool and Plan 
Benefit Package.
    Comment: One commenter requested clarification of the timeline for 
bid negotiations and finalizing benchmarks for negotiation with 
providers.
    Response: Regarding negotiations with other contractors, we believe 
that bidders are developing their bids on what it will cost them to 
provide the items and/or services in their plan benefit packages and 
have had discussions and negotiations with potential contractors in 
order to estimate properly in their bid submission. In most cases where 
organizations have made good faith efforts to estimate their actual 
revenue requirements with appropriate supporting documentation, we do 
not anticipate significant modifications to bid amounts and proportions 
during the negotiation phase of the process.

Rules for adjustment of rebate dollar allocations.

    In addition to other negotiated changes, an MA organization may 
need to adjust the allocation of rebate dollars in a plan bid, and 
resubmit the bid. We described several circumstances under which we 
expect reallocation of rebate dollars.
    First, MA organizations must submit their plan bids in June 
(including the estimated drug premium amount) for both local and 
regional MA plans before knowing the national average monthly bid 
amount for basic coverage. Given the preliminary nature of MA 
organizations' Part D premium submission, we expect that some rebate 
allocations to Part D premium reductions will be overestimated 
(excessive allocation) or underestimated (insufficient allocation). 
These misestimates will mean some portion of the beneficiary rebate has 
been credited where it is not needed or not enough has been credited to 
achieve the premium desired. For example, if a plan's monthly drug 
premium is determined to be $34, which is less than the projected 
premium of $35 in its initial bid submission, there was an excessive 
allocation of $1 of the rebate to fund the Part D premium reduction. We 
would require the MA organization to amend its bid submission to 
reallocate the excessive $1 of rebate credit to other mandatory 
supplemental benefits. On the other hand, if the plan monthly drug 
premium is determined to be $36, which is greater than the projected 
monthly premium of $35 in the initial bid submission, there is an 
insufficient allocation of $1. We would give the MA organization the 
option of reallocating $1 of rebate from another mandatory supplemental 
benefit toward the Part D premium reduction in order to eliminate the 
$1 Part D premium and return to the zero premium in the initial bid 
submission.
    For this reason, we anticipated that some MA organizations will 
make minor technical adjustments to the benefit structures of their 
non-drug bid amounts (that is, the basic A/B bid and supplemental bid). 
The adjustments will consist of reallocation of beneficiary rebate 
dollars among a subset of the categories allowed by law: (1) reduction 
in the premium for the non-drug portion of the mandatory supplemental 
package (that is, reduction in cost sharing for Parts A and B benefits 
or reduction in the cost of additional non-Medicare covered benefits); 
and (2) reduction in the Part D and Part B premiums. No modifications 
would be allowed to the cost of the Part D supplemental benefit 
(reduction in Part D cost sharing or reduction in the cost for coverage 
of drugs not covered under Part D). Changing the reduction in Part D 
cost sharing would have a domino effect. It would have implications for 
projected

[[Page 4652]]

reinsurance dollars, which impacts the pricing of the bid for basic 
Part D benefits, which in turn could affect the national average 
monthly bid amount and, hence, the basic beneficiary premium, which we 
would have just previously calculated and published for the year, as 
required by section 1860D-13(a)(4) of the Act.
    Second, we recognized that the June bid submission for regional MA 
plans will be based on unknown benchmarks not only for the drug premium 
but also for Medicare Parts A and B benefits. As discussed in Sec.  
422.258(c), the region-specific benchmark amount is based, in part, on 
a weighted average of the plan bids for Medicare Part A and Part B 
benefits, which we cannot calculate until after the June bid 
submission. This means that the exact amount of a plan's rebate is 
unknown and will shift to the extent that the estimated benchmark a 
plan uses to create its June basic A/B bid amount differs from the 
region-specific non-drug benchmark we establish based on plan bids. 
Therefore, regional MA plans will also be allowed to modify the 
allocation of rebate dollars, other than for Part D benefits, to arrive 
at the supplemental, Part B, and Part D premiums originally submitted.
    We proposed the following rules for the negotiation process 
concerning reallocation of rebate dollars due to excessive or 
insufficient allocation.
     MA plans with overestimated allocations to Part D premium 
reduction must reallocate beneficiary rebate dollars to other mandatory 
supplemental benefits and can do so only for the purpose of achieving 
the original Part D premium in their initial bid submission.
     Local MA plans with underestimated allocations to Part D 
premium reduction have the option of reallocating beneficiary rebate 
dollars from other mandatory supplemental benefits. However, the plan 
could only reallocate rebate dollars for the purpose of achieving the 
Part D premium in the initial bid submission. In this circumstance, 
plans could choose not to adjust the new premium or reallocate the 
appropriate amount to achieve the initial premium submitted.
    We proposed the following rule for regional plans, which unlike 
local plans will not know the exact amount of their rebate dollars at 
the time of the June bid submission.
     Regional MA plans may reallocate beneficiary rebate
    dollars to achieve the supplemental, Part B, and Part D premiums in 
their initial bid submission.
     Local MA plans not offering Part D benefits (these would 
only be PFFS plans who have elected this option) would have all the 
necessary information upon which to estimate their bid amounts for 
their initial June bid submission, and, therefore, the MA organizations 
would not be allowed to modify their plan benefit structures.
    Comment: A few commenters recommended that MA organizations be 
permitted to reallocate rebate dollars to ensure that dual eligibles 
would not need to pay a premium for Part D if they enroll or remain 
enrolled in these MA plans. The commenter believed that the MA plans 
that would likely use this discretion are MA Special Needs Plans 
(SNPs). The success of SNPs would be seriously undermined if their Part 
D premiums exceed the applicable low income Part D subsidy, because 
their dual eligible enrollment would have an incentive to disenroll 
from these plans. Because the Part D bids of MA special needs plans are 
not factored into the national average monthly bid amount and the low-
income benchmark premium amount, this adjustment will have an 
insignificant effect on the bid and payment process.
    Response: The proposed requirement is that reallocation of rebate 
dollars during the negotiation process must result in the supplemental, 
Part B, and Part D premiums originally submitted in June. We believe 
the commenter is requesting that this requirement be expanded to allow 
a change in the Part D premium from that originally submitted in order 
to allow an MA organization to change the plan premium to match the low 
income premium subsidy level in effect for the plan's service area. We 
would allow this. Therefore, when rebate reallocation results in a Part 
D premium that differs from that originally submitted in June, the new 
premium must match the low income premium subsidy level. The Part D 
premium will have to be uniform for every member of the plan.
    Comment: One commenter supported our proposal to limit changes to 
bids to technical changes. The commenter also questioned why MA 
regional plans would be permitted to make changes in cost sharing that 
would not be allowed for MA local plans. The commenter believes that 
allowing more than technical changes from regional plans would 
destabilize the level playing field of the bidding process.
    Response: Because the benchmark is calculated for regional plans 
after bids are submitted, unlike local plans, regional plans do not 
have the advantage of knowing the benchmark for estimating their 
rebate, cost sharing and premium amounts. Therefore, it is necessary to 
provide additional latitude for regional plans that is not necessary to 
provide for local plans. Our intent is to allow appropriate 
redistribution of the estimated amounts so that plans' benchmark 
estimates can be reconciled with the actual benchmark estimates and the 
necessary modifications.
5. Calculation of Benchmarks (Sec.  422.258)
    Proposed Sec.  422.258(a) implemented the new section 1853(j) of 
the Act by providing a description of how benchmarks for local MA plans 
are calculated. For a service area that is entirely within an MA local 
area (county), the MA area-specific non-drug monthly benchmark amount 
is equal to the monthly MA capitation rate for the local area. For a 
service area that is in more than one MA local area, the benchmark 
amount is calculated as a weighted average of the local MA monthly 
capitation rates, using as weights the projected enrollment in each 
county used to calculate the bid.
    Proposed Sec.  Sec.  422.258(b) and (c) implemented section 1858(f) 
of the Act by providing a description of how regional MA plan 
benchmarks are calculated. Each MA region will have a benchmark amount 
that consists of two components: (1) the statutory component (based on 
a weighted average of local area capitation rates in the MA region); 
and (2) the plan bid component (based on the weighted average of 
regional plans bids in the MA region). The purpose of the blend will be 
to be more responsive to market conditions in the region by allowing 
plan bids to influence the final benchmark amount.
    Finally, the statutory component will be multiplied by the 
statutory national market share, which is the number of MA eligibles in 
the Nation who were not enrolled in an MA plan during the reference 
month (the month in the previous year for which the most recent data on 
MA eligibles is available) divided by the total number of MA eligibles 
in the nation in the reference month. The plan-bid component will be 
multiplied by the non-statutory market share, which is the number of MA 
eligible in the nation who were enrolled in an MA plan during the 
reference month divided by the total number of MA eligible in the 
nation. These components will be added to yield the MA regional 
benchmark.
    Comment: One commenter recommended that we revise the first 
sentence of Sec.  422.258(c)(4) to replace the references to ``plan(s) 
offered in the region'' with ``regional plans offered in the region'' 
to clarify the plan-bid component of the regional benchmark is

[[Page 4653]]

calculated based only the regional plan bids, not all of the MA plan 
bids in the region.
    Response: We agree and have made this correction. We also made 
technical corrections in Sec.  422.258(c) along the same lines to 
further clarify this point. Finally, we made another change to the 
proposed rule language at Sec.  422.258(c)(5)(i) to clarify further how 
the plan bid component of the regional benchmark will be calculated. In 
the final rule at Sec.  422.258(c)(5)(i), we delete the following 
sentence from the proposed regulatory text because it states a specific 
calculation for determining a plan's share of enrollment that is not 
mandated at section 1858(f)(5)(B)(iii) of the Act: ``In that case, each 
plan's share will be the plan's projected enrollment divided by the 
total projected enrollment among all plans being offered in the 
region.'' We delete this sentence to clarify that the statute allows us 
to apply a factor based on plans' projected enrollment but does not 
mandate a particular calculation.
6. Beneficiary Premiums (Sec.  422.262)
    Proposed Sec.  422.262(a) would implement section 1854(b)(2)(A) of 
the Act, and described the new methodology for calculating the MA 
monthly basic beneficiary premium. This premium will now be determined 
by comparing the unadjusted statutory non-drug bid amount (basic A/B 
bid) to unadjusted benchmark amount. For an MA plan with a basic A/B 
bid that is less than the appropriate unadjusted non-drug benchmark 
amount, the basic beneficiary premium is zero. For an MA plan with a 
basic A/B bid that is equal to or greater than the unadjusted non-drug 
benchmark amount, the basic beneficiary premium is the amount by which 
the bid amount exceeds the benchmark amount. All approved premiums must 
be charged; that is, plans are not allowed to waive basic beneficiary 
premiums.
    Proposed Sec.  422.262(b) would implement section 1854(d)(4) of the 
Act, which specifies that MA enrollees must be charged consolidated 
monthly premiums. As intended by the Congress and as a part of our 
efforts to simplify the process for beneficiaries, an MA enrollee will 
pay a single premium consisting of the sum of all premiums a particular 
plan charges its enrollees, which will be one or more of the following: 
(1) the monthly basic beneficiary premium; (2) the monthly supplemental 
premium; and (3) the MA monthly prescription drug premium. This process 
will be in addition to the Part B premium payment process already in 
place.
    We clarified that in the case of an Medical Savings Account (MSA) 
plan, there are no basic beneficiary premiums because we instead make a 
deposit to the enrollee's MSA. MSA plans are high deductible insurance 
policies, not managed care plans. The only beneficiary premium for an 
MSA plan will be a supplemental premium.

Uniformity of premiums and cost-sharing.

    The MMA did not change current law regarding uniformity of 
premiums. Proposed Sec.  422.262(c) would implement section 1854(c) of 
the Act, which specifies that, with the exception permitted under Sec.  
422.106(d), the MA bid amount and beneficiary premiums may not vary 
among individuals enrolled in the plan. Proposed Sec.  422.262(c) 
continues current regulations now in subpart G at Sec.  422.304(b) that 
cost sharing for basic and supplemental benefits may not vary among 
individuals enrolled in an MA plan.
    MA organizations offering local MA plans within segments of service 
areas must submit separate bids for those segments that may have 
different premiums and cost sharing. Section 1858(a)(1) of the Act 
which specifies that regional MA plans may not have segmented service 
areas.
    Proposed Sec.  422.262(f) would implement section 1854(d)(2) of the 
Act on beneficiary payment options. This provision gives enrollees the 
option, at their discretion, of paying their MA consolidated premium 
by: (1) having it deducted directly from their Social Security benefit 
amount of from their Railroad Retirement Board or the Office of 
Personnel Management benefit amount in the same manner that Part B 
premium reductions are handled; (2) setting up an electronic funds 
transfer; or (3) through other appropriate means CMS may identify, 
including payment by an employer or under employment-based retiree 
coverage on behalf of an employee, a former employee, or a dependent. 
The MA organization may not impose a charge for individuals electing to 
pay their premiums through a deduction from their Social Security 
payments. In this final rule, we have consolidated subparagraphs (3) 
and (4) of Sec.  422.262(f) to clarify that the other methods we may 
specify for payment of premiums include those listed in the regulation.
    Comment: One commenter requested that we allow intra-regional 
benefit plan adjustments (that is, waiver of the requirement that plan 
have a uniform benefit package for a service area, including plan 
premiums and all applicable cost sharing) to ensure that regional PPO 
plans are not placed at a competitive advantage or disadvantage versus 
local plans due to rate variations within a plan's regional service 
area. The commenter stated that overall, the intra-regional benefit 
waiver would lead to greater participation in the regional PPO program 
and, at the same time, would ensure local plans can continue 
participation in areas with traditionally low reimbursement rates, 
resulting in competition and increased access to health plans for 
beneficiaries.
    Response: We do not have the authority to waive the requirement at 
section 1854(c) of the Act, which states that plan bids and premiums be 
uniform for all members of a plan. Moreover, section 1858(a)(1) of the 
Act explicitly disallows the application of section 1854(h) of the Act 
to regional plans, which signals Congressional intention that there not 
be variation in premium and cost sharing across segments within a 
region. Therefore, at this time, we cannot allow variations in the plan 
benefit package within the service area of regional MA plan.
    Comment: Two commenters recommended that we provide an option for 
an MA organization to waive the amount of premium that is the 
difference between the MA-PD premium and the low-income premium subsidy 
under Part D provided for in Sec.  423.780. The commenter believes that 
this waiver would fit well within a safe harbor provided for in the 
federal anti-kick back statute. The ability to waive premium would: (1) 
allow dual eligibles to be auto-enrolled into their current Medicare 
Advantage plan without the burden of an added premium that many of 
these beneficiaries could not afford; and (2) provide more flexibility 
for dual eligible enrollees to self-enroll into an MA-PD plan of their 
choosing.
    Response: If the commenter's reference to the ``MA-PD premium'' is 
to the combined basic Part A and Part B beneficiary premium and the 
Part D beneficiary premium charged by an MA-PD plan, then we must 
emphasize that these two premiums are determined separately and under 
different rules. When a plan's basic A/B bid is equal to or below its 
benchmark, by law the plan is not allowed to charge a basic premium for 
basic Part A and Part B benefits. When a plan's basic A/B bid is above 
its benchmark, section 1854(a)(2)(A) of the Act states that this 
difference is the monthly basic beneficiary premium. The basic 
beneficiary premium cannot be waived.
    Section 1854 of the Act does not provide for waiver of the basic 
Part A and Part B premium for dual eligibles.

[[Page 4654]]

Subsidies for dual eligibles for coverage of medical benefits are set 
forth under Title XIX of the Act. Moreover, special needs plans are 
subject to the same bidding rules as other MA plans, in accordance with 
sections 1854(a)(1)(A) and 1854(a)(6) of the Act. Therefore, we do not 
have the authority to waive the basic beneficiary premium for dual 
eligibles.
    The Part D premium determination is discussed at Sec.  423.286. We 
do not have the authority to waive the Part D premium for beneficiaries 
eligible for a premium subsidy. If those beneficiaries eligible for 
this subsidy enroll in a Part D plan or MA-PD plan that has a Part D 
premium higher than the subsidy, then they owe this difference.
    Comment: A commenter recommended that during the negotiation 
process, MA organizations be allowed to reallocate rebate dollars to 
reduce the Part D premium to the level of the low-income premium 
subsidy benchmark.
    Response: See Sec.  422.256 and the above response to comment in 
this subpart of the preamble for a discussion on this issue.
    Comment: Several commenters recommended that CMS and the Social 
Security Administration not implement the provision that beneficiaries 
may opt to have their premiums deducted from their Social Security 
benefit amounts until the systems are fully in place to ensure that 
payments will be made to MA organizations correctly and on a timely 
basis. The concern is that without sufficient operational planning for 
the development and testing of a new payment system, organizations will 
not be paid enrollee premiums accurately and timely.
    Response: We do not intend to delay the implementation of a 
statutorily mandated provision that gives beneficiaries the option of 
paying MA premiums by deducting the amounts from their Social Security 
benefit amounts. However, we are confident that the development and 
testing of a new payment system for accurate and timely payment of 
plans is feasible by January 2006.
    Comment: One commenter requested that we make clear that the MMA 
language at section 1854(d)(2)(C) of the Act only prohibits MA plans 
from imposing charges pertaining to choice of the premium payment 
option if beneficiaries choose to have their premiums deducted from 
their Social Security benefit checks. That is, the commenter wishes 
that we make clear to beneficiaries that the statute does not prohibit 
MA plans from imposing charges related to premium payment under other 
payment options. The commenter therefore requested that we require MA 
organizations to convey clearly to beneficiaries, and in writing, what 
are the precise charges that will apply to other premium payment 
options before the beneficiary makes a choice of how to pay plans 
premiums.
    Response: MA plans may not charge fees for late payment of the plan 
premium or other types of processing fees because this would violate 
the uniformity of premiums provision at section 1854(c) of the Act. For 
example, we interpret the uniform premium provision to mean that plans 
may not provide incentives to members to pay premiums in a certain 
manner by offering lower processing fees (per section 1854(d)). See 
Subpart B for a discussion of administrative remedies for non-payment 
of premiums.
    Comment: One commenter wanted to verify that beneficiaries may 
still opt to pay their MA plan premiums directly to the plan.
    Response: Enrollees in the MA plans may still choose to pay their 
MA plan premiums directly to the plan.
    Comment: Several commenters request that we remove for American 
Indian/Alaska Natives (AI/AN) Tribes the barriers to paying their Part 
B premiums under our current group payer rules, specifically rules 
concerning the size of the group and switching an individual from 
automatic deduction to group pay. The commenters maintained that 
without these changes, it is unlikely that AI/AN individuals, who are 
entitled to health care without cost sharing, will enroll in MA plans.
    Response: The issue of payment of Part B premiums under our current 
group payer rules is beyond the scope of this rulemaking.
7. Calculation of Savings (Sec.  422.264)
    Proposed Sec.  Sec.  422.264(a), (c), and (e) would implement 
sections 1854(b)(3)(A)and (B) of the Act (for local plans) and sections 
1854(b)(4)(A) and (B) of the Act (for regional plans) concerning 
calculation of risk-adjusted basic A/B bids and risk-adjusted 
benchmarks, which is the first step in determining whether an MA plan 
has savings. The MMA gave the Secretary flexibility to determine 
whether the risk adjustment factors to be applied to the benchmarks and 
bids are determined on a State-wide basis for local plans, a region-
wide basis for regional plans, a plan-specific basis, or on the basis 
of another geographic area.
    Proposed Sec.  Sec.  422.264(b) and (d) implement sections 
1854(b)(3)(C) and (b)(4)(C) of the Act, respectively, on how to 
determine the amount of savings for each local and regional MA plan (if 
any) by calculating the amount by which the risk-adjusted benchmark 
amount exceeds the risk-adjusted bid amount.
    Comment: All commenters from the industry agreed plan savings 
should be related to the risk profile of the enrollees. One important 
reason for this policy is that the rebate will likely take the form of 
supplemental benefits or reduced cost sharing and/or premiums. MA plans 
with enrollees whose average risk score is higher will typically need 
more revenue to provide the same level of supplemental benefits as a 
plan whose enrollees have a lower average risk score. To accomplish 
this objective, the adjustment to the benchmark and the bid that is 
used for calculating the savings should be based on the risk score of 
the particular plan.
    Response: We agree with the commenters. For both local and regional 
MA plans, the calculation of savings will be determined by applying the 
plan average risk adjustment factor to the basic A/B bid and benchmark. 
We have revised Sec.  Sec.  422.264(c) and (e) to reflect this policy, 
although we have left in regulation our discretion, as provided in the 
statute, to select a method for calculating savings.
8. Beneficiary Rebates (Sec.  422.266)
    Section 1854 (b)(1)(C) of the Act states that an MA plan with 
savings (because the basic A/B bid is less than the benchmark) must 
provide to the enrollee a monthly rebate equal to 75 percent of the 
savings amount for that plan for the year. The remaining 25 percent of 
the savings would be retained by the Medicare Trust Funds. If the plan 
basic A/B bid is equal to or greater than the benchmark, the plan has 
no savings and, thus, no rebate.
    Proposed Sec.  422.266(b) provided, as set forth in section 
1854(b)(1)(C)(ii) of the Act, that the beneficiary rebate could be 
provided in the following forms: (1) some part or all of the rebate can 
be credited toward the provision of supplemental health care benefits 
(including additional health benefits not covered under original 
Medicare; (2) a reduction in cost sharing for Parts A, B, and D 
benefits, and/or a reduction in the premium for the mandatory 
supplemental benefits); or (3) credited toward the prescription drug 
premium or Part B premium.
    Proposed Sec.  422.266(b)(1) provided that all rebate dollars must 
be applied to a mandatory supplemental benefit. We interpret the 
provision at section 1854(b)(1)(C)(i) of the Act that an MA plan must 
provide to enrollees a rebate equal to 75 percent of savings to mean

[[Page 4655]]

that rebate dollars must be provided to all enrollees in a plan. 
Therefore, rebate dollars could not be used to fund optional 
supplemental benefits because this would not guarantee that the plan is 
providing every enrollee with the rebate dollars.
    Although rebate dollars can only be used to fund a mandatory 
supplemental benefit, a mandatory supplemental benefit may also be 
funded by beneficiary premium dollars. That is, a plan with a rebate 
may fund a mandatory supplemental benefit with rebate dollars only or 
with a mixture of rebate and premium dollars.
    The MA plan will be required to inform us about the form and amount 
of the rebate and/or the actuarial value of the supplemental health 
care benefits. Adjustments to the structure of the benefit package will 
occur during the process of negotiating and approving bids detailed in 
proposed Sec.  422.256.
    If an MA organization elects to provide a rebate in the form of a 
reduction in the beneficiary Part B premium for beneficiaries in a 
particular plan, we will work with the Commissioner of Social Security 
to provide the necessary information to the Commissioner to apply a 
credit (as provided for under section 1840 of the Act) to reduce the 
amount of the Part B premium to be charged under section 1839 of the 
Act for each enrollee in that MA plan.
    Comment: One commenter recommended that we revise proposed Sec.  
422.266 to note that rebate dollars may be used both to pay for the 
Part D premium and to provide supplemental drug coverage at no cost. 
The commenter argued that this change is needed to clarify that MA 
plans have the right to use rebate dollars to fund supplemental 
prescription drug benefits at no cost to the beneficiary as part of the 
basic Part D prescription drug benefit offered by the MA plan.
    Response: We agree with the commenter, with one clarification. If 
an MA-PD plan offers basic drug coverage under Part D, by definition at 
Sec.  423.100, there is no supplemental drug benefit, and thus no 
supplemental drug premium toward which to apply rebate dollars. If an 
MA-PD plan offers enhanced alternative coverage under Part D, then the 
plan must charge a premium for supplemental drug coverage. Per Sec.  
422.266(b), supplemental drug coverage may consist of reductions in 
Part D cost sharing and coverage of drugs not covered under Part D.
    Section 1854(b)(2)(C) of the Act refers to the supplemental 
beneficiary premium that is attributable to the provision of 
supplemental health care benefits, less the amount of the rebate 
applied to supplemental benefits. The supplemental beneficiary premium 
is the estimated revenue required to offer the supplemental package, 
which may include non-drug or drug supplemental benefits or both. 
Therefore, when pricing a plan benefit package, MA organizations will 
distinguish the cost of a Part D supplemental benefit from a non-drug 
supplemental benefit.
    We have changed the language at Sec.  422.266(b)(1) to clarify that 
rebate dollars may be used to reduce the premium for either the non-
drug or drug portions of the supplemental benefit. We also have added 
language clarifying that plans must distinguish the amount of rebate 
applied to enhance original Medicare benefits from the rebate applied 
to enhance Part D benefits. Rebate dollars may also be used to reduce 
the basic Part D premium and the Part B premium.
    Comment: One commenter requested that we allow MA organizations to 
use rebate dollars to fund stabilization of their provider networks, 
because recent improvements in provider compensation are not sufficient 
to ensure stable provider networks.
    Response: Proposed Sec.  422.266(b), which implements section 
1854(b)(1)(C)(ii) of the Act establishes permissible uses of the 
beneficiary rebate. The statute does not allow MA organizations to 
apply rebate dollars to stabilize an MA plan's provider network.
9. Incorrect Collection of Premiums and Cost-Sharing for All Years 
(Sec.  422.270)
    Proposed Sec.  422.270, which is identical to the previous language 
in the current MA regulations in subpart G at Sec.  422.309, sets out 
procedures for situations in which an MA organization collects more 
than the amount the plan is allowed to charge its enrollees.

Subpart G--Payments to Medicare Advantage Organizations

1. Basis and Scope (Sec.  422.300)
    Proposed Sec.  422.300 set forth the basis and scope for the 
revised subpart G, stating that it is based on sections 1853, 1854, and 
1858 of the Act. It also indicated that the regulations in this subpart 
set forth the requirements for making payments to MA organizations 
offering local and regional MA plans, including calculation of MA 
capitation rates and benchmarks, conditions under which payment is 
based on plan bids, adjustments to capitation rates (including risk 
adjustment), and other payment rules.

2. Monthly Payments (Sec.  422.304)

    The MMA revised the payment methodology for MA plans beginning in 
2006. We provided, in proposed Sec.  422.304(a), that, with the 
exception of payments to MSA plans and payments for ESRD enrollees in 
all other plans, we will make advance monthly payments to an MA 
organization for each enrollee for coverage of original FFS benefits in 
the plan payment area for a month, using a new bidding methodology 
described in this subpart and subpart F.
    The amount of our payment for an MA plan (except an MSA plan) 
depends on the relationship of the plan basic A/B bid to the benchmark 
amount. Section 422.304(a) described two payment tracks:
     If the plan's risk-adjusted basic A/B bid is less than the 
risk-adjusted benchmark, the plan's average per capita monthly savings 
equals 100 percent of that difference, and the beneficiary is entitled 
to a rebate of 75 percent of this plan savings amount.
     If the plan's risk-adjusted plan basic A/B bid is equal to 
the risk-adjusted benchmark, the plan has no savings and thus no 
rebate, and we pay plans without rebates the benchmark for the 
geographic service area.
     If the plan's risk-adjusted basic A/B bid is greater than 
the risk-adjusted benchmark, the plan has no rebate and to meet the 
plan's revenue needs enrollees must pay a basic beneficiary premium 
equal to the difference between the unadjusted basic A/B bid and the 
unadjusted benchmark.
    Under section 1853(a)(1)(D) of the Act, implemented in proposed 
Sec.  422.304(b), MA plans offering qualified prescription drug 
coverage also receive payments for the direct and reinsurance subsidy 
payments for basic prescription drug coverage and reimbursement for 
premium and cost sharing reductions for low-income individuals, 
described at sections 1860D-14 and 1860D-15 of the Act.
    Special rules for enrollees with end-stage renal disease. Proposed 
Sec.  422.304(c)(1)(i) would implement section 1853(a)(1)(H) of the 
Act, which instructs us to continue using the ESRD payments rates and 
risk adjustment methodology in effect before the enactment of the MMA 
as the basis upon which to determine ESRD payment amounts. We believed 
the MMA provided us with flexibility for determining ESRD payments 
because of Congressional recognition that the cost and utilization 
patterns for ESRD beneficiaries are distinct from aged and disabled 
beneficiaries.
    One option proposed was to pay the State capitation rate for each 
enrollee,

[[Page 4656]]

with the relevant adjustments under this part, including risk 
adjustment. For plans offering the Part B premium reduction, the amount 
of that reduction would be subtracted from the capitation payment for 
ESRD enrollees, too. The second option proposed was to base payment on 
State capitation rates, as adjusted under MMA adjustments such as the 
geographic ISAR adjustment at section 1853(a)(1)(F). Accordingly, ESRD 
enrollees would be fully incorporated into the bid process and payments 
for all enrollees would reflect the plan's relative weights of ESRD 
versus non-ESRD enrollee costs. We would consider this sufficient 
implementation of section 1853(a)(1)(H) of the Act because State 
capitation rates are the basis of payment. We invited comments on these 
two approaches.
    Special rules for payments to MSA plans. Proposed Sec.  
422.304(c)(2) would implement section 1853(a)(1)(B)(iii) of the Act, 
which contains the same rules for MSA plans that existed under the 
previous M+C program. The only MMA change in the payment provision is 
that MSA plans become local MA plans, and we will make payments to MA 
organizations for MSA enrollees based on the non-drug benchmark amount, 
less 1/12 of the annual lump sum amount (if any) we deposit to the 
enrollee's MA MSA, as determined under Sec.  422.314(c). This payment 
amount is adjusted for enrollee risk, as proposed at Sec.  422.308(c).
    RFB plans. Proposed Sec.  422.304(c)(3) on special rules for 
religious fraternal benefit (RFB) society plan enrollees is unchanged 
from the current regulations, now in subpart F at Sec.  
422.250(a)(2)(iii).
    Payment areas. Proposed Sec.  422.304(d) would implement section 
1853(d) of the Act, which changes the definition of payment area to 
account for the new MA regional plan program. Under the previous M+C 
program, a payment area was defined as a county or equivalent area 
defined by the Secretary (with the exception of ESRD enrollees, for 
whom the payment area was a State).
    The MMA establishes two general types of payment areas: (1) for MA 
local plans, the payment area is an MA local area (defined as a county 
or equivalent specified by CMS); and (2) for MA regional plans, the 
payment area is an MA region. The payment area for ESRD enrollees 
continues to be a State.
    Proposed Sec.  422.304(e) would implement section 1853(d)(4) of the 
Act, which permits a State's chief executive to request that we use 
alternative payment areas. This provision retains the same language as 
the previous M+C provision, with the exception that the statute 
specifies this option applies only to local MA plans. No State has 
availed itself of this option since its enactment in 1998.
    Comment: A number of commenters preferred that CMS pay the State 
rate for each ESRD enrollee, risk adjusted, seeing this approach as 
linked to their preference not to include ESRD enrollees in bidding. 
Several commenters did not state a preference for payment, noting that 
the concept of the second option was not clear, so they are continuing 
to evaluate CMS's and other options that may merit our consideration.
    Response: Beginning in 2007, MA-PD plans will implement a merged 
bid method where ESRD and non-ESRD costs are combined. This means that 
MA organizations will submit a single bid for all enrollees, and will 
be paid according to the relationship of the basic A/B bid and the 
benchmark.
    However, as discussed in the F preamble, for 2006 MA organizations 
will exclude ESRD costs from plan bids. Accordingly, for 2006 payments, 
we will apply the ESRD payment method in effect for 2005. For ESRD 
enrollees on dialysis or transplant status, we will pay the State-level 
dialysis rate, adjusted by the appropriate individual risk score from 
the ESRD CMS-HCC risk adjustment model. For functioning graft 
beneficiaries, we will pay the county risk rate (from the aged/disabled 
ratebook), adjusted by the appropriate individual risk factor from the 
ESRD CMS-HCC model.
    Finally, as proposed in the August 2004 proposed rule, for any plan 
offering a Part B premium reduction to MA plan enrollees, the amount of 
this reduction will be subtracted from the payment for each ESRD 
enrollee. Future changes to how we make payments for ESRD MA enrollees 
will be announced in the Advance Notice of Methodological Changes for 
Calendar Year (CY) Medicare Advantage (MA) Payment Rates.
3. Annual MA Capitation Rates (Sec.  422.306)
    For years before 2004, payments to MA organizations were based on 
the highest of three amounts: a ``blended rate'' based on a blend of 
national and local data on Medicare's costs for providing services to 
beneficiaries not enrolled in an MA plan, a ``floor amount,'' based on 
an amount specified in statute, subject to an update factor, and an 
amount representing the previous year's rate updated by a minimum 
percentage increase.
    The MMA replaces the ``highest of three rates'' methodology in 
several phases. For 2004, the MMA specified a transitional methodology, 
where the county and State rates were the ``highest of four rates'': 
the floor amount rate, blend rate, minimum percentage increase rate 
(which was redefined to be the higher of 102 percent of the previous 
year's rate or the previous year's rate increased by annual MA growth 
percentage), or the 100 percent of FFS costs rate introduced by the 
MMA.
    For the next phase, the MMA specified that beginning with 2005, 
annual capitation rates will be minimum percentage increase rates 
except for years when we rebase the FFS rate; in rebasing years, the 
rate is the higher of the minimum percentage increase rate and the FFS 
rate. The MMA requires us to rebase the FFS rates no less than every 3 
years; that is, at least every 3 years a ``higher of two rates'' 
methodology is in effect. Hence, proposed Sec.  422.306(a) would 
implement the revised version of section 1853(c)(1)(C) of the Act, 
which defines the minimum percentage increase rate.
    The MMA also provides that no less than every three years, we must 
assign 100 percent of local per capita FFS costs as the county rate in 
those counties where this amount is higher than the minimum percentage 
increase rate. The new FFS rate is defined as the adjusted average per 
capita cost (AAPCC) for the MA local area, as determined under section 
1876(a)(4) of the Act, based on 100 percent of FFS costs for 
individuals who are not enrolled in an MA plan for the year, with the 
following adjustments: (1) standardized for the county risk profile 
relative to the nationally average beneficiary; (2) adjusted to exclude 
costs of direct graduate medical education; and (3) adjusted to include 
our estimate of costs for VA and DOD military facility services to 
Medicare-eligible beneficiaries. We must recalculate the AAPCC rate 
(which we also call the ``100 percent FFS rate'') no less than once 
every 3 years. The statute gives us the authority to determine how 
often to rebase the ratebook within this 3 year window. Rebasing the 
FFS rates means that the Office of the Actuary retabulates the per 
capita FFS expenditures for each county (and for ESRD beneficiaries, 
for each State) so that the FFS rates reflect more recent county growth 
trends in FFS expenditures.
    We intend to announce our decision annually in the Advance Notice 
of Methodological Changes for Medicare Advantage Payment Rates 
regarding whether we will rebase the 100 percent FFS rates for the 
upcoming year.
    Comment: Many commenters supported annual rebasing in order to 
adequately pay MA organizations in

[[Page 4657]]

areas where the FFS costs are increasing at a rate faster than the 
national average. One commenter noted that CMS should rebase annually 
because of the high degree of volatility in local FFS costs, and stated 
that CMS recognizes this volatility by using a 5-year moving average 
when forecasting county level Medicare FFS costs.
    Response: As announced in the 2005 Advance Notice of Methodological 
Changes, the CMS Office of the Actuary believes that it is appropriate 
to evaluate on an annual basis whether or not it is necessary to 
recalculate the basis for the 100 percent of FFS costs payment category 
for MA organizations. By requiring rebasing only every 3 years, the 
Congress determined there was no need to statutorily mandate an annual 
retabulation of FFS per capita expenditures for each county. Therefore, 
CMS will announce each year in the Advance Notice whether it intends to 
rebase the FFS rate. Interested parties will have the opportunity to 
comment each year on the announcement before it is finalized.
    Comment: A few commenters noted that CMS has not implemented the 
existing authority for inclusion in the 100 percent FFS rate the costs 
associated with services provided to eligible Medicare beneficiaries at 
VA and DOD facilities. Two commenters claimed that the result of taking 
these costs into account would be a positive adjustment to MA plan 
payments, and that currently plans serving areas with many VA and DOD 
facilities were not being fully reimbursed. Commenters recommended that 
CMS move forward as soon as possible with implementation based on the 
best data available.
    Response: As we previously stated in our Advance Notice of 
Methodological Changes for 2005, in order to incorporate the costs of 
services provided at VA/DOD facilities into the MA rates, it is 
necessary to obtain reliable data on a county level to make the 
adjustment. We have been unable to obtain these data, so to date the 
adjustment has been zero. CMS's Office of the Actuary will make an 
annual determination whether it has been able to obtain sufficient 
reliable data on the costs of services provided at VA/DOD facilities to 
make a non-zero adjustment to the 100 percent FFS rates.
4. Adjustments to Capitation Rates, Benchmarks, Bids, and Payments 
(Sec.  422.308)
    Language proposed in Sec.  422.308(a) remains the same as that 
currently in subpart F of the current regulations governing payments. 
Under section 1853(c)(1)(C) of the Act, the MMA makes only one change 
to how we must apply the national growth percentage each year to 
increase the minimum percentage increase rate. As we provided in 
proposed Sec.  422.308(b), no adjustment can be made for changes in 
prior years' estimates of the national growth percentage for years 
before 2004.
    Risk adjustment. Proposed Sec.  422.308(c) would implement section 
1853(a)(1)(C) of the Act, which requires us to adjust the payment 
amount for an MA plan to take into account the health status of the 
plan's enrollees. In order to ensure that MA organizations are paid 
appropriately for their plan enrollees (that is, less for healthier 
enrollees and more for less healthy enrollees), we will apply these 
adjustment factors to all types of plans (with the exception of MA RFB 
plans, discussed at Sec.  422.304(c)(3)).
    In 2006, 25 percent of our payment to MA organizations for aged and 
disabled enrollees will be based on current demographic factors, and 75 
percent based on the CMS-HCC risk adjustment model. In 2007 the 
demographic-only payment method will be completely phased-out for MA 
plans, and 100 percent of payment will be risk-adjusted in 2007 and 
succeeding years. Note that for ESRD MA enrollees, payments to MA 
organizations are 100 percent risk adjusted under the CMS-HCC ESRD risk 
adjustment model, effective January 1, 2005. Also, for PACE 
organizations and certain demonstrations, the transition payment blends 
are one year behind that for MA organizations.
    The demographic adjustment factors for aged and disabled enrollees 
are age, sex, institutional status, Medicaid status, and working aged 
status. The demographic adjustment factors for ESRD enrollees are age 
and sex.
    Under the CMS-Hierarchical Condition Category (HCC) risk adjustment 
payment methodology, there are CMS-HCC models for three different 
populations: community-based, long-term institutionalized, and ESRD 
beneficiaries. Currently, the CMS-HCC factors in these models include 
age, sex, original reason for entitlement, Medicaid status, and disease 
factors. The ESRD risk adjustment model distinguishes between an 
enrollee on dialysis, functioning graft, and transplant status.
    The statute continues to provide us the authority to add to, 
modify, or substitute for risk adjustment factors if the changes will 
improve the determination of actuarial equivalence. Additional factors 
would enable us to pay more accurately for different types of 
beneficiaries, that is, the healthier and less healthy MA enrollees.
    Comment: One commenter wanted clarification of how plans that are 
currently paid under a risk/frailty adjustment model will be paid in 
2006 and beyond.
    Response: The MMA did not alter the payment methodology transition 
schedule for MA organizations or other types of plans that are being 
paid using the current risk/frailty adjustment models (PACE plans and 
certain demonstrations). Thus, 2006 will be the last year that the 
demographic method will be used to determine 25 percent of payments for 
MA plans. In 2006, 75 percent of payment will be based on the risk 
adjustment method, and from 2007 onward 100 percent of payment will be 
determined with the risk adjustment method. Hence, PACE organizations 
are on a transition schedule one year behind MA organizations and 
certain demonstrations will be paid on the same lagged transition 
schedule. In 2006, 50 percent of our payments to PACE organizations and 
certain demonstrations will be based on the current demographic factors 
and the remaining 50 percent will be based on the appropriate CMS-
Hierarchical Condition Category (HCC) risk adjustment model. In 2007, 
75 percent of their payment will be based on the current demographic 
factors and the remaining 25 percent will be based on the CMS-HCC 
model. In 2008 and beyond, payments to PACE organizations and certain 
demonstrations will be entirely based on the CMS-HCC model.
    Regarding demonstration plans, the MMA did not alter the current 
protocol for determining a particular demonstration's payment 
methodology. Therefore, CMS will continue to make decisions on pricing 
and payment methodology for its demonstrations specific to each 
demonstration.
    Comment: Regarding the current risk adjustment model, one commenter 
suggested that there are certain conditions like diabetes and cancer 
that have several different HCC risk adjusters of varying intensity. 
The concern is that chronic obstructive pulmonary disease (COPD), 
congestive heart failure (CHF), and other HCCs common among frail 
elderly have only one risk score, when it may be more appropriate to 
distinguish a late stage or advanced stage of illness for certain 
conditions to trigger a higher score.
    Response: CMS continues to work on improvements to the CMS-
Hierarchical Condition Category (HCC) risk adjustment model. For 2006, 
more diagnoses and HCCs will be included in the CMS-HCC model. We will 
announce the updates to the CMS-HCC model in

[[Page 4658]]

the Advance Notice of Methodological Changes for Medicare Advantage 
Payment Rates. We believe that this risk adjustment model, on average, 
accurately pays for Medicare enrollees.
    Comment: Several commenters supported the implementation of a 
frailty adjuster across the MA program, but encouraged CMS to delay 
implementation of the adjuster for at least two years until the other 
significant changes to the MA program have been implemented. In light 
of the likely delayed implementation of a frailty adjuster for all MA 
organizations, another commenter believed that CMS should pursue a 
legislative change to pay special needs plans (SNPs) differently, in 
order to implement a frailty adjuster, from the rest of the MA 
organizations. In particular, several commenters were concerned about 
SNPs being paid accurately for their dual eligible enrollees.
    Response: We agree that implementation of a frailty adjuster across 
the MA program would not be appropriate in the near future in the 
advent of significant changes occurring in the MA program beginning in 
2006. We believe that the current risk adjustment model that includes a 
Medicaid eligibility adjuster pays on average correctly for dual 
eligible enrollees. In addition, as a part of refining the CMS-HCC 
model, we intend to recalibrate the current risk adjustment model so 
that it accurately reflects more current treatment costs. As the MA 
program continues to stabilize in its new form, we will be able to 
apply a frailty adjuster across the entire MA program. We do not have 
the statutory authority to apply a frailty adjuster only to special 
needs plans because the MMA requires CMS to pay special needs plans 
using the same methodology it uses for all other MA organizations.
    Comment: One commenter requested that CMS encourage MA 
organizations to include financial incentives in their contracts with 
providers that are designed to encourage risk adjustment data 
submission, rather than using financial penalties. The commenter noted 
the success in California with a pay-for-performance program that 
includes financial incentives to IPAs and medical groups to encourage 
quality health care, including incentives for the submission of 
encounter data.
    Response: In principle, we do not object to plans using financial 
incentives with their physicians to improve their risk adjustment data 
submission volume to the extent that these financial incentives do not 
result in MA organizations' encouraging physicians to provide 
unnecessary or inappropriate services in order to increase diagnosis 
reporting volumes. MA organizations proposing to offer providers 
remuneration in exchange for collecting data must ensure that such 
arrangements do not violate the anti-kickback statute. Parties who 
desire an advisory opinion about a particular arrangement may request 
an opinion from the HHS Office of the Inspector General (OIG). The OIG 
has the authority to audit financial incentives offered to providers.
    We believe that physicians who submit diagnoses for purposes of 
risk adjustment data submission as if they were submitting claims to 
FFS Medicare for reimbursement will be submitting the appropriate 
volume.
    Comment: One commenter suggested that CMS be less concerned about 
the burden on MA organizations of submitting risk adjustment data and 
more concerned about the accuracy of these data. Another commenter 
echoed this concern by noting that CMS' implementation of an 
abbreviated dataset might compromise the validity of the data 
submitted. One commenter praised CMS for reducing the burden on plans 
by implementing an abbreviated risk adjustment dataset.
    Response: In 2000, we implemented a risk adjustment model based on 
only principal inpatient hospital diagnosis data. The industry voiced 
concerns that the inpatient hospital model draws on diagnoses from an 
acute care setting only, and therefore, is less accurate. In 2004, we 
implemented a more comprehensive model with a more complete list of 
acute and chronic diagnoses. Diagnosis data are now being collected 
from three settings: inpatient hospital, outpatient hospital and 
physician office settings. At the same time as the more accurate, 
comprehensive model was being implemented, we began requiring an 
abbreviated set of data elements to be reported in order to reduce any 
unnecessary administrative burden on the MA organizations. However, 
this abbreviated dataset does not compromise the validity of the 
current risk adjustment model because all relevant diagnoses affecting 
payment still must be submitted. Rather, the fact that we no longer 
collect a full set of encounters for each MA enrollee means only that 
we do not have accurate utilization data for future recalibration of 
risk adjustment models. The fact that we no longer collect a full set 
of encounters does not affect the validity of the current model for 
making payments.
    Comment: One commenter asked for clarification of risk adjustment 
data deadlines.
    Response: We will provide updated information about risk adjustment 
data deadlines in the MA organization training materials and other 
formats such as MA organization user groups designed to provide 
operational information including data submission deadlines. General 
guidelines about risk adjustment data submission deadlines can be found 
at Sec.  422.310(g).
    Comment: One commenter stated that any risk adjustment system 
should take into account the traditionally higher costs and utilization 
of large employer group health plans.
    Response: Regarding the commenter's concern about the accuracy of 
the risk adjustment model for large employer group plans, data from the 
Medicare Current Beneficiary Survey indicate that any beneficiaries 
with supplemental coverage have higher costs. These data do not support 
the commenter's assertion that the costs and utilization of Medicare 
Part A and B benefits are higher for enrollees of large employer group 
plans than for beneficiaries with other types of supplemental coverage.
    Adjustment for intra-area variations. Proposed Sec.  422.308(d)(1) 
would implement section 1853(a)(1)(F)(i) of the Act, which requires us 
to adjust payments for regional MA plans to account for variations in 
local payment rates within the region the plan is serving.
    Proposed Sec.  422.308(d)(2) would implement section 
1853(a)(1)(F)(ii) of the Act, which requires us to adjust payments for 
a local MA plan serving more than one county to account for variations 
in local payment rates within the plan's service area.
    The proposed rule mentions four methods that could be used to 
adjust for relative costs in a plan's service area. Each rate reflects 
a different type of variation.
     MA rates: reflect what Congress determined to be 
appropriate variation in payment rates among counties. (The proposed 
rule suggests that this option could be used for local plans.)
     Local average fee-for-service (FFS) costs: reflect 
relative price and utilization differences among counties. (MA county 
rates that are 100% FFS rates also reflect price and utilization 
differences.)
     Input prices: reflect only price differences in certain 
service categories, for example, physician services, , not variations 
in practice patterns among counties.
     Plan-provided (county-specific) factors showing relative 
revenue needs

[[Page 4659]]

by county (which the MA organizations would provide in their annual bid 
submission): reflect cost variations unique to each plan.
    The proposed rule stated that we may choose to apply different 
adjustments to local versus regional plans, because there may be 
different reasons for rate variation. For example, regional MA plans 
will be required to cover regions at least as large as a State, thereby 
being compelled to offer the same benefit package to urban and rural 
areas. This requirement could be the source of significant variation in 
plan costs because of service area differences in provider practice and 
beneficiary utilization patterns, wage indices, and other factors.
    Comment: Most commenters recommended an adjustment based on the MA 
rates. One commenter recommended an approach where the cost index would 
be consistent with the costs MA plans face in their service areas. 
Several commenters recommended that CMS use the MA rates for a 
geographic adjustment at least in the initial years of the program, 
because the industry is familiar with the MA county rates as a means of 
payment. A number of commenters recommended that the method CMS selects 
for regional MA plans should be consistent with that for local MA plans 
so that the adjustment does not advantage one type of plan over the 
other, thus contributing to a more level playing field for all MA 
plans--local and regional. Another commenter remarked that the 
adjustment back to the local county rates is the most consistent with 
the constraints of the MMA, is the most feasible to implement, and 
contributes to a level playing field for the different types of private 
plans. The commenter reasoned that because the different benchmarks are 
all built upon the county payment rates, and because the local plans 
can always organize to be paid at the individual county level, payments 
to all the types of plans should reflect the county payment rates; 
otherwise, spending on MA plans would likely increase under any 
geographic adjustment. Finally, one commenter preferred to use county 
benchmarks as the basis for intra-area adjustments for local plans and 
an index of county benchmarks for regional plans, but added that the 
appropriateness of an index-type adjustment method will depend on the 
basis of the experience underlying the index derivation calculations.
    Response: To avoid confusion with the geographic adjustment we use 
to calculate the 100 percent FFS rates, we will refer to this section 
1853(a)(1)(F) adjustment as the geographic ISAR adjustment, reflecting 
its purpose.
    We have chosen to interpret the ISAR adjustment provision broadly. 
A more narrow interpretation of ``variations in MA local payment 
rates'' would be that variation refers only to the administratively-set 
MA rates. A broader interpretation of variation is that the provision 
denotes underlying variations in local prices. In this sense, ``local 
payment rates'' means payment rates MA organizations negotiate with 
providers. We have taken the latter approach because the MMA defines 
the bid to be an amount that reflects a plan's estimated revenue 
requirements--that is, the average underlying costs a plan faces in its 
service area. This approach allows us to consider adjustment methods in 
addition to those based on MA county rates.
    By law, a plan's bid is based on its projected enrollment. The 
purpose of the ISAR adjustment is to ensure that CMS pays an MA 
organization what its plan basic A/B bid would have been if the 
enrollment projections used to estimate the bid were identical to 
actual plan enrollment. That is, the ISAR adjustment would take into 
account the difference between the distribution of enrollment across 
counties in the plan's service area assumed in the plan's bid and the 
actual geographic mix of enrollment at the time payment is made. Since 
plan costs are not uniform across the plan's service area, the fact 
that the distribution of enrollment assumed in the bid is not the same 
as the plan's actual enrollment distribution would impact on whether 
the plan receives the revenue it indicated it needed in its bid to 
provide Medicare Part A and Part B services. The ISAR adjustment uses 
the distribution of actual enrollment and assumptions about relative 
costs across counties in the plan's service area to provide a payment 
amount that reflects actual enrollment.
    Regardless of the specific method (whether plan-provided projected 
costs per county or a relative cost or price index not specific to 
plans), use of the ISAR adjustment to translate the plan's bid into 
county-specific rates would mean that if a plan's enrollment 
distribution turns about to be different than originally estimated in 
their bid, their aggregate payments would be adjusted automatically to 
reflect the actual mix of enrollees in of low-cost and high-cost 
counties. Recall that for plans with bids below benchmarks, the average 
payment amount is the basic A/B bid (plus the rebate); and for plans 
with bids greater than or equal to the benchmark, the average payment 
amount is the benchmark. Conceptually, converting the average payment 
amount into plan-specific county rates means that the bid (or 
benchmark)--which is an average for the whole service area--is 
``disaggregated'' and allocated to each county in the service area.
    For each local and regional plan, we will be using a geographic 
ISAR adjustment based on the MA payment rates. This approach reflects 
the method preferred by the majority of commenters. However, since it 
is our goal to encourage regional bids, we will allow regional MA 
plans, on a case-by-case basis, to request to have their payments 
geographically adjusted at the county level using a plan-determined 
statement of the relative costs the plan faces in different counties 
for the provision of Medicare-covered services, in the event that the 
variation in MA rates is not an accurate reflection of the variation in 
a plan's projected costs in its service area. We would review the plan-
provided ISAR factors for reasonableness.
    MA organizations would be required to provide support for their 
factors (such as the projected utilization and cost by service category 
for each county), with the understanding that we could ask for 
additional detail (for example, fee schedules) during bid negotiation 
or during an audit. We would base our determination of whether to use 
MA rate ISAR factors or plan-provided ISAR factors for a particular 
regional plan on the comprehensiveness and reasonableness of the MA 
organization's cost and utilization assumptions and associated 
documentation, and on an assessment of which approach would best 
reflect the plan's likely costs throughout the service area.
    The rebate, described at Sec.  422.304(a)(3), is for the provision 
of non-Medicare-covered benefits and is paid separately from the basic 
A/B bid. The rebate is not subject to geographic adjustment. Further 
guidance on the calculation of the ISAR adjustment factor will be 
provided in the Advance Notice of Methodological Changes for 2006 
Medicare Advantage Payment Rates, which we expect to release February 
18, 2005 on our website at http://www.cms.hhs.gov/healthplans/rates/default.asp.
    Comment: One commenter remarked that CMS did not clearly explain 
its proposed method for the ISAR adjustment in the NPRM, and felt that 
unless we publish a proposed method for establishing regional PPO 
benchmark levels, participation in the regional PPO program may suffer. 
Another commenter requested that CMS wait until Medpac releases its 
report on payment rate variations before

[[Page 4660]]

determining how to apply the ISAR adjustment, and that CMS allow 
industry to comment on the proposed adjustment before implementation.
    Response: First, we would like to clarify that the geographic ISAR 
adjustment does not establish regional benchmarks. The method for 
calculating regional benchmarks is established by the MMA and 
implemented at Sec.  422.258. The purpose of the ISAR adjustment is to 
ensure that we pay an MA organization what its plan basic A/B bid would 
have been if the enrollment projections used to estimate the bid were 
identical to actual plan enrollment. Second, although we stated in the 
August 3, 2004 proposed rule our intention to review Medpac's upcoming 
study on variations in MA payment rates, we now do not believe we can 
wait until the final Medpac report is released, because it likely will 
be presented to the Congress in June 2005. We are required to announce 
our proposed approach to the ISAR adjustment, and other payment 
methodologies, in the Advance Notice of Methodological Changes for 
Calendar Year 2006 MA Payment Rates, which we expect to be released 
February 18, 2005 on the CMS website at http://www.cms.hhs.gov/healthplans/rates/default.asp.
    Comment: A few commenters recommended that the ISAR adjustment 
should be considered by CMS as a tool to use in adjusting the local 
payment rates in rural markets, where competing with a regional plan 
would be cost prohibitive. One commenter suggested that the adjustment 
should result in localized derivations of regional benchmarks, and 
another commenter suggested that in counties where the local benchmark 
is significantly lower than the regional benchmark, payment rates to 
regional plans should be adjusted downward to reduce the significant 
competitive advantage regional plans would have over local plans, 
because the latter will have to charge a higher member premium for the 
same benefit set and cost structure. Finally, a few commenters stated 
their concern that it has taken many years to narrow the reimbursement 
gap between rural and urban areas and now is not the time to reinvent 
that disparity. These commenters felt this could happen under this ISAR 
provision because it could allow health plans to segregate rural 
providers within their region and offer them a substantially lower 
payment rate.
    Response: As noted above, the ISAR adjustment will not affect 
regional or local benchmarks. In addition, the ISAR adjustment is not a 
tool to increase payments to local versus regional plans or vice versa. 
The ISAR adjustment is a mechanism to ensure that payments to plans 
reflect the plans' bids and their actual enrollment distribution.
    We have worked within the construct of the statute to provide a 
level playing field for all plans. The MMA created incentives to 
encourage participation in the new regional plan program, such as 
possible funding from a stabilization fund and the use of risk 
corridors that are only available to MA regional plans, as found at 
Sec.  422.438 and Sec.  422.458 (and see subpart J). These incentives 
are specified by statute, so we are unable to expand the types of 
organization that are eligible for these incentives. It is important to 
point out, however, that there are special provisions available only to 
local plans that MA regional plans do not have available, such as the 
ability to target specific counties and even partial county areas for 
inclusion in a plan service area, and to have segmented service areas 
within a local plan, where premiums and cost sharing can vary across 
segments.
    We are not clear exactly what link the commenters are positing 
between the ISAR adjustment and contract negotiations with rural 
providers where MA organizations offer payment arrangements that are 
lower than previous years.
    Adjustment relating to risk adjustment: the government premium 
adjustment. Proposed Sec.  422.308(e) would implement section 
1853(a)(1)(G) of the Act, which requires us to adjust payments to plans 
with basic A/B bids above their benchmarks to ensure that plans are not 
advantaged or disadvantaged by the method of paying based on bid-to-
benchmark comparisons. Under the bidding method, the beneficiary basic 
premium is the difference between unadjusted (``1.0 beneficiary'') bid 
and benchmark, yet the payment is the risk adjusted benchmark. If the 
MA organization received this premium and its risk adjusted payment 
from CMS, the combined payments would not match its revenue needs since 
the basic premium is not risk adjusted. Therefore, the impact that risk 
adjustment would have had on the basic premium will be incorporated 
into our payment to the organization.
    Proposed Sec.  422.308(e)(1) specified that for each regional plan, 
payments are adjusted so the sum of the monthly payment and any basic 
beneficiary premium equals the bid adjusted for enrollee risk factors 
and the adjustment for intra-area variations in payments in proposed 
Sec.  422.308(d)(1). Note that the formula as stated at section 
1853(a)(1)(G)(ii) of the Act also references the adjustment discussed 
in the previous paragraph--for intra-regional variations in local 
payment rates.
    Proposed Sec.  422.308(e)(2) specified that for each local plan, 
payments are adjusted so the sum of the monthly payment and any basic 
beneficiary premium equals the bid adjusted for enrollee risk factors. 
We note that, in contrast to the language for regional plans at section 
1853(a)(1)(G)(ii) of the Act, the formula for local plans does not 
include a reference to the intra-area variation described in proposed 
Sec.  422.308(d)(1). We believe this was an unintended omission for 
local plans, because section 1853(a)(1)(F) of the Act mandates this 
adjustment for both regional plans and local plans serving more than 
one county.
    The government premium adjustment must be applied after application 
of the risk adjustment methodology and after taking into account 
adjustments for intra-area variation in local payment rates under Sec.  
422.304(d).
    Comment: Two commenters supported CMS' proposal to adjust payment 
upward or downward to account for the fact that the basic beneficiary 
premium reflects the revenue needed for a beneficiary with a national 
average risk profile rather than the MA plan's anticipated mix of 
enrollees.
    Response: We will refer to this adjustment as the ``government 
premium adjustment,'' in order to distinguish it from other payment 
adjustments under the MMA.
    Section 1854(a)(1)(G) requires CMS to adjust payments to ensure 
that an MA organization is paid the revenue needed to offer an MA plan 
in a service area. The government premium adjustment applies to plans 
that have basic A/B bids greater than their benchmarks, and thus must 
charge a basic beneficiary premium. As described above, these plans 
receive their estimated required revenue to offer original Medicare 
benefits from two sources: capitation payments from CMS and premium 
payments from enrollees. Because the MMA requires that the basic 
beneficiary premium is the difference between the unadjusted 
(standardized ``1.0'') benchmark and unadjusted bid, plans with sicker 
than average risk profiles will not receive adequate premium payments 
from enrollees. The government premium adjustment would be an upward 
adjustment for these plans. Conversely, plans with healthier than 
average risk profiles will receive more premium payments than required, 
so they would receive a downward

[[Page 4661]]

adjustment. The government premium adjustment will be calculated, at 
the individual beneficiary level. Details on the payment formula will 
be provided in the Advance Notice of Methodological Changes for 2006 MA 
Payment Rates, which we expect to publish February 18, 2005 on the CMS 
website at http://www.cms.hhs.gov/healthplans/rates/default.asp.
    Adjustment of payment to reflect the number of enrollees. Proposed 
Sec.  422.308(f) implemented section 1853(a)(2)(A) of the Act, which is 
unchanged by MMA. Therefore, we proposed to retain the existing 
implementing regulatory language currently found in Subpart F. This 
provision requires us to make retroactive payment adjustments to 
account for any difference between the actual enrollees and the 
enrollees upon which we based advanced monthly payment.
    Adjustment for national coverage determination (NCD) services and 
legislative changes in benefits. Section 1853(c)(7) of the Act requires 
that when a national coverage determination (NCD) or legislative change 
in benefits is established and we project this will result in a 
significant increase in costs, we must appropriately adjust payments to 
reflect these new significant costs. Because all capitation rates under 
the MMA now automatically build in the annual national MA growth 
percentage and therefore incorporate the effect of NCDs annually, we 
proposed to amend Sec.  422.308(g) and remove the NCD adjustment 
factor.
    Section 1858(c) of the Act provides for temporary risk corridors 
for adjusting payments to regional plans, and proposed Sec.  422.308(h) 
specified data submission requirements to implement risk corridor 
payments. At the end of contract year 2006 and/or 2007, and before a 
date we specify, MA organizations offering regional plans must submit 
sufficient information for us to calculate risk corridor amounts.
    This information includes actual allowable costs for the relevant 
contract year and the portion of allowable costs that are attributable 
to administrative expenses incurred in providing these benefits. In 
addition, the MA organization will be required to provide the total 
cost for providing rebatable integrated benefits, as well as the 
portion of rebatable integrated benefits' costs that are attributable 
to administrative expenses.
5. Risk Adjustment Data (Sec.  422.310)
    Proposed Sec.  422.310 reflected changes we made in the methodology 
for risk adjusting MA payments, under which we moved from collecting 
extensive encounter data to collecting targeted risk-adjustment data. 
The risk-adjustment data referenced in this section are data that are 
used in the application of the current risk-adjustment model.
    We have implemented a streamlined process for MA organizations to 
submit risk adjustment data. MA organizations may submit risk 
adjustment data that conform to the requirements for equivalent FFS 
data. Alternatively, organizations may submit data according to an 
abbreviated format as specified by us. The purpose of the abbreviated 
format is to reduce the data submission burden on MA organizations.
    In addition, our current practice is to collect data and a sample 
of medical records, for conducting validation studies of the risk 
adjustment data we receive. MA organizations will still be required to 
submit a sample of their medical records in a manner specified by CMS 
to support the validation studies. We have not and will continue not to 
use medical records data for any other purpose.
    The risk adjustment data must be submitted according to the 
timeframes specified by CMS. (See the following website for information 
on the risk adjustment processing system: http://www.mcoservice.com/.) 
A reconciliation process will be allowed to account for late data 
submissions. Data that we receive after the final deadline for a 
payment year will not be accepted for purposes of the reconciliation.
    We have modified Sec.  422.310(e) to indicate that there may be 
penalties for submission of false data under the requirement for 
validation of risk adjustment data.
6. Announcement of Annual Capitation Rates, Regional Benchmarks, and 
Methodology Changes (Sec.  422.312)
    Proposed Sec.  422.312 would implement section 1853(b) of the Act, 
which was revised by the MMA to change the date for CMS' announcement 
of annual capitation rates to no later than the first Monday in April 
of each year. In addition, we must announce before September the non-
drug benchmark amounts for each MA region and MA regional plan for 
which a bid is submitted. We must announce regional benchmarks after 
the plan bids are submitted in June, since per the new section 
1858(f)(5) of the Act, the regional benchmark calculation includes a 
plan bid component based on regional plans that bid in June and also 
participated in the MA program in the previous year.
    The deadline for our release of the Advance Notice of 
Methodological Changes for Medicare Advantage Payment Rates was 
similarly changed by the MMA to no later than 45 days before the first 
Monday in April.
    Comment: Two commenters requested that CMS include in the Advance 
Notice of Methodological Changes for Medicare Advantage Payment Rates 
additional detail on the methodologies we use to develop and refine 
payment rates. The commenters specifically requested detail on the 
coding intensity adjustment, issues related to the data lag 
elimination, and implementation of the frailty adjuster.
    Response: The annual Advance Notice is designed to describe the 
methodological changes we propose in sufficient detail to alert MA 
organizations to new calculations, new deadlines, and so forth. If the 
Advance Notice is unclear, the public is invited to request more 
information during the public comment period, and we then publish 
further detail in the annual Rate Announcement. We will be sensitive to 
the commenters' request as we prepare future Advance Notices of 
Methodological Changes.
7. Special Rules for Beneficiaries Enrolled in MA MSA Plans (Sec.  
422.314)
    Proposed Sec.  422.314 would implement section 1853(e)(2) and (3) 
of the Act, which sets forth special rules for how we should make 
payments to enrollees' medical savings accounts. The MMA did not amend 
the payment provisions in section 1853(e) of the Act, so these 
provisions are similar to the provisions at Sec.  422.262 in subpart F 
of the current MA regulations. However, we have made a change to 
conform Sec.  422.314(c) with the statute at section 1853(e)(1) of the 
Act.
    In general, we deposit into the individual's MA MSA account at the 
beginning of a calendar year a lump sum equal to the annual difference 
between the monthly MSA premium (analogous to a plan basic A/B bid) and 
the monthly capitation rate applied under this section for the area. 
The premium filed by the organization offering the MA MSA plan is 
uniform for all enrollees enrolled in the MA MSA plan. This results in 
a uniform amount being deposited into enrollees' MSAs in a given area, 
because the uniform premium amount will be subtracted from the uniform 
rate.
    The advance monthly payments we make to an MA organization for each 
enrollee in the plan are risk adjusted under Sec.  422.308(c), as 
discussed in connection with proposed

[[Page 4662]]

Sec.  422.304(c)(2) on special rules for payments for MSA enrollees.
    Comment: One commenter noted a deficiency in the proposed 
regulations on how payment is made for enrollees in MSA plans, which 
prevents an MSA plan from being viable option under the MA program. The 
commenter summarized the problem as follows. Under the statute and 
proposed regulations, the total CMS payment on behalf of a beneficiary 
enrolled in an MSA (the sum of the deposit to the enrollee's MSA 
account and payment to the MSA plan) is not equal to the risk adjusted 
benchmark amount. Yet section 1853(a)(1)(B)(iii) requires CMS to pay 
the risk adjusted benchmark amount for each MSA enrollee. This problem 
arises because the payment to the MSA plan is risk-adjusted and the 
deposit to the enrollee's MSA is not. The result is that the total 
payment for an MSA plan enrollee could be substantially higher or lower 
than the risk adjusted benchmark. Beneficiaries and insurance companies 
cannot be reasonably sure that the Medicare payment will be adequate to 
cover the cost of care.
    The commenter recommended that the MSA requirements be written so 
that: (1) the deposit to the MA MSA account is the difference between 
the risk-adjusted benchmark amount (based on the annual capitation 
rate) and the risk-adjusted MSA premium; and (2) the payment to the MSA 
plan is equal to the risk-adjusted MSA premium. This requirement would 
result in the total payment (deposit plus payment to MSA insurance 
plan) being equal to the risk-adjusted benchmark. The commenter 
recognized that this change may require legislation. Specifically, 
subsection 1853(e) of the Act might need to be amended to provide for 
risk adjustment to the contribution to the MSA account.
    Response: In response to this comment, we have reviewed the 
proposed regulations text for MSA plans and have made a change to 
conform Sec.  422.314(c) with the statute at section 1853(e)(1) of the 
Act. We are continuing to consider how this statutory language should 
be applied, and this issue will be addressed in the Advance Notice of 
Methodological Changes for MA Payment Rates, which we expect to release 
February 18, 2005.
    Comment: Several commenters expressed concern about CMS' ability to 
risk adjust payments for MSA plan enrollees accurately. Given the 
complexities of risk adjustment and the absence of enrollee incentives 
to submit claims to their MSA plan, the commenters are concerned that 
risk scores for many of these enrollees will be artificially low. One 
commenter is concerned that in the absence of systems and incentives 
that encourage members to submit medical expenses to be applied against 
the deductible, it would not be possible to risk adjust accurately the 
MSA benchmark for individual health status, which is CMS' payment 
amount to the MSA plan sponsor. As a result, members will exceed 
deductibles ``prematurely'' and the plan will be responsible for all 
medical payments without the benefit of risk adjusted revenue.
    Response: Section 1853(a)(3)(B) of the statute requires that all MA 
organizations submit risk adjustment data for their plans, including 
MSA plans. The MMA did not change this requirement. We are not sure 
that we understand this comment, because MSA plans are required to 
track each enrollee's health care expenses in order to track when the 
deductible has been met and the plan becomes responsible for all 
covered expenses. Therefore, as an integral part of managing an MSA 
plan, an MA organization should have access to enrollee claims or 
``encounter-like'' data, which should enable them to submit the 
required data to CMS for risk adjustment payment purposes.
8. Special Payment Rule for Federally Qualified Health Centers (Sec.  
422.316)
    At proposed Sec.  422.316 we would implement section 1853(a)(4) of 
the Act, which provides for a new payment methodology for FQHCs that 
contract with MA organizations. Under this methodology, the FQHCs will 
receive a ``wrap-around payment'' from us representing the difference 
(if any) between what they are paid by an MA organization, including 
beneficiary cost sharing, and 100 percent of their ``reasonable costs'' 
of providing care to patients served at the centers who are enrolled in 
an MA plan.
    Section 1857(e)(3) of the Act, also added by MMA, requires that MA 
organizations that contract with FQHCs pay the FQHCs an amount that is 
not less than the level and amount of payment they would make for the 
services if furnished by an entity providing similar services that was 
not an FQHC. This is designed to avoid an agreement between an MA 
organization and an FQHC for payment of an artificially low rate, with 
the knowledge that the FQHC would receive supplemental payments from us 
resulting in a total of 100 percent cost reimbursement.
    Comment: One commenter suggests that Sec.  422.316 be revised to 
clarify that it applies to both written contracts and any deemed 
contracts as they exist under the rules that govern PFFS plans. PFFS 
plans would have to clearly disclose the payment rate in their written 
terms and conditions of payment. This would avoid discrimination 
against PFFS plans.
    Response: PFFS plans that have ``deemed'' networks must pay what 
the FFS Medicare program pays to the ``provider in question,'' per 
Sec.  422.114(a)(2)(i). Therefore, there would be no wrap-around 
payment for FQHCs treating PFFS patients under a ``deemed'' contract 
because the FQHC would be receiving full payment from the plan.
9. Special Rules for Coverage That Begins or Ends During an Inpatient 
Hospital Stay (Sec.  422.318)
    The MMA amended section 1853(g) of the Act, which puts forth 
special payment rules for situations where a beneficiary's coverage by 
an MA plan begins or ends while the beneficiary is a hospital 
inpatient. The MMA amendment expands the list of hospital facilities 
covered under this provision to include those that have come under a 
Medicare prospective payment system since the Balanced Budget Act. In 
addition to ``subsection (d)'' hospitals, three other types of 
facilities are now included: rehabilitation hospitals, distinct part 
rehabilitation units, and long-term care hospitals. These changes were 
proposed at Sec.  422.318, which otherwise retained existing language 
from subpart F applicable only to subsection (d) hospitals.
    Comment: One commenter proposed that CMS include Critical Access 
Hospitals (CAHs) in the list of facilities to which this provision 
applies.
    Response: Under section 1853(g), this rule applies only to 
``subsection (d)'' hospitals and the three types of facilities the MMA 
specifically added. Because CAHs are not defined under section 1886(d) 
of the Act, this provision at Sec.  422.318 does not apply to CAHs.
10. Special Rules for Hospice Care (Sec.  422.320)
    Proposed Sec.  422.320 revised the existing MA special rules for 
hospice care to reflect the new bidding and payment methodology in 
sections 1853 and 1854 of the Act, and the creation of a prescription 
drug benefit under Part D. Now the MA organization will be paid the 
portion of the payment attributable to the beneficiary rebate (minus 
the amount of the Part B premium reduction, if any) for the MA plan 
plus the amount of the subsidies related to basic prescription drug 
coverage for plans that offer prescription drug coverage.

[[Page 4663]]

    Note that for PACE organizations, PACE enrollees must elect either 
their PACE organization or the hospice benefit as their provider of 
Medicare services. An enrollee who elects to enroll in hospice is 
thereby disenrolled from the PACE benefit. However, PACE organizations 
provide a service similar to hospice known as ``end-of-life-care.''
    Comment: One commenter stated that beneficiaries who choose to 
enroll in a Medicare hospice program should also assign their Medicare 
Part D drug benefit to the hospice. The commenter argued that 
prescription drugs are usually an integral component of hospice care 
and should be managed by the provider. Once a health plan is not 
involved in the care management of a patient, then it should not be 
responsible for the patient's prescription drug management.
    Response: When a beneficiary enrolled in an MA plan elects hospice, 
that beneficiary is still an enrollee in the plan, is still liable for 
any plan premiums and cost sharing for benefits not covered under 
hospice. It is possible for an enrollee who has elected hospice to 
require prescription drugs for conditions not related to hospice care, 
which are the plan's responsibility. We believe that it is appropriate 
for Medicare Advantage Prescription Drug (MA-PD) plans to manage the 
prescription drug coverage of enrollees who have elected hospice, and 
therefore we will pay MA-PD plans the Part D premium for all enrollees.
    Comment: One commenter suggested that CMS conduct a demonstration 
allowing beneficiaries to elect hospice while still receiving life 
saving treatment as a means to overcoming the fear and perceived 
finality of electing hospice. The commenter cites the low rate of 
hospice election and short duration of services as reasons to develop 
some innovative approaches to identifying how to better transition 
beneficiaries with terminal or advanced illness into a care environment 
that provides needed and appropriate care, while improving quality of 
life.
    Response: It is important to note that the current hospice benefit 
began as a Medicare demonstration. It was considered successful, and 
therefore, the Congress added hospice care as a benefit in the Medicare 
program. In addition, Sec.  409 of the MMA requires CMS to conduct 
another hospice demonstration. The statute requires CMS to test 
delivery of hospice care in rural areas under which Medicare eligible 
individuals, without a caregiver at home, may receive care in a 
facility of 20 or fewer beds. Such facility will not have to offer 
hospice services in the community or comply with the 20 percent limit 
on inpatient days. In the future, we would be interested in considering 
other innovative ideas for increasing enrollment in hospice care 
throughout the country. We invite the commenter to submit a proposal on 
the suggestion.
11. Source of Payment and Effect of MA Plan Election on Payment (Sec.  
422.322)
    With the exception of a new provision addressing payments for Part 
D benefits, proposed Sec.  422.322 is identical to Sec.  422.268 in 
subpart F of the current MA regulations. Section 422.322(a)(2) was 
added to reflect the creation of subsidized prescription drug coverage 
under Part D. As required by section 1853(f) of the Act, subsidy 
payments to MA-PD organizations for basic drug coverage under this 
title are included in the payments described in Sec.  422.322(a)(2).
    Comment: Two commenters requested clarification on whether an MA 
organization can authorize that CMS payment be made directly to an 
agent of the MA organization.
    Response: We believe that the commenters may be anticipating a 
situation under the MA program where an employer directly contracting 
with CMS to offer an MA plan would contract with an MA organization to 
manage that plan. However, section 1857(a) of the statute, which was 
not amended by the MMA, explicitly states that no payment shall be made 
under section 1853 to an organization unless that organization is under 
contract with the Secretary. Therefore, we do not have the authority to 
make any payments from the Medicare Trust Funds under section 1853 to 
an agent of an MA organization. The existing regulatory language in 
Subpart F at Sec.  422.268(c) that implements section 1857(a) is found 
in proposed Subpart G at Sec.  422.322(c).
    Comment: One commenter was concerned that the proposed rules are 
silent with respect to provider recovery of unpaid amounts due from MA 
plan enrollees. The commenter recommended that CMS allow providers that 
treat MA enrollees the same recourse for unpaid enrollment amounts that 
currently exists in the regulations for the FFS program, that is, allow 
a cost report recovery that follows the Medicare bad debt recovery 
criteria. Without this recovery mechanism, providers will suffer 
financial harm because beneficiaries change program status, not because 
of any change in the service they provide.
    Response: The issue of bad debt recovery criteria for providers who 
submit cost reports is beyond the scope of this rulemaking. We refer 
the commenter to 42 CFR part 413 for further information about bad debt 
recovery rules.
12. Payments to MA Organizations for Graduate Medical Education Costs 
(Sec.  422.324)
    These provisions at proposed Sec.  422.324 were virtually identical 
to the current MA provisions in subpart F at Sec.  422.270 (we proposed 
some non-substantive editorial changes), and required us to make 
payments to MA organizations for direct graduate medical education 
costs that MA organizations incur in dealings with non-hospital 
provider settings, under specified conditions.
    Comment: One commenter requested that the final rule clarify 
whether utilization data on MA enrollees should be considered when 
making determinations about FFS payment adjustments and minimum 
utilization standards (for example, direct and indirect medical 
education payment formulas and the disproportionate share payment 
formula). The commenter also noted that current FFS regulations apply 
minimum Medicare utilization standards when assigning certain 
designations such as rural health clinics, sole community provider or 
rural referral center status, and requested that MA utilization data be 
included when CMS makes such designations.
    Response: The FFS rate determination and provider designation 
processes are beyond the scope of this rule making. Such decisions 
could be proposed and finalized in an upcoming rule-making for the 
relevant prospective payment system.

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

    The MMA amended section 1856(b)(3) of the Act and significantly 
broadened the scope of Federal preemption of State law. We proposed to 
revise Sec.  422.402 to clearly state that MA standards supersede State 
law and regulation with the exception of licensing laws and laws 
relating to plan solvency. In other words, with those exceptions, State 
laws do not apply to MA plans offered by MA organizations.
    We believe that the Conference Report was clear that the Congress 
intended to broaden the scope of preemption in the MMA. We accordingly 
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

[[Page 4664]]

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.
    In addition to outlining the new scope of the preemption, we also 
proposed the following technical changes:
     We proposed to remove the current Sec.  422.402(c) because
    we believed it was no longer relevant given the new MMA provision.
     We clarified that States are expressly prohibited from
    imposing a premium tax, or similar type of tax, on premiums paid by 
beneficiaries or third parties on behalf of beneficiaries to MA 
organizations.
    Below we summarize and respond to the comments we received on 
Subpart I:
    Comment: A commenter expresses concern that the statutory and 
regulatory language stating that Federal preemption does not extend to 
State licensing or solvency requirements is vague and may allow States 
to impose network access requirement on MA plans.
    Response: We note that the Conference Report makes it clear that 
the Congress intended to broaden the scope of Federal preemption with 
the intention of ensuring that the MA program as a Federal program will 
operate under Federal rules. We have also clarified (in the preamble to 
the interim regulation) and we restate here that we believe that State 
licensing laws under Federal preemption are limited to State 
requirements for becoming State licensed, and cannot be extended to 
other 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. We believe that under current Federal preemption 
authority States are limited in applying only those requirements that 
are directly related to becoming State licensed. For example, State-
licensing requirements may include requirements such as filing articles 
of incorporation with the appropriate State agency, or satisfying State 
governance requirements. However, under Federal preemption, State 
licensing laws may not be extended to include rules that apply to State 
licensed health plans which we believe would include network adequacy 
requirements for MA plans.
    Comment: A commenter expresses concern that if all State regulation 
of MA plans is broadly preempted by Federal law (with the limited 
exception of licensing and solvency requirements), contracting 
providers will not have adequate means to ensure prompt payment or 
access to external review of inappropriate denials of coverage or 
payment. The commenter recommended that CMS either narrow its 
interpretation of how State law may be preempted or expand its own 
Federal requirements for plan-provider contracting standards to include 
basic provider protections, such as prompt payment.
    Response: As previously stated, we believe that with the exceptions 
of State licensing and solvency requirements the Congress clearly 
intends and the MMA statute provides that the MA program is to be 
solely under Federal and not State rules. However, we do recognize 
concerns regarding the effectiveness of Federal regulation of the MA 
program. In overseeing the MA Program, CMS will ensure appropriate 
oversight of MA plans.
    With respect to prompt pay requirements, providers and MA 
organizations may enter into contracts the terms of which are 
established by the parties. In general the terms of these contracts 
including payment amounts and prompt payment standards are determined 
by negotiation between the parties. We specifically require in our 
regulations at Sec.  422.520(b) that contracts between MA organizations 
and providers contain prompt payment standards which the parties have 
both agreed to. In the event an MA organization fails to honor its 
provider contract(s) in certain circumstances, we may impose 
intermediate sanctions or even terminate its contract with the MA 
organization.
    Comment: A commenter asks that CMS clarify in its regulations that, 
with the exception of State laws that relate to State licensing and 
solvency, Federal preemption extends to any requirement that the State 
might impose, including requirements imposed as a condition of 
maintaining State licensure.
    Response: We believe our regulations at Sec.  422.402 are clear in 
regards to the broad extent of Federal preemption authority under the 
MMA. We have discussed in previous responses that States may not use 
licensure or solvency requirements as an indirect means to impose 
health plan regulations on MA plans. Again, we reiterate our 
understanding of the congressional intent that the MA program, as a 
Federal program operate solely under Federal rules with the exception 
of State licensure and solvency requirements.
    Comment: A commenter acknowledges the preamble discussion in the 
proposed rule clarifying that State licensing laws are limited to the 
requirements for becoming State licensed (for example, filing of 
articles of incorporation with the appropriate State agency or 
satisfying State governance requirements) and do not extend to the 
requirements that a State may impose on licensed health plans that 
absent preemption must be met as a condition of keeping a State 
license. The commenter recommended that CMS make this clarification in 
Sec.  422.402 of the MA regulations.
    Response: We believe State licensure requirements cannot be used as 
an indirect way to regulate MA plans by imposing requirements not 
generally associated with licensure. For example, we stated that 
reasonable licensure requirements may include the filing of articles of 
incorporation with the appropriate State agency or satisfying State 
governance requirements. However, we chose not to establish the 
parameters of State licensure in our regulations as there may be other 
legitimate aspects of State licensure we have not noted.
    Comment: A commenter stated that the proposed rule reiterates the 
MMA and fails to clarify the extent to which State law is preempted. 
The commenter maintains that the proposed regulation gives no guidance 
to States in determining which laws they can require Medicare plans to 
observe. According to the commenter, States do not know which standards 
they can enforce to protect consumers. As an example, the commenter 
cites the Knox-Keene Act in California which conditions health plan 
licensure on several minimum requirements. The commenter maintains that 
without explanation from CMS on what types of ``licensing'' laws States 
may enforce, California has no way of determining which parts of the 
State's broad statutory scheme may apply to Medicare plans and which 
parts are preempted. The commenter believes that CMS has not provided 
guidance to States on how financial solvency requirements can be 
separated from other parts of State licensing law which are intricately 
interwoven. Instead of clarifying underlying statute and policy, in the 
commenter's view, the proposed rule injects further confusion regarding 
the extent of Federal preemption of State law. The commenter requests 
further explanation and practical guidance on the role of the States in 
enforcing minimum licensure and financial solvency requirements.
    Response: As we stated in the preamble to the proposed rule (69 FR 
46904), we believe that under the MMA, States are preempted from 
applying any regulatory requirements on MA plans with the sole 
exception of State licensure and solvency requirements. We also believe 
that licensure and solvency requirements cannot be used

[[Page 4665]]

as an indirect method of imposing State regulatory requirements that a 
State might impose on non MA health plans. We recognize that there 
still may be questions about the extent of allowable State regulation. 
As in the case of the pre-MMA pre-emption provisions, we intend to 
address these specific type of preemption questions in cooperation with 
States.
    Comment: A commenter stated that Federal preemption authority under 
the MMA means that requirements concerning these matters as fair 
business practices, plan and physician contracting and prompt payments 
which have been traditionally under State law, will now be governed by 
Federal law. The commenter recommended that CMS monitor the effect of 
Federal preemption and establish strong Federal oversight to ensure 
that plans are complying with Federal regulatory standards. The 
commenter is concerned that without strong Federal oversight, patients 
in MA plans may not have the same protections that apply to other 
individuals enrolled in health plans, including those in traditional 
Medicare or those enrolled in private plans governed by State law. The 
commenter also recommended that since most State laws applicable to 
health plans will be preempted by Federal law, CMS should ensure that 
laws and regulatory standards that protect patients and physicians in 
the traditional Medicare program also be applied by CMS to MA plans.
    Response: We are aware of the need for strong consistent oversight 
of MA plans. As we have done under the previous M+C program, we will 
ensure that enrollees in MA plans receive the appropriate quality and 
access to plan covered health care services.
    Comment: A commenter stated that in the proposed rule (69 FR 46913 
through 46914), CMS takes the position that State contract are 
``generally applicable'' to MA organizations and are therefore not 
preempted. The commenter also indicated that CMS explains (in the 
preamble to the proposed rule) that State contract and tort law does 
not specifically apply to health plans, and that the Congress only 
intended to preempt State standards contained in State statutes and 
regulations, and that State standards developed through case law (for 
example, State contract and tort law) are not preempted. The commenter 
expresses concern that while State contract and tort law principals may 
have general application, State standards developed through case law 
based on interpretations of State contract and tort law may be specific 
to health plans, and may apply State standards that would otherwise be 
preempted under Section 232(a) of the MMA.
    The commenter concludes by stating that they believe that in 
enacting section 232(a) of the MMA, the Congress intended to draft a 
clear Federal preemption standard for the MA program, and that the 
primary motivation for this new preemption standard was to ease the 
administrative burden caused by the ambiguity in the old Sec.  422.402. 
The commenter also recommended that CMS make clear that all State 
standards, including those established through case law, are preempted 
with respect to the MA program, with exceptions of State licensing and 
solvency laws.
    Response: In response to this comment, we would clarify that all 
State standards, including those established through case law, are 
preempted to the extent that they specifically would regulate MA plans, 
with exceptions of State licensing and solvency laws. Other State 
health and safety standards, or generally applicable standards, that do 
not involve regulation of an MA plan are not preepmted.
    Comment: A commenter expresses concern that under the rules 
proposed by CMS, providers who contract with MA plans will be left with 
virtually no protection because State prompt pay laws will be 
preempted. The commenter stated that while CMS has proposed adding 
Sec.  422.520(b)(2), which provides that an MA organization is 
obligated to pay contracted providers according to the terms of the 
contract with the MA organization, this language does not provide 
sufficient protection for contracted providers. The commenter indicated 
that nearly every State in the country has enacted prompt pay 
legislation to protect providers who are often unable to negotiate 
sufficient prompt pay provisions in their contracts with plans. The 
commenter also suggested that if State prompt pay laws are preempted 
then CMS should revise the proposed rule to add prompt pay protection 
for contracted providers that is at least as strong as that given to 
non-contract providers.
    In addition, the commenter believes that preemption of State prompt 
pay requirements for MA contracting providers will cause hospitals to 
be less willing to contract with MA plans if they are uncertain whether 
claims will be paid promptly and fairly.
    Response: In our current MA regulations at Sec.  422.520(b), we 
require that MA organizations include in its contracts with providers a 
prompt pay provision. However, we allow the providers and MA 
organization discretion to negotiate the terms of the prompt payment 
provisions. Since these contracts typically include payment 
arrangements, we believe it is appropriate and reasonable to leave the 
parties to the contract discretion to work out mutually agreeable terms 
of their contract. The contracts may include payment amounts greater 
than what original Medicare will pay for some services and other 
payment incentives for contracted providers. If an MA organization 
fails to honor the terms of its provider contracts under certain 
conditions, we have the authority to impose intermediate sanctions or 
even terminate its contract with the MA organization.
    Comment: One commenter recommended that CMS develop guidance that 
builds on the preamble discussion of preemption in subpart I and 
Subpart M. The Congress provided broad preemption authority to ensure 
that the program is implemented in a uniform way for beneficiaries in 
States across the country. The commenter also recommended that CMS 
interpret the preemption authority, consistent with the Congressional 
intent, to maximize the uniformity of program implementation 
nationwide.
    Response: We believe that in our previous responses, we have made 
it clear that our understating of Federal preemption and the 
Congressional intent is that the MA plans are only subject to Federal 
regulation with the exception of State licensure and solvency 
requirements.
    Comment: A commenter encourages CMS to clearly communicate the 
provisions of the new law and regulations relating to both preemption 
of State law and restrictions on States imposing premium tax on funds 
collected from enrollees to all States. The commenter states that they 
have already received questions from States related to premium tax and 
believe a communication from CMS would help clear up any confusion the 
States may have.
    Response: We believe the MA regulations at Sec.  422.404 are 
absolutely clear that States cannot levy a premium tax, fee, or any 
other fee on the payment CMS makes to MA organizations (on behalf of MA 
enrollees) or payments made by MA enrollees to MA plans or by a third 
party to a MA plan on a beneficiaries behalf.
    Comment: One commenter stated that CMS has not established if its 
expanded preemption authority applies to cost HMOs that are either: (1) 
observing the same rules as MA organizations (with respect to grievance 
and appeals for

[[Page 4666]]

example); or (2) offering qualifying Part D coverage. Both the Congress 
and CMS have stated that cost HMOs offering qualifying Part D coverage 
should be ``treated'' like local MA-PDs and subject to the same rules 
as MA-PD plans offered by MA organizations. The commenter maintains 
that CMS should apply the expanded preemption available to MA 
organizations to cost HMOs when the latter are carrying out the same 
programs and are subject to the same rules as the former. The commenter 
also believes that doing so in the final rule would be consistent with 
the intent of the Congress, and would ensure consistent application of 
Medicare managed care rules when those rules are the same for both MA 
members and cost HMO members. The commenter concludes by noting that 
without preemption, cost HMOs may be mandated by State law to cover 
certain drugs, or have certain cost sharing for covered drugs, 
inconsistent with Part D.
    Response: If a cost plan offers the Part D benefit, the Part D 
provisions that apply under the MA program would apply to the Part D 
product, including the Federal preemption standards. However, other 
services offered by the cost plan are not subject to the new Federal 
preemption authority in the MMA which otherwise only applies to MA 
plans offered by MA organizations.

Subpart J--Special Rules for MA Regional Plans

    Section 1858 of the Act, as amended by section 221 of the MMA, sets 
forth special rules that apply to new MA regional plans. Although MA 
regional plans will have many similarities with local MA plans, the 
Congress provided for a number of unique financial and administrative 
incentives designed to support the introduction of these types of 
plans.
    These incentives will assist plans as they enter this new line of 
business and learn the market dynamics of serving beneficiaries across 
larger geographic areas. In addition, to encourage the formation of 
regional plans, we establish(at Sec.  422.451) a 2-year moratorium on 
new local PPO plans from January 1, 2006 until December 31, 2007, 
unless the plan was offered before the first day of the moratorium, to 
implement section 221(a)(2) of the MMA.
    In the August 3, 2004 rule, we proposed establishing a new subpart 
J to address many of the special regional PPO requirements. (Bidding 
and payment provisions for MA regional plans are implemented in 
subparts F and G of part 422.) We received more than 125 sets of 
comments on subpart J in response to the proposed rule; most related to 
the establishment of MA regions. The Secretary of the Department of 
Health and Human Services announced the establishment of the MA and PDP 
regions on December 6, 2004. The website address where the MA and PDP 
regions may be found is http://www.cms.hhs.gov/medicarereform/mmaregions/. Below we summarize the proposed provisions and respond to 
comments.
Sec.  422.451--2 year Moratorium on Expansion of local PPO plans
    To encourage the formation of regional plans, we had proposed at 
Sec.  422.451 to implement a 2-year moratorium on the offering of new 
local PPO plans from January 1, 2006 until December 31, 2007. As 
discussed below, in response to a comment on this final rule, we have 
revised our interpretation of the moratorium. We now interpret the 
moratorium as precluding an MA organization from offering a new PPO 
plan in a service area if the organization did not offer a PPO plan in 
that area in 2005. As discussed below, an organization that offers a 
PPO plan in 2005 in a service area will, under our new interpretation, 
be permitted to offer a different plan in the same area (for example, 
it could offer both an MA plan and MA-PD plan in the area). Section 
221(a)(2) of the MMA provides that we cannot permit the expansion of 
local PPO plans during 2006 or 2007 unless the PPO was offered as of 
December 31, 2005. We have determined that a PPO is ``offered'' as of 
December 31, 2005, for purposes of the moratorium, only if it has 
actually enrolled beneficiaries into its plan before January 1, 2006.
    Comment: A commenter believes that the Congress intended the 
moratorium to prohibit the expansion of local PPO service areas (for 
2006 and 2007) but allow for the introduction of new local PPO plans 
within those PPO service areas. In support of this view, the commenter 
believes that the Act permits plans to ``expand enrollment'' during the 
moratorium, and asserts that product innovation is necessary to do 
that. The commenter also notes that in order to migrate existing 
members to new products, MA organizations will need to have several 
plan offerings, both with and without Part D coverage. In addition, MA 
organizations may want to offer MA-PD PPO plans with both the standard 
coverage package and enhanced packages that provide ``donut hole'' 
coverage. The commenter concluded that if the moratorium were 
interpreted as freezing the number of plans that a local PPO can offer, 
the effect would be to greatly restrict choices for current members of 
local PPO plans. The commenter believes the Congress did not intend 
such a result.
    Response: We agree with the commenter. As noted above, we are now 
construing the moratorium to apply at the MA Organization level, rather 
than the plan level. Under this approach, an MA organization that has 
not offered a local PPO plan in a service area prior to the effective 
date of the moratorium will be prohibited from doing so, but an 
organization that did offer a PPO plan in the area could continue to do 
so, and could add other PPO plan options. We believe this change in 
interpretation is warranted on several grounds. First, we interpret 
section 221(a)(2) of the MMA as intended to prevent MA organizations 
from entering a new service area with a local PPO product in 2006 and 
2007, not to preclude an organization already offering a PPO plan in 
the area from changing its benefit designs. We believe that even though 
the text of section 221(a)(2) contains the word ``plan,'' Congress used 
that word in its more colloquial sense--that is, meaning ``health 
plan'' rather than ``MA plan.'' As the commenter stated, support for 
this interpretation is found in the Conference Report, which states 
that MMA section 221(a)(2) establishes the moratorium ``on new local 
preferred provider organizations to encourage PPOs to operate at the 
regional level.'' Further support for this interpretation arises from 
the fact that were we to retain the more restrictive reading, MA 
organizations would be precluded from offering their enrollees the 
option of choosing whether to enroll in Part D. Because the 
organization would be required to offer an MA-PD plan in the service 
area, if it only offered one PPO plan in 2005, it would have to offer 
Part D benefits in that plan, as only that plan would be exempted from 
the moratorium. We believe that the Congress intended to give MA 
organizations the right to offer a plan without Part D benefits as long 
as they offered an MA-PD plan in the same area. This right would be 
thwarted under our earlier interpretation of the moratorium provision. 
We have revised the regulation accordingly. The effect of the 2006 and 
2007 moratorium will be to prevent an MA organization from offering a 
PPO plan in a service area in 2006 and 2007 if it did not already offer 
one in the area, and to freeze any service area expansions of existing 
local PPO plans. However, during the 2-year moratorium, MA 
organizations offering local PPO plans, may offer additional PPO plans 
(within the pre-moratorium PPO services areas) to afford beneficiaries 
reasonable enrollment

[[Page 4667]]

options and to allow for the MA organization make changes in order to 
offer Part D coverage in a local PPO plan.
    Comment: A commenter recommended that CMS allow specialized MA 
plans for special needs individuals or SNPs to offer new local PPO 
plans and service area expansions (SAEs), even during the moratorium in 
2006 and 2007. The commenter believes that this flexibility is 
warranted because SNPs do not compete with MA regional plans.
    Response: As we have discussed above, an MA organization may 
introduce new local PPO plans within its 2005 service areas where it 
has offered local PPO plans. However, an MA organization may not expand 
its service area beyond the boundaries of the local PPO plans the 
organization has established prior to the moratorium's taking effect. 
This will allow an organization to offer a SNP (operating as a local 
PPO) in its pre-moratorium PPO service areas. We think this is 
consistent with the Congressional intent to allow organizations 
offering local PPO type plans to expand enrollment within its pre-
moratorium service areas.
    Comment: A commenter is interested in applying to us in 2006 as a 
new local HMO that would become operational in 2007. The commenter 
states that its operational model is as an HMO. However, the commenter 
is licensed in its State of operation as a ``health care services 
contractor'' and not as an HMO. The commenter is concerned that because 
it is not State-licensed as an HMO, it may not fit the definition of a 
local HMO and will be subject to the 2-year moratorium on local PPOs.
    Response: Organizations contracting with us must meet applicable 
State licensure requirements. Our basic regulatory requirement is that 
an MA organization must be State licensed to bear risk as described in 
the MA regulations at Sec.  422.400. Section 422.400 indicates that it 
is the responsibility of the MA organization to demonstrate to us that 
it is operating within the scope of its State license or the State 
authority granted to it under Sec.  422.400(b) (if the entity is not 
State-licensed as a commercial insurer) authorizes it to offer the type 
of MA plan or plans it intends to offer in a State. Upon meeting State 
licensure requirements, the organization offering an MA plan must meet 
MA regulatory requirements governing the type of plan being offered. As 
we have previously described, we will approve applications for new 
local PPO plans for 2006 and 2007 offered by an MA organization within 
the service area of local PPO plans offered by that MA organization and 
established prior to January 1, 2006. In addition, MA organizations may 
introduce other MA plan types without service area restriction (for 
example, HMOs or PFFS plans) that meet State licensing requirements and 
MA regulatory requirements.
    Comment: The commenter opposes the local PPO 2-year moratorium but 
recognizes that it is required under the MMA. The commenter states that 
CMS must set an application deadline that allows for the review and 
approval of a local PPO application in time for the bidding deadline. 
Accordingly, the commenter recommends that we consider a plan as 
``existing'' before 2006 even though the first effective date will not 
be until January 1, 2006. An MA local PPO should be considered as 
``existing'' when in 2005, has been awarded a contract, has submitted a 
bid for 2006, and is being marketed during the annual election period 
which begins in November, 2005.
    Response: Under MMA section 221(a)(2), the 2006 and 2007 moratorium 
prevents the offering of new local PPOs in a service area unless a 
local PPO plan was offered by that MA organization in that service area 
as of December 31, 2005. We have determined that this means that local 
PPO plans must have actually enrolled beneficiaries before January 1, 
2006 to be considered ``offered'' and thus in effect before the 
moratorium begins. The local PPO plans that have enrolled beneficiaries 
prior to January 1, 2006 will establish the limits of the service area 
where the MA organization can introduce new local PPO plans during the 
moratorium.
Establishment of the MA regions (Sec.  422.455)
    At Sec.  422.455, we implement section 1858(a) of the Act, which 
requires us to establish the regions that will constitute the service 
areas for the MA regional plans. We were required to establish between 
10 and 50 MA regions within the 50 States and the District of Columbia, 
and an MA regional plan will be required to serve an entire region.
    The statute specified that the MA regions should maximize the 
availability of regional plans for Medicare beneficiaries, particularly 
those residing in rural areas, regardless of their health status. To 
assist us in developing the MA regions, we were required to conduct a 
market survey and analysis, including an examination of current 
insurance markets.
    It is important to note that in accordance with section 
1858(a)(2)(B)(ii) of the Act, we may periodically review MA regions and 
revise as necessary. We implement this provision at Sec.  
422.455(b)(2)(ii).
    Combined with comments received on Prescription Drug Plan (PDP) 
regions, we received more than 110 sets of comments on the 
establishment of MA regions as found in Sec.  422.455(b). The first 
sets of comments were received in follow-up to a public meeting held in 
Chicago, Illinois on July 21, 2004 regarding the MA and PDP regions. We 
also received numerous comments in response to our request for comments 
in the proposed rule for part 422: Establishment of the MA Program. We 
also received comments on PDP regions on the part 423 proposed rule: 
Medicare Prescription Drug Benefit. Comments and responses that relate 
to the establishment of PDP regions are found in Subpart C of the 
preamble to the final rule for part 423. Finally, we received written 
comments following a CMS Special Open Door Forum conference call on 
``Factors for Determining MA and PDP Regions to Maximize Beneficiary 
Choice,'' held on Friday, October 22, 2004.
    The majority of MA region comments that specified the size of the 
region generally favored establishing 50 State-based regions. However, 
about one-third of all comments supported multistate regions, though 
few provided the number of multistate regions they would prefer. Issues 
identified in support of 50 State-based regions included the large 
assumption of risk with the establishment of larger regions; 
insufficient time for plans to negotiate and develop networks in larger 
regions or to renegotiate provider contracts and form partnerships; 
limitations in capacity and infrastructure issues in the initial years; 
and potential difficulties in obtaining State licenses and meeting 
State solvency requirements.
    Comment: Some commenters suggested that fewer organizations will 
participate as regional PPOs if larger regions are established. 
Commenters who favored multistate regions indicated their belief that 
larger regions would facilitate plan choices in areas traditionally 
without a choice of plans. Further, several commenters noted that 50 
State-based regions would perpetuate the status quo of not providing 
choice of plans in certain areas, especially in rural areas. Commenters 
in favor of multistate regions also cited Congressional intent to 
provide rural beneficiaries with the same array of choices that 
beneficiaries in non-rural areas often have. These commenters contend 
that these choices would not occur with 50 State-based regions. From a 
market perspective, supporters of multistate regions believe that there

[[Page 4668]]

would be a critical mass in larger regions that are necessary to 
encourage new entrants into the MA market.
    One commenter stated that the lack of specificity in the proposed 
rule made it difficult to envision how the new regional PPO option 
would work in practice. A number of commenters expressed concern about 
the compressed timeframe between our announcement of the regions and 
their deadline for making a decision about whether to apply as a 
regional PPO. Finally, a number of commenters recommended that CMS make 
Puerto Rico a freestanding MA region because of the unique cultural 
factors of Medicare beneficiaries residing in Puerto Rico.
    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, presence of PPO providers 
and primary care providers, and not splitting multistate Metropolitan 
Statistical Areas (MSAs). Additional factors were also considered, for 
example, solvency and licensing requirements and capacity issues. In 
response to comments about the lack of specificity in the proposed 
rule, we have taken several steps (for example, the market survey and 
extensive public outreach) to ensure that the public could see options 
for the regions, and factors used in determining these options. We also 
have sought public input in several contexts before the publication of 
the regions. The establishment of the MA PPO and PDP regions was 
announced on December 6, 2004, and can be found at http://www.cms.hhs.gov/medicarereform/mmaregions/ . We understand the 
commenters' concerns about Puerto Rico's unique circumstances. However, 
the statute defines an MA region as one that is within the 50 States 
and the District of Columbia. Therefore, we are not authorized to 
include Puerto Rico or any of the other U.S. territories in an MA 
region. However, pursuant to the requirement to establish PDPs under 
section 1860D-11(a)(2) of the Act (as implemented at Sec.  423.112), we 
have established PDP regions for the territories, separate from the 50 
States and the District of Columbia. A separate PDP region has been 
established for each territory.

Risk Sharing (Sec.  422.458)

    Section 1858(c) of the Act provided that we will share risk with MA 
regional plans for contract years 2006 and 2007, if plan costs are 
above or below a specific risk corridor. Risk sharing is intended to 
encourage plans to enter the regional market and to provide assistance 
to these plans during the start-up phase of their business.
    Section 422.258(a) will implement section 1858(c) of the Act by 
defining the following terms:
     Allowable costs were defined as the total amount of costs 
incurred in a year in providing benefits covered under the original 
Medicare FFS program option for all enrollees and in providing 
rebatable integrated benefits, reduced by the portion of those costs 
attributable to administrative expenses incurred in providing these 
benefits.
     Target amount for an MA regional plan was defined as the 
total amount of payments made to the organization for enrollees in the 
plan for the year, reduced by the amount of administrative expenses 
assumed in the portion of the bid attributable to benefits under 
original Medicare FFS program option and rebatable integrated benefits.
     Rebatable integrated benefits were defined as those non-
drug supplemental benefits that are funded through beneficiary rebates 
(described at Sec.  422.266(b)(1)) and that we determine are: (1) 
additional health benefits not covered under the original Medicare 
program option; and (2) benefits that require expenditures by the plan.
    Section 422.258(b)(2) will implement section 1858(c)(1)(B) of the 
Act by requiring that MA regional plans notify us, before that date in 
the succeeding year as we specify, of each plan's total allowable 
costs. As mentioned above, rebatable integrated benefits (RIBs) are the 
only supplemental benefits that can be included in a plan's allowable 
costs. We have discretion to evaluate whether certain rebatable 
benefits should be included in allowable costs for risk corridor 
calculations. We asked for comment whether reductions in cost sharing 
for Parts A and B benefits should be considered RIBs.
    Section 422.358(c) will implement section 1858(c)(2) of the Act 
relating to payment adjustments. There will be no payment adjustment if 
the allowable costs for the plan are at least 97 percent, but do not 
exceed 103 percent, of the target amount for the plan. Section 
422.358(c) also included the following:
     If allowable costs for the plan are more than 103 percent 
but not greater than 108 percent of the target amount for the plan for 
the year, we will increase the total monthly payments made to the 
organization by 50 percent of the difference between allowable costs 
and 103 percent of the target amount.
     If allowable costs for the plan are greater than 108 
percent of the target amount, we will increase the total monthly 
payments to the plan by an amount equal to the sum of: (1) 2.5 percent 
of the target amount; and (2) 80 percent of the difference between 
allowable costs and 108 percent of the target.
     If the allowable costs for the plan are less than 97 
percent, but greater than or equal to 92 percent of the target amount, 
we will reduce the total monthly payment to the plan by 50 percent of 
the different between 97 percent of the target amount and the allowable 
cost.
     If the allowable costs for the plan are below 92 percent 
of the target, we will reduce the total monthly payments to the 
organization by the sum of: (1) 2.5 percent of the target amount; and 
(2) 80 percent of the difference between 92 percent of the target and 
the allowable costs.
    Section 422.358(d) will implement section 1858(c)(3) of the Act 
relating to disclosure of information. Each contracting MA plan must 
provide the information that we determine is necessary to carry out 
this section. Although we have the right to inspect and audit all books 
and records pertaining to information provided under this section, the 
information disclosed or obtained for purposes of this section may only 
be used to carry out this section.
    Comment: Two commenters suggested that we clarify how MA regional 
plans should determine their administrative costs for purposes of 
determining their allowable costs and target amounts. Both commenters 
recommended that we develop an administratively straightforward 
methodology to identify administrative costs. One commenter suggested 
that we clearly state that the determination of administrative costs 
for purposes of the MA regional plan risk corridors may differ from the 
calculation of administrative costs for purposes of the Part D program.
    Response: As stated in Sec.  422.254 each bid submission must 
contain all estimated revenue required by the plan, including 
administrative costs and return on investment. We interpret the term 
administrative costs to be the costs associated with administering the 
program and the expected or retained earnings of health plans. For 
purposes of this final rule, we use the terms administrative costs and 
administrative expenses interchangeably. We intend to provide further 
guidance on defining administrative costs in the instructions

[[Page 4669]]

on use of the bid pricing tool. We expect that the guidance will seek 
to reconcile any differences in how administrative costs are calculated 
for purposes of Title I and Title II.
    Comment: Three commenters recommended that CMS consider cost 
sharing reductions for Part A and B benefits as plan expenditures, and 
thus included as rebatable integrated benefits, rather than as foregone 
revenue that would be excluded from RIBs. One commenter suggested that 
by doing so, more risk would be shared between a plan and Medicare, 
thereby encouraging greater plan participation. The commenter believes 
that this approach would be more intuitive and less likely to result in 
variable cost estimations than the alternative approach. Another 
commenter suggested that the MA plan actuary should demonstrate and 
certify its estimate of the rebatable portion of the cost sharing. 
Another comment was made recommending that the risk sharing calculation 
should be modified to include full plan costs (that is, those beyond 
the rebate funded portion).
    Response: We considered several issues when determining which uses 
of rebate dollars to define as RIBs. As we stated in the August 3, 2004 
proposed rule, one approach could be to define RIBs as benefits that 
will otherwise be covered under original Medicare were it not for the 
imposition of deductibles, co-pays, coinsurance, and benefit coverage 
limits. This will exclude, for example, non-Medicare covered benefits 
from the category of RIBs. However, we concluded that it is difficult 
to draw a non-arbitrary line between integrated and non-integrated 
benefits. For this reason, in the proposed rule, we proposed to include 
additional health benefits not covered by original Medicare in the 
category of RIBs. In terms of cost sharing reductions for Part A and B 
benefits, we agree with the commenters that cost sharing reductions for 
Part A and Part B Benefits can be considered expenses to a plan because 
when an enrollee pays less, the plan pays more. In other words, when a 
plan uses the rebate to reduce Part A and B cost sharing, the amount 
that otherwise would be paid to the provider by the beneficiary must be 
paid by the plan. Therefore, for the purposes of determining risk-
sharing payments to regional plans for 2006 and 2007, cost sharing 
reductions for Part A and Part B benefits will be considered plan 
expenditures for purposes of Sec.  422.458(b)(2)(ii). In doing so, this 
allows cost sharing reductions for Part A and Part B to be considered 
rebatable integrated benefits provided that these reductions are funded 
by plan rebate dollars and not by the beneficiary supplemental premium. 
With regard to extending risk to full plan costs, section 1858(c) of 
the Act limits the risk sharing arrangement between us and plans to 
only allowable costs (that is, those incurred in providing Part A and 
Part B benefits and rebatable integrated benefits). For mandatory 
supplemental benefits that are non-Medicare benefits and require 
expenditures by the plan though are partly funded by rebate dollars, we 
will include only the rebate funded portion of the costs and revenues 
in the risk corridor calculation.
    We note that several applications of rebate dollars are not 
considered RIBs: (1) reductions in Part D cost sharing since the 
statute defines RIBS an non-drug supplemental benefits in section 
1858(c)(1)(d) of the Act; (2) a Part B or Part D premium reduction does 
not require expenditure by the plan.

State Licensing Waiver

    Section 422.458(e) will implement section 1858(d), of the Act 
setting forth organizational and financial requirements for regional 
PPOs, including the provision for a temporary waiver of the MA State 
licensing requirement. In order to facilitate the offering of MA plans 
in regions encompassing multiple States, we may temporarily waive State 
license requirements, for example, to allow sufficient time for the 
processing of the application by the State or States where an 
application is pending.
    Comment: One commenter stated that under the MMA we have the 
authority to temporarily waive State licensure requirements to 
facilitate plans in regions encompassing multiple States when a plan is 
licensed in at least one State. The commenter asks for clarification 
whether we can use our authority to grant the same waiver to local 
plans seeking service area expansion to bordering States. The commenter 
believes that in providing this authority the Congress intended to 
facilitate plan choices for beneficiaries. The commenter concludes by 
noting that the licensure waiver should apply as well to local plans 
seeking to become another enrollment option for enrollees in 
neighboring States.
    Response: As the commenter indicated, section 1858(d) of the Act 
provides authority for us to temporarily waive State licensure 
requirements to facilitate the introduction of regional PPO plans if a 
region encompasses multiple states. However, under the statute this 
authority is specific to regional PPO plans. We do not believe we have 
the authority to extend the State licensure waiver to local plans with 
a service area encompassing more than one State.
    Comment: Another commenter recommended that CMS be as conservative 
as possible in deciding how to waive State licensing requirements in 
the States in which regional PPOs are operating. The commenter 
recommended that CMS ensure regional plans serving beneficiaries in 
multiple States are held accountable under the State laws under which 
they are operating.
    Response: As specified in the MMA, all MA organizations offering MA 
plans including regional PPO plans 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 they offer an MA 
plan. We will temporarily waive the State licensure requirements only 
in limited circumstances. Specifically, if an MA organization offering 
an MA regional plan is organized and licensed under State law in at 
least one State in the region but has not met the licensing 
requirements in other States in the region, under section 1858(d) of 
the Act, we may temporarily waive the State licensing requirement in 
the other States. This waiver will only be extended to allow sufficient 
time for the processing of the application by the State or States where 
an application is pending. The statute allows for the waiver to extend 
for a transition period after denial of a licensure application, but 
does not permanently excuse a plan from compliance with state licensing 
requirements. Therefore, if a State denied a regional PPO's application 
for State licensure, we will not allow the plan to continue operating 
in that region beyond the transition period, unless the plan obtains 
licensure in all States in the region.
    Comment: A commenter is concerned that organizations that lack 
sufficient experience in operating a PPO plan or being a capitated 
Medicare provider will apply to become regional PPO plans. The 
commenter proposes that we establish minimum requirements (beyond the 
filing of licensing applications) that an applicant must satisfy before 
we would consider a temporary waiver of the State licensure 
requirement. The commenter recommends that CMS impose the following 
requirements:
     The applicant or a sponsoring organization of the 
applicant must have operational experience in offering insured PPO 
plans;
     The applicant or a sponsoring organization of the 
applicant must have

[[Page 4670]]

operational experience with assuming risk under capitated programs;
     CMS should limit the duration of the waiver to one year 
from the date the waiver is granted.
    Response: We anticipate that most State licensure waivers will be 
for less than 1 year. The exact duration of the waiver will depend on 
how long a State takes to process the application. In any event, as we 
indicated in the previous response, all regional PPO plans must become 
State licensed in each State in which they operate. We do not believe 
it is necessary for us to impose additional requirements for new PPO 
applicants. We have considerable experience in reviewing applications 
from new organizations entering the MA program. New organizations 
entering the program must meet the operational and regulatory 
requirements that apply to current plans. If a new applicant has no 
current experience we invest the necessary time and resources to ensure 
that the organization offering the plan does in fact have the capacity 
to offer the proposed plan and meet all regulatory requirements. We 
expect that we will take the same approach with any new applicant to 
the MA program.
    Comment: A commenter recommends that if CMS do not designate 
single-State regions, CMS should amend the proposed rules governing 
preemption of State law to ease the burden of multistate licensure as 
much as possible. The commenter recommended that CMS apply the Federal 
waiver and uniform solvency standards applicable to provider sponsored 
organizations to regional PPO plans to promote greater regional PPO 
participation and access to potential beneficiaries. Alternatively, the 
commenter recommends that CMS engage the National Association of 
Insurance Commissioners and the State departments of Insurance in 
discussions that will result in the creation of a single, uniform MA 
PPO licensure application form, procedures, and solvency standards, 
that maximize the availability of PPO assets for use in providing 
direct services and care enhancement, and minimize the net worth, 
reserve, deposit, surplus and related requirements applicable to PPOs.
    Response: Under the MMA we do not have the authority to establish 
regional licensure and solvency standards for regional PPO plans. Under 
the law, regional PPO plans must meet State licensure and solvency 
standards in each State in which they operate. We have added language 
to Sec.  422.458(e)(1) to clarify that regional PPOs must be licensed 
in each State of the region, except during the period of the temporary 
waiver.
    Comment: A commenter stated that even temporarily waiving State 
licensure without requiring applicants to satisfy certain minimum 
requirements could expose the MA program and beneficiaries to 
insecurity. Waiver of State licensure requirements based on a filing of 
an application for licensure does not constitute an assurance the 
organization has the essential capability necessary to operate a 
multistate PPO potentially serving thousands of beneficiaries. The 
commenter recommended that CMS establish minimum requirements, such as 
solvency standards, in addition to the filing of an application that a 
regional PPO applicant must satisfy before we even evaluates, or 
approves, a temporary wavier of State licensure. The commenter also 
recommended that any waiver be limited to 1 year from the date the 
waiver is granted. The commenter believes that a 1-year limit will 
promote stability and confidence in the MA program by terminating an 
unlicensed organization before their withdrawal causes disruption to 
beneficiaries.
    Response: As we have previously discussed, we will grant a 
temporary State licensure waiver only in circumstances where the 
organization is State licensed in a least one State in the region and 
has submitted applications in the others. Under the waiver process, in 
those State(s) where it has a waiver, the organization will select the 
licensing rules of one State in the region and apply those rules to the 
States in which the organization has not met State licensure until the 
organization is licensed in all the States. We have made a technical 
change to the regulations at Sec.  422.458(e)(2) to clarify this point. 
We expect that in most cases the State licensure waiver will be for 
less than a year. However, we will not specify the time limit, because 
the length of the waiver will depend on how quickly the State processes 
the PPO's licensure application. We note that all regional PPO plans 
entering the MA program (including those with a temporary State 
licensure waiver) must still be reviewed and approved by us and 
determined to be capable of meeting all regulatory requirements. We 
will not approve any MA plan that we have not confirmed through our 
application review process has the capacity to offer the proposed plan.

Stabilization Fund

    Section 422.458(f) will implement the provisions in section 1858(e) 
of the Act providing for the creation of a Regional Stabilization Fund. 
The Congress has authorized an MA Regional Plan Stabilization Fund in 
order to promote greater stability in the regional program and provide 
us with a tool to respond to market fluctuations.
    The Fund can be used to provide incentives for plan entry in each 
region, as well as for retaining plans that have already entered the 
market in MA regions with below average MA penetration. Initially, $10 
billion will be available for expenditures from the Fund beginning on 
January 1, 2007, and these start-up funds will only be available until 
December 31, 2013. The Fund is designed to allow us to respond to 
market conditions on a temporary basis. If the Fund is used for either 
plan entry or retention for 2 consecutive years, we will report to the 
Congress on the underlying market conditions in the regions. These 
reports will give the Congress time to respond to the market conditions 
through changes to the regions or the underlying payment system.
    The funds will be available in advance of appropriations to MA 
regional plans in accordance with specified funding limitations. The 
total amount projected to be expended may not exceed the amount 
available in the Fund as of the first day of that year. We will only 
obligate funds if our Chief Actuary, and the appropriate budget 
officer, certify that there are sufficient funds at the beginning of 
the year to cover all the obligations for that year. We will take steps 
to ensure that sufficient funds are available to make the payments for 
the entire year, which may include computing lower payment amounts or 
limitations on enrollment in MA regional plans receiving the payments. 
Expenditures from the Fund will first be made from amounts made 
available from the initial funding. We have made a change to Sec.  
422.458(f)(3)(ii) to conform the provision to our proposal as discussed 
in the August 2004 proposed rule.
    Comment: Several commenters had concerns over the financial 
incentives made available to MA regional plans and asserted that these 
would disadvantage local plans by compromising their ability to compete 
with regional plans or the FFS Medicare program. To encourage the 
offering of all plan options, commenters recommended that local plans 
and others should also have access to these risk sharing arrangements. 
Several commenters proposed that CMS should use the demonstration 
authority to offer the same financial incentives to local plans as 
those offered to regional MA plans. Other commenters expressed their 
support for these incentives, and

[[Page 4671]]

asserted that these types of incentives would encourage MA regional 
plans to enter or re-enter certain markets.
    Response: Financial incentives, such as the application of risk 
corridors and access to the stabilization fund, were designed to 
encourage new regional plans to enter the MA program and stay in the 
program over time. Section 1858 of the Act limits these incentives to 
only MA regional plans. As stated previously, regional plans are 
defined as those MA preferred provider organization plans available to 
all MA eligible individuals without regard to health status and are 
offered throughout the entire region. Because these incentives are 
provided for in the statute, we are unable to change the types of 
organizations that could receive them. It is important to note, that 
there are special provisions available only to local plans that MA 
regional plans do not have available, for example, the ability to 
choose the areas they cover, including specific counties and even 
partial counties, and they are not required to cover an entire region. 
Further, the MMA contemplated competition between plans so that 
beneficiaries will have greater choice of high-quality, low-cost 
regional and local plans. The statute specified the payment methodology 
for both local and regional plans. Additional responses to bidding and 
payment comments may be found in the preamble for subparts F and G.
    Comment: One commenter stated that the stabilization fund 
discriminates against local plans because a portion of local plan 
savings would subsidize the regional plans.
    Response: The commenter is incorrect. Seventy-five percent of the 
savings accrued when an MA plan bid falls below the benchmark, is 
rebated to the beneficiary in the form of extra benefits. For local 
plans, the remaining 25 percent of the difference between the bid and 
the benchmark returns to the Medicare Trust Funds. For regional plans, 
the remaining 25 percent of the difference is split: 12.5 percent of 
the difference returns to the Medicare Trust Funds, and 12.5 percent of 
the difference goes toward supplementing the stabilization fund.
6. Plan Entry Funding
    At Sec.  422.458(f), we make available plan entry incentives for 
either a 1-year national bonus payment or multi-year adjustments in 
regional payments (but not both). Funding will only be available for a 
single year, but more than one organization can receive the incentive 
in the same year.
    As found in Sec.  422.458(f)(4)(ii), the national bonus payment 
will be: (1) available to an organization only if it offers plans in 
every MA region; (2) available to all MA regional plans of the 
organization regardless of whether any other MA regional plan is 
offered in any region; and (3) equal to 3 percent of the benchmark 
amount otherwise applicable for each MA regional plan offered by the 
organization, subject to funding limitations.
    If a national bonus payment is not made, a regional payment 
adjustment can be made. The regional payment adjustment is an increased 
payment for an MA regional plan offered in an MA region that did not 
have any MA regional plans offered in the previous year. The adjusted 
payment amount will be determined based solely on plans' bids in the 
region and that the adjusted payment amount be available to all plans 
offered in the region.
    We did not receive any public comments on this section. We are 
implementing this section as proposed.
7. Regional Payment Adjustment
    Subject to funding limitations, we will determine the period of 
time that funds are available for regional payment changes to encourage 
plan entry. If funding is provided for a second consecutive year under 
this provision, we will submit a report to the Congress describing the 
underlying market dynamics in the region and recommend changes to the 
payment methodology. Multi-year funding will be made available to all 
MA plans offered in a region, but if this multi-year increased amount 
is made available to MA plans in a region, funding will not be 
available for plan retention in the region in the following year.
    We did not receive any public comments on this section. We are 
implementing this section as proposed.
8. Plan Retention Funding
    In addition to using the Fund to encourage plans to enter regions 
that might otherwise go unserved, we may also use the fund to encourage 
plans to remain in regions if market conditions are causing plan 
withdrawals. At Sec.  422.548(f)(5), incentives for plan retention 
could take the form of an increased payment to plans in regions that 
meet specific requirements.
    We intend to use this provision to ensure that all MA organizations 
offering regional plans in a region receive appropriate incentives to 
remain in the region. As specified at Sec.  422.548(f)(5)(ii), the 
payment will be an amount determined by the Secretary that does not 
exceed the greater of: (1) 3 percent of the benchmark amount applicable 
in the region; or (2) an amount that, when added to the benchmark, 
results in a ratio such that the additional amount plus the benchmark 
for the region divided by the adjusted average per capita cost (AAPCC) 
equals the weighted average of benchmarks for all regions divided by 
the AAPCC.
    The payment would be available if: (1) one or more plans inform us 
that they are going to discontinue service in the region in the 
succeeding year; (2) we determine that if those plans were not offered, 
fewer than two MA organizations will be offering MA regional plans in 
the region in the year; (3) for the previous year, we determine that 
the proportion of beneficiaries enrolled in MA regional plans in the 
region is less than the national average of MA regional plan 
enrollment; and (4) funds have not already been awarded for 2 
consecutive years.
    We did not receive any public comments on this section. We are 
implementing this section as proposed.

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

1. Overview
    Subpart K sets forth the provisions relating to the application 
procedures and contract determinations that are entered into by MA 
organizations including a description of terms that must be included in 
the contract, the duration of the contract, provisions regarding the 
nonrenewal or termination of a contract, and minimum enrollment, 
reporting, and prompt payment requirements of the MMA.
    In this final rule, in order to make more clear the requirements 
for MA plans under part 422 and any additional requirements for MA 
plans offering a prescription drug benefit under part 423, we have 
amended section Sec.  422.500 by revising the section heading to read 
``Scope and definitions; designating the undesignated 
introductory text as paragraph (b) and adding the heading 
``Definitions; and adding a new paragraph (a), ``Scope,'' 
which specifies the scope of the subpart K requirements.
    We also incorporated the application requirements and evaluation 
and determination procedures from subpart A (Sec.  422.6 and Sec.  
422.8) into subpart K at newly redesignated Sec.  422.501 and Sec.  
422.502, respectively. As a result we have revised the title of subpart 
K in this final rule to read as follows ``Application Procedures and 
Contracts for Medicare Advantage Organizations.''
    In addition, we have eliminated the proposed Sec.  
422.502(b)(3)(iv)(G), regarding self-reporting requirements.

[[Page 4672]]

 However, we have specified at Sec.  422.503(b)(vi)(H), that MA-PDPs 
must follow the requirements in part 423 (the requirements for the Part 
D prescription drug benefit) concerning a comprehensive fraud and abuse 
plan. Note that the fraud and abuse requirement in part 423 applies 
only to the Part D prescription drug benefit offered by the MA 
organization. Please see our discussion of this requirement at section 
4 of this preamble.
    The MMA added a new section 1857(e)(3)(A) of the Act, which applies 
only to Federally Qualified Health Centers (FQHCs)and requires that the 
contract between CMS and MA organizations include a provision that any 
written arrangements between an MA organization and an FQHC include a 
level of payment that would be equal to what the MA organization would 
pay other providers for similar services. This requirement was codified 
at proposed Sec.  422.527. We received two comments asking for some 
clarifications on the reimbursement of FQHCs which we do address here.
    We also responded to commenters expressing concern that they would 
be unable to properly prepare for beneficiary enrollment if the 
contract process and the bid process were consecutive. Other 
commenters, for the same reason, asked that we streamline the 
application and contracting process. We welcomed these suggestions and 
have made changes accordingly, which we discuss below.
    We made a number of technical and clarifying changes. In Sec.  
422.502(b)(1), for example, we clarified that the completion of an 
application is a condition necessary to contract as an MA organization, 
clarified the distinction between the contract and process for purposes 
of redeterminations at Sec.  422.501(c)(2), and, at Sec.  
422.503(b)(4)(ii), Sec.  422.503(b)(4)(vi)(F), Sec.  422.503(b)(6) and 
Sec.  422.503(b)(6)(i), made several terminology changes (for example, 
we changed ``terminated'' to ``non-renew''). We received 25 comments on 
subpart K. Below we summarize and respond to these comments. Please 
refer to the proposed rule for additional discussion of the specific 
provisions of the requirements we proposed for subpart K. Note that 
public comments on the proposed MA rule and the proposed rule 
establishing the prescription drug benefit under part 423 are often 
related and we draw on comments from both proposed rules for our 
responses here. These comments often lead to changes in both rules and 
we identify the changes affecting both rules, as appropriate. Because 
of the similarity of many aspects of both rules and the comments we 
received related to both we refer interested readers to our final rule 
establishing the prescription drug benefit.
2. Application Requirements (Sec.  422.501)
    Comment: Several commenter submitted comments on the proposed 
regulation for MA organizations as well as the proposed rule 
establishing the Medicare prescription drug benefit asking CMS to make 
every effort 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 plan applicants as 
well as, specifically, all Part D plan sponsors (which includes MA 
organizations offering a prescription drug benefit). Several commenters 
expressed concern that the contract and bid determination processes for 
MA organizations, as well as, more generally, sponsors of Part D plans, 
if occurring consecutively, would not leave enough time for plans to be 
ready for business by January 2006. The commenters requested that CMS 
permit the contract determination process to run concurrently with the 
bid application process (subpart F).
    Response: We will permit contract applicants to enter into the bid 
determination process concurrently with the contracting process prior 
to the execution of a contract. The contract will be pre-qualified and 
left unsigned until a successful bid negotiation has been approved by 
us. We are also clarifying at Sec.  422.501(c)(2) that these are 
distinct processes and, further, that determinations concerning the 
contract only are appealable under subpart N of part 422 (the bid 
application requirements are in subpart F). We have made other changes 
to streamline the contract application process including, for example, 
the elimination, as a requirement, of a separate notice of incomplete 
or missing application information which we had proposed in Sec.  
422.502(e). Additional ways that we will streamline the contract 
application process are included in Sec.  422.502(a)(2). We made 
similar changes to the requirements of part 423. We discuss these and 
other changes below.
    Comment: A commenter recommended that CMS confirm the scope of 
State licensure requirements that apply to entities offering MA PPO 
plans, as State licensing laws may restrict an HMO's ability to offer a 
PPO plan, and sought CMS' confirmation that a State licensed indemnity 
insurer authorized under State law to provide PDP coverage meets the 
definition of a Regional Plan provider.
    Response: Section 422.400(c) is clear in saying that State law 
controls whether the MA organization is licensed or authorized to offer 
the type of MA plan it proposes to offer. As we explained in the 
preamble discussion in subpart A of the proposed rule, the fact that MA 
organizations offering local PPOs that are (or are not) licensed as 
HMOs is pertinent to the MA program solely for purposes of the 
application of quality improvement standards in section 1852(e) of the 
Act, and has no specific bearing on whether an MA organization has 
State authority to actually offer an HMO or PPO under the MA program. 
Whether an MA organization (licensed either as an HMO or otherwise) can 
offer a specific type of MA plan continues to rest upon State licensure 
or authority to offer such a type of MA plan.
3. Evaluation and Determination Procedures (Sec.  422.502)
    Comment: One comment pointed to the differing timelines for 
evaluation and determination of applications set forth under the 
Medicare+ Choice rules (and now under MA plans) from those proposed for 
PDP Sponsors under Part D and requested clarification. Another 
commenter asked that CMS streamline its application process in a way 
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.
    Response: We have modified the timeline for evaluation and 
determination of applications for both applicants to be MA 
organizations and PDP sponsors at Sec.  422.502 (and made similar 
changes to the requirements of part 423 for other Part D plan 
sponsors). We believe that maintaining a single application and 
evaluation procedure and a single set of contract requirements for both 
MA and PDP programs brings simplicity, consistency, and reduced 
administrative burden for those entities that are managing both 
programs. If an application is determined to be both incomplete, and 
failing to meet requirements necessary to become an MA organization 
resulting in an intent to deny issuance, we will notify the applicant 
concurrently of both determinations. For a notice of intent to deny, 
based on an incomplete (for example, applicant already received an 
incompleteness notice and did not provide the required information) or 
non-responsive application, we will allow applicants 10 days to cure 
their application before issuing a denial notice, if still justified.

[[Page 4673]]

    We remain committed to providing successful applicants a reasonable 
time to begin operations by the first of the year in their selected 
service area(s). We also want to ensure all potential applicants are 
given every chance to contract with us. In the event we determine that 
an application is incomplete, we afford a means for the applicant to 
``cure'' the contract application. However, under the MMA with a 
bidding process added, and the absence of a ``rolling application'' 
program used under the M+C process, we needed to modify these 
determination timelines.
    In order to respond to concerns that the determination application 
process as it was set up could compromise a plan's ability to 
effectively prepare for the beginning of a contract we are 
consolidating the proposed Sec.  422.502 by removing paragraphs (e), 
(f), and (g). The change eliminates, as a separate and distinct step in 
the review process, notification that an application is incomplete. In 
the final rule, Sec.  422.502 now provides that if an applicant's 
contract is submitted and found to be both incomplete, as well as 
unqualified (resulting in the issuance of an Intent to Deny Notice), 
the period to remedy the application will be 10 days from the date of 
the notice.
    Also, in the final rule in Sec.  422.502(c)(2)(ii), we are changing 
the amount of time that an applicant has to remedy an application after 
receiving an intent to deny notice from 60 days suggested in the 
proposed rule to 10 days. We believe this change is in accordance with 
the comments we have received to on both rules to streamline the 
process for each, bring the MA requirements under part 422 and the 
prescription drug benefit requirements under part 423 in to line, and 
to reduce confusion and administrative burden. Additionally, if after 
the initial review of the applications, we determine that an 
application is missing information necessary for us to make a 
determination we will attempt to notify the applicant that this is the 
case. This is not a requirement, however, and we are stating in the 
preamble of this final rule that applicants receiving notification that 
their application is incomplete but who have not yet received an intent 
to deny notice respond back to us with a cured application within two 
days of receiving the notice. The two days are thus a guide, but 
ultimately we are constrained by the total amount of time 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. 
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.
    As discussed above, we are making every effort to accommodate plans 
in the contract application process. We believe that the availability 
of choices will enhance opportunities to lower program costs. However, 
we must balance this goal with the need to ensure that only qualified 
plans are selected to contract with us.
    With the exceptions noted, we are accepting the language from the 
proposed rule for this section.
4. General Provisions (Sec.  422.503).
    Comment: In the proposed rule at Sec.  422.503(b)(vi)(G)(2), CMS 
suggested that MA organizations include provisions that would require a 
MA organization to report misconduct it believes may violate various 
criminal, civil or administrative authorities. Numerous comments, both 
for and against, were received regarding these mandatory self-reporting 
of misconduct requirements. Most of the comments, however, objected 
that the rule as written was vague and overbroad, with no basis in 
statute. Other comments directed CMS 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 MA organizations 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 
MA organizations 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 MA 
organizations 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 MA organization has determined that the 
misconduct has violated or may violate criminal, civil or 
administrative law, the MA
    organization 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 to MA organizations, 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.
    As discussed earlier, we believe that establishing procedures to 
ensure prompt responses to potential fraud violations should be one of 
the elements in an effective compliance plan. While we are eliminating 
the mandatory self-reporting requirements, we expect all MA 
organizations offering a Part D plan to comply with the requirement for 
a comprehensive fraud and abuse plan as found under Sec.  
422.503(b)(4)(vi)(H). (Note: we are not reproducing our discussion on 
the fraud and abuse requirements here as this is a requirement 
specifically for MA organizations offering a prescription drug benefit. 
Please see our discussion in our final rule establishing the 
prescription drug benefit.) In summary, we have elected to recommend 
reporting fraud and abuse as part of the compliance plan as required as 
a condition of contracting as an MA organization. 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.
5. Sec.  422.504 Contract Provisions
    Comment: A commenter questioned the need for proposed Sec.  
422.504(h) which would require MA organizations 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

[[Page 4674]]

relating to licensure. Furthermore, nothing suggests a rationale for 
naming some laws and not others. The same commenter also suggested that 
the provisions might more appropriately be replace 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 and on issues that we 
are responsible for enforcing such as the HIPAA Administrative 
Simplification rules. We have, therefore, made the suggested changes to 
reflect this focus at Sec.  422.504(h). These changes are in no way 
meant to imply that MA organizations need not comply with other Federal 
laws and regulations as applicable, only that the enforcement of these 
Federal laws and regulations is the responsibility of Federal agencies 
other than ours. We have made a similar change in the regulations 
establishing the prescription drug benefit program under part 423.
    Comment: A commenter responding to our proposed rule establishing 
the prescription drug benefit under part 423 asked us to clarify 
whether the retention periods all refer to MA organizations offering 
Part D plans. Another commenter asked that our records retention policy 
for Part D plan sponsors parallel the statute of limitations that 
applies to the 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 
apply to the False Claims Act. And, in response to the other commenter, 
we are using this standard for retention requirements under both parts 
422 and 423. As a result, in the final rule at Sec.  422.504(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 (see 42 CFR 
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 such as Part D, the 10-year 
retention requirement is necessary. We are making the change to parts 
422 and 423 in order to maintain uniformity between requirements for MA 
organizations and other Part D sponsors. With the exception noted, we 
are accepting the language from the proposed for this section.
6. Prompt Payment by MA organization (Sec.  422.520)
    Comment: A commenter recommended that we remove the distinction 
between contracted and non-contracted providers under Sec.  
422.520(a)(3) referring to prompt payment terms for non-contractors, 
fearing that we relinquish any authority to enforce prompt payment 
control for contracted providers. A commenter asked that the 60-day 
period for non-contracted providers to be paid be shortened to 30 days.
    Response: In response to the first commenter, we do not believe it 
is necessary to add language concerning contract and non-contract 
providers. We believe that Sec.  422.520(b)(2) makes it clear that the 
MA organization is obligated by the terms of its contract with the 
provider and that such a contract is the proper vehicle for any prompt 
payment terms.
    In response to the second commenter, we believe that a limit of 60 
calendar days strikes a reasonable balance by allowing time for the 
processing of payment without causing providers hardship.
    Comment: We received comments asking that we include Independent 
Physicians Associations (IPAs) and Medical Groups under the prompt 
payment standards. Other suggestions included establishing timely 
payment requirement for capitations paid to IPAs and Medical groups; 
standards for documentation that should be included with capitation 
payments and/or deductions; establishment of a 90-day limit on an MA 
plan's ability to retroactively assign or terminate beneficiaries to or 
from a capitated IPA or Medical group; establishment of a time limit on 
how far back an MA plan is allowed to make a capitation deduction (not 
longer than 12 months; allow capitated IPA and medical groups to 
renegotiate their capitation rate if new benefits are by law and/or 
added by an MA plan; requiring MA plans to provide on a quarterly basis 
a detailed accounting of the status of any risk arrangements or risk 
pools(for example hospital, and pharmacy) in a mutually agreed to 
electronic format.
    Response: Non-contracted IPAs and Medical Groups are already 
included in the prompt payment requirements in section 1857(f)(1) of 
the Act and in Sec.  422.502. The billing ``agent'' or entity is 
immaterial. We have not specifically regulated the content of contracts 
between providers and MA organizations. We have long supported the 
notion that allowing the ``free'' market to determine the contractual 
terms, including payment amounts and timeliness, as well as related 
matters was best left to the interested parties (MA organizations and 
providers), who could best represent their own self-interest. While we 
support many of the items suggested and would support their inclusion 
in provider/MA organization contracts, we do not believe it is 
appropriate to require that they appear there.
    We have adopted the language of the proposed rule in this final 
rule.
7. Agreements with Federally Qualified Health Centers (Sec.  422.527)
    Comment: One commenter recommended that we add language clarifying 
under Sec.  422.527(b) that payment in full to an FQHC does not 
preclude the FQHC from receiving the wrap-around payment provided by 
statute and in Sec.  422.316.
    Response: We agree with the commenter that we are responsible for 
the difference between what the MA plan pays to the FQHC and what its 
fee for service cost are, described above as a wrap-around. Our 
proposed language at Sec.  422.527 concerned primarily the contract 
between CMS and the plan. However, in order to clarify how our payments 
to FQHCs are determined when a beneficiary in an MA plan receives 
treatment from an FQHC that has a written agreement with the MA 
organization offering the plan, we have revised Sec.  422.527 of the 
final rule by adding new paragraph (c) to specify that financial 
incentives and withholds are not considered in determining the payments 
made under Sec.  422.316(a).
    Comment: The same commenter asked that we clarify that in the final 
rule that we will not include a financial incentives, ``such as risk 
pool payments, bonuses or withholds'' received by a FQHC from an MA--
when determining payments made by CMS.
    Response: In response to the commenter, we are clarifying in Sec.  
422.527(c) that financial incentives such as risk pool payments and 
bonuses as well as financial withholds are not considered in 
determining payments made to FQHCs by CMS. The language

[[Page 4675]]

at section 1833(a)(3)(B)(ii) of the Act, as added by section 
237(a)(B)(ii) of the MMA, specifically excludes these financial 
incentives or withholds when determining the base amount used to be 
used in calculating payments by CMS.
    With the exception of the changes noted, we are adopting the 
language of the proposed rule for this section.

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

    In the proposed rule, we indicated that we would study the 
modification of existing change of ownership (CHOW) provisions in order 
to reduce the administrative burden of these requirements and to 
increase the effectiveness of these provisions. In particular, we 
requested and received comments regarding situations which constitute a 
CHOW and how the CHOW provisions should be applied to large companies 
with multiple business units. These provisions are essentially the same 
as those requirements found in Title I subpart L for Prescription Drug 
Plan sponsors. Several commenters specifically requested that we 
maintain consistency between the provisions for subpart L in Title I 
and Title II.
    After reviewing the comments that we received, we recognize that 
given the infinite variety of business arrangements and transactions it 
may be necessary to provide guidance via interpretive documents (for 
example, FAQs,) and on a case by case basis as to whether a given 
arrangement constitutes a CHOW and requires an entity to adhere to the 
CHOW requirements. Contracting organizations should be aware that 
although we are committed and sensitive to reducing the administrative 
burden on businesses with multiple legally related entities, we will be 
alert to situations where these organizations may be looking to avoid 
compliance with the CHOW provisions so as to evade Medicare liabilities 
and obligations.
    In this final rule we note that contracted MA organizations must 
adhere to the Privacy Rule on sharing patient health information in the 
course of a CHOW and novation agreement. MA organizations are not 
permitted to share protected enrollee health information with a new 
owner that is not, or will not, become a covered entity absent 
authorization from its enrollees.

General Provisions (Sec.  422.550)

    Comments: Two commenters requested that CMS clarify that the 
transfer of the MA line of business from one entity to another 
constitutes an asset transfer for which CMS will permit a novation 
agreement.
    Response: We agree that the transfer of a MA line of business from 
one entity to another would constitute a CHOW, such that a novation 
agreement would be permitted and, in fact, required.
    Comment: A commenter recommended that the change of ownership 
requirements under Sec.  422.550 and Sec.  422.552 exempt change of 
ownership transactions between two separate subsidiaries of the same 
parent corporation from the financial information, financial impact and 
novation agreement requirements of the CHOW provisions. Instead, the 
commenter suggested that such entities provide written certification 
detailing that a legally binding transfer of the MA obligations has 
occurred.
    Response: We asked specifically for comments with regard to 
multiple business units so as to ensure that our rules reflect the 
realities of today's business world and are not unduly burdensome. 
While transactions between two subsidiaries of the same parent 
corporation may not in all cases constitute a CHOW, and, therefore, the 
business units would not need to adhere to the requirements of the CHOW 
provisions, we decline to create a separate certification procedure for 
such business units in the event that a CHOW does occur, as suggested 
by the commenter. Our ultimate responsibility is to the beneficiaries 
and objective is to ensure that an entity cannot under any circumstance 
evade its responsibilities to the Medicare program. What is relevant is 
whether the transaction leaves the same entity responsible for the MA 
contract and all inherent responsibilities remain unchanged. Any 
transfer of functions and/or assets that results in a change of the 
responsible party or parties for the MA contract must comply with the 
CHOW provisions under Subpart L.

Asset Sale (Sec.  422.550(a)(2))

    Comment: Two commenters recommended that the title of the 
subparagraph identified as ``Asset sale,'' be revised to read ``Asset 
Transfer.''
    Response: The suggestion has been adopted in the final regulation. 
In the proposed rule we were looking for comment on how to best 
characterize a CHOWs for those businesses with multiple business units, 
recognizing that a business would not always be selling its assets, but 
may sometimes simply be transferring a business asset.
    Notice Period (Sec.  422.550(b))
    Comments: Two commenters recommended that CMS consider extending 
the 60 day Notice period that MA organizations are required to provide 
before a change of ownership. The commenters stated that circumstances 
may arise when it is not possible to give such notice, for example, 
State approval pending, and a final determination date by the State is 
indefinite. Additionally, they recommended adding a good clause 
exception to the rule when such circumstances occur.
    Response: The MMA was passed, in part, to encourage and ease MA 
plans into the new Medicare market place. Towards that end we will, on 
a case by case basis, have the flexibility to extend the 60 day notice 
period if a situation arises that warrants such an exception. We do not 
feel at this time we need to add a clause that specifies a good cause 
exception.

Subpart M--Grievances, Organization Determinations, and Appeals

1. Introduction
    The MMA did not make any revisions to the statutory requirements in 
sections 1852(f) and (g) of the Act regarding MA grievances and 
appeals. Thus, we generally proposed to maintain the existing 
regulatory requirements in subpart M of part 422, with the inclusion of 
minor changes needed to conform these subpart regulations to MMA 
terminology and other provisions. We also reviewed the existing MA 
grievance and appeal requirements to identify needed refinements. 
Finally, we proposed changes to the part 417 regulations, which apply 
only to section 1876 cost contractors and section 1833 health care pre-
payment plans (HCPPs) that would establish uniform grievance and appeal 
procedures for all Medicare managed care plans.
    We received 30 comments on subpart M in response to the proposed 
rule. Below we summarize our proposals and respond to public comments. 
(For a detailed discussion on our proposals, please refer to the August 
3, 2004 proposed rule. (69 FR 46,866, 46,909).
2. Background
    Section 1852(f) of the Act provides that an MA organization must 
provide meaningful procedures for hearing and resolving grievances 
between the organization (including any other entity or individual 
through which the organization provides health care services) and 
enrollees in its MA plans. Section 1852(g) of the Act addresses the 
procedural requirements concerning coverage (``organization'') 
determinations and reconsiderations and other appeals for MA 
organizations. Only disputes concerning ``organization

[[Page 4676]]

determinations'' are subject to the reconsideration and other appeal 
requirements under section 1852(g) of the Act.
    In general, organization determinations involve whether an enrollee 
is entitled to receive a health service or the amount the enrollee is 
expected to pay for that service. All other disputes are subject to the 
grievance requirements under section 1852(f) of the Act. For purposes 
of this regulation, a reconsideration consists of a review of an 
adverse organization determination by either the MA organization itself 
or an independent review entity. We use the term ``appeal'' to denote 
any of the procedures that deal with the review of organization 
determinations, including reconsiderations, hearings before 
administrative law judges (ALJs), reviews by the Medicare Appeals 
Council (MAC) and judicial review.
    For the grievance, organization determination, and appeal 
requirements, an MA organization must establish procedures that satisfy 
these requirements with respect to each MA plan that it offers. These 
requirements generally are the same for all plan types --including 
coordinated care plans such as HMOs and PPOs, non-network MSA plans, 
and PFFS plans. However, note that for MA-PD plans, separate rules 
apply for drug benefits, as set forth under part 423, subpart M.
    Sections 1833(a)(1)(A) and 1876(a)(5)(B) of the Act reference 
reasonable cost reimbursement contracts for HCPPs and HMO/CMPs. Section 
1876(c)(5) of the Act sets forth the procedures HMO/CMP organizations 
must follow with regard to grievances, organization determinations, and 
appeals. Section 417.840 of our regulations requires HCPPs to apply the 
administrative review procedures set forth for HMO/CMPs. Section 1869 
of the Act provides the right to a hearing and to judicial review for 
any individual dissatisfied with a determination regarding his or her 
Medicare benefits.
3. General Provisions, Grievances, and Organization Determinations 
(Sec.  422.560 through Sec.  422.576)
    Section 940(b)(2)(A) of MMA amended section 1852(g)(5) of the Act 
to incorporate the provisions of section 1869(b)(1)(E)(iii) of the Act, 
which also was added by MMA. This new clause provides for inflation 
adjustments to the ``amount in controversy'' required to pursue a 
hearing and judicial review. It makes these provisions applicable in 
determining the amount in controversy under section 1852(g)(5) of the 
Act ``in the same manner as they apply to the dollar amounts specified 
in section 1869(b)(1)(E)(i).'' Therefore, revisions to the provisions 
in section 1869 of the Act governing the calculation of the amount in 
controversy apply to MA appeals.
    The existing MA regulations incorporate 42 CFR part 405, subparts G 
and H, and 20 CFR part 404, subparts J and R. Note that in an interim 
final rule we expect to publish shortly, we intend to create a new 
subpart I of part 405 to implement significant revisions to section 
1869 of the Act. To accommodate these changes, we proposed minor 
changes to the cross-references for MA appeals at Sec.  422.560(a)(3), 
Sec.  422.561, and Sec.  422.562 accordingly. We are finalizing these 
changes in this final rule. We note that under Sec.  422.562(d), 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, if and 
when finalized, would apply to MA appeals. Thus, we have added a 
reference to Sec.  422.602(b) that the time and place for a hearing 
before an ALJ will be set in accordance with Sec.  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 provisions 
that are dependent upon qualified independent contractors would not 
apply since an independent review entity conducts reconsiderations for 
MA appeals.
    We also clarified the definitions of an authorized representative 
and an enrollee under Sec.  422.561, which are consistent with part 
405. We have removed ``authorized representative'' and replaced it with 
``representative'' to clarify that a representative means an individual 
appointed by an enrollee or other party, or authorized under State or 
other applicable law, to act on behalf of an enrollee or other party 
involved in the appeal. Unless otherwise stated in this subpart, the 
representative will have all of the rights and responsibilities of an 
enrollee or party in obtaining an organization determination or in 
dealing with any of the levels of the appeals process, subject to the 
applicable rules described in part 405 of this chapter.
    In accordance with section 1852(g)(1) of the Act, Sec.  422.566 
begins by specifying that an MA organization must have a procedure for 
making timely organization determinations regarding the benefits an 
enrollee is entitled to receive and the amount, if any, that an 
enrollee must pay for a health service. We clarified at proposed Sec.  
422.566(b)(4) that a reduction in services was an action that 
constituted an organization determination that an enrollee may appeal. 
Notice requirements would continue to apply whenever an enrollee 
disputed the reduction, under Sec.  422.568(c).

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

    The only substantive change we proposed in Sec.  422.568 was the 
elimination of the practitioner's notice requirement set forth in Sec.  
422.568(c). This section required that at each patient encounter with 
an MA enrollee, a practitioner must notify the enrollee of his or her 
right to receive, upon request, a detailed written notice from the MA 
organization regarding any decision to deny services to an enrollee. 
Instead of requiring practitioners to provide general notices to 
enrollees at each patient encounter, we proposed instead to require MA 
organizations to provide specific written notice for MA organization 
denials. We believed that MA organizations could provide general 
information about enrollees' rights in physician office settings in the 
plan's Evidence of Coverage (EOC). Requiring practitioners to issue 
notices to enrollees has proven to be administratively burdensome and 
impossible to monitor.
    We also proposed conforming changes to Sec.  422.570(d)(2)(ii) and 
Sec.  422.572(b) to require that an MA organization must inform an 
enrollee of the right to file an ``expedited'' grievance, if the 
enrollee disagrees with the MA organization's decision not to expedite 
a request for an expedited organization determination.

Timeframe and notice requirements for expedited organization 
determinations.

    Under Sec.  422.572(c), we proposed to eliminate the requirement 
that oral notice of an expedited determination be followed up with 
written confirmation in cases of fully favorable determinations. Notice 
would be required only for decisions that are fully or partly adverse 
to the enrollee, and thus could engender an appeal.
    Comment: Several commenters supported the elimination of the 
practitioner's notice set forth in Sec.  422.568(c). Some commenters 
agreed that the practitioner's notice was not a practical means of 
notifying enrollees of their appeal rights; they supported use of the 
EOC to provide information about enrollee rights in situations where

[[Page 4677]]

physicians make coverage determinations in their offices. One commenter 
contended that the practitioner's notice was burdensome for providers 
to deliver and in effect absolved plans of any accountability for their 
utilization review decisions.
    Two commenters stated that the EOC was not a viable substitute for 
communicating appeals information to enrollees. The commenters believe 
that the EOC would not be as effective as a notice provided in a 
practitioner's office regarding how an enrollee could get a coverage 
determination from the plan. These commenters thought our proposal 
would disadvantage enrollees, because they do not routinely refer to 
the EOC. In lieu of the requirement to provide a written notice to each 
enrollee, one commenter recommended that CMS require practitioners to 
display posters in their offices to inform enrollees about their 
rights.
    Response: In our view, the EOC is an appropriate alternative to 
requiring practitioners to deliver notices regarding enrollees' rights 
to receive coverage determinations from their plans. We believe that 
enrollees have a responsibility to refer to their EOC to obtain general 
information regarding coverage determinations. Furthermore, we believe 
that enrollees have relationships with their physicians built on trust, 
and enrollees often play an active role in the treatment decisions that 
affect them. Therefore, in the absence of a delegated arrangement, we 
are not placing the burden on practitioners to deliver notices to 
enrollees on their right to receive detailed coverage notices at each 
patient encounter.
    We will work with MA organizations to ensure that the EOC contains 
information on an enrollee's right to receive a detailed explanation if 
he or she believes that a practitioner has denied care that the 
enrollee believes he or she is entitled to receive, or care the 
enrollee believes should continue. For these situations, the EOC will 
direct the enrollee to request an organization determination. We will 
also work with consumer advocates to determine other ways to educate 
enrollees about their rights.
    Comment: Four commenters supported CMS' proposal to explicitly 
specify in Sec.  422.566(b) that a reduction of services constitutes an 
organization determination that an enrollee may appeal.
    Response: We believe that this approach essentially clarifies 
existing policy, under which a reduction in service is an appealable 
issue. Thus, if an enrollee disagrees with an MA organization's 
decision to reduce a course of treatment, the MA organization must 
consider the disputed reduction of service a new request for an 
organization determination. A request for a new organization 
determination allows the enrollee to receive notice, appeal rights, and 
access to the MA appeals system under Sec.  422.570 and Sec.  422.584.
4. Requests for Reconsiderations (Sec.  422.582)
    The only substantive change we proposed regarding standard 
reconsiderations pertained to the manner in which a party to an 
organization determination would request an appeal. Proposed Sec.  
422.582(a)(1) and (a)(2) allowed a party to request a standard 
reconsideration orally or in writing. In addition, proposed Sec.  
422.584(e) required an MA organization to give notice in accordance 
with the broader provision of Sec.  422.590, since there are notice 
requirements other than those contained in Sec.  422.590(d).
    As we proposed for expedited organization determinations under 
Sec.  422.570(d)(2)(ii), proposed Sec.  422.590(a) and Sec.  
422.590(d)(2) required an MA organization to inform an enrollee of the 
right to file an ``expedited'' grievance if the enrollee disagreed with 
the MA organization's decision not to expedite a request for an 
expedited reconsideration. This is a right that already was established 
under the grievance provision at Sec.  422.564(d)(2) (re-codified under 
this final rule at Sec.  422.564(f)(2)); thus, we needed to make a 
conforming change.
    Comment: One commenter took exception to the expedited grievance 
process currently in Sec.  422.564(d) (re-codified in this rule at 
Sec.  422.564(f)), (and by extension, the conforming changes at 
proposed Sec.  Sec.  422.570(d)(2)(ii) and 422.572(b)), arguing that 
this process was not beneficial because it allowed the same 
organization determination to be considered along two separate tracks 
simultaneously. The commenter stated that an MA enrollee has the right 
to request an expedited review of a plan's organization determination, 
and that the review is automatically granted if supported by a 
physician's assertion that the life or health of an enrollee would be 
adversely affected by a decision not to expedite the review. Thus, even 
without the benefit of an expedited grievance process, a decision would 
still be made by the plan (albeit in a longer period), and the enrollee 
would not be in jeopardy while waiting for the plan's decision. The 
commenter recommended that CMS delete this provision from the 
regulation in its entirety because, in the commenter's view, it is 
redundant and inefficient. It would also remove the need for conforming 
changes.
    Response: We agree with the commenter that we should not create 
redundant processes. However, we do not believe that Sec.  422.564(d) 
(now Sec.  422.564(f)) is duplicative of the appeal procedures. An 
expedited grievance process provides important protections for 
enrollees who are unable or prefer not to obtain a physician's 
certification that applying the standard time frame would have adverse 
consequences for the enrollee. In addition, an MA plan could determine 
that it needs an extension to process a standard or expedited 
organization determination or reconsideration request. By allowing an 
expedited grievance to proceed under those circumstances, the decision 
about the grievance would not be the organization determination, but 
the plan's appropriate use of its discretion to extend the time frame. 
Thus, we specified at Sec.  422.564(d) (now (f)) that an MA 
organization must notify the enrollee within 24 hours of receiving a 
grievance about the MA organization's refusal to expedite a review. 
Similarly, if an enrollee believes an MA organization's decision to 
invoke an extension to the organization determination or 
reconsideration time frames is incorrect, an expedited review would 
ensure that any inappropriate procedural actions under the appeals 
process are resolved and that the appeal proceeds without delay. 
Therefore, we are retaining the provision that in the current Sec.  
422.564(d) (now Sec.  422.564(f)), and making the required conforming 
changes at Sec.  422.570(d)(2)(ii) and Sec.  422.572(b) as previously 
proposed.
    Comment: A commenter supported CMS' decision to revise Sec.  
422.572(c) to no longer require MA organizations to provide written 
notice for fully favorable decisions. The commenter also recommended 
that the MA organization should communicate fully or partially 
favorable decisions to the provider, who would then notify the enrollee 
of the organization's decision.
    Response: While we agree that the revision at Sec.  422.572(c) will 
eliminate the unnecessary burden to issue written notices in cases of 
fully favorable decisions, we believe that written notifications remain 
appropriate for partially favorable decisions, which may result in 
appeals. Moreover, notwithstanding any arrangements an MA organization 
negotiates with its providers, the MA organization is ultimately 
responsible for ensuring that its decisions are communicated to

[[Page 4678]]

enrollees. We believe that decisions involving whether to initiate a 
service constitute the majority of an MA organization's communication 
with enrollees. Therefore, in the absence of a delegated arrangement, 
we do not believe that it is appropriate or practical to require all 
individuals or entities that provide health care services to give 
routine notices to a plan's enrollees.
    Comment: Two commenters opposed CMS' proposed revision at Sec.  
422.582(a) that would allow a party to request a standard 
reconsideration orally or in writing. One commenter recommended that 
CMS delete the proposed provision because oral requests would increase 
the number of meritless reconsiderations and overburden the 
reconsideration process. The commenter believed that this provision 
would lead to confusion and undocumented assertions in the process. The 
commenter further believed that written requests ensure that MA 
organizations effectively and efficiently focus on an enrollee's 
ultimate issue. Additionally, the commenter noted that the MA 
organization would be required to reduce oral requests to writing, 
which would transfer the burden of generating a written request from 
the enrollee to the MA organization. If the provision for oral appeal 
requests is retained, the commenter recommended that they be allowed 
only in person. Another commenter believed that MA organizations would 
need guidance on how to process oral requests, particularly in the case 
of a request from a purported authorized representative. Finally, a 
commenter stated that CMS should not permit oral requests in order to 
be consistent with private sector regulatory requirements.
    Response: Based on our review of the comments, we agree with the 
commenters that oral appeal requests could present problems for both MA 
organizations and the appealing parties, particularly when one 
individual attempts to translate an oral request into writing on behalf 
of another. We believe that an unintended consequence of our proposed 
change is the potential for essential information to get misconstrued. 
Thus, rather than requiring MA organizations to accept oral requests, 
we will continue to provide guidance on how an MA organization may 
choose to accept an oral request for reconsideration, and the steps it 
can take to validate the request. This will enable plans the 
flexibility to create such a process if they choose to do so. 
Therefore, we have revised the text at Sec.  422.582(a) to reflect that 
an MA organization may adopt a policy under which it accepts oral 
requests for standard reconsiderations. We would expect that MA 
organizations would accept oral requests in instances where there is a 
clear and compelling reason to do so. An example of a clear and 
compelling reason to accept an oral request would be in the case of an 
illiterate or an incapacitated enrollee on the basis that they would 
not be able to request a reconsideration in writing.
5. Administrative Law Judge (ALJ) Hearings, Appeals to the Medicare 
Appeals Council, Judicial Review, and Provisions Affected by Part 405 
(Sec.  422.600 through Sec.  422.612)
    Section 931 of the MMA requires that the ALJ hearing function now 
conducted by the Social Security Administration (SSA) be transferred to 
the Department of Health and Human Services by no later than October 1, 
2005. In light of this impending change, we are revising Sec.  422.582 
and Sec.  422.602 to eliminate any reference to SSA as a location for 
enrollees to file appeals. If an enrollee inadvertently files an appeal 
request with SSA after the transfer, its field offices will ensure that 
the request is transferred to the appropriate appeals entity. We have 
modified Sec.  422.602(a) to require that a party must file a written 
request for an ALJ hearing with the entity specified in the independent 
review entity's (IRE's) reconsideration notice.
6. Noncoverage of Inpatient Hospital Care--Notice and QIO Review (Sec.  
422.620 and Sec.  422.622)
    We proposed at Sec.  422.620(b) to specify that an MA organization 
(or an entity delegated by the organization) must obtain the 
concurrence of the physician responsible for the enrollee's in-patient 
care before discharging an enrollee. This provision would clarify an 
omission in our April 4, 2003 final rule where we inadvertently failed 
to include a corresponding change that physician concurrence is 
necessary for discharging the enrollee rather than for issuing the 
notice. Therefore, an MA organization's obligation to provide a notice 
of non-coverage when an enrollee objects to a discharge would not be 
contingent upon a physician concurrence because the discharge decision 
already would have been made.
    We also proposed to revise Sec.  422.620(c) to require that if an 
MA organization lowers the enrollee's level of care in an inpatient 
hospital setting, for example, from acute to skilled, but the enrollee 
is not discharged from the facility, the MA organization must specify 
the enrollee's new level of care in the notice. This change would be 
consistent with Sec.  422.620(a)(1)(ii), which requires the MA 
organization to provide a notice to the enrollee when it no longer 
intends to continue coverage of the inpatient hospital stay, but is not 
``discharging'' the enrollee from the facility.
    Comment: Several commenter recommended that CMS clarify that an 
enrollee's right to receive a notice of non-coverage is linked to 
physician concurrence to the extent that the physician must concur with 
the MA organization's decision to discharge the enrollee or change the 
enrollee's level of care. Several commenters continued to believe that 
an MA organization could not issue a notice without the physician's 
concurrence. One commenter thought that the propose rule suggested that 
it is the MA organization rather than the physician that ultimately 
discharges the enrollee. The commenter maintained that since a hospital 
cannot discharge an enrollee without physician concurrence, CMS should 
prohibit an MA organization from ending coverage without a physician's 
concurrence. Another commenter stated that the final rule should 
prevent MA organizations from shifting financial liability to hospitals 
without securing the attending physician's concurrence to discharge the 
enrollee.
    One commenter stated that a benefit determination based on medical 
necessity guidelines to discontinue unnecessary inpatient coverage does 
not require physician concurrence. Another commenter thought that if 
physician concurrence were required to issue the notice of non-
coverage, then enrollees would be unable to initiate the appeals 
process in a timely manner. This commenter recommended that CMS delete 
the entire provision and only require plans to issue a notice of non-
coverage to the enrollee when it decides to no longer pay for acute 
care.
    Another commenter, concerned about a hospitalized enrollee's 
reaction to receiving a notice of non-coverage from the MA 
organization, thought that CMS should withdraw the proposal, citing the 
trauma, confusion and stress to the enrollee. Instead, the commenter 
believed that the hospital staff familiar with the specific medical 
circumstances related to the enrollee's confinement should provide the 
notice.
    Response: Medical guidelines alone cannot substitute for a 
physician's judgment about the medical condition of the patient under 
the physician's care. We agree with the commenters that physicians 
ultimately have the authority to discharge enrollees or change the 
level of care in hospital settings.

[[Page 4679]]

 However, the MA organization is required to issue a notice of non-
coverage if an enrollee objects to the discharge decision, or when an 
enrollee's level of care changes in an acute facility. Since the 
attending physician must agree to the discharge or the change in level 
of care, the MA organization can provide the notice without further 
physician involvement. Thus, we are merely clarifying under Sec.  
422.620(b) that a physician concurrence is required before discharging 
an individual or changing the level of care in an inpatient setting.
    We disagree with the commenter that argued if a physician 
concurrence were required to issue the notice, then enrollees would be 
unable to initiate timely appeals. The timeframe for filing does not 
begin until the enrollee receives the notice. We further disagree that 
we should delete the entire provision at Sec.  422.620 and only require 
plans to issue notices when they decide to no longer pay for acute 
care. If an enrollee disagrees with being discharged from the hospital, 
then the enrollee is entitled to a notice explaining his or her appeal 
rights under the law.
    Finally, if an MA organization believes that its provision of the 
notice to an enrollee in an acute facility would create stress, trauma 
and confusion, then the MA organization has the option to delegate to 
the hospital the responsibility to provide the notice of non-coverage 
on behalf of the MA organization.

Advance Beneficiary Notices in the MA Program

    In the August 3, 2004 proposed rule, we solicited comments on 
whether to permit or require network and non-network providers to 
furnish enrollees advance beneficiary notices (ABNs) when they access 
non-Medicare covered services, or when they face potential liability 
for out of network services that would be otherwise payable by the MA 
plan if proper referral were obtained.
    Comment: Several commenters vehemently opposed requiring providers 
to furnish ABNs to enrollees who wish to obtain non-Medicare covered 
services. They stated that CMS could not enforce any requirements on 
non-network providers to advise enrollees of potential liability. The 
commenters believed that ABNs would be burdensome for physicians, 
providers and MA organizations, and could lead to delays in care for 
enrollees. Another commenter stated that CMS, instead, should educate 
providers about their responsibility to contact the MA organization 
when enrollees seek out of network or non-Medicare covered services.
    Several commenters stated that ABNs in original Medicare have 
inherent problems, such as providers that issue blanket ABNs, which 
then become meaningless to the enrollee. A commenter noted that 
although the ABN was only a one-page document, there were 30 pages of 
instructions for the provider to complete the form, thus the use of 
ABNs would be confusing.
    One commenter indicated that it was premature to propose the use of 
ABNs in managed care. Instead, CMS should establish a database with 
information, so that physicians could have access to coverage 
information for each plan. Otherwise, it would be too burdensome for 
physicians to know the different benefits and coverage of each plan. 
The commenter further recommended that if CMS determined that ABNs were 
necessary, then we should ensure that MA organizations provide clear 
information to physicians' offices on the appropriate use of ABNs.
    Another commenter recommended that CMS should allow providers to 
issue ABNs only after they have requested and received an adverse 
organization determination from the MA organization. If an enrollee 
waived the right to have the provider request an organization 
determination, nothing would preclude the enrollee from appealing the 
MA organization's denial for the service.
    Other commenters, however, were in favor of CMS allowing the use of 
ABNs in managed care. One commenter reported that not all providers of 
MA organizations have contracted networks, and even among those that 
do, enrollees still utilize non-network providers. The commenter stated 
that the MA organization could be unaware that the enrollee received 
any services until he or she presents a claim. ABNs would inform 
enrollees about potential costs at the time the enrollee seeks 
services, thereby providing protection from unintended liability. 
Another commenter thought ABNs should be required when enrollees access 
non-Medicare covered services, and that an out of network provider 
should be required to get an organization determination prior to 
providing services.
    Response: We will continue to study this issue and will pursue 
subsequent notice and comment rulemaking before implementing any 
standard use of ABNs under the MA program. In addition, we will work 
with interested parties to determine how best to educate enrollees and 
providers on financial liability matters, including the possibility of 
permitting optional use of an ABN-like notice.
8. Appeal Procedures for Cost Plans and HCPPs.
    We proposed under Sec.  417.600(b) that the same rights, 
procedures, and requirements relating to beneficiary appeals and 
grievances set forth in subpart M of part 422 of this chapter also 
apply to organizations offering Medicare cost plans. In proposing this 
change, we took into account that a key difference between cost plans 
and MA plans is that virtually all organizations offering cost plans 
employ a billing option available under Sec.  417.532(c)(1) that 
reduces a cost plan's financial liability for certain Medicare-covered 
services. Under this billing methodology, hospitals and SNFs that 
furnish services to cost plan members can obtain direct reimbursement 
from Medicare fiscal intermediaries for these services. For services 
paid for under this methodology, the claims appeal procedures available 
under original Medicare regulations in part 405 would be the 
appropriate recourse when a Medicare fiscal intermediary denies a 
claim. However, for other services, including any service or payment 
denial resulting from an organization determination under a cost plan, 
as defined in Sec.  417.606, enrollees would appeal through the cost 
plan's appeals process. The plan's appeal procedures would also apply 
in the rare situation when a fiscal intermediary approved a claim for 
hospital or SNF services, but the cost plan refused to pay the covered 
portion of the enrollee's cost sharing associated with the services.
    As noted above, the cost plan appeals process would follow the same 
rules that apply to MA organizations, as set forth in subpart M of part 
422. Although the appeal procedures set forth in part 417 and part 422 
are largely similar, it is important to note that the part 422 
grievance provisions and recent changes to the notice and appeal 
requirements for inpatient hospital, SNF, home health agency (HHA) and 
comprehensive outpatient rehabilitation facility services would apply 
to cost plans for the first time. These changes primarily involve Sec.  
422.564, Sec.  422.620, Sec.  422.622, Sec.  422.624 and Sec.  422.626 
which were set forth in the April 4, 2003 final rule, Improvements to 
the Medicare+Choice Appeals and Grievance Procedures.'' (See 68 FR 
16,652). The effect of those changes would be that plans would have 
more specific guidelines for processing grievances, and enrollees would 
be entitled to the same notice and appeal rights in cases of 
terminations of Medicare services

[[Page 4680]]

furnished by hospitals, SNFs, HHAs and CORFs.
    Comment: Commenters generally supported CMS' proposal to require 
cost plans and HCPPs to follow the Medicare Advantage grievance and 
appeal requirements, particularly in light of the unique billing 
arrangement utilized by the majority of cost plans. One commenter 
stated that CMS should reflect in its final rule that cost plans may 
elect billing option one, a payment methodology where a fiscal 
intermediary pays certain Part A services instead of the cost plan. 
Another commenter wanted CMS to make sure that the cost plan's appeals 
process would apply in the unusual circumstance where a fiscal 
intermediary approved a claim, but the cost plan denied payment of the 
enrollee's cost sharing portion. Other commenters wanted CMS to allow 
sufficient time for cost plans that do not have MA experience to 
transition to the MA rules. Some commenters recommended an effective 
date of January 2006. Another commenter requested that the transition 
to MA rules apply as of the first day of the contract year following 
publication of the final rule.
    Response: We did not receive any comments on the applicability of 
the notice and appeal requirements to cost plans when Medicare services 
end in SNFs, HHAs and CORFs, under Sec.  422.624 and Sec.  422.626. 
Nevertheless, we agree with the commenters that there should be one 
managed care appeals process for all plan types. As proposed, all part 
422 rules now apply to cost plans and HCPPs. Thus, we have deleted all 
part 417 grievance, organization determination, and appeal provisions, 
and replaced them with Sec.  417.600(b) and Sec.  417.840 to require 
cost plans and HCPPs to apply the MA procedures under part 422, subpart 
M. Additionally, we have made a conforming change to Sec.  417.832(c) 
dealing with representation of parties, and added a new provision at 
Sec.  417.832(d) dealing with administrative law judge hearings, 
Medicare Appeals Council review, and judicial review that references 
part 405, as applicable to those provisions. However, for those cost 
plans that elect to bill under original Medicare, any denied claim by 
the fiscal intermediary or carrier must be subject to the appeals 
process under original Medicare. We also agree that if a plan denies 
payment of an enrollee's cost sharing amount, then the enrollee must 
file an appeal under the MA appeal procedures.
    As recommended by commenters, we will require that cost plans and 
HCPPs must transition to the MA grievance and appeals processes under 
part 422 no later than January 1, 2006. This should give plans, 
providers and original Medicare contractors an ample opportunity to 
make a seamless transition.
9. Federal Preemption of Grievances and Appeals
    Section 232(a) of the MMA changes the presumption from one in which 
State laws are not preempted unless they conflict with Federal laws or 
fall into specified categories to one in which State standards are 
presumed preempted unless they are licensing or solvency laws. In light 
of the comprehensive nature of the appeals process already established, 
we did not believe that the new preemption standard would have any 
effect on coverage appeals provisions. Our regulations would continue 
to defer to State law on the issue of authorized representatives of 
enrollees in the organization determination, grievance and appeals 
processes. We were concerned, however, with State grievance 
requirements now preempted, and believed that we needed to reexamine 
our Federal grievance requirements. Therefore, we solicited comments on 
whether we should adopt the grievance provisions proposed in our 
January 24, 2001 proposed rule that would require MA organizations to 
establish notice and timeliness procedures. (See 66 FR 7593.) 
Alternatively, we asked whether we should impose, as a Federal MA 
requirement, that MA organizations meet State grievance requirements.
    Comment: Most commenters, including both those representing MA 
organizations and consumers, favored adopting the specific grievance 
requirements first proposed in the January 2001 proposed rule. They 
indicated that establishing national standards would eliminate 
confusion for plans, particularly regional PPOs, and protect 
beneficiary interests. They indicated that plans should not be subject 
to multiple and conflicting State laws governing grievances. One 
commenter generally supported the grievance rules but recommended that 
CMS make two changes. The first modification would be that MA 
organizations must process grievances ``as expeditiously as the 
enrollee's health requires, but no later than 60 days.'' The second 
change would prohibit plans from taking extensions to the timeframes.
    Two commenters thought that CMS should not only require the 
originally proposed standards for grievances, but also require plans to 
adhere to individual State grievance processes as well. One of the 
commenters believed that requiring plans to follow State processes 
would restore the status quo before enactment of MMA, while the other 
commenter thought that beneficiaries would have better protections by 
having access to both Federal and State grievance procedures.
    Response: We agree with the commenters that establishing a uniform 
set of grievance standards would reduce confusion and burden for MA 
organizations. We also believe that one set of rules will ensure 
greater beneficiary understanding of their grievance rights and achieve 
consistency among plan operations. Thus, we are implementing at Sec.  
422.564 the specific Federal requirements for grievance procedures that 
basically mirror those set forth in our January 2001 proposed rule. We 
disagree with the commenter that MA organizations should be required to 
follow both State and Federal grievance processes. We believe that such 
an approach would be inconsistent with section 232(a) of the MMA, which 
preempts State grievance requirements.
    Under MA grievance requirements, organizations must notify 
enrollees of decisions as expeditiously as the enrollee's case 
requires, but no later than 30 calendar days after receiving a 
complaint. MA organizations may extend the timeframe by up to 14 
calendar days if the enrollee requests the extension, or if the 
organization justifies a need for additional information and the delay 
is in the interest of the enrollee. We believe that the timeframes 
should 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 physician does not offer 
convenient hours for office visits. In addition, we believe that most 
MA organizations will be able to respond to most grievances within 30 
days. Even if an MA organization needs to extend the timeframe, we 
believe that a 60-day standard is too long for an MA organization to 
respond to an enrollee's grievance.
    If an enrollee makes a grievance orally, the MA organization may 
respond to it orally or in writing, unless the enrollee requests a 
written response. If an enrollee files a written grievance, then the MA 
organization must respond in writing. In addition, an MA organization 
must provide information to enrollees on their right to request a 
review by a Quality Improvement Organization (QIO) if the grievance

[[Page 4681]]

involves a quality of care issue. For any complaint involving a QIO, 
the MA organization must comply with the requirement at Sec.  
422.564(c), and cooperate with the QIO in resolving the complaint. MA 
organizations must establish a 72-hour expedited grievance process for 
complaints involving certain procedural matters in the appeals process. 
Finally, MA organizations must create a system to track and maintain 
records on all grievances.
    We note that under MMA, enrollees would still have access to 
various State remedies available in cases in which an issue is 
unrelated to the MA organization's status as a health plan. As noted 
above, cost plans and HCPPs must follow the grievance, organization 
determination and appeal procedures under MA. However, general 
preemption rules continue to apply to cost plans and HCPPs.
10. Employer Sponsored Benefits and Appeals
    When an employer, by contracting with an MA plan, provides health 
benefits in addition to those covered under Part C of Title XVIII of 
the Social Security Act to their retirees, such employer may have 
established a group health plan governed by both title I of the 
Employee Retirement Income Security Act of 1974 (ERISA), as amended, 
and State law (to the extent such State law is not preempted by ERISA). 
In addition, when MA plans offer benefits covered under Part C, they 
also fall under the requirements of part 422 with respect to Part C 
benefits. Therefore, we solicited comments on whether, and to what 
extent, the application of parallel appeal procedures in this context 
might be a problem for plans, employers and/or eligible individuals.
    Comment: Almost all commenters supported utilizing only the MA 
procedures for claims involving integrated ERISA and MA benefits. One 
commenter noted 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 MA, MA-PD, or PDP group 
plan, including benefits separately negotiated between the MA, MA-PD or 
PDP organization and an employer or labor organization, those benefits 
should be governed by the MA or PDP regulations on grievances, 
organization determinations, and appeals rather than subjecting the 
beneficiary to two separate processes. Commenters also noted that 
although the ERISA and MA rules contain some differences, they 
generally provide similar enrollee protections.
    Three commenters agreed that adopting and applying a single, 
uniform MA appeals process for all benefits would be easier for the 
enrollee to understand. Other commenters stated 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 a continuation 
of parallel appeal procedures, but only to the extent that parallel 
procedures afforded enrollees with more protection than would be 
available in the absence of parallel procedures.
    One commenter argued that the benefits under the two separate 
programs must be adjudicated according to the rules for each program. 
The commenter stated that it was not clear whether the outcome of a CMS 
decision would preclude an enrollee from filing an ERISA appeal, and 
that a decision made by CMS could affect the need for appeal under 
ERISA when the ERISA plan had secondary payer status. The commenter 
added that given that the benefits provided to the Medicare beneficiary 
in this instance involve two different laws, there is no statutory 
authority for us to adjudicate appeals relating to an ERISA plan, just 
as there is no statutory authority for the DOL to adjudicate appeals 
relating to Medicare benefits. This commenter recommended that DOL and 
CMS work together to develop a process that would allow the plan 
sponsor of a retiree health plan to delegate its authority for appeals 
to the same entity considering Medicare appeals, provided that DOL is 
satisfied that this process would satisfy ERISA claims and appeal 
procedures.
    Response: After reviewing the public comment and conferring with 
representatives of DOL, we have concluded that changes (not only to the 
CMS regulations but also to the DOL regulations) are needed to properly 
address this issue. Accordingly, we have added Sec.  422.560(c), which 
is intended to give ERISA plans the option, according to regulations of 
the Secretary of Labor, of electing the MA process rather than the 
procedures under 29 CFR Sec.  2560.503-1 for claims involving 
supplemental benefits provided by contract with an MA organization. In 
this regard, DOL has agreed to work with CMS to develop such 
regulations. The language in Sec.  422.560 is intended to demonstrate 
our commitment to make the entire MA process available in this context. 
The provision in Sec.  422.560 would not take effect in the absence of 
regulations by the Secretary of Labor.

Subpart N. Medicare Contract Determinations and Appeals

1. Overview
    Subpart N ``Medicare Contract Determinations and Appeals'' went 
into effect under Part C of Title XVIII, and as such was not part of 
the proposals in the proposed rule of August 3, 2004. However, we found 
that we needed to make a change to the requirements under Title II 
subpart N.
    Section 1860D-12(b)(3)(F) of the Act directs that the ``procedures 
for termination'' in section 1857(h) of the Act be incorporated into 
requirements for PDP sponsors. Therefore, we proposed under Title I 
that a single set of procedures relating to contract determinations and 
appeals would apply to both MA organizations and PDP sponsor 
contractors and that the requirements in Sec.  423.641 through Sec.  
423.669 (applicable to PDP sponsors) would mirror the requirements at 
Sec.  422.641 through Sec.  422.698 for the MA program. We asked for 
comments on this proposal and did not receive any negative comments. 
Whenever practicable the regulations mirror each other. We assume that 
commenters believed that it should be simpler to adhere to a uniform 
set of contract requirements.
    We found that in order to maintain one set of contract 
requirements--and be responsive to commenters asking for a streamlined 
application process and a single timeline--we needed to add a cutoff 
date to the contract determination process under subpart N. This new 
rule clarifies the timeline for valid contracts, in the event of a 
redetermination, and we have added this provision at Sec.  422.654(c). 
This provision specifies that in the case of a favorable 
redetermination, including favorable decisions as the result of a 
hearing or Administrative review, that such determinations 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 PDP sponsor 
regulations by adding Sec.  423.647(c).

Subpart O--Intermediate Sanctions

    In the proposed rule, we proposed a technical correction to Sec.  
422.752(a)(8). The word ``entity'' was inadvertently left out of the 
regulations text of that amendment. We proposed revising paragraph 
(a)(8) to read ``[e]mploys or contracts with an individual or entity 
who is excluded from participation in

[[Page 4682]]

Medicare under section 1128 or 1128A of the Act (or with an entity that 
employs or contracts with such an individual or entity) for the 
provision of any of the following.'' We did not receive any comments on 
these clarifications and will adopt them in this final rule.
    We note that while we did not propose other changes to the 
requirements at Sec.  422.750 through Sec.  422.760, an interim final 
rule with comment period was issued at the end of December, 2004 to 
correct technical errors in the regulatory text made in a final rule 
for MA plans that was issued on August 22, 2003 and that was entitled 
``Modifications to Medicare Rules'' (68 FR 50840).
    In addition, in the course of reviewing and responding to comments 
that we received regarding the corresponding regulatory provisions for 
Title I and the Part D program, we discovered that while we did not 
need to propose changes to the substance of the regulatory provisions, 
we needed to make certain revisions to the regulatory text at this 
subpart in the interests of clarity and accuracy. We are, therefore, 
making the following changes in this final rule:
    At Sec.  422.752(b), we are deleting the references to Sec.  
422.756(c)(1) and (c)(3) that are listed under procedures for imposing 
sanctions. We are replacing them with references to Sec.  422.750(a)(2) 
and (a)(4). The purpose of this correction is to include a reference to 
the provision that details the kinds of sanctions that we may impose, 
rather than the provision that details the procedures for imposing 
sanctions.
    At Sec.  422.752(a) we clarified our authority to impose more than 
one sanction at a time by deleting the word ``any'' and replacing it 
with the phrase ``one, or more''. Therefore, Sec.  422.752(a) will now 
read as follows: ``All intermediate sanctions. For the violations 
listed in this paragraph (a), we will impose one, or more, of the 
sanctions. . .''
    Also, at Sec.  422.752(a)(8) we have added the word ``excluded'' to 
the parenthetical clause in the interest of clarity. The parenthetical 
will now read, ``or with an entity that employs or contracts with an 
excluded individual or entity.''
    At Sec.  422.756(f)(2) a reference to ``part 1005 of this chapter'' 
was incorrect and we have replaced with a reference to ``part 1003 of 
this chapter,'' since part 1003 is the correct reference to the OIG 
procedures for imposing sanctions whereas part 1005 includes the appeal 
procedures for sanctions.
    At Sec.  422.756(f)(3) we have deleted the clause ``in accordance 
with the provisions of part 1005 of this chapter'' of this chapter. 
Since this subparagraph discusses our authority to impose CMPs, as 
opposed to the OIG's authority, we realized that this reference was 
incorrect.
    At Sec.  422.758, in the introduction and at paragraph (c), we made 
some editorial changes to better clarify the basis for civil money 
penalties issued by CMS.

IV. Provisions of the Final Rule

    For the most part, this final rule incorporates the provisions of 
the proposed rule. Those provisions of this final rule that differ from 
the proposed rule are as follows:
Effective Date of Initial Regulations (Sec.  417.402)
    In paragraph (c)(2) we have added the word ``calendar'' prior to 
``year'' to clarify our intent.
Applicability of Requirements and Procedures (Sec.  417.832)
    We have made a conforming change to paragraph (c) of Sec.  417.832 
to reflect that the provisions of subpart I of part 405 dealing with 
the representation of parties apply to organization determinations and 
appeals.
    We have added a new paragraph (d) at Sec.  417.832 to indicate that 
the provisions of subpart I of part 405 dealing with administrative law 
judge hearings, Medicare Appeals Council review, and judicial review 
are applicable, unless otherwise provided.
Definitions (Sec.  422.2)
    We have amended the definitions of ``prescription drug plan (PDP)'' 
and ``Prescription drug plan (PDP) sponsor'' to make them consistent 
with the Medicare Prescription Drug Benefit Program proposed rule.
    We have revised the definition of ``service area'' to clarify that 
CMS may consider whether a contracting provider network meets the 
access and availability standards set forth in Sec.  422.112 for all MA 
coordinated care plans and network MA MSA plans.
    We have clarified the definition of ``institutionalized'' for the 
purpose of SNPs to provide information on what is meant by a long term 
care facility (SNFs, ICF, ICF/MR and Inpatient Psychiatric hospitals). 
We have also expanded the definition to include a special needs 
individual who is expected to reside in a long-term care facility for 
90-days or longer based on as assessment of the potential for such a 
stay as long as the assessment is of a type approved by CMS .
    We have defined a SNP that enrolls a disproportionate percentage of 
special needs individuals as one that enrolls a greater proportion of 
the target group than occur nationally in the Medicare population.
    We have included in its definition that a SNP is required to 
provide Part D coverage.
    We further clarified the definition of a SNP as a plan that has 
been designated by CMS as meeting the requirements of a MA SNP for 
institutionalized or dual eligible individuals or those individuals 
with a severe or disabling chronic condition as determined on a case-
by-case basis using criteria that include the appropriateness of the 
target population, the existence of clinical programs or special 
expertise to serve the target population, and whether the proposal 
discriminates against sicker members of the target population
    Additionally, we have added a technical amendment to correct the 
term ``Religious and Fraternal Benefit (RFB) Society'' to read 
``Religious Fraternal Benefit (RFB) Society''.
Types of Plans (Sec.  422.4)
    We have amended paragraph (a)(1)(iv) to clarify the types of MA 
plans and Part D prescription drug coverage.
    We have also added a new paragraph (c) regarding rules for MA 
plans' Part D coverage. This paragraph clarifies the requirements for 
MA coordinated care plans, MA MSAs, and MA PFFS plans. In addition, a 
new paragraph (c)( 2) states the MSAs cannot offer drug coverage, other 
than that required under Parts A and B of Title XVIII of the Act. 
Finally, in paragraph (c)(3), we have added language that MA 
organizations offering private fee for service plans can choose to 
offer qualified Part D coverage meeting the requirements in Sec.  
423.104.
Eligibility to Elect an MA Plan (Sec.  422.50)
    In Sec.  422.50, we have added a new paragraph (a)(2)(iii) to allow 
SNPs to serve ESRD individuals.
    We have amended paragraph (a)(5) to provide that beneficiaries may 
make elections by completing an enrollment form by completing another 
CMS approved election mechanism offered by the MA organization.
Coordination of Enrollment and Disenrollment through MA Organizations 
(Sec.  422.66)
    We have revised Sec.  422.66(d)(5) to allow us to offer, as an 
option in the future, the ability of an MA plan to process a 
``seamless'' enrollment upon an individual's entitlement to Medicare.
Disenrollment by the MA Organization (Sec.  422.74)
    We have added a new paragraph (b)(2)(iv) to show that in certain 
cases, loss of special needs status is a basis for required 
disenrollment from a SNP that enrolls only special needs individuals.

[[Page 4683]]

    We have amended paragraph (d)(1)(i) by adding paragraphs 
(d)(1)(i)(A), (B), and (C) to clarify what ``reasonable efforts'' to 
collect unpaid premiums must be taken in prior to the disenrollment of 
an individual from an MA plan.
    We have revised the definition of ``disruptive behavior'' in 
paragraph (d)(2)(i) to focus on the behavior that substantially impairs 
the plan's ability to arrange or provide care for the individual or 
other plan members.
    We have added a new paragraph (d)(2)(ii) ``Basis of disenrollment 
for disruptive behavior.
    We have amended paragraph (d)(2)(iii) to require the MA 
organization to provide reasonable accommodations for individuals with 
mental or cognitive conditions.
    We have amended paragraph (d)(2)(iv) ``Documentation'' to provide 
an MA organization the option to decline future enrollment of an 
individual who has been disenrolled for disruptive behavior.
    We have revised proposed paragraph (d)(2)(v) ``CMS review of the 
proposed disenrollment'' to also require MA organizations to provide a 
``reasonable accommodation'' to individuals in exceptional 
circumstances.
    We have removed proposed paragraph (d)(2)(vi) ``Reenrollment in the 
MA organization'' and paragraph (d)(2)(vii) ``Expedited process''.
Requirements Related to Basic Benefits (Sec.  422.101)
    We have revised paragraph (b)(4) to clarify its intent.
    We have added a new paragraph (b)(5) to require MA organizations 
that elect to apply local coverage policies uniformly across a local MA 
plan's service area, or across an MA regional plan's service area, to 
inform enrollees and potential providers of the applicable local 
coverage policy that applies to the MA plan enrollees.
    We have modified Sec.  422.101(d)(4) to indicate that notification 
to providers, as well as members, of enrollee status related to a 
deductible (if any) and catastrophic caps is required.
Special Rules for Self-Referral and Point of Service Option (Sec.  
422.105)
    We have renamed the title of this section and reorganized the 
section in order to clarify its scope and applicability.
Coordination of Benefits with Employer or Union Group Health Plans and 
Medicaid (Sec.  422.106)
    We have modified Sec.  422.106 to clarify the intent.
Disclosure Requirements (Sec.  422.111)
    To be consistent with language elsewhere in this regulation, we 
have added a conforming amendment, revising paragraph (b)(9) to change 
references to ``Quality assurance program'' to ``Quality improvement 
program.
    We have amended paragraph (e) by reinserting the word ``written'', 
as its removal was unintentional.
    We have corrected the language in Sec.  422.111(f)(10) to clarify 
our initial intent.
    We have added a requirement at Sec.  422.111(f)(11) requiring all 
MA organizations to make uniform coverage policies related to an MA 
plan readily available to members and providers, including through the 
Internet.
    We have also added a new paragraph (f)(12) requiring MA 
organizations that have Internet web-sites to post the Evidence of 
Coverage, the Summary of Benefits, and information on the network of 
contracted providers.
Access to Service (Sec.  422.112)
    In paragraph (a) introductory text, we removed obsolete terminology 
from both heading and introductory text.
    We have revised paragraph (b) introductory text related to 
``continuity of care.''
    We have removed the instructions that would have removed paragraph 
(b)(4)(i) and redesignated paragraphs (b)(4)(ii) and (b)(4)(iii). The 
inclusion of this amendment in the proposed rule was an error.
    We have amended paragraph (c) introductory text by adding 
``noncontracting'' before ``hospital''.
    We have amended paragraph (c)(1) to clarify the types of hospitals 
that are eligible to be designated an ``essential hospital''.
    We have amended paragraph (c)(3) to clarify ``good faith''.
    We have added a new paragraph (c)(4) in order to include 
``competition text'' in regulation, where no MA organization will be 
permitted to designate a hospital as an ``essential hospital'' where 
there is a ``competing hospital'' in the area.
    We have added a new paragraph (c)(7), under which we will evaluate 
the continued applicability of ``essential hospital'' status on an 
annual basis at the time of annual contract renewal.
Compliance Deemed on the Basis of Accreditation (Sec.  422.156)
    We revised paragraph (b)(1) to change the term ``Quality assurance 
Program'' to ``Quality improvement program'', in order to be consistent 
with changes elsewhere in this regulation.
Terminology (Sec.  422.252)
    We have made a clarifying change to the definition of MA local area 
to be consistent with the intent of Sec.  422.308.
Submission of Bids (Sec.  422.254)
    We amended paragraph (a)(1) by adding ``and, for plans with rebates 
as described at Sec.  422.266(a), the MA organization must provide the 
information required in paragraph (d) of this section.''
    We have added a new paragraph (a)(3), to retain language from the 
current MA regulations at Sec.  422.306(a)(2), which says if the bid 
submission is not complete, timely, or accurate, CMS has the authority 
to impose sanctions under subpart O of this part or may choose not to 
renew the contract.
    We have revised paragraph revise (b)(2) to read ``as the term 
revenue requirements is used for purposes of section 1302(8) of the 
Public Health Service Act'' to track the statutory language.
    We have amended paragraph (b)(3) by removing the proposed sentence 
stating that plan assumptions about revenue requirements must include 
adjustments for the utilization effects of cost sharing reductions.
    We have revised paragraph (b)(4) to conform the regulation to the 
statutory provision.
    We have made a clarifying change to paragraph (c)(5) to reflect the 
statutory requirement that in the bid submission, MA organizations 
provide the actuarial bases for determining the amount of cost sharing 
for a plan.
    We have added a new paragraph (c)(9) to address information 
requirements resulting from our policy decision on the geographic ISAR 
adjustment, presented in the G preamble discussion of Sec.  422.308(d).
    We have added paragraph (f) to clarify that separate bids must be 
submitted for Part A and Part B enrollees and Part B-only enrollees for 
each MA employer group health plan offered.
Review, Negotiation, and Approval of Bids (Sec.  422.256)
    We have amended paragraph (b)(2) for clarity and to better reflect 
the statutory language on standards of bid review.
Calculations of Benchmarks (Sec.  422.258)
    We have corrected paragraph (c)(4) to clarify the plan-bid 
component of the regional benchmark is calculated based only on 
regional plan bids, not an all of the MA plan bids in the region.
    We made an additional change to the proposed paragraph (c)(5)(i) to 
clarify further how the plan bid component of the regional benchmark 
will be calculated.
Calculation of Beneficiary Premiums (Sec.  422.262)
    We have amended paragraph (f)(1) to add the Railroad Retirement 
Board and the Office of Personnel Management.

[[Page 4684]]

    We consolidate paragraphs (f)(3) and (f)(4) to clarify that the 
other methods CMS may specify for payment of premiums include those 
listed in the regulation.
Calculation of Savings (Sec.  422.264)
    We have amended paragraphs (c) and (e) to more accurately reflect 
the policy that for both local and regional MA plans, the calculation 
of savings will be determined by applying the plan average risk 
adjustment factor to the basic A/B bid and benchmark, although we have 
left in regulation the statutorily mandated discretion for CMS to 
select a method for calculating savings.
Beneficiary Rebates (Sec.  422.266)
    We have changed the language in paragraph (b)(1) to clarify that 
rebate dollars may be used to reduce the premium for either the non-
drug or drug portions of the supplemental benefit. We also add language 
clarifying that plans must distinguish the amount of rebate applied to 
enhance original Medicare benefits from the rebate applied to enhance 
Part D benefits.
    We have amended paragraph (c) by adding ``MA organizations must 
distinguish, for each MA plan, the amount of rebate applied to enhance 
original Medicare benefits fro the amount of rebate applies to enhance 
Part D benefits.''
Adjustments to Capitation Rates, Benchmarks, Bids, and Payments (Sec.  
422.308)
    We have amended the language in paragraph (e) to refer to the 
adjustment as the ``government premium adjustment,'' in order to 
distinguish it from other payment adjustments under the MMA.
Risk Adjustment Data (Sec.  422.310)
    We have modified Sec.  422.310(e) to indicate that there may be 
penalties for submission of false data under the requirement for 
validation of risk adjustment data.
Special Rules for Payments to Federally Qualified Health Centers (Sec.  
422.316)
    We have amended (a) to clarify what amount CMS will pay an FQHC by 
adding ``less the amount the FQHC would receive for the MA enrollee 
from the MA organization and taking into account the cost sharing 
amount paid by the enrollee.''
Moratorium on New Local Preferred Provider Organization Plans (Sec.  
442.451)
    We have revised this section to better reflect Congressional intent 
to give MA organizations the option of introducing new PPO plans in 
those service areas where they have already established a local PPO 
plan prior to the start of the local PPO moratorium of 2006 & 2007.
Risk Sharing with Regional MA Organizations for 2006 and 2007 (Sec.  
422.458)
    We have added language to Sec.  422.458(e)(1) to clarify that 
regional PPOs must be licensed in each State of the region, except 
during the period of the temporary waiver.
    We have also made a technical change in paragraph (e)(2) to clarify 
what State licensing rules an organization must apply until the 
organization is licensed in all states, under the waiver process.
Scope (Sec.  422.500)
    This section sets forth application requirements for entities 
seeking a contract as a Medicare Organization offering, an MA plan. MA 
organizations offering prescription drug plans must, in addition to the 
requirements of this part, follow the requirements of 42 CFR part 423 
specifically related to the prescription drug benefit.
Application Requirements (Sec.  422.501)
    We have added a new Sec.  422.501(c)(2) to clarify that a CMS 
determination that an entity is qualified to act as an MA sponsor is 
distinct from the bid negotiation that occurs under subpart F of part 
422.
Evaluation and Determination Procedures (Sec.  422.502)
    In paragraph (c)(2)(ii), we are changing the amount of time that an 
applicant has to remedy an application after receiving an Intent to 
Deny Notice from 60 days to 10 days.
    We have eliminated paragraphs (e), (f) and (g
General Provisions (Sec.  422.503)
    In Sec.  422.503, we have eliminated the mandatory self reporting 
requirements that we proposed, but we have added a new requirement at 
Sec.  422.503(b)(4)(vi)(H) that MA-PDPs have a comprehensive fraud and 
abuse plan.
Contract Provisions (Sec.  422.504)
    We have made changes in paragraph (h) to reflect our focus on 
requirements to prevent fraud, waste and abuse and on issues that we 
are responsible for enforcing, such as the HIPAA administrative 
simplification rules.
Agreements with Federally Qualified Health Centers (Sec.  422.527)
    We have amended paragraph (c) to clarify that financial withholds 
are not considered in determining payments made to FQHCs by CMS.
General Provisions (Sec.  422.550)
    We have added an amendment to amend Sec.  422.550(a)(2) by revising 
the heading to read, ``Asset Transfer'' instead of ``Asset Sale''.
Basis and Scope (Sec.  422.560)
    In response to comments on whether and to what extent, the 
application of parallel appeal procedures might be a problem for plans, 
employers, and eligible individuals, we have added a new paragraph (c) 
related to ERISA standards.
Definitions (Sec.  422.561)
    We have clarified the definitions of ``Enrollee'' and ``Authorized 
representative'' in this section. We have removed ``Authorized 
representative'' and replaced it with ``Representative'' to clarify 
that a representative means an individual appointed by an enrollee or 
other party, or authorized under State or other applicable law, to act 
on behalf of an enrollee or other party involved in an appeal.
Grievance Procedures (Sec.  422.564)
    We have added new paragraphs (d) and (e) related to the method for 
filing a grievance and the grievance disposition and notification 
process and we have redesignated the existing sections.
Timeframes and notice requirements for expedited organization 
determinations.
    We have made a conforming change in paragraph (b) of Sec.  422.572 
to reflect the enrollee's right to file an expedited grievance if he or 
she disagrees with an MA organization's decision not to expedite an 
organization determination.
Request for a Standard Reconsideration (Sec.  422.582)
    We have revised the text in paragraph (a) to denote that an MA 
organization may adopt a policy under which it accepts oral requests 
for standard considerations. Additionally, in accordance with part 405, 
subpart I, we have removed paragraph (a)(2) to eliminate the SSA as a 
filing location for standard reconsideration requests.
Timeframes and Responsibility for Reconsideration (Sec.  422.5900)
    We have made a conforming change in paragraph (a) of Sec.  422.590 
to reflect the enrollee's right to file an expedited grievance if he or 
she disagrees with an MA organization's decision not to expedite a 
request for an expedited reconsideration.
    We have revised paragraph (a) of Sec.  422.602 that previously read 
that a party must file a written request with ``the appropriate ALJ 
hearing office'' to read that a party must file a written request for a 
hearing with ``the entity specified in the IRE's reconsideration 
notice'' in accordance with part 405, subpart I that eliminates 
alternate filing locations.
Reconsideration: Applicability (Sec.  422.648)
    We have added a new paragraph (c) to Sec.  422.648. This provision 
specifies that in the case of a favorable determination, including 
favorable decisions as a result of a hearing or Administrative review, 
that such

[[Page 4685]]

determinations be made by July 15 for the contract in question to be 
effective in January of the following year.
Basis for Imposing Sanctions (Sec.  422.752)
    We have amended paragraph (a) in Sec.  422.752 to clarify CMS' 
authority to impose more than one sanction at a time.
    We have also amended paragraph (b), by deleting references to Sec.  
422.756 (c) (1) and (c) (3) and replacing them with references to Sec.  
422.750(a)(2) and (a)(4). This clarifies that we are cross referencing 
the basis for sanctions with the kind of sanctions that could result, 
not the procedure for imposing sanctions.
Procedures for Imposing Sanctions (Sec.  422.756)
    We have amended paragraph (f)(2) to corrected a reference to ``part 
1005 of this chapter'' to correctly reference ``part 1003 of this 
chapter,'' since 1003 includes the OIG procedures for imposing 
sanctions whereas 1005 are appeal procedures.
Maximum Amount of Civil Money Penalties Imposed by CMS (Sec.  422.758)
    At Sec.  422.758 we added some language that better clarifies the 
basis for Civil monetary penalties (CMPS) issued by CMS. At Sec.  
422.758(a) we added language that clarifies the existing basis for the 
Office of the Inspector General to support the imposition of this CMP. 
At Sec.  422.752(a)(8) we added the word ``excluded'' for 
clarification.''

V. 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.
    The collection requirements referenced in sections one and two 
below are currently approved under OMB approval number 0938-0753 (CMS-
R-0267, Medicare Plus Choice Program Requirements Referenced in 42 CFR 
422.000 through 422.700), with a current expiration date of October 31, 
2005.
    Section one below outlines the collection requirements referenced 
in this regulation that have not been modified by the proposed 
regulatory changes. Section number two references requirements in this 
regulation that have been technically revised, but do not affect the 
currently approved burden estimates. Table three below references new 
collection requirements.
    It should be noted that all of the collection requirements 
summarized and discussed below are open for public comment and will be 
submitted to OMB for approval.
1. Currently Approved Collection Requirements Not Affected By Proposed 
Regulation:

Section 422.54 Continuation of enrollment for MA local plans

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

Section 422.60 Election process

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

Section 422.66 Coordination of enrollment and disenrollment through MA 
organizations

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

Section 422.80 Approval of marketing materials and election forms

    (a)(i) At least 45 days (or 10 days if using marketing materials 
that use, without modification, proposed model language as specified by 
CMS) before the date of distribution the MA organization has submitted 
the material or form to CMS for review under the guidelines in 
paragraph (c).

Section 422.506 Nonrenewal of contract

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

Section 422.564 Standard timeframes and notice requirements for 
organization determinations

    (e)(3)(ii) 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.
    Based on the results of prior sampling of managed care enrollees, 
we extrapolate that approximately 17 percent of MA enrollees would 
likely experience some dissatisfaction with their MA organizations. 
Since we estimate that there would be approximately 6.7 million MA 
enrollees in 450 plans, we estimate that approximately 1,139,000 
enrollees likely would experience some dissatisfaction with their MA 
organizations in a given year.
    Based on previous grievance requirements analysis (See 66 FR 7593 
through 7600), we estimate that approximately 455,600 enrollees, that 
is,

[[Page 4686]]

40 percent of the total number of dissatisfied enrollees, will file an 
oral or written grievance. We further estimate that another 60 percent 
will request a grievance orally, that is, 273,360. Of those requests, 
we believe that approximately 10 percent of enrollees will request a 
follow-up written response, that is 27,336 enrollees.
    We estimate that it will take MA organizations 15 minutes to 
prepare and furnish each written response, and that MA organizations 
will be required to provide an estimated 27,336 written notices 
following oral requests. The total annual burden associated with this 
requirement is 6,834 hours.

Section 422.568 Standard timeframes and notice requirements for 
organization determinations

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

Section 422.590 Timeframes and responsibility for reconsiderations

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

Section 422.600 Right to a hearing

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

Section 422.608 Medicare Appeals Council (MAC) review

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

Section 422.612 Judicial review

    (b) Any party, including the MA organization, may request judicial 
review (upon notifying the other parties) of the MAC decision if it is 
the final decision of CMS and the amount in controversy meets the 
threshold established in paragraph (a)(2) of this section.
    (c) In order to request judicial review, a party must file a civil 
action in a district court of the United States in accordance with 
section 205(g) of the Act. See part 405 of this chapter for a 
description of the procedures to follow in requesting judicial review.
2. Currently Approved Collection Requirements Technically Modified By 
Proposed Regulation: Not Affecting Burden:

Section 422.50 Eligibility to elect an MA plan

    (a)(5) Completes and signs an election form or completes another 
CMS approved election method offered by the MA organization and 
provides information required for enrollment.

Section 422.66 Coordination of enrollment and disenrollment through MA 
organizations

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

Section 422.74 Disenrollment by the Medicare Advantage Organization

    (c)(1) A notice must be provided to the individual before 
submission of the disenrollment transaction to CMS.
    (d)(1)(i) The MA organization can demonstrate to CMS that it made 
reasonable efforts to collect the unpaid premium amount that meets the 
requirements of this section.
    (d)(1)(ii)The MA organization provides the enrollee with notice of 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section.
    (d)(2)(ii)An organization may disenroll an individual whose 
behavior is disruptive as defined in 422.74(d)(2)(1)(i)only after it 
meets the requirements described in this section and CMS reviews and 
approves the request.
    (d)(2)(iii) The beneficiary has a right to submit any information 
or explanation that he or she may wish to submit to the MA 
organization.
    (d)(2)(iv) The MA organization must document the enrollee's 
behavior, its own efforts to resolve any problems, as described in 
paragraphs (d)(2)(i) through (d)(2)(ii) of this section and any 
extenuating circumstances. The MA organization may request from CMS the 
ability to decline future enrollment by the individual if the 
organization obtains approval from CMS.

Section 422.111 Disclosure requirements

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

Section 422.112 Access to services

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

Section 422.152 Quality improvement program

    (b)(3)(i) Plans must measure performance using the measurement 
tools required by CMS, and report its performance to CMS. The standard

[[Page 4687]]

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

Section 422.570 Expediting certain organization determinations

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

Section 422.572 Timeframes and notice requirements for expedited 
organization determinations

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

Section 422.582 Request for a standard reconsideration

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

Section 422.602 Request for an ALJ hearing

    A party must file a written request for a hearing with the 
appropriate ALJ office, which meets the requirements of this section.

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

    (c) When appropriate, a written notice of non-coverage must be 
issued no later than the day before hospital coverage ends. The written 
notice must include the elements set forth in this section.
    As noted above, while the requirements in this section have been 
modified, the associated burden has not changed.
3. New/Revised Collection Requirements Proposed In This Regulation: 
Affecting burden:

Section 422.80 Approval of marketing materials and election forms

    (a)(3) The MA plan meets the performance requirements established 
by CMS The MA plan may distribute the designated marketing materials 5 
days following their submission to CMS with an certification that the 
marketing materials meet the model language guidelines specified by 
CMS.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit the designated marketing materials to 
CMS five days prior to distribution.
    We estimate it will take 350 plans approximately 12 hours to 
provide the materials to CMS on an annual basis.

Section 422.101 Requirements relating to basic benefits

    (b)(5) An MA organization an MA local plan or regional MA plan as 
described in this section must make information on the selected local 
coverage policy readily available to the enrollees and health care 
providers.
    The burden associated with this requirement is the time and effort 
necessary for the plan to make information on the selected local 
coverage policy readily available to the enrollees and health care 
providers. We estimate that it will require 350 MA plans 1 hour each on 
annual basis to make the necessary information available.
    (d)(4) MA regional plans are required to track the deductible (if 
any) and catastrophic limits in paragraphs (d)(1) through (d)(3) of 
this section based on incurred out-of-pocket beneficiary costs for 
original Medicare covered services, and are also required to notify 
members and health care providers when the deductible (if any) or a 
limit has been reached.
    The burden associated with this requirement is the time and effort 
necessary for the plan to notify members when the deductible (if any) 
or a limit has been reached. While this requirement is subject to the 
PRA, we believe this requirement meets the requirements of 5 CFR 
1320.3(b)(2), and as such, the burden associated with this requirement 
is exempt from the PRA.

Section 422.106 Coordination of benefits with employer group health 
plans and Medicaid

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

Section 422.111 Disclosure requirements

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

Section 422.112 Access to services

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

[[Page 4688]]

that on an annual basis it will take 100 plans 8 hours to submit the 
materials to CMS.

Section 422.254 Submission of bids and rebate information

    (a)(1) No later than the first Monday in June, each MA organization 
must submit to CMS an aggregate monthly bid amount for each MA plan 
(other than an MSA plan) the organization intends to offer in the 
upcoming year in the service area (or segment of such an area if 
permitted under Sec.  422.262(c)(2)) that meets the requirements in 
paragraph (b) of this section. With each bid submitted, the MA 
organization must provide the information required in paragraph (c) of 
this section and, for plans with rebates as described at 422.266, the 
MA organization must provide the information required in this section.
    The burden associated with this requirement is the time and effort 
necessary for the plan to submit the required bid materials and rebate 
information to CMS. 350 MA organizations offering 400 plans 100 hours 
per plan bid and rebate submission to CMS for a total annual burden of 
40,000 hours.
    (b) For MSA plans, MA organizations must submit the following 
information: the monthly MSA premium, the plan deductible amount, and 
the beneficiary supplemental premium, if any. Since CMS does not review 
or approach MSA plan submissions, we estimate that the submission 
burden is half that for other MA plans. Under the M+C program, no MSA 
plans were offered. We estimate that under the MA program 5 
organizations will offer an MSA plan and require 50 hours for 
submission of the above information, for a total annual burden of 250 
hours.

Section 422.270 Incorrect collections of premiums and cost-sharing

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

Section 422.304 Monthly payments

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

Section 422.310 Risk adjustment data

    (b) Each MA organization must submit to CMS (in accordance with CMS 
instructions) all data necessary to characterize the context and 
purposes of each service provided to a Medicare enrollee by a provider, 
supplier, physician, or other practitioner. CMS may also collect data 
necessary to characterize the functional limitations of enrollees of 
each MA organization.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required risk adjustment data to 
CMS. We estimate that on an annual basis it will take 350 MA 
organizations 121 hours each to submit the required data to CMS.
    (d)(1) MA organizations must electronically submit data that 
conform to the requirements for equivalent data for Medicare FFS when 
appropriate, and to all relevant national standards. Alternatively, MA 
organizations may submit data according to an abbreviated format, as 
specified by CMS and which meet the requirements of (d)(2) and (d)(3) 
of this section.
    The burden associated with this requirement is the time and effort 
necessary for a plan to gather the required data and submit the 
required risk adjustment data to CMS. The estimate for submission of 
the abbreviated format data is included in the above estimate.
    (e) MA organizations and their providers and practitioners will be 
required to submit medical records for the validation of risk 
adjustment data, as required by CMS.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required validation data to CMS. We 
estimate that on average 350 MA organizations will each submit 29 
medical records to CMS, requiring 1 hour per record, for a total annual 
burden of 9800 hours.

Section 422.314 Special rules for beneficiaries enrolled in MA MSA 
plans

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

Section 422.320 Special rules for hospice care

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

Section 422.458 Risk sharing with regional MA organizations for 2006 
and 2007

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

[[Page 4689]]

to the information regarding costs provided to CMS under paragraph 
(b)(2) of this section.
    This requirement is exempt from the PRA as stipulated under 5 CFR 
1320.4.

Section 422.501 Application requirements

    (b)(1) In order to obtain a determination on whether it meets the 
requirements to become an MA organization and is qualified to provide a 
particular type of MA plan, an entity, or an individual authorized to 
act for the entity (the applicant) must complete and submit a certified 
application, in the form and manner required by CMS, that meets the 
requirements set forth in this section.
    The burden associated with this requirement is the time and effort 
necessary for a plan to submit the required application to CMS. We 
estimate that on an annual basis it will take 350 plans 40 hours to 
submit the required application to CMS.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:
Centers for Medicare and Medicaid Services
    Office of Strategic Operations and Regulatory Affairs,
    Attn: John Burke (CMS-4069-P)
    Room C5-13-28, 7500 Security Boulevard,
    Baltimore, MD 21244-1850;
and
Office of Information and Regulatory Affairs,
    Office of Management and Budget,
    Room 10235, New Executive Office Building,
    Washington, DC 20503,
    Attn: Christopher Martin, CMS Desk Officer,
    [CMS-4069-F], [email protected].
    Fax (202) 395-6974.

VI. Regulatory Impact Analysis

    We received comments on the proposed rule regulatory impact 
analysis in six subject areas. The comments pertained to (1) our not 
having examined the impact of the Comparative Cost Adjustment program 
under section 241 of the MMA, set to begin in 2010; (2) an error in our 
projection of the value of extra benefits that enrollees of MA plans 
will receive; (3) a question regarding the number of insurers licensed 
to operate nationally or in multiple states; (4) the manner in which we 
classify entities as being either regional plans or local plans; (5) 
concerns about the competitive advantages that regional plans may have 
over local plans; and (6) our not having discussed the effect of these 
rules on American Indian and Alaska Native populations. Our responses 
to those comments are addressed in the appropriate sections below. None 
of these comments suggested the need for major changes in our analysis, 
and we have accordingly modified it primarily to reflect final 
decisions and to use updated economic projections (in addition to 
correcting the projection error pointed out in public comments).

A. Overall Impact

    We have examined the impacts of this rule under Executive Order 
12866 (September 1993, Regulatory Planning and Review), the Regulatory 
Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), section 
1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 
1995 (Pub. L. 104-4) and Executive Order 13132 on Federalism.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impact and equity). A regulatory impact analysis 
(RIA) must be prepared for any rule with an effect on the economy of 
$100 million or more in any one year. Since this rule will be the most 
significant step in implementing the MA program, we are classifying it 
as an economically ``significant'' rule for purposes of E.O. 12866 and 
as a ``major'' rule for purposes of the Congressional Review Act (5 
U.S.C., section 804(2)). Accordingly, we have prepared this RIA in 
accordance with OMB Circular A-4, combined with a Final Regulatory 
Flexibility Analysis (FRFA), pursuant to the Regulatory Flexibility 
Act), in which we analyze the overall effects of the Medicare Advantage 
program, including effects not addressed in this rulemaking (for 
example, rate increases that went into effect in March, 2004). Although 
the MMA is a highly detailed statute that delineates most important 
provisions of the MA program, there are alternatives available to us in 
implementing several important provisions of the statute. We analyze in 
detail those areas for which regulatory alternatives are available.
    Although we have included or summarized most of the required 
analysis in this section of the preamble, the explanation of the basis 
for the rule and analysis of some regulatory options are presented 
elsewhere in the preamble. We note that the preamble to the companion 
rulemaking concerning the Part D drug benefit also contains an RIA and 
a FRFA, and some effects of the legislation (for example, on Medigap 
plans) are analyzed in more detail in that preamble.
    The MMA provides for increasing the role of private plans in 
providing Medicare benefits to beneficiaries. The statute made changes 
to the payment system that increase Medicare payment rates to private 
plans as of 2004, and for subsequent years. A new private plan option 
is introduced, the regional Medicare Advantage plan, structured as a 
PPO, which will be required to offer services over a wide geographic 
area. To encourage the formation of such plans, the MMA provides 
financial incentives above and beyond the payment rate increases 
applicable to all plans. There are other financial incentives discussed 
in what follows and elsewhere in the preamble. In addition to increased 
payments to plans, the MMA will provide benefits to beneficiaries and 
to entities (such as employers and States) that would otherwise be 
financially responsible for the cost of beneficiaries' medical care. 
The benefits to beneficiaries and plans are the result of transfer 
payments from the Federal Government which we project will total $18.3 
billion in the period 2004 to 2009 (as a result solely of the Title II 
provisions of the MMA), as described in more detail in what follows.
    The main purpose of this rule is to implement the statutory 
provisions of Title II of the MMA, which deal with the Medicare 
Advantage program. Insofar as the rule implements provisions of the 
law, we are providing a general discussion of the impact of the law and 
our basis for projections of the impact. These impact projections 
reflect the statutory scheme in its entirety, not just the relatively 
minor effects attributable to discretionary provisions in the 
regulations. Although the statute prescribes Medicare Advantage rules 
and procedures in considerable detail, it specifically affords CMS 
discretion to make decisions on a number of issues regarding how the 
law will be implemented. The preamble and this impact analysis discuss 
these types of issues in greater detail. The rule also introduces 
changes to Medicare private health plan requirements that, in most 
cases, are intended to streamline the administration of the program and 
make contracting less burdensome for health plans while not impinging 
on the rights of enrollees. (Note that this analysis does not extend 
beyond the year 2009; that is, the Comparative Cost Adjustment (CCA) 
demonstration program of subtitle E of the MMA is not

[[Page 4690]]

discussed. The CCA regulations will be proposed at a later date.)
    Comment: One commenter expressed disappointment in the approach of 
dealing with the impact of the law and regulations only through 2009, 
without discussing the Comparative Cost Adjustment (CCA) program set to 
begin in 2010 (under section 241 of the MMA). The commenter is 
interested in knowing what our thinking is with regard to the CCA 
program.
    Response: As discussed in the notice of proposed rule making, any 
necessary regulations for the CCA program will appear sometime in the 
future as proposed rules, at which time there will be opportunity for 
public comment. We would also note that our experience with the bidding 
system that begins in 2006 will help inform our thinking about the CCA 
program when we begin active planning for it.
    1. Objectives of the Final Rule
    The primary goal of the MMA is to expand the health plan choices 
available to Medicare beneficiaries, allowing beneficiaries to meet 
their medical needs at a lower cost. There is also the expectation that 
Medicare health plan enrollment will increase. The expansion of health 
plan choice is envisioned as occurring at many levels: areas of the 
country that previously did not have private plans available should see 
new plans enter the market; areas where there are plans should see an 
increase in the number of competing plans; and beneficiary choice 
should be enhanced by the introduction of new types of plans, including 
specialized plans, and, most importantly, regional plans that are 
structured as preferred provider organizations. In keeping with the 
overall objectives of the law, the rule seeks to implement the law in 
ways that will promote plan participation (and, as a consequence, lead 
to increased enrollment in private plans). The introduction of regional 
plans and the choice of the PPO model for such plans are designed to 
lead to greater plan participation. The rationale for the introduction 
of regional plans and the use of the PPO model are discussed in the 
impact analysis of the August 3, 2004 proposed rule (69 FR 46919).
    General Impact. In general, the law and regulations will have a 
positive impact on beneficiaries and private health plans. Transfer 
payments from the Federal Government will go towards the provision of 
additional health benefits to enrollees of health plans and reduced 
out-of-pocket costs, including reduced Part B and Part D premiums for 
these enrollees. The law will result in increased revenue for 
participating private plans for the provision of the basic Medicare 
benefit and the provision of additional health benefits. We also 
anticipate a positive impact for employers and unions as sponsors of 
retiree coverage, as discussed in more detail below.
    There are revenue effects on States arising directly from the law 
(the prohibition on premium taxes) and arising indirectly as a result 
of beneficiary movement towards private plans and away from traditional 
FFS Medicare with Medigap coverage. The latter effect is relevant to 
Medigap insurers. The effects on States and insurers are discussed more 
fully in what follows.
2. Provisions of the Law
    The MMA introduces major changes in the payment rules for private 
plans. These changes are discussed in detail in the preamble text for 
subparts F and G of these regulations. For local plans, the MMA 
increased MA payment rates beginning in 2004, by using county FFS rates 
(minus direct medical education payments) as a minimum payment level 
and rebasing the rates periodically, by removing a budget neutrality 
limitation on payment at a national/local blended rate, and by 
providing for higher yearly payment rate increases (while maintaining 
minimum payment rate increases).
    Payment to plans are risk adjusted for health status (in addition 
to risk adjustment for demographic factors such as age), with 30 
percent of payment being subject to health status risk adjustment in 
2004, 50 percent in 2005, 75 percent in 2006, and 100 percent in 2007 
and thereafter. When payments are risk-adjusted, a greater proportion 
of such payments are directed to chronically ill and older 
beneficiaries with predictably high costs. Note that CMS is currently 
implementing health status risk adjustment in a ``budget-neutral'' 
manner, with savings re-invested in plan payments. That is, the 
difference in payment between the total health status-adjusted payment 
rates and the rates adjusted only by demographic factors is paid to the 
health plan ``sector,'' in 2006, but the funds are distributed among 
plans based on the relative health status of each plan's enrollees.
    Through 2005, there is no change to the payment rules related to 
how plans must use any excess funds (Medicare payments greater than the 
amount a health plan requires to provide the Medicare benefit). 
Currently such funds must be returned to enrollees in the form of 
reduced cost sharing, or the provision of extra (non-Medicare) 
benefits. Plans also have the option of using the excess funds to 
reduce all or a portion of an enrollee's Part B premium, but in that 
case, the Government retains 20 percent of the reduction in plan 
payments while reducing the Part B premium that is usually collected 
through a beneficiary's Social Security payment. Another option for the 
disposition of excess funds is to make deposits to a ``stabilization 
fund'' to be used in a subsequent contract year for reductions in cost 
sharing or for financing of extra benefits-an option that the MMA 
eliminates as of the end of the 2005 contract year.
    Currently and through 2005, the determination of whether there are 
excess funds is done through the ``adjusted community rate'' approval 
process (a CMS review of proposed benefits and premiums and the revenue 
required to provide the benefit package). The MMA does away with the 
ACR review process and instead institutes a bidding process. As of 
2006, plans will present bids that are to be compared against 
benchmarks to determine whether enrollees will receive rebates or be 
required to pay a premium to the health plan. For local plans, the 
benchmark is based on what today are county payment rates. For regional 
plans, the benchmark represents a weighting of these same county rates 
and the actual plan bids. CMS will evaluate the bids for reasonableness 
and actuarial soundness, and can negotiate over the bid amounts and 
proposed supplemental benefits. In 2006 and thereafter, to the extent 
that the bid is less than the benchmark, that difference (comparable to 
the current ``excess funds'') determines plan rebates. The Government 
retains 25 percent of this difference, and the remaining 75 percent is 
to be used for beneficiary ``rebates,'' which can take the form of 
extra benefits, reduced cost sharing, reduced health plan premiums for 
mandatory supplemental benefits, or reduced Part B and/or Part D 
premiums. To the extent that the plan bid is greater than the 
benchmark, that difference becomes the premium the plan must charge 
enrollees for ``basic'' benefits.
    The limitation on cost sharing for Medicare services that 
previously existed is modified in the MMA. Prior to the MMA, for 
coordinated care plans, the combination of the actuarial value of cost 
sharing for Medicare-covered services, plus any premium or portion of a 
premium representing a charge in lieu of Medicare cost sharing, could 
not exceed the average level of cost sharing that beneficiaries face in 
FFS Medicare. As of 2006, premium amounts that are in lieu of cost 
sharing are not counted

[[Page 4691]]

in determining whether the limit is exceeded (which is the rule as it 
is currently applied to PFFS plans). In addition, the comparison is 
made to local values of cost sharing in FFS Medicare rather than to the 
current use of national values. (The cost sharing for Medicare Part A 
and B services that enrollees of MA regional plans obtain from non-
network providers is not counted in determining whether the cost 
sharing limit on Medicare services has been exceeded.)
    The MMA also makes structural changes in the Medicare private plan 
contracting program. The most important of these statutory changes is 
the introduction of regional MA plans that will be structured as PPOs, 
and which would first become available in 2006. While local plans may 
choose the counties in which they wish to operate as MA plans, regional 
plans must cover an entire region. On December 6, 2004, we designated 
26 regions for MA regional plans and 34 regions for PDP plans. 
Information on the regions and the basis for their selection can be 
found at www.cms.hhs.gov/medicarereform/mmaregions. To facilitate the 
ability of regional plans to operate in multiple States, plans that are 
licensed in at least one State in the region can qualify for a waiver 
of the licensing requirements in the other States in the region for a 
period of time pending an organization's becoming licensed in each 
State (see the preamble text for subpart J). In the first 2 years of 
formation of regional plans, there is a moratorium imposed on the 
formation or expansion of local PPOs.
    Regional plans have various statutory incentives to participate, 
including:
     Sharing risk with the Government in 2006 and 2007,
     Access, beginning in 2007 through the end of 2013, to a 
``stabilization fund'' of $10 billion (plus half of the 25 percent of 
regional plan rebate dollars that would otherwise go to the 
Government). The stabilization fund will be used to encourage plan 
entry (including a bonus for plans operating in the entire Nation) or 
to prevent plans from discontinuing contracts; and
     Access to additional funding payable to ``essential'' 
hospitals (as described in the subpart G preamble text).
    As described elsewhere in this regulation, we are also taking other 
regulatory steps to support regional plan participation, such as 
allowing plan payments to be adjusted based on geographic variations in 
a plan's costs within a region, and providing flexibility in network 
adequacy standards (as outlined in the preamble discussion of subpart 
G).
    Other structural changes affecting Medicare health plans include 
provisions for plans that can exclusively or disproportionately serve 
special needs individuals, special treatment of enrollees with ESRD 
(paid outside of the bidding system in 2006-see subpart G), authority 
for direct contracting between CMS and employers or unions for coverage 
of retirees (see Sec.  422.106), and removal of certain limitations 
that had been imposed on medical savings account plans. There are also 
provisions calling for the termination of cost-reimbursed contracts 
with health plans if certain conditions are met (see discussion of 
changes to part 417).
    In the following section we list those areas in which we will 
exercise discretion, either because the law entails a choice of options 
or because we have elected to exercise regulatory discretion.
3. Discretion Resulting from Statutory Provisions
    Designation of Regions. The most important feature of the MA 
program that the statute leaves to the discretion of the Secretary is 
to determine the boundaries for the regions in which regional MA plans 
will operate. As permitted by the statute, the regions for MA are 
different from the PDP regions, as explained in the announcement of the 
regional configurations and as discussed in the impact analysis for 
Title I of the MMA (concerning PDPs). The biggest difference between 
the two sets of regions is that the size of the eligible population 
necessary to support economic viability is somewhat larger for MA than 
PDP plans. All PDP regions are ``nested'' within (included in) MA 
regions to simplify planning and administration. Some of the issues 
relating to the configuration of regions were discussed in the 
alternatives considered section of the proposed rule (see 69 FR 46937). 
The estimates contained in the analysis found in the proposed rule (see 
69 FR 46928, Table 2, for example) were for illustrative purposes and 
were based on an assumption that there would be 15 regions. The 
projected numbers in this final rule are based on the MA regions 
designated by CMS. The configuration of the regions affects the 
projections because of the expected benchmark levels in each region and 
the projected bids from health plans in the regions.
    Statewide Versus Plan-Specific Risk Adjustment. CMS is given the 
authority to use a statewide, area-wide, or a plan-specific, risk 
adjustment methodology for determining rebates. The effects of each and 
the factors to consider in choosing one or the other approach were 
discussed in the alternatives considered section of the proposed rule 
(see 69 FR 46942). The consequence of choosing the option of the plan-
specific approach is briefly discussed below, in the alternatives 
considered section of this final rule.
4. Regulatory Discretion
    The statute spells out in detail most major and many minor 
parameters of Medicare reform. However, in certain matters, the statute 
describes a structure or uses terminology that is open to 
interpretation but which is a necessary component of the statutory 
scheme. There are also other areas where we believe further 
interpretation is needed, or where there appear to be internal 
inconsistencies in the statute that need to be resolved. The following 
issues are of this nature, and each is noted here briefly, with some of 
the issues discussed in further detail in the section on alternatives 
considered.
    Actuarial Value of Medicare Cost Sharing. When plans present bids 
for Medicare-covered services the bid may include only Medicare-covered 
services and must reflect cost sharing at Medicare levels or with 
``actuarially equivalent'' cost sharing. The options for defining 
``actuarially equivalent'' in this context are discussed in detail in 
the preamble text of subsection F in this final rule and in the 
proposed rule (where the uniform, plan-specific, and proportional 
amount methods of determining actuarial equivalence are discussed).
    Treatment of Induced Demand as a Supplemental Cost. As was 
discussed in the proposed rule, to the extent that we were to use the 
``plan-specific'' approach to determining cost sharing that is 
actuarially equivalent to that of traditional Medicare, an additional 
issue arises, having to do with the additional expenditures arising 
from ``induced demand'' (higher utilization because of lower cost 
sharing). We have decided not to use the plan-specific approach, 
relying instead on a proportional approach to determining cost sharing 
as a component of the bid for Medicare A and B services. Therefore we 
are unable to quantify any induced demand that may exist (that is, any 
difference in A and B expenditures between the bid and actual 
utilization under a plan's benefit design which is attributable to 
reduced cost sharing). In the alternatives considered section, below, 
we discuss the consequence of this choice.
    Prohibiting Use of Rebate Dollars for the Purchase of Optional 
Supplemental Benefits. This final rule prohibits rebate dollars from 
being used for the purchase of optional supplemental benefits, as

[[Page 4692]]

explained in the preamble text for subpart F.
    Intra-Area Geographic Adjustment to Payments. The statute specifies 
that ``if applicable'' (1853(a)(1)(B)(i)), CMS ``shall adjust'' 
payments ``in a manner to take into account variations in MA local 
payment rates'' (1853(a)(1)(F) for regional plans and for local plans 
operating in more than one local payment area. This issue is discussed 
in more detail in the ``alternatives considered'' section. We will be 
using a geographic adjustment based on MA county payment rates, but in 
exceptional situations, for regional plans, we will allow the use of a 
plan-determined statement of the variation in the relative cost to the 
plan of providing Medicare-covered services.
5. Provisions Of The Rule Not Based On Specific MMA Changes
    As discussed throughout the preamble of this final rule and the 
proposed rule, we have made a concerted effort to improve, and wherever 
possible simplify and reduce the burden of, existing regulations. In 
general, as previously noted, these provisions reduce the burden on 
health plans while enhancing beneficiary protections or not adversely 
affecting the rights of enrollees. Among the changes that are being 
made that are not a result of the MMA statutory provisions are (a) new 
beneficiary protections related to coverage of services when network 
providers can see patients on a ``point-of-service'' basis (Sec.  
422.105); (b) revisions to the rules limiting beneficiary cost sharing 
related to emergency episodes (Sec.  422.113); (c) the elimination of 
requirements on MA plans that are duplicative of activities already 
conducted by CMS regarding information about beneficiary health care 
coverage options (elimination of Sec.  422.111(f)(4) and (f)(6), and 
portions of (f)(7)); (d) the elimination of certain access to care 
provisions (changes made at Sec.  422.112); (e) use of alternative 
election mechanisms other than forms (Sec.  422.50(a)(5)), and 
alternative notice options (Sec.  422.60(e)); (f) allowing MA 
organizations to submit requests to restrict enrollment for capacity 
reasons at any time during the year (Sec.  422.60(b)); (g) providing 
more flexibility in the procedures for disenrolling beneficiaries for 
failure to pay premiums (Sec.  422.74(d)(1)) and rules related to 
disenrollment due to disruptive behavior (Sec.  422.74(d)(2)); (h) 
formal adoption of a ``file and use'' approach to approval of marketing 
materials (Sec.  422.80) for contractors that have demonstrated a 
record of compliance with marketing rules; (i) changes in requirements 
regarding information plans provide to enrollees about participating 
providers (Sec.  422.111(b)(3), for example); and, in Sec.  422.133 , 
extending the right under section 1852(l) of the Act for admission to a 
``home skilled nursing facility'' in the event that a health plan 
admits an enrollee to a skilled nursing facility without a prior 
qualifying hospital stay. In addition, various changes are made in 
subpart D that are consistent with a ``quality improvement'' approach 
to quality standards.

B. Basis for Estimating Impacts

    The extent of the impact of the MMA will depend on whether the 
goals of the law are realized. We believe that the payment changes and 
structural changes of the MMA will lead to higher levels of plan 
participation, and, as a consequence, enrollment in coordinated care 
plans will increase over the next several years and over the longer 
term. We expect the absolute level of Medicare health plan enrollment 
to increase because of the greater availability of plans, and we expect 
the rate of enrollment in such plans (``penetration'') to increase 
because plans will be able to offer plan designs that will allow 
beneficiaries to meet their medical needs at a lower cost, and MA 
organizations will be able to offer generous benefit packages that 
Medicare beneficiaries will find attractive. However, there is a great 
deal of uncertainty involved in making projections of plan 
participation and beneficiary enrollment levels. The factors 
contributing to uncertainty include uncertainty about market decisions 
health plans might make, how changes in health care markets and costs 
will affect plan participation and beneficiary enrollment, whether MA 
plan offerings will satisfy the enrollment preferences of Medicare 
beneficiaries, how MA plans will fare in competition with the new PDP 
plans, and other factors. For the MMA, the designation of MA regions 
and how the marketplace will react to the regional designations is also 
a factor contributing to uncertainty.
    We have revised the enrollment, expenditure, and distribution of 
funds estimates contained in the proposed rule (summarized in the 
proposed rule, in Tables 2, 4, and 12, found at 69 FR 46928, 46930, and 
46951). The revisions reflect revised bid and benchmark estimates based 
on the designation of regions; and revised enrollment estimates based 
in part on the results of discussions with the Technical Review Panel 
on the Medicare Trustees Reports (information about the panel and its 
findings can be found at http://aspe.hhs.gov/health/medpanel/2004/, in 
particular the minutes of the October 15, 2004 meeting). The enrollment 
estimates (and associated expenditures for MA) were revised downward 
for the 2004 to 2009 period that is the subject of the projections 
contained in this final rule. While enrollment in MA had been projected 
to reach 33 percent of the Medicare population by 2009 in our proposed 
rule projections, we are revising the penetration projection to be 
lower in 2009-it is now projected to be about 24 percent-but we 
continue to expect enrollment to reach 33 percent by 2016, with 
enrollment in 2016 being evenly divided between local MA plans and 
regional plans.
    The proposed rule contained a lengthy discussion of the history and 
current state of the MA program (and its predecessor programs, such as 
Medicare+Choice). The discussion contained data on beneficiary access 
to MA plans over the years and penetration levels in the past, the 
types of beneficiaries who currently enroll in such plans (for example, 
lower-income individuals are more likely to enroll in MA), the 
categories of beneficiaries less likely to enroll; and a discussion of 
any conclusions that can be drawn from the history of the program in 
terms of health plan decisions to participate in the program and 
beneficiary decisions on enrollment in Medicare health plans (69 FR 
46921 through 46925 of the proposed rule). The discussion was intended 
to provide historical and anecdotal evidence to support the enrollment 
projections found in the proposed rule. For this final rule, we are 
providing an update of some of the data.
    As of January 2005 there are 174 MA coordinated care plans (CCPs), 
and such plans were available to 65 percent of the Medicare population 
(compared to 61 percent of the population at the end of 2004, and 
compared to a historical high of 74 percent). There are applications 
pending for 19 additional CCPs. Including PFFS plans, if all pending 
new contract applications and service area expansion requests are 
approved, 86 percent of Medicare beneficiaries will have access to at 
least one Medicare private plan.
    The current data demonstrate a significant increase in plan 
participation in MA, associated with an increase in enrollment in CCP 
plans of about three percent between January and December of 2004 (to 
4.7 million). (In addition, enrollment in PPO demonstration plans 
increased 34 percent to 111,000; and enrollment in PFFS plans increased 
93 percent, to 51,000.)

[[Page 4693]]

    With regard to MSA plans, we remain uncertain, as noted in the 
proposed rules, about participation and enrollment in MSAs. The MMA 
changed the MSA provisions of the BBA with a view towards facilitating 
the offering of such plans. However, we are unable to determine whether 
the MMA provisions will result in such plans being introduced and the 
extent to which beneficiaries might enroll in such plans.
    Comment: Several commenters remarked that the impact analysis 
showed that very little of the additional payments to health plans 
resulting from the MMA would be used to fund extra benefits for plan 
enrollees.
    Response: The commenters have pointed out what is an error in the 
impact analysis published in the notice of proposed rule making of 
August 3, 2004. We are correcting the error in this final rule. While 
the projections of Tables 2 and 4 of the proposed rule (69 FR 46928 and 
46930, respectively) show that only about six percent of total new 
expenditures arising from the MMA would be used to fund extra benefits, 
the correct percentage, over the period 2004 through 2009, should be a 
much higher figure-in the range of 50 percent, as explained below in 
the section on effect on beneficiaries. The remainder of the payment 
increases will support maintaining and enhancing provider networks and 
stabilization of the plans' financial status in Medicare. (The 
erroneous projected percentage was based on the percentage of total MA 
payments in 2004 through 2009 that we project will be used for extra 
benefits, not the percentage of only the incremental dollars that plans 
will receive in 2004 through 2009 because of the MMA provisions.)
    Comment: One comment questioned a statement in the impact analysis 
of the proposed rule to the effect that there were a number of insurers 
that are licensed as insurers in every State in the Nation, or which 
are licensed in multiple States. The commenter noted that they were 
aware of several national and multi-state insurers but inquired whether 
CMS had in mind any other insurers beyond the ones named in the 
comment.
    Response: The CMS information on the number of insurers that are 
multi-state or national insurers was based on information available at 
the web site of the National Association of Insurance Commissioners 
(www.naic.org), showing the licensure status, by State, of health 
insurance companies. We have not done an exhaustive analysis to 
determine the total number of such companies. Our purpose was merely to 
point out, as the commenter noted, that there are a number of 
organizations that are potential MA regional plan contractors.
    Projections Provided in the Impact Analysis. The methodology used 
to project the impact of the law and regulations is partly explained in 
the section on effects on beneficiaries. The projections in this final 
rule, which are different from those in the proposed rule, are based on 
the CMS designation of 26 MA regions. For projection purposes, a model 
is used that assumes three regional plans in each region, with each 
plan at a different level of efficiency (though this is not to suggest 
that this would be the number of regional/national plans in each 
region). With regard to the number of MA local plans, the projections 
of enrollment do not involve assumptions about any specific number of 
local plans. Instead a certain level of enrollment is assumed for local 
plans based on the benefits they are expected to offer. It was assumed 
that there would be sufficient capacity among local plans to enroll all 
beneficiaries that are expected to join such plans. The estimates of 
plan bids are based on the proprietary information submitted to CMS by 
current Medicare Advantage plans (coordinated care plans as well as 
demonstration PPO plans). Beneficiary behavior is modeled with utility 
functions that predict the choices they will make among available 
health plan options. As previously mentioned, we recognize the high 
degree of uncertainty entailed in such projections. The projections 
represent our best estimate of the impact given the assumptions stated.

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies identify any Federal mandates resulting from 
rules that may result in the expenditure by State, local, and tribal 
governments of $100 million or more (adjusted for inflation and 
currently about $110 million). If this threshold is met, a detailed 
analysis is required. This rule does not contain any such mandate, and 
other direct effects on State, local, and tribal governments will be 
minimal. There will, however, be an indirect effect on State premium 
tax revenues due to the increased enrollment in MA plans and reduced 
enrollment in certain Medigap policies. These indirect effects, 
however, are not the result of these rules, but of increased plan 
payments and prohibitions on sale of those Medigap policies implemented 
independently of these regulations.
    Title II of the MMA contains several provisions that have a direct 
impact on States. Section 232(a) of the MMA amends section 1856(b)(3) 
to preempt all State standards other than licensure and solvency as 
they apply to MA plans. Section 232(b) of MMA amends section 1854(g) to 
expand a prohibition on State taxes for MA plans to apply to both CMS' 
payments to MA plans and to enrollee premium payments to MA plans. In 
addition, section 221(c) of MMA allows for temporary waiver of State 
licensure in States covered by regional MA plans where those plans 
cover a multi-State area.
    Medicare law prohibiting State taxes on section 1853 payments to 
M+C organizations, that is, payments made by CMS to health plans 
contracting with Medicare, was established by the Balanced Budget Act 
1997. That prohibition did not apply to enrollee premium payments made 
to M+C plans.
    Section 232(b) of the MMA has expanded the prohibition on State 
taxes for MA plans, addressed in statute at section 1854(g), to apply 
to both section 1853 payments to MA plans and to section 1854 enrollee 
premium payments to MA plans. This provision was effective on the date 
of enactment of the MMA and is, therefore, not subject to the 
Regulatory Accountability provisions of the UMRA, which apply only to 
effects resulting from promulgation of rules. Section 422.404(a) is 
revised to reflect this change. We do not anticipate that the added 
prohibition on taxation of enrollee premiums to have a significant cost 
impact on States. Enrollee premiums to Medicare health plans are a 
small proportion of total payments to health insurers. Thus, State loss 
of tax revenue from Medicare enrollee premiums would also be small. 
Therefore, even if it were subject to UMRA, the prohibition of taxation 
by States of Medicare enrollee premiums would not approach the UMRA 
threshold.
    We also recognize, however, that there is an indirect effect of the 
MMA law because of the expected enrollment shift from taxable Medigap 
insurance, and employer-sponsored private supplemental coverage, to 
non-taxable MA plans. This indirect effect would vary by State and 
would be dependent on a variety of factors, including the State's tax 
rate on health insurance premiums, the extent of Medigap enrollment in 
a State, the extent that Medigap enrollees choose to shift to MA plans 
in that State, as well as other resulting factors such as changes in 
Medigap premiums that could result from enrollment shifts. Due to these

[[Page 4694]]

factors, estimates of the indirect effect of enrollment shifts away 
from taxable Medigap and employer-sponsored supplemental plans combined 
with the prohibition on State taxation of Medicare enrollee premiums 
would involve great uncertainty and would necessarily be speculative.

D. Federalism

    MMA provisions may have qualitative impacts on how States regulate 
and interrelate with health insurers serving Medicare enrollees due to 
the expanded preemption of State laws and possible temporary waiver of 
State licensure for multi-State MA regional plans. Law relating to 
Federal preemption of State standards for Medicare-contracting health 
plans has undergone several revisions in recent years. While Federal 
preemption of State standards was initially established into Medicare 
law by the Balanced Budget Act of 1997, a general preemption authority 
existed under Executive Order prior to that time. Federal preemption of 
State standards for Medicare-contracting health plans was expanded by 
Congress in 2000 and expanded again by Congress in 2003.
    Prior to 1997, Federal law did not contain specific preemption 
requirements for Medicare-contracting health plans. However, section 
1876 Federal requirements could preempt a State law or standard if 
State provisions were inconsistent with Federal standards based on 
general constitutional Federal preemption principles, consistent with 
the provisions of Executive Order 12612 on Federalism, since superseded 
by Executive Order 13132. Section 1876 requirements did not preempt a 
State law or standard unless the State law or standard was in direct 
conflict with Federal law. See the June 26, 1998 Federal Register 
notice (63 FR 35012) for further discussion on the history of general 
Federal preemption of State law prior to the BBA.
    The BBA established for the M+C program at section 1856(b)(3) of 
the Act a general preemption authority in which State laws or standards 
would be preempted when they were inconsistent with M+C standards in 
the same manner that the previous Executive Order applied, and this law 
also established a specific preemption of State laws and standards in 
three areas: benefit requirements, requirements relating to inclusion 
or treatment of providers, and coverage determinations (including 
related appeals and grievance procedures). This meant that a general 
preemption applied if State laws, regulations, or other standards were 
inconsistent with Federal standards and, furthermore, in the 
specifically preempted areas, meant that State standards were preempted 
regardless of whether or not those standards were inconsistent with 
Federal standards.
    In 2000, section 614 of BIPA maintained the general preemption 
authority and expanded specific preemption requirements by amending 
benefit requirements to include cost-sharing requirements and by adding 
a fourth specific preemption for requirements relating to marketing 
materials and summaries and schedule of benefits regarding a M+C plan. 
Thus, the list of areas of specific preemption effective since 2001 
were: benefit requirements (including cost-sharing requirements), 
requirements relating to inclusion or treatment of providers, coverage 
determinations (including related appeals and grievance procedures), 
and requirements relating to marketing materials and summaries and 
schedule of benefits.
    In 2003, section 232(a) of the MMA amended section 1856 for MA 
plans by eliminating the general and specific preemption distinctions 
from section 1856 and expanded Federal preemption of State standards to 
broadly apply preemption to all State law or regulation (other than 
State licensing laws or State laws relating to plan solvency). Section 
422.402 of the regulation is thus revised. Note that State laws on 
secondary payer are also preempted by Federal law and a change is made 
in regulation at Sec.  422.108(f) to reflect that States are prohibited 
from limiting the amount that MA organizations can recover from liable 
third parties under Medicare Secondary Payer provisions. The Congress 
indicated its intention to fully preempt State laws in the Conference 
Report for the MMA emphasizing that Medicare is a Federal program and 
that State laws should not apply. Section 232(a) of MMA was effective 
on enactment.
    We do not perceive that there will be a significant cost impact on 
States from section 232(a) of MMA to broaden Federal preemption 
authority to preempt all State law and regulation (other than State 
licensing laws or State laws relating to plan solvency). The specific 
preemptions already in effect were broad areas where States were most 
likely to have enacted laws or developed other regulations or standards 
for health insurance. Apart from those specific preemptions, general 
preemption already applied where State provisions were inconsistent 
with Federal standards such that other State standards in conflict with 
Federal standards were also already preempted.
    Areas of State law that will newly be preempted by full preemption 
of State laws (other than licensing and solvency) do exist, however, 
and will affect State residents who are Medicare beneficiaries. State 
governments will be affected in that State governments will no longer 
be responsible for enforcing preempted laws, which will likely reduce 
costs to States. A discussion of the diverse types of State laws that 
previously fell under general preemption is addressed in some detail in 
the response to public comments in the preamble to a June 29, 2000 
final rule implementing the BBA's preemption law. (See 65 FR 35012 
through 35014 of the June 29, 2000 Federal Register for a further 
discussion of the types of State laws that may be affected, which 
includes grievances and quality complaint reviews conducted by State 
governments.)
    In reality, determinations of which State laws have been subject to 
general preemption often has not been made unless specific questions or 
disputes have arisen that resulted in a court review of applicability 
of law to specific cases. The MMA revision relieves uncertainty of 
which State laws are preempted by ``preempting the field'' of State 
laws other than State laws on licensing and solvency.
    As required by Executive Order 13132, because of the implications 
for the States of the Federal preemption of State laws enacted in the 
MMA, we will consult with the States regarding the effect of the 
preemption provision on the role the States will play with respect to 
the regulation of Medicare plans, and the effect the preemption will 
have on State agencies and on beneficiaries enrolled in Medicare health 
plans. As noted in the preamble discussion of subpart I, there are 
issues to resolve with the States in order to clarify the breadth of 
preemption provisions with respect to State licensure laws, and which 
State statutory and regulatory provision may be considered licensing 
standards which are not preempted by the MMA provision. The comments 
and responses presented earlier in this preamble make clear that the 
role of State regulation of these plans is severely circumscribed. Some 
State-specific questions may subsequently arise, and some of these may 
be common across several States. In such cases we will undertake 
appropriate consultations with the States and, if necessary, issue 
interpretive guidance.

E. Effect on Beneficiaries

    The MMA increases the value of benefits that enrollees of MA plans 
have and will increase the availability of such

[[Page 4695]]

benefits. When MA plans can bid at levels below the relevant benchmark, 
they can offer Medicare enrollees coverage of benefits beyond what 
Medicare covers (such as eyeglasses, hearing aids, or dental care), 
reduction in out-of-pocket expenditures for covered services (either as 
reduced cost sharing, on average, compared to FFS Medicare, or reduced 
expenditures for supplemental premiums compared to Medigap, for 
example), and reductions in expenditures for the Medicare Part B and 
Part D premiums. As a result of the MMA provisions, we project that in 
the period 2004 through 2009, Medicare beneficiaries enrolling in MA 
plans will see benefits beyond basic Medicare Parts A and B coverage 
which represent approximately 50 percent of the incremental dollars 
that are the government transfers to plans listed in Table 1. We are 
unable to provide a more precise figure because of the type of modeling 
used to determine projected expenditures and enrollment. The 50 percent 
estimate is based on the disposition of the incremental MMA dollars 
that MA plans received in March of 2004, at which time plans were asked 
to resubmit adjusted community rate proposals to CMS to account for the 
extra money received mid-year. We analyzed the benefit changes 
resulting from these mid-year filings and found that, for non-employer-
sponsored plans, 58 percent of the additional funds were used to 
provide enrollees with extra benefits (or were deposited in a 
stabilization fund to be used for that purpose in 2005). Remaining 
funds were used to strengthen MA benefits in other ways, for example, 
maintaining or enhancing provider networks or financial stability for 
the MA plan. Expressed in dollars per enrollee, of the $38 per enrollee 
per month that was added to plan payments by the MMA in March of 2004, 
$22 was used to finance extra benefits or reduce out-of-pocket costs, 
and most of the remainder was used for provider networks (which will be 
particularly important to create attractive PPO plans). Employer group 
plans, which represent a little under 20 percent of MA enrollment, had 
a higher proportion of incremental dollars used for extra benefits-
about 80 percent of the incremental dollars were used for that purpose-
but, unlike non-group plans, a substantial proportion of the 
incremental dollars (over three-fourths of the funds) were deposited 
for use in 2005 (compared to five percent for non-group enrollees), and 
are included in the 80 percent figure. On average, therefore, across 
both types of coordinated care plans (employer group plans and plans 
for individual Medicare enrollees), about 60 percent of the 2004 MMA 
incremental dollars were used to finance extra benefits for MA 
enrollees. We assume that in future years this percentage will decrease 
slightly (a) because of the 2006 provision whereby the Government 
retains 25 percent of savings generated by local plans, and (b) because 
regional plans will incur relatively higher costs for the provision of 
Medicare A and B services (for example, because of higher out-of-
network costs) and will consequently have less money available to 
return to enrollees in the form of rebates.
    Because of the MMA payment increases effective March 2004, 
beneficiaries enrolled in private plans have already seen reduced out-
of-pocket expenditures and increased benefits. Our analysis of MA 
benefit packages in 2004 after the MMA payment increases shows that 
enrollees of MA plans had out-of-pocket costs (including Medigap 
premiums) that were $700 less per year than for an individual in 
traditional FFS. This corresponds to a 14 percent savings for MA 
enrollees, relative to traditional Medicare. Individuals in poorer 
health had estimated savings in out-of-pocket costs of up to $1,909 a 
year in comparison to the alternative of traditional Medicare without 
Medigap coverage. (Savings are also substantial for MA relative to 
traditional Medicare with Medigap, average $1,647 per year).

F. Effect on Health Plans and Insurers

    Health plans will see significant increases in transfer payments 
from the Federal Government as a result of the MMA. Plan payments will 
increase significantly, allowing plan revenues and profits to rise as 
enrollment increases with the offering of better benefits, better 
networks, and more stable plan availability. Organizations that 
currently contract with Medicare will have new market opportunities as 
regional plans and opportunities to expand their participation as local 
plans (other than as PPOs at a local level, which are prohibited from 
being newly formed, or expanding into a new service area, for an 
interim transition period, 2006 and 2007). Organizations that are not 
currently participating in Medicare will have a more favorable market 
environment for participating as local or regional plans.
    The Federal Government transfer payments to health plans over and 
above what would have been paid in the absence of the law, as a result 
of the Title II provisions of the MMA, are expected to total $18.3 
billion. To determine the administrative costs associated with these 
expenditures, we have relied on the adjusted community rate proposals 
of current MA coordinated care plans and demonstration PPOs, which 
report administrative cost figures as a percentage of Medicare 
payments. On average, ten percent of total plan revenues-consisting of 
Government payments and member premiums-will be used for plan 
administration in each type of plan (local and regional). The benefits 
to health plans will vary geographically, depending on benchmarks and 
the cost of doing business for the plans. The administrative cost 
figure cited here for the plans includes projected start-up costs for 
new organizations becoming Medicare contractors. The estimates of 
benefits related to MA plans for 2004 through 2009 are shown in Table 
1. The data in the table reflect projections we have made about the 
number of plans participating, their bids and (consequently) their 
level of benefits, and the level of expected beneficiary enrollment. 
These projections are based on (a) what we know about the expected 
benchmarks in each of the 26 MA regions; (b) the current premium and 
benefit packages of MA plans and PPO demonstration plans, and their 
costs for the packages as submitted to CMS; and (c) the current 
patterns of enrollment in health plans in Medicare and the commercial 
sector. As noted previously, projections are based on a model that 
assumes three regional plans in each region, and that there will be a 
sufficient number of local plans to meet beneficiary demand for 
enrollment in local plans. In general, in terms of the proportion of 
funds used to provide extra benefits to enrollees, we expect local MA 
plans to be able to have more revenue available than regional PPO plans 
for the provision of extra benefits and reduced out-of-pocket 
expenditures. This is due to the cost of doing business in the areas 
where the regional PPOs will draw much of their enrollment (for 
example, the higher costs in rural areas), and the PPO structure, which 
involves the use of network providers as well as non-network providers. 
However, we would also expect that in many areas, there will only be 
regional plans available, and no local MA coordinated care plans. In 
addition, some beneficiaries will prefer the availability of out-of-
network options in the regional PPOs, as is the case for many non-
elderly Americans who prefer PPOs. As noted elsewhere, areas where 
there are only regional plan options and no coordinated care MA plans 
are likely to have higher benchmarks that are a vestige of the 
``floor'' payment status of

[[Page 4696]]

such counties. Although PPO plans may face higher costs in operating in 
such areas, the higher benchmarks will enable them to offer enriched 
benefit packages (compared to traditional FFS Medicare). The 
projections of Table 1 show the distribution of dollars to all plans. 
The distribution is subject to regional variation (as is currently the 
case), so that in some areas, for example, beneficiaries will have more 
offerings and better benefit packages available to them as a result of 
plans having more funds to provide extra benefits, reduced cost 
sharing, lower premiums, or more extensive networks. Some plans may 
offer very few extra benefits but would still be attractive to 
enrollees and would be viewed by beneficiaries as more advantageous 
than FFS Medicare with Medigap coverage, for example.
    The dollar figures shown in Table 1 reflect the projected 
additional Medicare Part A and B expenditures incurred solely as a 
result of the MMA provisions. That is, the expenditures are the 
incremental program expenditures that are incurred because of the MMA 
provisions, including any difference in expenditures that result when 
beneficiaries enroll in a private plan rather than receiving care in 
FFS Medicare.
    Comment: Several commenters stated that the impact analysis 
projections are misleading in how types of plans are classified-that 
is, the basis for determining whether a plan is a regional plan or a 
local plan, and what kinds of organizations will be receiving payments 
as MA plans. The commenters noted that some local plans cannot become 
regional plans because they are not able to provide services across an 
entire region, while some local plans are sponsored by organizations 
that would also be (or could become) regional plans. The commenters 
believe that payments to local plans that are operated by organizations 
that operate regional plans (or could operate such plans) should be 
classified as payments to regional plans rather than payments to local 
plans. Response: While we acknowledge that the commenters' observations 
reflect the situation in the health care market-which is that not all 
organizations can be regional plans-we have provided separate 
projections for regional and local plans on the basis of the 
statutorily defined differences between the two types of MA 
contractors. In addition, we separated the two categories because we 
believe there is a value to the public in knowing what our expectations 
are with respect to the new types of plans-MA regional plans-introduced 
by the MMA.
    The Congress recognized that it is not feasible for some 
organizations that are current MA contractors to become regional plans, 
and Congress did not preclude regional plan sponsors from also 
operating local plans. In various sections of the conference report it 
is noted that regional plans were designed to be able to provide 
services over a wide geographic area, and in particular to provide 
choices in rural areas that historically have not had coordinated care 
plans available to Medicare beneficiaries (see pages 96 through 98 of 
the MMA Conference Agreement, for example). It is recognized that 
regional plans would be larger-scale plans than some current local 
plans. We would also note that the possibility envisioned in the 
statute of a national plan eligible for stabilization fund payments 
demonstrates that Congress was aware that there could be plans that 
operate on a much larger scale than many local plans.

  Table 1: Projected Payments to MA Plans Resulting from Title II Provisions of the MMA, Years 2004 to 2009, in
 Millions (Incremental Amounts in Absence of MMA Title II Provisions); Projected Total Plan Enrollment, 2004 to
                             2009, in Thousands (Totals May Not Sum Due to Rounding)
----------------------------------------------------------------------------------------------------------------
                                                                                                    TOTAL, Years
                  Year 2004     Year 2005     Year 2006     Year 2007     Year 2008     Year 2009     2004-2009
----------------------------------------------------------------------------------------------------------------
Enrollment          4,752         4,855         4,980         5,648         6,234         6,539     ............
 Projection,
 Local Plans
----------------------------------------------------------------------------------------------------------------
Enrollment      ............  ............      1,686         2,637         3,097         3,604     ............
 Projection,
 Regional
 Plans
----------------------------------------------------------------------------------------------------------------
Total Value of      1,738         2,618         2,143         1,632         1,259         1,023        10,414
 Transfer
 Payments,
 Local Plans
----------------------------------------------------------------------------------------------------------------
Total Value of  ............  ............        746         2,498         2,372         2,312         7,928
 Transfer
 Payments,
 Regional
 Plans
----------------------------------------------------------------------------------------------------------------
Total Value of      1,738         2,618         2,889         4,130         3,631         3,335        18,342
 Transfer
 Payments to
 Plans, Both
 Types of
 Plans
----------------------------------------------------------------------------------------------------------------

    As between regional and local plans, and the choice that an 
organization can make, regional plans, as described elsewhere, have a 
number of financial incentives. Local plans have the advantage of being 
able to selectively market to Medicare beneficiaries in that they can 
make decisions on a county basis. Local MA plans can choose whether or 
not to serve a particular county, and they can also vary benefits and 
premiums by county under one contract by segmenting larger service 
areas to as small a unit as a single county. The uniform benefit 
requirement applies to local plans at the service area or segment 
level, while regional MA plans, as previously noted, must have a 
uniform benefit in the entire region (for each of the plans that an MA 
regional organization offers in a region, each of which must be offered 
on a region-wide basis). One organization may offer both local and 
regional plans.
    Although we have emphasized the additional benefits that we expect 
plans to be able to offer, the transition to a competitive bidding 
process more similar to that used by FEHB and large employers to obtain 
high-quality, stable plan participation should also help provide 
broader plan participation. As part of this process, Medicare has 
replaced the adjusted community rate process and its requirement that 
plan profit levels must be the same as for a plan's commercial product, 
and has

[[Page 4697]]

eliminated the limit on premiums related to reducing cost sharing for 
Medicare-covered benefits, plans can potentially manage their profit 
levels by developing more competitive benefit packages at a lower cost. 
Plans with bids exceeding the benchmark can also be assured of having 
adequate revenue to operate as Medicare plans (though they must offer 
sufficient additional benefits or quality to attract beneficiaries 
despite their higher premium). These provisions may also lend stability 
to the program in allowing plans to make adjustments to revenue needs 
from one year to the next without facing statutorily imposed limits on 
their ability to generate needed revenue.
    There are a number of statutory and regulatory provisions which 
reduce burden on Medicare plans while maintaining and strengthening 
beneficiary protections, including the statutory changes that 
eliminated the reporting requirements relating to physician incentive 
plans, and the major changes in the quality assurance standards for 
plans. As discussed elsewhere, this rule also has several 
administrative changes that will reduce plan burden, including 
elimination of plan disclosure requirements that are redundant, and 
provisions that streamline the appeals procedure as regards notices to 
beneficiaries.
    In terms of estimating the impact of these changes, the physician 
incentive plan (PIP) burden reduction was previously codified in the 
final rule entitled ``Medicare Program: Modifications to Managed Care 
Rules'' on August 22, 2003 and effective September 22, 2003. In the 
regulatory impact statement of that rule (68 FR 50853 and 50854) we 
stated: ``We find that overall the economic impact of this final rule 
is positive, due to...the reductions in regulatory burden due to...the 
reduction of the physician incentive reporting requirements...The data 
available do not allow us to determine the distributional effects...We 
have not considered alternatives to lessen the economic impact or 
regulatory burden of this final rule because the regulatory burden is 
reduced...'' We have no new data at this time that would alter the 
analysis and conclusions drawn in the prior rule.
    With regard to the ``file and use'' policy, we are codifying in 
regulation a previously existing program tolerance which has been 
successful. The ``burden reduction'' actually associated with ``File 
and Use'' is minimal for two reasons. The first is that it represents a 
``tolerance'' already in use; so additional burden reduction is non-
existent. Second, File and Use is simply permission to publish (or use) 
certain marketing materials prior to CMS review and approval. To the 
extent that MA plans ``earn'' (or qualify for) File and Use status, the 
advantage gained and the burden reduction available to them is that MA 
plans qualifying for File and Use will not need to wait for CMS 
approval prior to using specific marketing materials. Finally, CMS does 
not currently collect data nor does it have information on the 
distributional impact of the currently existing File and Use program, 
so it is impossible to project the precise impact that File and Use 
will have on organizations qualifying for it.
    We remove certain plan disclosure requirements from Sec.  
422.111(f). These disclosure requirements all are information that MA 
organizations must provide ``upon request.'' We have no data that would 
help us quantify the actual level of burden reduction. Therefore, the 
level of administrative burden mitigation is likely negligible.
    Other Effects. Although most Medicare health plans and 
organizations that can participate as MA plans stand to benefit from 
the MA provisions, Medigap insurers may face price pressures and see 
declining enrollment if MA enrollment increases to the level that CMS 
projects. It should be noted that many of the insurers that offer 
Medigap coverage are companies that also operate health plans and are 
already, or can become, local or regional MA plans.
    Medicare Advantage PFFS plans are another class of insurer that may 
see changes in the competitive environment. To date, such plans have 
operated primarily in ``floor'' counties (counties in which, because of 
the BBA and BIPA payment rules, health plan payment rates are higher 
than estimated FFS Medicare costs). PFFS plans generally have not 
competed directly against coordinated care plans. PFFS plans offer 
generally less generous benefit packages than MA coordinated care plans 
(involving higher levels of cost sharing and premiums), but they do 
offer some level of supplemental coverage for individuals (including 
drug coverage in many such plans), and they offer an advantage that 
some beneficiaries prefer, which is that there is not a limited network 
of providers that must be used to obtain covered care. As a consequence 
of the MMA, where there are regional MA plans, regional plans are 
likely to have a competitive advantage over Medicare PFFS plans that 
had usually targeted areas in which there were no MA local plans. MA 
regional plans must offer coverage for out-of-network care, and they 
are likely to be able to offer a significant level of extra benefits 
because of the financial incentives in the MMA. (As stated elsewhere in 
the preamble, regional MA plans may not be PFFS plans; regional plans 
must operate as a PPO model.)

G. Effects on States

    States may see benefits from Title II of the MMA if more Medicaid 
beneficiaries who are also entitled to Medicare A and B coverage (the 
dual eligible population) enroll in private Medicare plans. Because MA 
enrollees are likely to receive non-Medicare-covered benefits (such as 
vision care) as well as lower copayments for Medicare-covered benefits, 
dual eligible enrollees would receive benefits that the States would 
otherwise have had to pay for. States may benefit from reduction of the 
Part B premium which the State would otherwise pay for dual eligibles. 
It should be noted that to date, the enrollment level of dual eligibles 
in Medicare plans is not as high as it could be (see Edith G. Walsh and 
William D. Clark, ``Managed Care and Dually Eligible Beneficiaries: 
Challenges in Coordination,'' Health Care Financing Review, fall 2002, 
volume 24, number 1). A number of factors could contribute to greater 
enrollment of dual eligibles in MA plans: the extension of plan 
availability across an entire State (as part of a regional plan), the 
likelihood of Part B premium rebates (which the State would be entitled 
to), and the designation in the law of dual eligibles as a category for 
purposes of determining whether an MA plan is a specialized plan. Dual 
eligible individuals do not have the same incentives to enroll in MA 
plans as other low-income Medicare beneficiaries. In certain 
circumstances, a State may require the enrollment of dual eligibles in 
MA plans (if, for example, the plan is also a Medicaid health plan and 
the State has a waiver permitting mandatory health plan enrollment for 
Medicaid beneficiaries).
    The direct effect on the States of the expansion of the premium tax 
prohibition is discussed in the section on unfunded mandates. The MMA 
changed the law to exempt from State premium taxes the premiums paid by 
beneficiaries, as well as Federal payments to plans (which the law 
already exempted). This provision by itself has a relatively minor 
effect on State revenues, given the prevalence of zero-premium MA plans 
and given the expected trend in MA benefit packages towards more zero-
premium products. However, an indirect effect of the premium tax 
prohibition is that, to the

[[Page 4698]]

extent that there are reductions in the number of beneficiaries who 
hold Medigap policies, States may lose premium tax revenue that would 
have been derived from Medigap policies (the entire premium of which is 
generally taxed). As previously discussed, it is unclear what the 
impact will be if there is such an effect, given the trend of greater 
numbers of beneficiaries with Medigap coverage and rising Medigap 
premiums.

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

    Historically, Medicare-contracting health plans that contracted 
with employer or union groups to provide benefits had to comply with 
the same Medicare regulatory requirements that apply to all Medicare-
contacting health plans. In 2000, section 617 of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) added a new authority at section 1857(i) of the Act, effective 
2001, that provided CMS broad authority to waive or modify requirements 
that hinder the design of, the offering of, or the enrollment in M+C 
plans under contracts between M+C organizations and employers, labor 
organizations, or the trustees of a fund established to furnish 
benefits to an employer's current or former employees or to a labor 
organization's current or former members.
    Three types of waivers have been approved under the BIPA authority 
which are discussed in an August 22, 2003 Federal Register notice (68 
FR 50845). The three types of waivers are: (1) M+C organizations are 
allowed to offer employer-only plans that are not open to individuals 
and plan marketing materials do not have to be submitted for CMS review 
and approval; (2) M+C organizations are allowed to ``swap'' benefits 
not covered by Medicare of approximately equal value when an employer 
asks for a benefit package different from what is offered on the 
individual market; and (3) M+C organizations are allowed to raise the 
co-payments for certain benefits but to provide a higher benefit level 
or a modification to the premium charged as long as projected 
beneficiary liability is actuarially equivalent. These waiver 
authorities also will continue for MA organizations.
    Section 222(j) of the MMA adds another authority for employer or 
union sponsored plans, effective 2006, at section 1857(i)(2) of the Act 
CMS may waive or modify requirements that hinder the design of, the 
offering of, or the enrollment in an MA plan offered directly by an 
employer, a labor organization, or the trustees of a fund established 
by employers or labor organizations to furnish benefits to current or 
former employees or to current or former members of labor 
organizations. This authority is added in the rule at Sec.  422.106(d). 
We have received a number of inquiries from employers and labor 
organizations expressing interest in this direct contracting option.
    We believe that there is likely to be a significant increase in the 
number of retirees whose employer or union provides retiree coverage 
through an MA plan because of the additional payments MA plans will 
receive (so that benefits that otherwise would have been financed by 
the employer or union can be financed by Medicare payments), and 
because regional plans will be available that can cover wider 
geographic areas and meet the needs of employers with retirees residing 
throughout a large geographic area, or dispersed across many geographic 
areas.
    As of January 2002, about 18 percent of enrollees in 
Medicare+Choice plans were employer- or union-sponsored retirees (see 
Geoffrey R. Hileman, Kerry E. Moroz, C. William Wrightson, and Suhn K. 
Kim, ``Medicare+Choice Individual and Group Enrollment: 2001 and 
2002,'' Health Care Financing Review, fall 2002, volume 24, number 1). 
There are 1.1 million beneficiaries residing in counties in which only 
employer-sponsored retirees or dependents may enroll in MA plans 
operating in those counties. MA plans may find this particular market 
segment attractive for a number of reasons, including: the efficiency 
of marketing to a large group; the advantage of having a group will 
have been previously insured; and the ability of offering enrollees a 
seamless continuation of coverage between active worker status and 
retiree status. The regional PPO model may also facilitate the ability 
of plans to serve this population to the extent that retirees no longer 
reside near their place of work.
    According to a 2003 Hewitt-Kaiser Family Foundation survey of large 
employers, 21 percent of employers with 1000 or more employees require 
new Medicare-eligible retirees to pay 100 percent of the plan premium. 
The survey also found that, with regard to future trends, ``Serious 
consideration is also being given to only providing access to health 
benefits and asking retirees to pay 100 percent of costs; 26 percent of 
firms said that they are very or somewhat likely to make such a 
change.'' (Frank B. McArdle, et al., ``Large Firms' Retiree Health 
Benefits Before Medicare Reform: 2003 Survey Results.'' Health Affairs, 
web exclusive, January 14, 2004.) MA plans are a likely vehicle for 
employers to offer health plans under these circumstances. In fact, the 
2004 Kaiser/Hewitt Survey on Retiree Health Benefits report indicates 
the continuing trend of having retirees pay 100 percent of their 
premiums and also shows that, among the changes large private sector 
employers made in 2004, ten percent of such employers are offering MA 
plans (the report is available at http://www.kff.org/medicare/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=49652; see in 
particular exhibit 22, at page 53). These trends would suggest that we 
will see an increase in MA enrollment of retirees with employer group 
or union-sponsored coverage (for beneficiaries of both types, those for 
whom the sponsor contributes to the cost of the coverage and those 
whose coverage involves only an offering of coverage).

I. Effect on the Federal Government

    The benefits to beneficiaries and private health plans are the 
result of transfer payments from the Federal Government to plans, or, 
in the case of reductions in the Part B and Part D premiums, transfer 
payments to beneficiaries. For the period 2004 through 2009, the total 
amount of such transferred funds is projected to be $18.3 billion above 
what would otherwise have been incurred in the absence of the Title II 
provisions of the law. The preceding figure assumes a private plan 
penetration rate of 24 percent by 2009. The total expenditure figure 
assumes that $5.1 billion of the stabilization fund dollars for 
regional MA plans are used in the period 2004 through 2009. We have not 
separately projected an administrative cost to the Government for the 
administration of Title II of the MMA separate from administration of 
all portions of the MMA taken together.
    There were several issues with a potential budgetary impact that 
were discussed in the notice of proposed rule making. The section on 
alternatives considered in the proposed rule examined the impact on 
expenditures in choosing between statewide and plan-specific risk 
adjustment to determine rebate amounts (beginning at page 46942). The 
conclusion of that analysis was that expenditures under either approach 
(plan-specific or area-wide) depended on the risk profile of plan 
enrollees, and that it was not possible to quantify the effect: ``Wide 
swings in the level of rebate dollars are possible under either method, 
but we cannot quantify the effect at this time without knowing the risk 
distribution of enrollees for

[[Page 4699]]

2006 and the respective bids of the health plans.'' As discussed in the 
preamble, in part as a reflection of comments received, CMS has chosen 
the plan-specific option. (See the preamble of the final rule and the 
alternatives considered section of the proposed rule, previously cited, 
for a discussion of the considerations that led to this decision.)
    Another issue that has an effect on expenditures is the payment 
adjustment relating to risk adjustment for bids that exceed the 
benchmark. The regulatory text at Sec.  422.308(e), discussed in 
subpart G of the preamble, would implement section 1853(a)(1)(G) of the 
Act, which requires CMS to make certain plan payment adjustments to 
take into account the health status of a plan's enrollees. For plans 
bidding above the benchmark, this provision would allow the total 
revenue a plan receives for its actual enrollees to more closely match 
the plan's required revenue. The 1853(a)(1)(G) provision requires CMS 
to adjust plan payments in recognition of the amount that a health plan 
receives as a basic premium from its enrollees. The basic member 
premium that plans actually will charge is the premium for a ``1.0'' 
beneficiary-that is, it is determined based on the revenue needs for a 
person with average health status. For a plan with a risk score above 
1.0 (that is, the plan has enrollees that are sicker than average and 
utilize more services), there would be an additional payment from 
Medicare to provide the plan with revenue that covers the shortfall 
between the basic premium determined for a 1.0 enrollee, and the actual 
revenue necessary from member premiums. (Under the current system, but 
not after 2005, in such a case enrollees would be charged a higher plan 
premium to cover the needed revenue that matches their enrollees' 
actual utilization patterns.)
    A similar adjustment would be made for plans with risk scores below 
1.0. A plan with a risk score below 1.0 would have determined its basic 
premium for a 1.0 person, and enrollees will be charged that level of 
premium. This provides the plan with more revenue than it needs. 
Consequently, the section 1853(a)(1)(G) provision would call for a 
reduction in Medicare's payment to the plan in recognition of the 
additional revenue that comes from member premiums that are determined 
for a 1.0 beneficiary.
    The budgetary impact of this provision depends on the number of 
plans that would have bids above the benchmark, and the health status 
of enrollees in such plans. One would assume that the majority of 
organizations deciding to enter the Medicare market would like to be 
able to offer extra benefits at no cost, or at little cost, to 
prospective enrollees. Therefore there may be few plans that bid above 
the benchmark, and those that do so would try to limit the basic 
premium to an amount that would attract a sufficient number of 
beneficiaries. However, bids above the benchmark may arise (a) in 
certain areas-for example, in areas where there may be only one or two 
plans, or (b) in certain competitive situations-for example, when the 
reason for a bid above the benchmark is that the plan offers coverage 
that is expensive but has features that appeal to beneficiaries (such 
as a wide network of providers, particular ``marquee'' providers in the 
network, especially lower copayments, or generous out-of-network 
coverage).
    With respect to the risk profile of plans that may be bidding above 
the benchmark, currently private plan enrollees are somewhat healthier 
on average than Medicare beneficiaries in traditional FFS. If plans 
bidding above the benchmark have healthier-than-average enrollees, the 
budgetary impact of the 1853(a)(1)(G) provision would actually be net 
program savings as beneficiaries bear some extra cost in their plan 
premium. If today's patterns of enrollment continue, there may be such 
program savings: looking at the subset of plans that currently charge a 
premium for Medicare-covered services compared to plans that have no 
premium charge for Medicare-covered services (a rough type of proxy for 
determining whether a bid will be above the benchmark), the risk status 
of enrollees of plans in which there is no premium is below 1.0 but 
closer to 1.0 than among plans charging a premium. The latter group of 
plans have risk scores that are also below 1.0, but the risk scores are 
about 10 percent lower-that is, risk scores show that enrollees are 
healthier-than the risk scores of plans that have no premium charge for 
Medicare-covered services.
    On the other hand, as Medicare increases the proportion of plan 
payments that are risk-adjusted to 100 percent, plans will have even 
greater financial incentives to offer benefit packages that appeal to 
less healthy beneficiaries. Consequently, moving to full risk 
adjustment would be expected to lead to a reduction of any differences 
in health status in MA plans, including the higher-premium plan.
    In summary, the 1853(a)(1)(G) risk adjustment provision, which may 
have limited applicability if few plans bid above the benchmark, may 
result in program savings.

J. Administrative Costs

    The expenditures shown in Table 1 include administrative costs for 
MA plans. For both local and regional plans, administrative costs are 
assumed to comprise ten percent of the total incremental expenditures 
shown in Table 1. This includes both costs to administer the program 
and the profit or retained earnings of health plans. Administrative 
costs for local plans and regional plans are considered to be roughly 
the same based on the reported administrative costs of current MA plans 
that are PPOs and HMOs.

K. Analysis of Effects on Small Entities

    The Regulatory Flexibility Act (RFA) requires us to determine 
whether a rule will have a ``significant economic impact on a 
substantial number of small entities.'' If so, the RFA requires that a 
Final Regulatory Flexibility Analysis (FRFA) be prepared. Under the 
RFA, a ``small entity'' is defined as either a small business (as 
defined by the size standards of the Small Business Administration, or 
SBA), a non-profit entity of any size that is not dominant in its 
field, or a small governmental jurisdiction. The SBA size standard for 
``small entity'' health insurance plans is annual revenue of $6 million 
or less.
    The direct effects of Medicare Advantage fall primarily on 
insurance firms and on individual enrollees. The competitive market 
created by Medicare Advantage is likely to have long run indirect 
effects on health care providers, such as hospitals, physicians, and 
pharmacies, depending on the extent to which MA plans attract 
enrollees. However, those effects will result from the workings of 
market choices made by enrollees, plans, and providers, not from 
specific provisions of this rule. (There is an MMA provision for paying 
certain ``essential hospitals'' higher rates for participation in the 
MA program, which we analyze below.) Therefore, we primarily analyze 
effects on the insurance industry (including HMOs as insurers) in this 
FRFA.
    We do not believe that these rules will create a significant 
economic impact on a substantial number of small entities. We have 
prepared the following analysis in part to provide a factual basis for 
our beliefs regarding the impact of this regulation on small entities; 
we also consider this analysis a voluntary FRFA. Under longstanding HHS 
policy we prepare a FRFA if significant impacts of a rule on small 
entities are positive rather than negative. We also prepare a FRFA if 
we cannot be certain of a conclusion of no ``significant impact'' on 
less than a

[[Page 4700]]

``substantial number.'' In this case, the statutory reform is so major 
and the number of regulatory changes so large that we cannot be certain 
of our conclusion. Finally, we generally prepare a FRFA if there is 
likely to be substantial interest on the part of small entities. 
Essentially all of the insurance firms affected by the statute and this 
final 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. We note that under prior law (continued unchanged for 
Medicare Advantage), no health insurance plan is normally eligible to 
participate in Medicare Advantage unless it already serves at least 
5,000 enrollees, or 1,500 enrollees if it primarily serves rural areas. 
At the 5,000-enrollee level, no plan would fall below the SBA revenue 
cutoff assuming, very conservatively, yearly revenue of $2,000 per 
enrollee. While a very small rural plan could fall below the threshold, 
we do not believe that there are more than a handful of such plans. In 
the InterStudy Competitive Edge HMO Directory for 2000, discussed 
below, we found only one rural HMO with a continuing enrollment level 
below 1,500. Therefore, the statutory limits generally prevent any 
insurance firm defined as ``small'' pursuant to the RFA's size 
standards from participating in the program. However, a substantial 
fraction of the insurance firms affected by this final rule are ``small 
entities'' by virtue of their non-profit status. The analysis in this 
section, taken together with the other regulatory impact sections, and 
the preamble as a whole, constitute our FRFA for the Medicare Advantage 
provisions of Title II of the MMA. We note that there is a related FRFA 
in the companion final rule on the Part D Drug Program of Title I of 
the MMA.
1. The Health Insurance Industry
    The 1997 Economic Census: Finance and Insurance (the latest 
available edition when the proposed rule was being developed) states 
that there were 944 firms classified as ``Health and Medical Insurance 
Carriers'' under the North American Industry Classification System. Of 
these, 851 firms operated the entire year. Using Census data, these 
firms had total revenue of $203 billion, operated through about 3,200 
establishments, and had about 328,000 employees. Of the 851 firms that 
operated the entire year, 342 had revenues of less than $5 million. 
Taking into account subsequent inflation, this corresponds closely to 
the $6 million threshold established by the SBA as the current cutoff 
for small businesses in this insurance category. Thus, approximately 40 
percent of the industry as counted by the Census is ``small'' using the 
SBA definition. These small firms had total revenue of about $440 
million, rather less than one half of one percent of total health 
insurance revenue. As discussed below, we do not believe that any of 
these small firms underwrite comprehensive health insurance policies, 
or are actual or potential participants in the Medicare Advantage 
market.
    In contrast, the Census found that the largest 50 firms, or 6 
percent, accounted for 75 percent of all health insurance revenue. 
While these data cannot be reconciled directly with other statistics on 
numbers and size of health insurance companies, they clearly indicate 
that the market for comprehensive health insurance policies, covering 
the lives of about 200 million Americans, is dominated by several 
hundred companies, few of which, and most likely none of which, are 
``small'' by SBA revenue standards.
    Another source of industry data, much richer in detail, is found in 
the InterStudy Competitive Edge. This annual report covers only HMOs. 
The discussion that follows uses the 2000 edition as reflecting most of 
the changes of the 1990s, but still close enough in time to the Census 
information to be roughly comparable. In 2000, there were 560 HMOs. 
While these were all separately incorporated, many were subsidiaries of 
larger corporations. For example, the report lists 40 United HealthCare 
plans, 22 Aetna and 32 Prudential plans (all owned by Aetna), 31 Cigna 
plans, 10 Humana plans, and 9 Kaiser plans. Ninety-seven of these HMOs 
enrolled 200,000 or more people (enrollment is a standard industry 
measure of size). The InterStudy data, using an enrollment cutoff of 
3,000 to correspond roughly to the SBA $6 million threshold, shows that 
only 5 HMOs were continually operating entities (not entering or 
exiting the industry) with revenues below the SBA small entity 
threshold.
    Of the approximately 200 contracts under the current MA program 
(this figure excludes demonstration contracts), only a handful have 
enrollment of fewer than one thousand or annual Medicare revenue of 
under $6 million assuming, conservatively, revenues of $6,000 per 
enrollee (Medicare enrollees cost, and are reimbursed, more than double 
working age persons). Of course, these plans have other revenues from 
non-Medicare clients, and we are unaware of any current MA 
organizations with revenues below the SBA threshold. (Note that the 
number of current MA contracts includes separate Medicare contracts 
held by a single firm in different parts of the country-as in the case 
of PacifiCare, for example, which has ten contracts in eight States.)
    These data show that few, if any, health insurance firms with 
revenues of $6 million or less underwrite comprehensive insurance in 
the national insurance market. Furthermore, discussions with Bureau of 
the Census staff indicate many and probably most of the small firms 
classified as insurers do not underwrite health care costs (that is, 
provide comprehensive health insurance), but are firms offering dental 
or medical discounts through small provider networks or offering 
indemnity-type policies paying, for example, a few hundred dollars a 
day for each day spent in a hospital. They would not even be licensed 
by States to offer comprehensive or group insurance policies. 
Therefore, we have no reason to believe that the changes to the 
Medicare Advantage program that will take effect for the 2006 contract 
year will have any positive or negative effect on ``small'' insurance 
firms, with the possible exception of Medigap insurers.
    Some of these small firms may be Medigap insurers. For this limited 
group, the MMA has major consequences. Specifically, existing 
categories of Medigap policy that cover prescription drugs will become 
illegal to sell to new enrollees, and several new Medigap categories 
will be created. (These changes, however, are specified in the statute 
and are not subject to regulatory discretion.) Furthermore, Medigap 
insurance is a unique type of product that does not involve accepting 
insurance risk for the full cost of health benefits, since Medicare 
itself remains the primary insurer. Therefore, it is unlikely that any 
consequential number of firms operating solely in the Medigap market 
would expect to operate in the Medicare Advantage market. Effects of 
the MMA on Medigap are discussed in more detail the economic effects 
analysis in the companion Title I rule.
    The definition of small entities under the RFA also encompasses 
not-for-profit organizations that are not ``dominant'' in their field. 
(HHS interprets ``dominant'' to mean national dominance.) There are 
many large HMO companies that are non-profit. As of 2000, about 37 
percent of HMO enrollment was in non-profit firms, and 152 of 558 HMOs, 
or 27 percent, were non-profit (InterStudy Competitive Edge HMO 
Industry Report for 2000). None of these firms is nationally 
``dominant'' in

[[Page 4701]]

the health insurance industry although many firms achieve large market 
share in particular health care markets.
    About half of these firms already compete in the Medicare MA 
market, and most are potential entrants or re-entrants as Medicare 
Advantage plans. According to the InterStudy data, about one third of 
HMOs currently participating in MA are non-profit. Some HMOs, profit or 
non-profit, may be potential entrants in the new regional MA markets. 
This will partly depend on how rapidly the non-profit firms grow by 
merger or make other market adaptations, such as adding PPO networks. 
However, relatively few HMO plans (in contrast to parent company or 
linked HMOs), operating through local HMO networks, are likely to be 
able to compete in a region encompassing large areas or several States 
and multiple health care markets.
2. The Local Medicare Advantage Market and Small Entities
    Under MA, there are two distinct (though overlapping) markets: 
local and regional. All existing MA HMO plans participate on a local 
area basis, typically covering the several counties encompassed in a 
metropolitan area. Because HMOs are most common in metropolitan areas, 
and especially in the largest metropolitan areas, existing plan 
availability and enrollment is concentrated in these areas. As 
discussed previously in this analysis, only about one fifth of U.S. 
counties, though over 60 percent of the eligible population, have an MA 
coordinated care plan available. The MMA makes one major change for 
local plans by significantly improving payment rates. This statutory 
change is already in effect and is not addressed in these rules. These 
rules will have beneficial effects on local plans, by reducing some 
administrative burdens, but the changes in this final rule, singly and 
collectively, do not rise to the level of ``significant economic 
impact'' on local HMOs (though the payment increases in 2004, already 
in effect as a result of the statute, did have an effect of that 
magnitude).
    The other major changes of Medicare Advantage include the creation 
of a new regional plan structure to become operational in 2006, 
designed for and limited to PPO plans. The regional structure is 
intended to ensure that the entire beneficiary population, not just 
those residing in major urban centers, has access to alternative plans. 
As discussed elsewhere in this analysis, we assume that as a result of 
these changes private plans may attract as much as one-third of all 
Medicare enrollment by 2016.
    Starting in 2006, local HMOs will face two new sources of 
competition. First, they will find themselves seeking to attract 
enrollees from a pool of eligible applicants who will now have Part D 
drug benefits as enrollees in FFS Medicare. Second, they will be 
competing against regional MA plans serving their areas. Regional plans 
will have some advantages specified in the statute, including access to 
the stabilization fund and, temporarily, to risk sharing with the 
government. It is possible that some existing local plans will lose 
some enrollment. The local HMOs will, however, have important assets 
including integrated benefit packages (as compared to free-standing 
PDPs), quite likely drug benefits at premiums lower than PDP premiums, 
and extra benefits (including rebates of the Parts B and D premiums) 
not available in FFS and possibly more generous than those available in 
regional MA plans. The local plans will have an existing customer base 
and pre-existing networks in the areas where most beneficiaries live. 
Most compete in major metropolitan areas where Medicare payment rates 
are higher than in other areas that a region would encompass. Finally, 
many and perhaps most local plans are subsidiaries of large insurance 
firms that offer multiple product lines. These firms retain the ability 
to ``mix and match'' their product offerings to best advantage. 
Regardless, whether and how much any given plan loses or gains will 
primarily depend on its overall attractiveness (benefits, services, 
provider panels, out of network benefits, and premiums) compared to its 
competitors. Nothing in these rules, as such, either favors or 
disfavors local plans when competing against regional plans.
    While it is impossible to predict the precise situations that these 
HMOs will face, or their responses, there are some lessons available 
from the FEHB Program experience. In that program, about 200 local HMOs 
co-exist in competition with about a dozen national PPO plans. Most 
HMOs compete in big city markets against 15 or 20 plans, both PPO and 
HMO. While HMO enrollment in the program has declined slightly in 
recent years, and almost half of all HMOs have left the program since 
their peak participation in the early 1990s (reflecting mainly industry 
consolidations), HMOs currently enroll about 35 percent of all Federal 
employees, and 9 percent of retirees, down only slightly from the peak 
levels of 39 percent and 10 percent, respectively, a decade ago.
3. The Regional Medicare Advantage Market and Small Entities
    Starting in 2006, health insurance firms both profit and non-profit 
(and hence ``small entities'' under the RFA) will be able to compete as 
regional plans. A firm may compete in as many regions as it chooses, up 
to and including the entire nation. The chief constraint is that a plan 
must demonstrate that it has a region-wide network of providers.
    We know of one group of potential regional competitors who may be 
affected by regional boundary decisions-insurance plans that operate on 
a state-specific basis, notably Blue Cross/Blue Shield plans. In recent 
years many Blue Cross/Blue Shield plans have merged within and across 
State lines. However, there still remain several dozen of these plans 
that operate on a state-delineated basis. The regional MA boundaries 
established in December, 2004 attempt to accommodate these and other 
plans that face significant practical constraints in operating across 
state line. Of course, many considerations affected decisions on 
regional boundaries, including beneficiary access, viable economic 
size, and existing medical and PPO markets. Our primary objectives were 
to give all Medicare beneficiaries the opportunity to enroll in an MA 
plan, to give them the greatest amount of choice by encouraging 
competition, and as a result to provide price competition and 
affordable costs for enrollees. These considerations, and the resulting 
boundary decisions, are described on the CMS Web site at 
www.cms.hhs.gov/medicarereform/mmaregions.
    A local plan may encompass all or most of a State, and/or operate 
in more than one State if it so chooses. Of course, regional plans have 
some advantages, but local plans have others. Since the statute 
preempts State standards for benefits, coverage, and provider networks, 
leaving effectively only licensure and solvency standards as State-
imposed requirements, we anticipate no important problems for plans 
(though regional plans may have to seek licensure in States in which 
they currently do not operate, or would have to seek a waiver as 
permitted by the MMA). There is another problem that could be important 
to a plan far larger than the SBA size standard but nonetheless smaller 
than the plans serving hundreds of thousands or millions of enrollees. 
Organizing the full resources needed to compete effectively in the 
Medicare context will require substantial investments in acquiring and 
maintaining actuarial expertise, legal expertise, effective marketing, 
network

[[Page 4702]]

building, benefit design, cost-control, disease management, formulary 
design, claims processing, financing, and so forth. There are economies 
of scale in health insurance (like many other businesses), and these 
presumably favor larger firms, all other things equal, up to some 
point. We are not aware of any industry studies that seek to measure 
the minimum size necessary for health insurance firms to compete 
effectively in local, regional, or national markets and request 
information on this question. However, to the best of our understanding 
any such barriers to entry or cost competitiveness are likely to fall 
well within the size of most firms competing today in such large 
systems as M+C, the FEHB Program, or the private employer market. In 
summary, the MA program, by having both a regional and local model, 
provides opportunity for health insurance entities of all types and 
most sizes (but probably not below the ``small'' insurance entity 
cutoff level defined by the SBA, which is lower than appears viable for 
a comprehensive, risk-bearing insurance plan), and offering many 
different kinds of plans, to participate. That participation is more 
likely to take the form of local plans in the case of smaller and non-
profit entities. However, the overriding objective of the regional plan 
model is to give beneficiaries access to and choice among integrated 
private plans that can offer comprehensive health insurance 
encompassing Medicare parts A, B, and D. This model is dictated in 
almost all its important details in the statute.
    Comment: Several commenters felt that the impact analysis did not 
discuss the negative impact on local MA plans of having to compete with 
regional plans, which have various financial incentives to ensure 
participation. For example, local plans operating in a rural area would 
be at a disadvantage because their benchmarks could be lower than the 
benchmarks applying to regional plans. The commenters also suggested 
that CMS work with the Department of Justice and the Federal Trade 
Commission to ensure that anti-competitive practices are not permitted, 
given that the MMA creates new health insurance markets with 
participating plans that, the commenters state, would have the market 
power to unfairly limit competition.
    Response: As we noted above in response to another comment 
regarding how to classify plans as local or regional, in order to 
address the issue of limited access to coordinated care plans in rural 
areas, the MMA has created the MA regional plan option, which is likely 
to be an option that is primarily offered by larger health plans or 
insurers. In the year 2003, only about 13 percent of Medicare 
beneficiaries residing in rural areas had access to a Medicare 
coordinated care plan. That is, only 13 percent of the rural population 
was served by a local coordinated care plan. If the MMA is successful 
in the goal of expanding access to rural areas, ideally 100 percent of 
rural enrollees will have access to a coordinated care plan because of 
new regional MA option.
    The manner in which the MMA seeks to expand access to coordinated 
care plans in rural areas involves certain incentives for plans willing 
to participate under the terms set out by the law, and it involves 
certain ``trade-offs'' that were felt necessary to ensure 
participation. One such trade-off is the willingness of the Congress to 
increase payments through the use of the stabilization fund in order to 
ensure maximum access to MA plans across a wide geographic area. Only 
plans that are willing to serve a wide geographic area have access to 
the stabilization fund. Local plans do not have access to the fund, 
unless they are willing to participate as regional plans. Similarly, 
regional benchmarks may be higher than local benchmarks in certain 
areas. However, organizations for which a regional benchmark applies 
are assuming risk for a large population across a wide geographic area, 
must offer a uniform benefit package across the entire area, and cannot 
selectively discontinue contracting on a county-by-county basis (or 
even selectively drop portions of counties, as local plans are 
permitted to do under certain circumstances). Regional plans are 
required to operate as preferred provider organizations throughout a 
large service area. Requiring plans to operate under such a model, as 
opposed to a more tightly knit network model, would tend to raise costs 
for the plan and would result in a lower level of extra benefits for 
enrollees. The PPO model also adds to the level of risk assumed by the 
health plans because of the uncertainty surrounding the utilization and 
costs for out-of-network services that such plans must reimburse.
    As we have stated above, we would hope that there is room for 
competition to occur in all types of areas of the country between local 
plans and regional plans. With regional and local plans each having 
some advantages, and open competition among multiple plans of each type 
expected in most areas, we cannot predict likely ``winners.'' Our 
expectation is that plans of both types will succeed in most areas.
    With respect to anti-competitive practices, CMS has worked with the 
Department of Justice and Federal Trade Commission in the past on 
competition issues in the provider and health plan markets, and we will 
continue to work with those agencies in the future.
4. Hospitals
    An additional program under Medicare Advantage directly affects 
hospitals. HHS has long taken the approach of treating all hospitals as 
presumptive ``small entities'' within the meaning of the RFA, mainly 
because of the dominance of the non-profit model in the hospital 
industry (about 80 percent) and also because most of the rest have 
revenues under the $29 million SBA size threshold for hospitals.
    The MMA facilitates the inclusion of hospitals in regional networks 
in cases in which a plan and a hospital cannot reach agreement 
regarding the hospital's provision of services under the plan. As 
described in more detail under the Subpart C preamble section, if the 
hospital's participation is ``essential'' to meeting a plan's network 
adequacy requirement, and the hospital can demonstrate to us that its 
costs are higher than the normal Part A payment it receives, then the 
MA plan can pay the normal amount and the network adequacy fund will 
pay the difference. The total amount available nationally for this 
purpose is $25 million in 2006 (rising annually at the hospital market 
basket rate).
    This provision will most likely apply to small towns and rural 
areas, particularly if such areas are served by only one hospital. It 
is impossible at this time to predict the frequency with which this 
situation will arise, since that depends on future bargaining among 
plans and hospitals, and on hospitals' ability to demonstrate excess 
costs. Since the hospitals benefiting would otherwise serve Medicare 
enrollees at Medicare rates, the financial effects of this program on 
hospitals should never be negative, and qualifying hospitals will 
obtain higher payments. Likewise, by allowing regional plans to meet 
their network requirements at a reasonable cost the effects on them are 
positive. We note that over 700 rural hospitals are already paid at 
rates somewhat higher than would otherwise be applicable under 
Medicare's hospital payment rules. Some of these would be candidates 
for ``essential'' hospital payments (although the eligibility criteria 
are different). Although there are 700 such hospitals, they are small 
hospitals in sparsely inhabited rural areas and account for only about 
one

[[Page 4703]]

percent of Medicare hospital payments. The pattern under the essential 
hospital program is likely to be similar.
5. Medical Savings Accounts
    These regulations also change the rules for Medical Savings 
Accounts (MSAs), which are high deductible plans. This provides new 
opportunities for insurance firms to participate in Medicare Advantage. 
High deductible plans are increasingly being offered in the under age 
65 market by large insurance firms. As discussed previously in this 
Preamble, we are implementing the statutorily defined changes (at 
section 233 of the MMA), which are intended to make MSAs a viable 
option for beneficiaries. We are also amending the existing rules in 
several places to remove requirements that would be inappropriate if 
applied to MSAs.
6. Employer Sponsored Plans
    The MMA adds new authority for employers and unions to sponsor 
plans for their employees and former employees, or members. Previously 
they could sponsor plans through an M+C organization; the statute gives 
them the flexibility to sponsor plans directly. The statute and the 
regulation provide for waiver or modification of any requirement under 
Part C or Part D that would hinder the design of, the offering of, or 
the enrollment in employer or union-sponsored plans.
7. Other Requirements in the Regulatory Flexibility Act
    The RFA lists five general requirements for a FRFA and four 
categories of burden reducing alternative to be considered. It also 
defines as a small entity a ``small governmental jurisdiction'' whose 
area has a population of less than fifty thousand. We anticipate no 
consequential effects of these regulations on small governmental 
jurisdictions. We know of no relevant Federal rules that duplicate, 
overlap, or conflict with the rule (which in any event amends an 
existing rule that is not duplicated or overlapped by other rules). The 
analysis above, taken together with the rest of this preamble, 
addresses all these general requirements.
    We have also sought both to avoid imposing new burdens, and to 
ameliorate existing burdens, as discussed throughout this analysis. 
Throughout this preamble we identify a number of changes that would 
lessen the burden of the existing MA rules.
    Comment: In response to our desire to know of any small businesses 
or entities affected by these regulations whose concerns might not have 
been addressed, a number of commenters stated that CMS failed to 
address issues related to the health care needs of AI/AN.
    Response: This concern is addressed in various sections of the 
preamble language dealing with specific issues as they relate to AI/AN 
(specifically in subparts A, B, C and F). As noted in those sections, 
where the statute permits us to do so, we have taken into consideration 
issues raised by commenters having to do with the special needs of AI/
AN populations, their use of IHS providers and the reimbursement rules 
and cost sharing requirements for such providers, and outreach issues 
related to such populations.
    The preamble to subpart A addressed the comments asking (1) that 
IHS services be included within the definition of basic services; (2) 
that we include as SNPs those plans that would enroll only AI/AN 
beneficiaries; and (3) that we recognize that IHS, I/T/U Programs will 
face high costs related to outreach, education and enrollment because 
of the MMA. As stated in the preamble, we are unable to accept the 
commenters suggestions for the first two issues because there is no 
statutory authority to expand the definition of basic services as 
suggested, and there is no statutory authority for establishing AI/AN 
special needs plans. With regard to the third issue, we recognize this 
concern and state that we will continue to work with the IHS and other 
partners in identifying effective outreach and education strategies 
appropriate to AI/AN populations.
    Comments on subpart B asked that (1) we make exceptions for AI/AN 
beneficiaries when plans are closed for enrollment because of capacity 
waivers; (2) allow AI/AN beneficiaries to switch among types of plans 
outside of open enrollment periods; (3) have plans contact I/T/U if a 
plan intends to involuntarily disenroll an AI/AN enrollee; and (4) 
specify that outreach workers employed by IHS or tribal organizations 
not be prohibited from going door-to-door to assist AI/AN individuals 
in making health plan choices because of the prohibition on door-to-
door marketing. With regard to the first item, we do not believe it is 
appropriate to have exceptions to capacity waivers for particular 
categories of individuals because of the nature of capacity waivers, 
which are granted when an organization establishes that its provider 
network capacity is such that enrollment must be limited to a certain 
number of individuals. With respect to SEPs, the subpart B preamble 
language explains that specific SEPs are included in regulations if 
they are based on statutory provisions. Periodically, we establish SEPs 
based on special circumstances, and there may arise situations in which 
AI/AN populations may be subject to SEPs. On the question of 
involuntary disenrollment, the preamble states that the notification is 
to the individual who is the subject of the proposed disenrollment, and 
that to bring in other parties would be beyond the scope of the 
statutory provision. With regard to the prohibition on door-to-door 
marketing, the preamble notes that we understand this concern and will 
work with the IHS and tribal organizations to address the concern.
    Subpart C comments included requests that there be rules requiring 
``full reimbursement'' of IHS facilities and that there be a blanket 
waiver of cost sharing requirements for AI/AN enrollees of MA plans. 
Neither of these requests is possible within the scope of the statute. 
However, the rules that apply, for example, to non-network providers 
and the amount that must be paid to such providers, apply to IHS 
providers. With regard to cost sharing, although blanket waivers are 
not permissible, under current law and regulations cost sharing can be 
waived in individual cases under certain circumstances.
    The subpart C preamble also discusses a comment asking that we use 
the waiver authority of section 1857(i)(2) of the Act, as expanded by 
section 222(j)(2) of the MMA, to permit direct contracting with I/T/Us 
to sponsor MA plans exclusively designed for AI/AN beneficiaries. As 
stated in the subpart C discussion, the waiver authority applies only 
to employer- or union-sponsored health plans.
    In the subpart F preamble we note that we are considering possible 
options to facilitate the ability of AI/AN Tribes to use the option of 
allowing groups to pay the part B premium for individuals, which is 
suggested as a means of making it more likely that AI/AN beneficiaries 
will enroll in MA plans.
    L. Alternatives Considered
    In this section we discuss the impact of several issues in which we 
have made a choice among various policy options. We refer readers to 
the Notice of Proposed Rule Making, and other documents available from 
CMS, for a fuller discussion on the issue of the designation of 
regions. Readers are referred to the NPRM for a discussion of the 
effect of our decision to use a plan-specific versus statewide, area-
wide or region-wide risk adjustment to

[[Page 4704]]

determine plan rebates, and the effect of the payment adjustment 
relating to risk adjustment for bids that exceed the benchmark. Below 
is a discussion of the impact of our decision regarding the 
determination of the actuarial value of Medicare cost sharing as part 
of a health plan's bid, as well as a discussion of the potential impact 
of different approaches to intra-area geographic adjustment of payments 
when plans serve more than one county.
Designation of Regions
    The impact analysis for the proposed rule of August 3, 2004, noted 
that a major area in which CMS was given discretion was in the matter 
of designating the configuration of MA and PDP regions. The proposed 
rule impact analysis included a discussion of some of the issues 
related to the designation of MA regions (69 FR 46937). On December 6, 
2004, CMS announced the MA and PDP regions. The listing of the regions 
and material discussing the rationale for choosing the regions can 
found at http://www.cms.hhs.gov/medicarereform/mmaregions/. That site 
also contains links to sites containing research findings related to 
the designation of regions, and information concerning public meeting 
that were held on the subject of the regions (for example, http://www.cms.hhs.gov/medicarereform/mmaregions/All_Info_Materials.pdf). 
The impact analysis of the companion Title I final regulations contain 
an explanation of why there is a larger number of PDP regions than MA 
regions.
    As we have discussed in the explanation of projections, the 
enrollment and expenditure figures of Table 1 represent our best 
estimate of the effects of the law and regulations based on the regions 
as they have now been designated. The proposed rule assumed 15 regions, 
but with a greater number of MA regions, there is likely to be a 
smaller level of enrollment in regional plans.
Plan-Specific Versus Statewide, Area-Wide or Region-Wide Risk 
Adjustment to Determine Plan Rebates; Payment Adjustment Relating To 
Risk Adjustment For Bids That Exceed The Benchmark
    As noted previously in section I (Effect on the Federal 
Government), these issues were discussed at length in the proposed 
rule, with the conclusion being that the impact could not be quantified 
without knowing the risk distribution among the plans and their bids. 
Another issue that has an effect on expenditures is the payment 
adjustment relating to risk adjustment for bids that exceed the 
benchmark, previously discussed in section I, Effect on the Federal 
Government.
Actuarial Value of Medicare Cost Sharing as Part of Bid
    As explained in the preamble of this final rule in the discussion 
of subpart F, a number of alternatives were considered in determining 
how to compute an actuarially equivalent value of Medicare cost sharing 
as a component of a plan's bid for the basic Medicare benefit package 
(coverage of Medicare A and B services). Under the provisions of 
section 1854(a)(6)(A)(ii)(I) of the Act, one component of the bid is 
the proportion of ``such bid amount.attributable to.the provision of 
benefits under the original Medicare fee-for-service program option (as 
defined in section 1852(a)(1)(B)).'' Under section 1852(a)(1)(B), 
``benefits under the original Medicare fee-for-service program'' are 
defined as ``those items and services (other than hospice care) for 
which benefits are available under parts A and B to individuals 
entitled to benefits under part A and enrolled under part B, with cost-
sharing for those services as required under parts A and B or an 
actuarially equivalent level of cost-sharing as determined in this 
part.'' A number of alternatives are discussed in the preamble of the 
final rule and the proposed rule under subpart F.
    One alternative discussed would use a plan-specific determination 
of cost sharing which would have included a computation of any induced 
demand resulting from reduced cost sharing. That is, for purposes of 
comparison to the benchmark, a bid would have been made based on the 
cost sharing structure of FFS Medicare. To the extent that the Medicare 
cost sharing structure acts as a limit on utilization, a plan would 
require less revenue to provide Medicare A and B services as compared 
to a benefit package with a cost sharing structure less restrictive 
than that of FFS Medicare (the extreme case being, for example, a 
benefit package with no cost sharing on Part A and B benefits). The 
former, lower amount-the bid based on Medicare cost sharing-would be 
the amount to be compared to the benchmark to determine whether there 
were any savings that would be retained by the Government (25 percent 
of the savings, for local plans) or which would have to be passed on to 
the plan's enrollees (75 percent of the savings). If an organization 
decided to offer a benefit package with, for example, no cost sharing 
for Medicare-covered services, the proposed rule suggested that the 
supplemental benefits associated with such a benefit package would 
include not only the dollar value of reduced cost sharing (that is, the 
charges that would otherwise be the responsibility of the beneficiary 
are borne by the health plan), but also the dollar value of any 
additional utilization of Part A and B services which would not have 
arisen if there had been a Medicare-like cost sharing structure. In 
other words, because the benefit package being offered is ``richer'' or 
more costly than the benefit package that the Government asks plans to 
bid on (the Medicare Part A and B package with a specified level of 
cost sharing), one hundred percent of that cost must be borne by the 
plan and/or its enrollees. The cost to the beneficiary of such a 
package could be reduced by available rebate dollars, but the 
computation of the total rebate dollars would be based on a comparison 
between the benchmark and the plan-specific determination of the 
presumably lower-cost ``benefits under part A and.part B, with cost-
sharing for those services as required under Parts A and B.''
    The alternative chosen-which is to use a proportional method to 
determine the actuarial value of cost sharing for Part A and B services 
associated with a bid-does not involve a determination of induced 
utilization. The proportional method assigns cost sharing values to a 
bid in manner that is intended to closely approximate Medicare FFS cost 
sharing with respect to the expenditures for services that would be 
plan expenditures versus those (the cost sharing) that are beneficiary 
expenditures. It is not entirely clear whether having chosen this 
method rather than the plan-specific approach has the effect of 
reducing the amount of savings the Government would have retained. And 
if there is such a difference, we do not believe we are able to provide 
a reasonable dollar estimate of the effect.
    With regard to whether induced demand is an issue that would affect 
the determination of Government savings as just described, a number of 
commenters stated that induced demand does not arise in managed care 
plans because utilization is limited to necessary and appropriate 
services through the plan's utilization management practices. That is, 
changes in cost sharing would neither reduce nor increase utilization; 
they would only shift the source of provider revenue from the plan to 
the enrollee. As discussed in the preamble, this argument may be 
clearer for hospital services received through a plan, when 
discretionary hospitalizations may be limited because physicians admit 
patients, but for other service such as specialist physician services 
in ``open access'' plans there

[[Page 4705]]

would presumably be a utilization effect if, for example, copayments 
for specialist physician visits are far higher than copayments for 
primary care providers and a beneficiary is making a choice between 
visiting a specialist versus a primary care provider.
    As we note in the preamble, CMS will continue to examine the issue 
of the relationship between cost sharing and plan bids, and we may 
refine our approach in the future.
Geographic Adjustment of Payments
    Subpart G of the preamble contains a discussion of the manner in 
which we will implement the geographic adjustment of payments called 
for in section 1853(a)(1)(F) of the Act ``to take into account 
variations in MA local payment rates under this part among the 
different MA local areas.'' Under the bidding system effective in 2006, 
variations in payment rates among counties have to be taken into 
account through an adjustment process that is somewhat different from 
what occurs today when Medicare Advantage plans operate in more than 
one county. As previously noted, we will be using a geographic 
adjustment based on county-level MA payment rates, but will allow 
regional MA plans, on a case-by-case basis, to request to have their 
payments geographically adjusted at the county level using a plan-
determined statement of the relative costs the plan faces in different 
counties for the provision of Medicare-covered services. What follows 
is a general discussion of the two methods and the possible budget 
implications of one method versus another.
    Under the system in use in 2005 (as in prior years), the 
``geographic adjustment'' consists simply of paying the county MA rate 
adjusted by the demographic and risk characteristics of the individual 
beneficiary. To the extent that a plan's health care expenditures vary 
by county, this method of ``geographic adjustment'' entails a certain 
level of risk for a health plan with respect to any unanticipated costs 
incurred for (a) the provision of Medicare A and B benefits, to the 
extent that the plan's costs of providing A and B benefits vary from 
county to county, and (b) the provision of required extra benefits to 
the extent that the cost of such benefits vary by county, or-what is 
more likely-to the extent that the Medicare A and B cost and revenue 
projections, which form the basis of the determination of savings and 
the valuation of extra benefits, vary from actual A and B costs and 
revenues because of the actual enrollment distribution. The geographic 
adjustment system of 2006 and thereafter will have a different 
budgetary impact because of the manner in which rebates are paid for, 
and the impact may differ from today's methodology depending on the 
method used to accomplish the geographic adjustment.
    Today's method of ``geographic adjustment'' is illustrated in Table 
2. In this example, an organization is operating in three counties with 
the same benefit package offered in all counties. The first section of 
Table 2 shows the plan's projected enrollment, revenue needs, and 
ability to provide extra benefits based on the projected enrollment 
(the kind of information contained in the adjusted community rate 
proposal the plan submits to CMS under today's system). Although in one 
county, County A of the example, the plan's projected cost of providing 
the Medicare A and B benefit package exceeds the Medicare payment level 
($520 in costs versus a payment of $500), the ability of the plan to 
provide the Medicare A/B benefit package in other counties at a 
``cost'' below the level of the MA payment rate in the county enables 
the organization to provide extra benefits to each of its expected 
enrollees. That is, enrollees in one county are cross-subsidizing the 
costs of enrollees in other counties. Had this organization only 
contracted for County C, residents of that county would have received 
$100 in extra benefits. However, because there are three counties 
involved, and a certain enrollment distribution is assumed, County C 
enrollees will receive less in extra benefits, but they will receive 
the same amount as any other enrollee of the plan in the three-county 
area. This geographic cross-subsidization enables residents of some 
counties (in this case, the first two counties listed in Table 2) to 
receive extra benefits financed by revenues generated in a different 
county (County C, which enables County A residents to receive extra 
benefits, and enables County B enrollee to receive better benefits than 
they would otherwise receive under a single-county contract).

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BILLING CODE 4120-01-C

[[Page 4707]]

    Table 2 serves to illustrate the ``risk'' to the Government, and 
the risk to the plan, in the current system. If the actual enrollment 
had turned out to be the distribution in section II.a. of Table 2, the 
Government would have paid the plan more money because of the actual 
enrollment distribution coming from each county. In this example, the 
plan would have had excess revenue beyond that needed to provide the 
Medicare A and B benefits and the promised level of extra benefits. Had 
the plan predicted this enrollment distribution going into the contract 
year in its ACR submission, beneficiaries would have been entitled to 
extra benefits valued at $83 per month. (Under the current system, 
there is a limit to the Goverment's ``risk exposure'' in the case just 
described because county level payments for any enrollee cannot exceed 
the MA payment rate in each county.)
    Section II.b. of Table 2 shows a situation in which, because of the 
actual enrollment distribution, the plan incurs a loss both in the 
provision of A and B benefits and in providing the promised level of 
extra benefits. Plans can seek to protect themselves from this kind of 
risk by reducing their obligation to provide extra benefits. The plan 
can have an adjusted community rate filing showing that its required 
revenue matches the MA payment rates in each county, for example 
(though the stated inability to provide extra benefits may dampen 
enrollment, and the statement of revenue needs might be challenged in 
the ACR audit process). However, even with that approach to minimizing 
risk, if the figures in section II.b. of Table 2 accurately represent 
the plan's costs in each county, the plan will incur a loss just in 
providing Medicare A and B benefits, with the enrollment mix shown in 
the example. To avoid that kind of risk, what the MA organization might 
do is either not include the first county in its service area, or 
segment that county. Segmenting the county-establishing a separate 
``plan'' for the county-enables the organization to exclude the 
county's enrollees from the computation of extra benefits for the other 
counties and to have a separate determination of the Medicare benefit 
package to be offered in the individual county. (Such service area 
segmentation is not available to regional plans in the competitive 
bidding system, but the approach can still be used by MA local plans in 
2006 and thereafter.)
    The examples of Table 2 show extreme cases in which the actual 
enrollment ends up being significantly different from the projected 
distribution of enrollment by county. Once a plan has at least one 
year's experience as a contractor, there is a better basis for 
reviewing the enrollment projections of a plan to ensure that the 
projections are reasonable and that the plan is appropriately 
determining the level of benefits it should be providing to its 
enrollees. This will also be true in the new system as of 2006, when 
one aspect of the bid review process will be an evaluation of the 
reasonableness of a plan's projections. However, there is always likely 
to be some level of uncertainty in predicting a plan's enrollment 
distribution by county. The issue of geographic adjustment is 
especially important for regional plans that will be required to have a 
uniform benefit package and premium in a large region.
    The purpose of the equivalent of a bid under the ``old'' system was 
solely to determine whether there were any extra benefits available to 
beneficiaries, and what their Medicare premium would be. A bid under 
the new system serves that same purpose but it also can be thought of 
as the primary basis of payment for the provision of Medicare A and B 
services. Any rebate, for the provision of non-Medicare-covered 
benefits, is paid separately from the bid, and is not subject to 
geographic adjustment In the competitive bidding system of 2006 and 
thereafter, the Government is ``at risk'' for the cost of the rebate to 
the extent that the rebate amount would have been higher or lower 
because a plan's projected enrollment mix does not match its actual 
enrollment mix. Under the prior system, plans could be said to be at 
risk for the promised value of extra benefits incorporated in their 
bid: even though there might be significant changes in the county of 
residence of their actual enrollment compared to their projected 
enrollment, only the county-based Government payments could change. 
When the Government payments changed in tandem with the relative change 
in costs faced by the plan, the plan would remain whole with respect to 
its revenue needs for the provision of Medicare A and B benefits and, 
potentially, for the provision of any additional benefits. (Whether the 
plan would remain whole would also depend on the types of additional 
benefits being provided-for example, a fixed cost benefit such as a 
dollar reduction of the Part B premium, or a benefit with variable 
costs, such as the buy-down of cost sharing that can take the form of 
reduced coinsurance. Under the new system, the Government also limits 
its risk exposure by retaining 25 percent of plan savings.)
    For geographic adjustment in 2006, one of the alternatives 
considered, an adjustment based on the MA payment rates, is similar to 
today's system. This method allows us to adjust the service area-wide 
bid to arrive at the county MA rate, less the value of any rebate when 
a rebate is required. The rebate value that reduces the MA rate is 
``apportioned'' across all counties based on the plan's projected 
enrollment and based on the overall expected revenue that enabled the 
plan to offer a rebate (which is a function of the MA payment rate 
totaled across all counties, based on the enrollment projected in each 
county). When a plan provides a rebate, this method pays a percentage 
(always less than 100 percent) of the county MA payment rate, even 
though in a particular county the plan's costs of providing the Part A 
and B benefit might exceed the county MA payment. In that respect, this 
method is similar to the current method, which limits the Government's 
risk exposure to the level of the MA payment, or benchmark, in a given 
county.
    This adjustment is illustrated in Table 3. The bid is adjusted by 
the county-level, enrollment-weighted MA factors shown in Table 3. This 
operation ``returns'' the bid to the appropriate MA rate for that 
county, taking into account the level of rebate dollars determined on a 
plan-wide basis. (Note that unless the plan projects the same level of 
enrollment in each county of its service area, the MA factors for the 
plan are not the same as the simple relationship among MA payment 
levels in the plan's service area.)
    Under this method of geographic adjustment based on MA payment 
rates, the Government never pays more than the MA rate in a given 
county for the provision of Medicare A and B benefits. However, it is 
possible under the competitive bidding system for the Government to 
have higher per capita expenditures for an MA enrollee in a given 
county as compared to today's MA payment methodology, because of the 
manner in which rebate dollars are paid. In the competitive system of 
2006 and thereafter, the bid to benchmark comparison-a comparison based 
on projected enrollment-determines the rebate dollars (in the same 
manner that savings were determined in 2005, by comparing projected 
payment rates to projected revenue needs for Medicare A and B 
services). In 2006 and thereafter, regardless of the plan's actual 
enrollment distribution by county, the Government is obligated to pay 
the per capita amount of rebate dollars directly to the plans as a 
separate payment stream (or the Government withholds the amount for 
reduction of the Part B premium). That is, the rebate amount, as 
determined based on projected

[[Page 4708]]

numbers, is a fixed amount and is not geographically adjusted. In 2005 
and earlier years, there was no separate payment of savings dollars. 
Savings were financed out of the county MA rate, with plans receiving 
100 percent of the MA payment rate as the payment for the provision of 
both A and B benefits. The MA payment also financed the provision of 
any extra (non-Medicare) benefits the plan was obligated to provide if 
its projected average MA payment rate exceeded its adjusted community 
rate for the provision of Medicare A and B benefits. (For simplicity, 
these examples represent the situation of a multi-county local plan 
with enrollment of beneficiaries with a 1.0 risk score. A similar 
methodology would also apply to regional plans.)
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BILLING CODE 4120-01-C

[[Page 4710]]

    A different alternative method for geographic adjustment that was 
mentioned in the impact analysis of the NPRM, would emphasize the bid-
based nature of the new system (that is, plans are to be paid their 
bids for the provision of Medicare A and B services) and would 
recognize variation in plan costs among counties, as stated by the 
plans, for the provision of Medicare A and B benefits. Under this 
method, illustrated in Table 5, we would adjust the bid by a county-
level cost factor to arrive at the payment for each plan in each 
county. Under either system, the MA-based system or the plan-determined 
cost factor system, total payments to a plan in a given year would be 
the same to the extent that the plan's actual enrollment distribution 
across counties matched the projected enrollment distribution that 
formed the basis of any rebate determination. When the actual 
enrollment distribution differs from the projection, the Government 
payment to a plan might exceed the MA rate in a given county if the 
plan states that its costs in the county exceed the MA rate. However, 
in at least one county, we would pay less than the MA rate (and less 
than the MA-rate-based geographically adjusted amount of the 
alternative previously described, given that there has to be at least 
one county below the MA rate in order for the plan to have a rebate). 
This bid-based method of payment based on plan-determined relative 
costs makes plans whole with respect to their revenue needs for the 
provision of Medicare A and B services, unlike the MA-based system 
which can pay more or less than the plan needs for the provision of A 
and B services. With regard to rebate dollars, either method results in 
the plan being paid the stated cost of providing the required rebate, 
which should make the plan whole with respect to these expenditures 
unless there is geographic variation in the cost of providing the 
rebate (for example, cost sharing reductions as a rebate).

[[Page 4711]]

[GRAPHIC] [TIFF OMITTED] TR28JA05.005


[[Page 4712]]


    Table 5 below summarizes the examples of Tables 2, 3 and 4. The two 
different possible methods of geographic adjustment for 2006 discussed 
above have different results, but in each case there is a divergence 
only when the actual enrollment differs from the projected enrollment 
distribution, as previously noted. In certain cases, the plan-
determined index produces higher total Government expenditures than the 
MA payment-based index, while in other cases the opposite is true. Only 
the plan-determined index makes a plan whole with respect to its 
reported cost of providing benefits on a county-by-county basis. As is 
the case with today's payment system, enrollment distributions 
different from those projected in advance result in either revenue 
gains or revenue shortfalls. Compared to the current system of payment, 
the plan-determined index would appear to be particularly advantageous 
to plans in ensuring the avoidance of risk based on errors in 
enrollment projections. As previously noted, however, the MA-based 
index prevents Government payments in any county which would exceed the 
benchmark-which is a possibility for the plan-specified approach. 
Again, as previously noted, for there to be any projected rebate, there 
has to be at least one county in which plans costs (whether revealed or 
not) are below the benchmark, with such margins being used to cross-
subsidize other counties.
    One concern with the plan-specified system is the issue of whether 
it is more subject to gaming than the MA index approach. Either 
approach is gameable based on misstatements of enrollment projections 
in order to maximize profits. However, manipulation of the enrollment 
distribution, if it occurs, would likely be an issue only in the first 
year of contracting.
[GRAPHIC] [TIFF OMITTED] TR28JA05.006

BILLING CODE 4120-01-C

    The public comments on the method of geographic adjustment almost 
without exception favored the use of the MA rates as the basis for 
adjustment. Commenters stated that they favored using the MA rates 
because it promotes a level playing field among plans and because 
current plans are familiar with adjustments made on this basis (which 
is similar to today's method of adjustment). While we have accepted 
these comments and have decided to use the MA rates for geographic 
adjustment, we also believe that it is important to provide the option 
to regional plans, on a case-by-case basis, of using a plan-determined 
index for geographic adjustment. The purpose of allowing this is to 
encourage regional bids. As we have noted, local plans can fashion 
their own service areas and can pick and choose which counties they 
want to serve. In most cases, local plans are operating as Medicare 
plans in areas in which they have commercial operations and are 
therefore familiar with the market conditions that they face. This 
enables local plans to be able to project their costs (in relation to 
MA rates) and to make more reliable projections of enrollment in a 
given area. For regional plans, the law requires that they assume risk 
over a wide geographic area, because a regional plan must serve an 
entire MA region and not a subset of counties in the region. Regional 
plans are likely to be entering areas in which they have not had any 
Medicare involvement and may not have had any significant commercial 
presence (for example, in rural areas, where fewer people have employer 
group coverage).

M. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 6 we have 
prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of Title II of the MMA that 
are the subject of this regulation. The table provides our best 
estimate of the dollar amount of these transfers, expressed in 2001 
dollars, at three percent and seven percent discount rates.

[[Page 4713]]

    All expenditures are classified as transfers to health plans. As 
previously explained, a large share of these expenditures would be used 
for the provisions of extra
    benefits and reduced cost sharing for beneficiaries enrolled in 
private plans. (Note that this information, as it appeared in Table 12 
of the August 3, 2004 proposed rule did not contain annualized figures. 
The figures were total figures for the 2004 to 2009 period.)

   Table 6. Accounting Statement: Classification of Expenditures, 2004
                Through 2009 (2001 Dollars, in Millions)
Three Percent Annual Discount Rate
------------------------------------------------------------------------
TRANSFERS
------------------------------------------------------------------------
Annualized Monetized Transfers       2,742
------------------------------------------------------------------------
From Whom To Whom?                   Federal Government To Private Plans
------------------------------------------------------------------------
Seven Percent Annual Discount Rate
------------------------------------------------------------------------
TRANSFERS
------------------------------------------------------------------------
Annualized Monetized Transfers       2,711
------------------------------------------------------------------------
From Whom To Whom?                   Federal Government To Private Plans
------------------------------------------------------------------------

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

List of Subjects

42 CFR Part 417

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

42 CFR Part 422

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

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

0
1. The authority citation for part 417 continues to read as follows:

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

Subpart J--Qualifying Conditions for Medicare Contracts

0
2. Amend Sec.  417.402 by--
    A. Revising paragraph (b).
    B. Adding paragraph (c).
    The revision and addition read as follows:


Sec.  417.402   Effective date of initial regulations.

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

Subpart Q--Beneficiary Appeals

0
3. Section 417.600 is revised to read as follows:


Sec.  417.600  Basis and scope.

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


Sec.  417.602 through Sec.  417.638   [Removed]

0
4. Sections 417.602 through 417.638 are removed.

Subpart U--Health Care Prepayment Plans

0
5. Amend Sec.  417.832 by-
    A. Revising paragraph (c).
    B. Adding paragraph (d).
    The revision and addition read as follows:


Sec.  417.832   Applicability of requirements and procedures.

* * * * *
    (c) The provisions of part 405 dealing with the representation of 
parties apply to organization determinations and appeals.
    (d) The provisions of part 405 dealing with administrative law 
judge hearings, Medicare Appeals Council review, and judicial review 
are applicable, unless otherwise provided.

0
6. Section 417.840 is revised to read as follows:


Sec.  417.840  Administrative review procedures.

    The HCPP must apply Sec.  422.568 through Sec.  422.619 of this 
chapter to

[[Page 4714]]

organization determinations that affect its Medicare enrollees, and to 
reconsiderations, hearings, Medicare Appeals Council review, and 
judicial review of those organization determinations.

PART 422--MEDICARE ADVANTAGE PROGRAM

0
7. The authority citation for part 422 continues to read as follows:

    Authority:  Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
0
8. Revise the heading of part 422 to read as set forth above.

Subpart A--General Provisions

0
9. Amend Sec.  422.1(a) by adding the following statutory basis in 
numerical order:


Sec.  422.1   Basis and scope.

    (a) * * *
    1858--Special rules for MA Regional Plans.
* * * * *

0
10. Amend Sec.  422.2 by-
    A. Removing the definitions of ``ACR,'' ``Additional benefits,'' 
``Adjusted community rate,'' and ``M+C.''
    B. Revising the definitions of ``Basic benefits,'' ``Benefits,'' 
``Mandatory supplemental benefits,'' and ``Service area.''
    C. Adding the definitions of ``Institutionalized,''
    ``MA,'' ``MA local area,'' ``MA local plan,'' ``MA-Prescription 
drug plan,'' ``MA regional plan,'' ``Prescription drug plan (PDP),'' 
``Prescription drug plan (PDP) sponsor,'' ``Special needs individual,'' 
and ``Specialized MA plans for special needs individuals.''
    D. In the definitions of ``M+C eligible individual,'' ``M+C 
organization,'' ``M+C plan,'' and ``M+C plan enrollee,'' ``M+C'' is 
removed each place it appears and ``MA'' is added in its place.
    E. Amending the definition of ``Religious and Fraternal Benefit 
(RFB) Society'' by removing the words ``Religious and Fraternal'' and 
by adding the words ``Religious Fraternal'' in their place.
0
The revisions and additions read as follows:


Sec.  422.2   Definitions.

* * * * *
    Basic benefits means all Medicare-covered benefits (except hospice 
services).
    Benefits means health care services that are intended to maintain 
or improve the health status of enrollees, for which the MA 
organization incurs a cost or liability under an MA plan (not solely an 
administrative processing cost). Benefits are submitted and approved 
through the annual bidding process.
* * * * *
    Institutionalized means for the purpose of defining a special needs 
individual, an MA eligible individual who continuously resides or is 
expected to continuously reside for 90 days or longer in a long-term 
care facility which is a skilled nursing facility (SNF) nursing 
facility (NF); SNF/NF; an intermediate care facility for the mentally 
retarded (ICF/MR); or an inpatient psychiatric facility.
* * * * *
    MA stands for Medicare Advantage.
    MA local area is defined in Sec.  422.252.
    MA local plan means an MA plan that is not an MA regional plan.
    MA-Prescription drug (PD) plan means an MA plan that provides 
qualified prescription drug coverage under Part D of the Social 
Security Act.
    MA regional plan means a coordinated care plan structured as a 
preferred provider organization (PPO) that serves one or more entire 
regions. An MA regional plan must have a network of contracting 
providers that have agreed to a specific reimbursement for the plan's 
covered services and must pay for all covered services whether provided 
in or out of the network.
    Mandatory supplemental benefits means health care services not 
covered by Medicare that an MA enrollee must accept or purchase as part 
of an MA plan. The benefits may include reductions in cost sharing for 
benefits under the original Medicare fee for service program and are 
paid for in the form of premiums and cost sharing, or by an application 
of the beneficiary rebate rule in section 1854(b)(1)(C)(ii)(I) of the 
Act, or both.
* * * * *
    Prescription drug plan (PDP). PDP has the definition set forth in 
Sec.  423.272 of this chapter.
    Prescription drug plan (PDP) sponsor. A prescription drug plan 
sponsor has the definition set forth in Sec.  423.2 of this chapter.
* * * * *
    Service area means a geographic area that for local MA plans is a 
county or multiple counties, and for MA regional plans is a region 
approved by CMS within which an MA-eligible individual may enroll in a 
particular MA plan offered by an MA organization. Each MA plan must be 
available to all MA-eligible individuals within the plan's service 
area. In deciding whether to approve an MA plan's proposed service 
area, CMS considers the following criteria:
    (1) For local MA plans:
    (i) Whether the area meets the ``county integrity rule'' that a 
service area generally consists of a full county or counties.
    (ii) However, CMS may approve a service area that includes only a 
portion of a county if it determines that the ``partial county'' area 
is necessary, nondiscriminatory, and in the best interests of the 
beneficiaries. CMS may also consider the extent to which the proposed 
service area mirrors service areas of existing commercial health care 
plans or MA plans offered by the organization.
    (2) For all MA coordinated care plans, whether the contracting 
provider network meets the access and availability standards set forth 
in Sec.  422.112. Although not all contracting providers must be 
located within the plan's service area, CMS must determine that all 
services covered under the plan are accessible from the service area.
    (3) For MA regional plans, whether the service area consists of the 
entire region.
    Special needs individual means an MA eligible individual who is 
institutionalized, as defined above, is entitled to medical assistance 
under a State plan under title XIX, or has a severe or disabling 
chronic condition(s) and would benefit from enrollment in a specialized 
MA plan.
    Specialized MA Plans for Special Needs Individuals means a MA 
coordinated care plan that exclusively enrolls or enrolls a 
disproportionate percentage of special needs individuals as set forth 
in Sec.  422.4(a)(1)(iv) and that, beginning January 1, 2006, provides 
Part D benefits under part 423 of this chapter to all enrollees; and 
which has been designated by CMS as meeting the requirements of a MA 
SNP as determined on a case-by-case basis using criteria that include 
the appropriateness of the target population, the existence of clinical 
programs or special expertise to serve the target population, and 
whether the proposal discriminates against sicker members of the target 
population.

0
11. Amend Sec.  422.4 by-
    A. Revising the section heading.
    B. Revising paragraph (a)(1)(iii).
    C. Redesignating paragraph (a)(1)(iv) as paragraph
    (a)(1)(v).
    D. Adding a new paragraph (a)(1)(iv).
    E. Revising newly redesignated paragraph (a)(1)(v).
    F. Removing paragraph (a)(2)(ii).

[[Page 4715]]

    G. Redesignating paragraph (a)(2)(iii) as paragraph (a)(2)(ii).
    H. Adding a new paragraph (c).
0
The revisions and additions read as follows:


Sec.  422.4  Types of MA plans.

    (a) * * *
    (1) * * *
    (iii) Coordinated care plans include plans offered by health 
maintenance organizations (HMOs), provider-sponsored organizations 
(PSOs), regional or local preferred provider organizations (PPOs) as 
specified in paragraph (a)(1)(v) of this section, and other network 
plans (except MSA and PFFS plans).
    (iv) A specialized MA plan for special needs individuals (SNP) 
includes any type of coordinated care plan that meets CMS'SNP 
requirements and either--
    (A) Exclusively enrolls special needs individuals as defined in 
Sec.  422.2; or
    (B) Enrolls a greater proportion of special needs individuals than 
occur nationally in the Medicare population as defined by CMS.
    (v) A PPO plan is a plan that has a network of providers that have 
agreed to a contractually specified reimbursement for covered benefits 
with the organization offering the plan; provides for reimbursement for 
all covered benefits regardless of whether the benefits are provided 
within the network of providers; and, only for purposes of quality 
assurance requirements in Sec.  422.152(e), is offered by an 
organization that is not licensed or organized under State law as an 
HMO.
* * * * *
    (c) Rule for MA Plans' Part D coverage.
    (1) Coordinated care plans. In order to offer an MA coordinated 
care plan in an area, the MA organization offering the coordinated care 
plan must offer qualified Part D coverage meeting the requirements in 
Sec.  423.104 of this chapter in that plan or in another MA plan in the 
same area.
    (2) MSAs. MA organizations offering MSA plans are not permitted to 
offer prescription drug coverage, other than that required under Parts 
A and B of Title XVIII of the Act.
    (3) Private Fee-For-Service. MA organizations offering private fee-
for-service plans can choose to offer qualified Part D coverage meeting 
the requirements in Sec.  423.104 in that plan.


Sec.  422.6  [Removed]

0
12. Remove Sec.  422.6.


Sec.  422.8   [Removed]

0
13. Remove Sec.  422.8.


Sec.  422.10   [Redesignated as Sec.  422.6]

0
14. Redesignate Sec.  422.10 as Sec.  422.6 and amend newly 
redesignated Sec.  422.6 by-
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
    D. Revising paragraph (d)(2)(ii).
    E. Revising paragraph (e).
    F. Revising paragraph (f)(1).
    G. Revising paragraph (f)(2)
    H. Revising paragraph (f)(3).
0
The revisions read as set forth below:


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

    (a) Basis and scope. This section implements that portion of 
section 1857 of the Act that pertains to cost-sharing in enrollment-
related costs. It sets forth the procedures that CMS follows to 
determine the aggregate annual ``user fee'' to be contributed by MA 
organizations and PDP sponsors under Medicare Part D and to assess the 
required user fees for each MA plan offered by MA organizations and PDP 
sponsors.
    (b) Purpose of assessment. Section 1857(e)(2) of the Act authorizes 
CMS to charge and collect from each MA plan offered by an MA 
organization its pro rata share of fees for administering section 1851 
of the Act (relating to dissemination of enrollment information), and 
section 4360 of the Omnibus Budget Reconciliation Act of 1990 (relating 
to the health insurance counseling and assistance program) and section 
1860D-1(c) of the Act (relating to dissemination of enrollment 
information for the drug benefit).
* * * * *
    (d) * * *
    (2) * * *
    (ii) For fiscal year 2006 and each succeeding year, $200 million, 
the applicable portion (as defined in paragraph (e) of this section) of 
$200 million.
    (e) Applicable portion. In this section, the term ``applicable 
portion'' with respect to an MA plan means, for a fiscal year, CMS's 
estimate of Medicare Part C and D expenditures for those MA 
organizations as a percentage of all expenditures under title XVIII and 
with respect to PDP sponsors, the applicable portion is CMS's estimate 
of Medicare Part D prescription drug expenditures for those PDP 
sponsors PDP sponsors as a percentage of all expenditures under title 
XVIII.
    (f) Assessment methodology. (1) The amount of the applicable 
portion of the user fee each MA organization and PDP sponsor must pay 
is assessed as a percentage of the total Medicare payments to each 
organization. CMS determines the annual assessment percentage rate 
separately for MA organizations and for PDPs using the following 
formula:
    (i) The assessment formula for MA organizations (including MA-PD 
plans):
    C divided by A times B where--
    A is the total estimated January payments to all MA organizations 
subject to the assessment;
    B is the 9-month (January through September) assessment period; and
    C is the total fiscal year MA organization user fee assessment 
amount determined in accordance with paragraph (d)(2) of this section.
    (ii) The assessment formula for PDPs:
    A is the total estimated January payments to all PDP sponsors 
subject to the assessment;
    B is the 9-month (January through September) assessment period; and
    C is the total fiscal year PDP sponsor's user fee assessment amount 
determined in accordance with paragraph (d)(2) of this section.
    (2) CMS determines each MA organization's and PDP sponsor's pro 
rata share of the annual fee on the basis of the organization's 
calculated monthly payment amount during the 9 consecutive months 
beginning with January. CMS calculates each organization's monthly pro 
rata share by multiplying the established percentage rate by the total 
monthly calculated Medicare payment amount to the organization as 
recorded in CMS's payment system on the first day of the month.
    (3) CMS deducts the organization's fee from the amount of Federal 
funds otherwise payable to the MA organization or PDP sponsor for that 
month.
* * * * *

Subpart B--Eligibility, Election, and Enrollment

0
15. Amend Sec.  422.50 by-
    A. Revising the section heading.
    B. Adding introductory text.
    C. Amending paragraph (a)(2)(i) by removing the word ``and'' from 
the end of the paragraph.
    D. Amending paragraph (a)(2)(ii) by removing the period from the 
end of the paragraph and by adding ``; and'' in its place.
    E. Adding paragraph (a)(2)(iii).
    F. Revising paragraph (a)(5).
0
The revisions and addition read as follows:


Sec.  422.50   Eligibility to elect an MA plan.

    For this subpart, all references to an MA plan include MA-PD and 
both MA local and MA regional plans, as defined

[[Page 4716]]

in Sec.  422.2 unless specifically noted otherwise.
    (a) * * *
    (2) * * *
    (iii) An individual with end-stage renal disease may elect an MA 
special needs plan as defined in Sec.  422.2, as long as that plan has 
opted to enroll ESRD individuals.
* * * * *
    (5) Completes and signs an election form or completes another CMS-
approved election method offered by the MA organization and provides 
information required for enrollment; and
* * * * *

0
16. Add Sec.  422.52 to read as follows:


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

    (a) General rule. In order to elect a specialized MA plan for a 
special needs individual (Special Needs MA plan, or SNP), the 
individual must meet the eligibility requirements specified in this 
section.
    (b) Basic eligibility requirements. Except as provided in paragraph 
(c) of this section, to be eligible to elect an SNP, an individual 
must:
    (1) Meet the definition of a special needs individual, as defined 
at Sec.  422.2;
    (2) Meet the eligibility requirements for that specific SNP; and
    (3) Be eligible to elect an MA plan under Sec.  422.50.
    (c) Exception to Sec.  422.50. CMS may waive Sec.  422.50(a)(2) 
concerning the exclusion of persons with ESRD.
    (d) Deeming continued eligibility. If an SNP determines that the 
enrollee no longer meets the eligibility criteria, but can reasonably 
be expected to again meet that criteria within a 6-month period, the 
enrollee is deemed to continue to be eligible for the MA plan for a 
period of not less than 30 days but not to exceed 6 months.
    (e) Restricting Enrollment. An SNP must restrict future enrollment 
to only special needs individuals as established under Sec.  422.2.
    (f) Exceptions. (1) As specified in Sec.  422.4, CMS may designate 
certain MA plans that disproportionately serve special needs 
individuals, as defined in Sec.  422.2 as SNPs.
    (2) Individuals already enrolled in an MA plan that CMS 
subsequently designates as an SNP may continue to be enrolled in the 
plan and may not be involuntarily disenrolled because they do not meet 
the definition of special needs individuals in Sec.  422.2.

0
17. Amend Sec.  422.54 by-
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
    D. Revising paragraph (c)(1)(ii).
    E. Revising paragraph (c)(2).
    F. Revising paragraph (d)(3).
0
The revisions read as follows:


Sec.  422.54   Continuation of enrollment for MA local plans.

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

0
18. Amend Sec.  422.56 by-
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
0
The revisions read as follows:


Sec.  422.56   Enrollment in an MA MSA plan.

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

0
19. Amend Sec.  422.60 by-
    A. Revising paragraph (b)(1).
    B. Revising paragraph (b)(3).
    C. Revising the heading of paragraph (c).
    D. Revising paragraph (c)(1).
    E. Revising paragraph (d).
    F. Revising paragraph (e).
    G. Revising paragraph (f)(1).
    H. Revising paragraph (f)(3).
0
The revisions read as follows:


Sec.  422.60  Election process.

* * * * *
    (b) Capacity to accept new enrollees. (1) MA organizations may 
submit information on enrollment capacity of plans.
* * * * *
    (3) CMS considers enrollment limit requests for an MA plan service 
area, or a portion of the plan service area, only if the health and 
safety of beneficiaries is at risk, such as if the provider network is 
not available to serve the enrollees in all or a portion of the service 
area.
    (c) Election forms and other election mechanisms. (1) The election 
must comply with CMS instructions regarding content and format and be 
approved by CMS as described in Sec.  422.80. The election must be 
completed by the MA eligible individual (or the individual who will 
soon become eligible to elect an MA plan) and include authorization for 
disclosure and exchange of necessary information between the U.S. 
Department of Health and Human Services and its designees and the MA 
organization. Persons who assist beneficiaries in completing forms must 
sign the form, or through other approved mechanisms, indicate their 
relationship to the beneficiary.
* * * * *
    (d) When an election is considered to have been made. An election 
in an MA plan is considered to have been made on the date the completed 
election is received by the MA organization.
    (e) Handling of elections. The MA organization must have an 
effective system for receiving, controlling, and processing elections. 
The system must

[[Page 4717]]

meet the following conditions and requirements:
    (1) Each election is dated as of the day it is received in a manner 
acceptable to CMS.
    (2) Elections are processed in chronological order, by date of 
receipt.
    (3) The MA organization gives the beneficiary prompt notice of 
acceptance or denial in a format specified by CMS.
    (4) If the MA plan is enrolled to capacity, it explains the 
procedures that will be followed when vacancies occur.
    (5) Upon receipt of the election, or for an individual who was 
accepted for future enrollment from the date a vacancy occurs, the MA 
organization transmits, within the timeframes specified by CMS, the 
information necessary for CMS to add the beneficiary to its records as 
an enrollee of the MA organization.
    (f) Exception for employer group health plans. (1) In cases in 
which an MA organization has both a Medicare contract and a contract 
with an employer group health plan, and in which the MA organization 
arranges for the employer to process elections for Medicare-entitled 
group members who wish to enroll under the Medicare contract, the 
effective date of the election may be retroactive. Consistent with 
Sec.  422.250(b), payment adjustments based on a retroactive effective 
date may be made for up to a 90-day period.
* * * * *
    (3) Upon receipt of the election from the employer, the MA 
organization must submit the enrollment within timeframes specified by 
CMS.

0
20. Amend Sec.  422.62 by-
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b) introductory text.
    D. Revising the heading of paragraph (d).
    E. Revising paragraph (d)(1).
    F. Removing paragraph (d)(2)(i)(A).
    G. Redesignating paragraph (d)(2)(i)(B) as paragraph (d)(2)(i)(A).
    H. Redesignating paragraph (d)(2)(i)(C) as paragraph (d)(2)(i)(B).
0
The revisions and addition read as follows:


Sec.  422.62   Election of coverage under an MA plan.

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

[[Page 4718]]

elect an MA plan and who is institutionalized, as defined by CMS, is 
not limited (except as provided for in paragraph (d) of this section 
for MA MSA plans) in the number of elections or changes he or she may 
make. Subject to the MA plan being open to enrollees as provided under 
Sec.  422.60(a)(2), an MA eligible institutionalized individual may at 
any time elect an MA plan or change his or her election from an MA plan 
to original Medicare, to a different MA plan, or from original Medicare 
to an MA plan.
    (b) Special election periods. An individual may at any time (that 
is, not limited to the annual coordinated election period) discontinue 
the election of an MA plan offered by an MA organization and change his 
or her election, in the form and manner specified by CMS, from an MA 
plan to original Medicare or to a different MA plan under any of the 
following circumstances:
* * * * *
    (d) Special rules for MA MSA plans--(1) Enrollment. An individual 
may enroll in an MA MSA plan only during an initial coverage election 
period or annual coordinated election period described in paragraphs 
(a)(1) and (a)(2) of this section.
* * * * *

0
21. Amend Sec.  422.66 by-
    A. Revising the section heading.
    B. Revising paragraph (b)(1)(i).
    C. Revising paragraph (b)(1)(ii).
    D. Revising paragraph (b)(3)(ii).
    E. Revising paragraph (b)(3)(iii) introductory text.
    F. Revising paragraph (d)(5).
    G. Revising paragraph (e).
    H. Revising paragraph (f)(2).
0
The revisions and additions read as follows:


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

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

0
22. Amend Sec.  422.68 by revising paragraph (b) to read as follows:


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

* * * * *
    (b) Annual coordinated election periods. For an election or change 
of election made during the annual coordinated election period as 
described in Sec.  422.62(a)(2)(i), coverage is effective as of the 
first day of the following calendar year except that for the annual 
coordinated election period described in Sec.  422.62(a)(2)(ii), 
elections made after December 31, 2005 through May 15, 2006 are 
effective as of the first day of the first calendar month following the 
month in which the election is made.
* * * * *

0
23. Amend Sec.  422.74 by-
    A. Revising the section heading.
    B. Revising paragraph (b)(1)(ii).
    C. Adding paragraph (b)(2)(iv).
    D. Revising paragraph (c)(1).
    E. Revising paragraph (d)(1).
    F. Revising paragraph (d)(2).
0
The revisions and addition read as follows:


Sec.  422.74   Disenrollment by the MA Organization.

* * * * *
    (b) * * *
    (1) * * *
    (ii) The individual has engaged in disruptive behavior specified at 
paragraph (d)(2) of this section.
* * * * *
    (2) * * *
    (iv) Individuals enrolled in a specialized MA plan for special 
needs individuals that exclusively serves and enrolls special needs 
individuals who no longer meet the special needs status of that plan 
(or deemed continued eligibility, if applicable).
    (c) * * *
    (1) Be provided to the individual before submission of the 
disenrollment to CMS; and
* * * * *
    (d) Process for disenrollment--(1) Monthly basic and supplementary 
premiums are not paid timely. An MA organization may disenroll an 
individual from the MA plan for failure to pay basic and supplementary 
premiums under the following circumstances:
    (i) The MA organization can demonstrate to CMS that it made 
reasonable efforts to collect the unpaid premium amount, including:
    (A) Alerting the individual that the premiums are delinquent;
    (B) Providing the individual with a grace period, that is, an 
opportunity to pay past due premiums in full. The length of the grace 
period will be, at minimum, one month and will begin on the first day 
of the month for which the premium is unpaid.
    (C) Advising the individual that failure to pay the premiums by the 
end of the grace period will result in termination of MA coverage.
    (ii) The MA organization provides the enrollee with notice of 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section.

[[Page 4719]]

    (iii) If the enrollee fails to pay the premium for optional 
supplemental benefits but pays the basic premium and any mandatory 
supplemental premium, the MA organization has the option to discontinue 
the optional supplemental benefits and retain the individual as an MA 
enrollee.
    (2) Disruptive Behavior. (i) Definition of disruptive behavior. An 
MA plan enrollee is disruptive if his or her behavior substantially 
impairs the plan's ability to arrange for or provide services to the 
individual or other plan members. An individual cannot be considered 
disruptive if such 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. An 
organization may disenroll an individual whose behavior is disruptive 
as defined in 422.74(d)(2)(i) only after it meets the requirements 
described in this section and CMS has reviewed and approved the 
request.
    (iii) Effort to resolve the problem. The MA organization 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 and developmental disabilities. In addition, the MA 
organization must inform the individual of the right to use the 
organization's grievance procedures. The beneficiary has a right to 
submit any information or explanation that he or she may wish to the MA 
organization.
    (iv) Documentation. The MA organization must document the 
enrollee's behavior, its own efforts to resolve any problems, as 
described in paragraph (iii), and any extenuating circumstances. The MA 
organization may request from CMS the ability to decline future 
enrollment by the individual. The MA organization must submit this 
information and any documentation received by the beneficiary to CMS.
    (v) CMS review of the proposed disenrollment. CMS will review the 
information submitted by the MA organization and any information 
submitted by the beneficiary (which the MA organization must forward to 
CMS) to determine if the MA organization has fulfilled the requirements 
to request disenrollment for disruptive behavior. If the organization 
has fulfilled the necessary requirements, CMS will review 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 will ensure that staff with 
appropriate clinical or medical expertise review the case before making 
the final decision. The MA organization will be required to provide a 
reasonable accommodation, as determined by CMS, for the individual in 
such exceptional circumstances that CMS deems necessary. CMS will 
notify the MA organization within 5 working days after making its 
decision.
    (vi) Effective date of disenrollment. If CMS permits an MA 
organization to disenroll an individual for disruptive behavior, the 
termination is effective the first day of the calendar month after the 
month in which the MA organization gives the individual notice of the 
disenrollment that meets the requirements set forth in paragraph (c) of 
this section, unless otherwise determined by CMS.
* * * * *

0
24. Amend Sec.  422.80 by-
    A. Revising paragraph (a).
    B. Revising paragraph (e)(1)(ii).
    C. Revising paragraph (e)(1)(iii).
    D. Revising paragraph (e)(1)(iv).
    E. Revising paragraph (e)(1)(v).
    F. Adding paragraph (e)(1)(ix).
0
The revisions and additions read as follows:


Sec.  422.80  Approval of marketing materials and election forms.

    (a) CMS review of marketing materials. (1) Except as provided in 
paragraph (a)(2) of this section, an MA organization may not distribute 
any marketing materials (as defined in paragraph (b) of this section ), 
or election forms, or make such materials or forms available to 
individuals eligible to elect an MA organization unless--
    (i) At least 45 days (or 10 days if using marketing materials that 
use, without modification, proposed model language as specified by CMS) 
before the date of distribution the MA organization has submitted the 
material or form to CMS for review under the guidelines in paragraph 
(c); and
    (ii) CMS does not disapprove the distribution of new material or 
form.
    (2) The MA organization may distribute the marketing materials 5 
days following their submission to CMS if--
    (i)The MA organization is deemed by CMS to meet certain performance 
requirements established by CMS; or
    (ii)The MA organization certifies that in the case of certain 
marketing materials designated by CMS, it followed all applicable 
marketing guidelines or used model language specified by CMS without 
modification.
* * * * *
    (e) * * *
    (1) * * *
    (ii) Engage in any discriminatory activity, including targeted 
marketing to Medicare beneficiaries from higher income areas without 
making comparable efforts to enroll Medicare beneficiaries from lower 
income areas.
    (iii) Solicit Medicare beneficiaries door-to-door.
    (iv) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the MA organization. The MA organization 
may not claim it is recommended or endorsed by CMS or Medicare or the 
Department of Health and Human Services or that CMS or Medicare or the 
Department of Health and Human Services recommends that the beneficiary 
enroll in the MA plan. It may, however, explain that the organization 
is approved for participation in Medicare.
    (v) Distribute marketing materials for which, before expiration of 
the 45-day period (or 10 days as provided in paragraph (a)(1) of this 
section), the MA organization receives from CMS written notice of 
disapproval because it is inaccurate or misleading, or misrepresents 
the MA organization, its marketing representatives, or CMS.
* * * * *
    (ix) Engage in any other marketing activity prohibited by CMS in 
its marketing guidance.
* * * * *

Subpart C--Benefits and Beneficiary Protections


Sec.  422.100   [Amended]

0
25. Amend Sec.  422.100 by-
    A. Revising paragraph (b)(2).
    B. Revising paragraph (c)(1).
    C. Removing paragraph (e).
    D. Redesignating paragraph (f) as paragraph (e).
    E. Redesignating paragraph (g) as paragraph (f).
    F. Redesignating paragraph (h) as paragraph (g).
    G. Redesignating paragraph (i) as paragraph (h).
    H. Redesignating paragraph (j) as paragraph (i).
    I. Revising newly redesignated paragraph (f) introductory text.
    J. Revising newly redesignated paragraph (f)(2).
0
The revisions read as follows:

Subpart C--Benefits and Beneficiary Protections


Sec.  422.100   General requirements.

* * * * *
    (b) * * *

[[Page 4720]]

    (2) An MA plan (and an MA MSA plan, after the annual deductible in 
Sec.  422.103(d) has been met) offered by an MA organization satisfies 
paragraph (a) of this section with respect to benefits for services 
furnished by a noncontracting provider if that MA plan provides payment 
in an amount the provider would have received under original Medicare 
(including balance billing permitted under Medicare Part A and Part B).
    (c) ***
    (1) Basic benefits are all Medicare-covered services, except 
hospice services.
* * * * *
    (f) CMS review and approval of MA benefits. CMS reviews and 
approves MA benefits using written policy guidelines and requirements 
in this part and other CMS instructions to ensure that--
* * * * *
    (2) MA organizations are not designing benefits to discriminate 
against beneficiaries, promote discrimination, discourage enrollment or 
encourage disenrollment, steer subsets of Medicare beneficiaries to 
particular MA plans, or inhibit access to services; and
* * * * *

0
26. Amend Sec.  422.101 by-
    A. Revising paragraph (b)(2).
    B. Revising paragraph (b)(3) introductory text.
    C. Adding paragraph (b)(4).
    D. Adding paragraph (b)(5).
    E. Adding paragraph (d).
    F. Adding paragraph (e).
0
The revision and additions read as follows:


Sec.  422.101   Requirements relating to basic benefits.

* * * * *
    (b) * * *
    (2) General coverage guidelines included in original Medicare 
manuals and instructions unless superseded by regulations in this part 
or related instructions; and
    (3) Written coverage decisions of local Medicare contractors with 
jurisdiction for claims in the geographic area in which services are 
covered under the MA plan. If an MA plan covers geographic areas 
encompassing more than one local coverage policy area, the MA 
organization offering such an MA plan may elect to apply to plan 
enrollees in all areas uniformly the coverage policy that is the most 
beneficial to MA enrollees. MA organizations that elect this option 
must notify CMS before selecting the area that has local coverage 
policies that are most beneficial to enrollees as follows:
* * * * *
    (4) Instead of applying rules in paragraph (b)(3) of this section, 
and to the extent it exercises this option, an organization offering an 
MA regional plan in an MA region that covers more than one local 
coverage policy area must uniformly apply all of the local coverage 
policy determinations that apply in the selected local coverage policy 
area in that MA region to all parts of that same MA region. The 
selection of the single local coverage policy area's local coverage 
policy determinations to apply throughout the MA region is at the 
discretion of the MA regional plan and is not subject to CMS pre-
approval.
    (5) If an MA organization offering an MA local plan elects to 
exercise the option in paragraph (b)(3) of this section related to a 
local MA plan, or if an MA organization offering an MA regional plan 
elects to exercise the option in paragraph (b)(4) of this section 
related to an MA regional plan, then the MA organization must make 
information on the selected local coverage policy readily available, 
including through the Internet, to enrollees and health care providers.
* * * * *
    (d) Special cost-sharing rules for MA regional plans. In addition 
to the requirements in paragraph (a) through paragraph (c) of this 
section, MA regional plans must provide for the following:
    (1) Single deductible. MA regional plans, to the extent they apply 
a deductible, are only permitted to have only a single deductible 
related to combined Medicare Part A and Part B services (to the extent 
they have a deductible). Applicability of the single deductible may be 
differential for specific in-network services and may also be waived 
for preventative services or other items and services.
    (2) Catastrophic limit. MA regional plans are required to provide 
for a catastrophic limit on beneficiary out-of-pocket expenditures for 
in-network benefits under the original Medicare fee-for-service program 
(Part A and Part B benefits).
    (3) Total catastrophic limit. MA regional plans are required to 
provide a total catastrophic limit on beneficiary out-of-pocket 
expenditures for in-network and out-of-network benefits under the 
original Medicare fee-for-service program. This total out-of-pocket 
catastrophic limit, which would apply to both in-network and out-of-
network benefits under original Medicare, may be higher than the in-
network catastrophic limit in paragraph (d)(2) of this section, but may 
not increase the limit described in paragraph (d)(2) of this section.
    (4) Tracking of deductible and catastrophic limits and 
notification. MA regional plans are required to track the deductible 
(if any) and catastrophic limits in paragraphs (d)(1) through (d)(3) of 
this section based on incurred out-of-pocket beneficiary costs for 
original Medicare covered services, and are also required to notify 
members and health care providers when the deductible (if any) or a 
limit has been reached.
    (e) Other rules for MA regional plans. (1) MA regional plans are 
required to provide reimbursement for all covered benefits, regardless 
of whether those benefits are provided within or outside of the network 
of contracted providers.
    (2) In applying the actuarially equivalent level of cost-sharing 
with respect to MA bids related to benefits under the original Medicare 
program option as set forth at Sec.  422.256(b)(3), only the 
catastrophic limit on out-of-pocket expenses for in-network benefits in 
paragraph (d)(2) of this section will be taken into account.

0
27. Amend Sec.  422.102 by-
    A. Revising paragraph (a)(1).
    B. Revising paragraph (a)(3).
    C. Adding paragraph (a)(4).
0
The revisions and addition read as follows:


Sec.  422.102   Supplemental benefits.

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

0
28. Amend Sec.  422.103 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
0
The revisions read as follows:


Sec.  422.103   Benefits under an MA MSA plan.

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

0
29. Amend Sec.  422.105 by-

[[Page 4721]]

    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b).
0
The revisions read as follows:


Sec.  422.105   Special rules for self-referral and point of service 
option.

    (a) Self-referral. When an MA plan member receives an item or 
service of the plan that is covered upon referral or pre-authorization 
from a contracted provider of that plan, the member cannot be 
financially liable for more than the normal in-plan cost sharing, if 
the member correctly identified himself or herself as a member of that 
plan to the contracted provider before receiving the covered item or 
service, unless the contracted provider can show that the enrollee was 
notified prior to receiving the item or service that the item or 
service is covered only if further action is taken by the enrollee.
    (b) Point of service option. As a general rule, a POS benefit is an 
option that an MA organization may offer in an MA coordinated care plan 
to provide enrollees with additional choice in obtaining specified 
health care services. The organization may offer A POS option--
    (1) Before January 1, 2006, under a coordinated care plan as an 
additional benefit as described in section 1854(f)(1)(A) of the Act;
    (2) Under a coordinated care plan as a mandatory supplemental 
benefit as described in Sec.  422.102(a); or
    (3) Under a coordinated care plan as an optional supplemental 
benefit as described in Sec.  422.102(b).
    (4) An MA regional plan or local MA PPO is permitted to offer a 
POS-LIKE benefit as described in paragraphs (b)(2) or (b)(3) of this 
section as a supplemental benefit. An MA regional plan or local MA PPO 
may offer a POS-LIKE option as a supplemental benefit where cost 
sharing for out-of-network services is reduced, in a limited manner, 
for services obtained from out-of-network providers. Offering a POS-
LIKE supplemental benefit does not affect the MA regional plan's or 
local MA PPO's responsibility to provide reimbursement for all covered 
benefits, regardless of whether those benefits are provided within the 
network of contracted providers.
* * * * *

0
30. Amend Sec.  422.106 by-
    A. Revising the paragraph (c) heading.
    B. Revising paragraph (c)(2).
    C. Adding paragraph (d).
0
The revisions and addition read as follows:


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

* * * * *
    (c) Waiver or modification of contracts with MA organizations.
* * * * *
    (2) Approved waivers or modifications under this paragraph granted 
to any MA organization may be used by any other similarly situated MA 
organization in developing its bid.
    (d) Employer sponsored MA plans for plan years beginning on or 
after January 1, 2006. (1) CMS may waive or modify any requirement in 
this part or Part D that hinders the design of, the offering of, or the 
enrollment in, an MA plan (including an MA-PD plan) offered by one or 
more employers, labor organizations, or the trustees of a fund 
established by one or more employers or labor organizations (or 
combination thereof), or that is offered, sponsored or administered by 
an entity on behalf of one or more employers or labor organizations, to 
furnish benefits to the employers' employees, former employees (or 
combination thereof) or members or former members (or combination 
thereof) of the labor organizations. Any entity seeking to offer, 
sponsor, or administer such an MA plan described in this paragraph may 
request, in writing, from CMS, a waiver or modification of requirements 
in this part that hinder the design of, the offering of, or the 
enrollment in, such MA plan.
    (2) An MA plan described in this paragraph may restrict the 
enrollment of individuals in that plan to individuals who are 
beneficiaries and participants in that plan.
    (3) Approved waivers or modifications under this paragraph granted 
to any MA plan may be used by any other similarly situated MA plan in 
developing its bid.

0
31. Amend Sec.  422.108 by revising paragraph (f) to read as follows:


Sec.  422.108   Medicare secondary payer (MSP) procedures.

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

0
32. Amend Sec.  422.109 by-
    A. Revising paragraph (a)(2).
    B. Revising paragraph (c)(2)(iv).
    C. Revising paragraph (c)(3).
0
The revisions read as follows:


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

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

0
33. Amend Sec.  422.110 by-
    A. Revising paragraph (b).
    B. Removing paragraph (c).
0
The revision reads as follows:


Sec.  422.110   Discrimination against beneficiaries prohibited.

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


Sec.  422.111   [Amended]

0
34. Amend Sec.  422.111 by-
    A. Revising paragraph (b)(2) introductory text.

[[Page 4722]]

    B. Redesignating paragraph (b)(3) introductory text as paragraph 
(b)(3)(i) and revising it.
    C. Adding new paragraph (b)(3)(ii).
    D. Revising paragraph (b)(9).
    E. Adding paragraph (b)(11).
    F. Revising paragraph (c)(1).
    G. Revising paragraph (d)(2).
    H. Revising paragraph (e).
    I. Removing paragraph (f)(4).
    J. Removing paragraph (f)(6).
    K. Redesignating paragraph (f)(5) as paragraph (f)(4).
    L. Redesignating paragraph (f)(7) as paragraph (f)(5).
    M. Redesignating paragraph (f)(8) as paragraph (f)(6).
    N. Redesignating paragraph (f)(9) as paragraph (f)(7).
    O. Redesignating paragraph (f)(10) as paragraph (f)(8).
    P. Redesignating paragraph (f)(11) as paragraph (f)(9).
    Q. Revising newly redesignated paragraph (f)(5)(iv).
    R. Removing newly redesignated paragraph (f)(5)(v).
    S. Redesignating paragraph (f)(5)(vi) as paragraph (f)(5)(v).
    T. Redesignating paragraph (f)(5)(vii) as paragraph (f)(5)(vi).
    U. Redesignating paragraph (f)(5)(viii) as paragraph (f)(5)(vii).
    V. Revising newly redesignated paragraph (f)(9).
    W. Adding new paragraph (f)(10).
    X. Adding new paragraph (f)(11)
    Y. Adding new paragraph (f)(12)
0
The revisions and addition read as follows:


Sec.  422.111   Disclosure requirements.

* * * * *
    (b) * * *
    (2) Benefits. The benefits offered under a plan, including 
applicable conditions and limitations, premiums and cost-sharing (such 
as copayments, deductibles, and coinsurance) and any other conditions 
associated with receipt or use of benefits; and to the extent it offers 
Part D as an MD-PD plan, the information in Sec.  423.128 of this 
chapter; and for purposes of comparison-
* * * * *
    (3) Access. (i) The number, mix, and distribution (addresses) of 
providers from whom enrollees may reasonably be expected to obtain 
services; any out-of network coverage; any point-of-service option, 
including the supplemental premium for that option; and how the MA 
organization meets the requirements of Sec.  422.112 and Sec.  422.114 
for access to services offered under the plan.
    (ii) The process MA regional plan enrollees should follow to secure 
in-network cost sharing when covered services are not readily available 
from contracted network providers.
* * * * *
    (9) Quality improvement program. A description of the quality 
improvement program required under Sec.  422.152.
* * * * *
    (11) Catastrophic caps and single deductible. MA organizations 
sponsoring MA regional plans are required to provide enrollees a 
description of the catastrophic stop-loss coverage and single 
deductible (if any) applicable under the plan.
    (c) * * *
    (1) The information required in paragraph (f) of this section.
* * * * *
    (d) * * *
    (2) For changes that take effect on January 1, notify all enrollees 
at least 15 days before the beginning of the Annual Coordinated 
Election Period defined in section 1851(e)(3)(B) of the Act.
* * * * *
    (e) Changes to provider network. The MA organization must make a 
good faith effort to provide written notice of a termination of a 
contracted provider at least 30 calendar days before the termination 
effective date to all enrollees who are patients seen on a regular 
basis by the provider whose contract is terminating, irrespective of 
whether the termination was for cause or without cause. When a contract 
termination involves a primary care professional, all enrollees who are 
patients of that primary care professional must be notified.
    (f) * * *
    (5) * * *
    (iv) In the case of an MA MSA plan, the amount of the annual MSA 
deposit.
* * * * *
    (9) Supplemental benefits. Whether the plan offers mandatory and 
optional supplemental benefits, including any reductions in cost 
sharing offered as a mandatory supplemental benefit as permitted under 
section 1852(a)(3) of the Act (and implementing regulations at Sec.  
422.102) and the terms, conditions, and premiums for those benefits.
    (10) The names, addresses, and phone numbers of contracted 
providers from whom the enrollee may obtain in-network coverage in 
other parts of the service area.
    (11) If an MA organization exercises the option in Sec.  
422.101(b)(3) or (b)(4) related to an MA plan, then it must make the 
local coverage determination that applies to members of that plan 
readily available to providers, including through a web site on the 
Internet.
    (12) To the extent an MA organization has a web site or provides MA 
plan information through the Internet, then it must also post copies of 
its Evidence of Coverage, Summary of Benefits and information (names, 
addresses, phone numbers, specialty) on the network of contracted 
providers on an Internet web site. Such posting does not relieve the MA 
organization of its responsibility under Sec.  422.111(a) to provide 
hard copies to enrollees.


Sec.  422.112   [Amended]

0
35. Amend Sec.  422.112 by-
    A. Revising the heading of paragraph (a) and paragraph (a) 
introductory text.
    B. Revising paragraph (a)(1).
    C. Removing paragraph (a)(4).
    D. Redesignating paragraph (a)(5) as paragraph (a)(4).
    E. Redesignating paragraph (a)(6) as paragraph (a)(5).
    F. Redesignating paragraph (a)(7) as paragraph (a)(6).
    G. Redesignating paragraph (a)(8) as paragraph (a)(7).
    H. Redesignating paragraph (a)(9) as paragraph (a)(8).
    I. Redesignating paragraph (a)(10) as paragraph (a)(9).
    J. Revising the heading of paragraph (b) and paragraph (b) 
introductory text.
    K. Adding paragraph (c).
0
The revisions and addition read as follows:


Sec.  422.112   Access to services.

    (a) Rules for coordinated care plans. An MA organization that 
offers an MA coordinated care plan may specify the networks of 
providers from whom enrollees may obtain services if the MA 
organization ensures that all covered services, including supplemental 
services contracted for by (or on behalf of) the Medicare enrollee, are 
available and accessible under the plan. To accomplish this, the MA 
organization must meet the following requirements:
    (1) Provider network. (i) Maintain and monitor a network of 
appropriate providers that is supported by written agreements and is 
sufficient to provide adequate access to covered services to meet the 
needs of the population served. These providers are typically used in 
the network as primary care providers (PCPs), specialists, hospitals, 
skilled nursing facilities, home health agencies, ambulatory clinics, 
and other providers.
    (ii) Exception: MA regional plans, upon CMS pre-approval, can use 
methods other than written agreements to establish that access 
requirements are met.
* * * * *
    (b) Continuity of care. MA organizations offering coordinated care 
plans must ensure continuity of care and integration of services 
through

[[Page 4723]]

arrangements with contracted providers that include-
* * * * *
    (c) Essential hospital. An MA regional plan may seek, upon 
application to CMS, to designate a noncontracting hospital as an 
essential hospital as defined in section 1858(h) of the Act under the 
following conditions:
    (1) The hospital that the MA regional plan seeks to designate as 
essential is a general acute care hospital identified as a 
``subsection(d)'' hospital as defined in section 1886(d)(1)(B) of the 
Act.
    (2) The MA regional plan provides convincing evidence to CMS that 
the MA regional plan needs to contract with the hospital as a condition 
of meeting access requirements under this section.
    (3) The MA regional plan must establish that it made a ``good 
faith'' effort to contract with the hospital to be designated as an 
essential hospital and that the hospital refused to contract with it 
despite its ``good faith'' effort. A ``good faith'' effort to contract 
will be established to the extent that the MA regional plan can show it 
has offered the hospital a contract providing for the payment of rates 
in an amount no less than the amount the hospital would have received 
had payment been made under section 1886(d) of the Act.
    (4) The MA regional plan must establish that there are no competing 
Medicare participating hospitals in the area to which MA regional plan 
enrollees could reasonably be referred for inpatient hospital services.
    (5) The hospital that is to be designated as an essential hospital 
provides convincing evidence to CMS that the amounts normally payable 
under section 1886 of the Act (and which the MA regional plan has 
agreed to pay) will be less than the hospital's actual costs of 
providing care to the MA regional plan's enrollee.
    (6) If CMS determines the requirements in paragraphs (c)(1) through 
(c)(5) of this section have been met, it will make payment to the 
essential hospital in accordance with section 1858(h)(2) of the Act 
based on the order in which claims are received, as limited by the 
amounts specified in section 1858(h)(3) of the Act.
    (7) If CMS determines the requirements in paragraphs (c)(1) through 
(c)(4) of this section have been met, (and if they continue to be met 
upon annual renewal of the CMS contract with the MA organization 
offering the MA regional plan), then the hospital designated by the MA 
regional plan in paragraph (c)(1) of this section shall be ``deemed'' 
to be a network hospital to that MA regional plan based on the 
exception in paragraph (a)(1)(ii) of this section and normal in-network 
inpatient hospital cost sharing levels (including the catastrophic 
limit described in Sec.  422.101(d)(2)) shall apply to all plan members 
accessing covered inpatient hospital services in that hospital.

0
36. Amend Sec.  422.113 by-
    A. Revising paragraph (b)(2)(v).
    B. Revising paragraph (c)(2)(iv).
0
The revisions read as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (v) With a limit on charges to enrollees for emergency department 
services of $50 or what it would charge the enrollee if he or she 
obtained the services through the MA organization, whichever is less.
* * * * *
    (c) * * *
    (2) * * *
    (iv) Must limit charges to enrollees for post-stabilization care 
services to an amount no greater than what the organization would 
charge the enrollee if he or she had obtained the services through the 
MA organization. For purposes of cost sharing, post-stabilization care 
services begin upon inpatient admission.
* * * * *

0
37. Amend Sec.  422.114 by--
    A. Revising the section heading to read as set forth below.
    B. Adding paragraph (c) to read as follows:


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

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

0
38. Amend Sec.  422.133 by adding paragraph (b)(4) to read as follows:


Sec.  422.133   Return to home skilled nursing facility.

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

Subpart D--Quality Improvement

0
39. In subpart D, remove ``quality assurance'' wherever it appears and 
add in its place ``quality improvement.''

0
40. Revise Sec.  422.152 to read as follows:


Sec.  422.152   Quality improvement program.

    (a) General rule. Each MA organization (other than MA private-fee-
for-service and MSA plans) that offers one or more MA plans must have, 
for each of those plans, an ongoing quality improvement program that 
meets the applicable requirements of this section for the services it 
furnishes to its MA enrollees. As part of its ongoing quality 
improvement program, a plan must--
    (1) Have a chronic care improvement program that meets the 
requirements of paragraph (c) of this section concerning elements of a 
chronic care program;
    (2) Conduct quality improvement projects that can be expected to 
have a favorable effect on health outcomes and enrollee satisfaction, 
and meet the requirements of paragraph (d) of this section; and
    (3) Encourage its providers to participate in CMS and HHS quality 
improvement initiatives.
    (b) Requirements for MA coordinated care plans (except for regional 
MA plans) and including local PPO plans that are offered by 
organizations that are licensed or organized under State law as HMOs. 
An MA coordinated care plan's (except for regional PPO plans and local 
PPO plans as defined in paragraph (e) of this section) quality 
improvement program must--
    (1) In processing requests for initial or continued authorization 
of services, follow written policies and procedures that reflect 
current standards of medical practice.
    (2) Have in effect mechanisms to detect both underutilization and 
overutilization of services.
    (3) Measure and report performance. The organization offering the 
plan must do the following:
    (i) Measure performance under the plan, using the measurement tools 
required by CMS, and report its performance to CMS. The standard

[[Page 4724]]

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


Sec.  422.154   [Removed]

0
41. Remove Sec.  422.154.

0
42. Amend Sec.  422.156 by-
    A. Revising paragraph (b)(1).
    B. Adding paragraph (b)(7).
0
The revision and addition read as follows:


Sec.  422.156   Compliance deemed on the basis of accreditation.

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

Subpart E--Relationships With Providers


Sec.  422.202   [Amended]

0
43. In Sec.  422.202, amend paragraph (b) introductory text by removing 
``quality assurance'' and adding ``quality improvement'' in its place.


Sec.  422.204   [Amended]

0
44. In Sec.  422.204, amend paragraph (b)(2)(ii) by removing ``quality 
assurance'' and adding ``quality improvement'' in its place.

0
45. In Sec.  422.208, the following changes are made:
    A. Paragraph (c)(2) is revised.
    B. Paragraph (h) is removed.
    C. Paragraph (i) is redesignated as paragraph (h).
0
The revision reads as follows:


Sec.  422.208   Physician incentive plans: Requirements and 
limitations.

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

0
46. Section 422.210 is revised to read as follows:


Sec.  422.210   Assurances to CMS.

    Each organization will provide assurance satisfactory to the 
Secretary that the requirements of Sec.  422.208 are met.

0
47. In 422.214, the following changes are made:
    A. Paragraph (a)(1) is revised.
    B. Paragraph (b) is revised.
0
The revisions read as follows:


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

    (a) * * *
    (1) Any provider (other than a provider of services as defined in 
section 1861(u) of the Act) that does not

[[Page 4725]]

have in effect a contract establishing payment amounts for services 
furnished to a beneficiary enrolled in an MA coordinated care plan, an 
MSA plan, or an MA private fee-for-service plan must accept, as payment 
in full, the amounts that the provider could collect if the beneficiary 
were enrolled in original Medicare.
* * * * *
    (b) Services furnished by section 1861(u) providers of service. Any 
provider of services as defined in section 1861(u) of the Act that does 
not have in effect a contract establishing payment amounts for services 
furnished to a beneficiary enrolled in an MA coordinated care plan, an 
MSA plan, or an MA private fee-for-service plan must accept, as payment 
in full, the amounts (less any payments under Sec.  412.105(g) and 
Sec.  413.86(d) of this chapter) that it could collect if the 
beneficiary were enrolled in original Medicare. (Section 412.105(g) 
concerns indirect medical education payment to hospitals for managed 
care enrollees. Section 413.86(d) concerns calculating payment for 
direct medical education costs.)

0
48--49. Subpart F is revised to read as follows:
Subpart F--Submission of Bids, Premiums, and Related Information and 
Plan Approval
Secs.
422.250 Basis and scope.
422.252 Terminology.
422.254 Submission of bids.
422.256 Review, negotiation, and approval of bids.
422.258 Calculation of benchmarks.
422.262 Beneficiary premiums.
422.264 Calculation of savings.
422.266 Beneficiary rebates.
422.270 Incorrect collections of premiums and cost sharing.

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


Sec.  422.250   Basis and scope.

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


Sec.  422.252   Terminology.

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


Sec.  422.254   Submission of bids.

    (a) General rules. (1) Not later than the first Monday in June, 
each MA organization must submit to CMS an aggregate monthly bid amount 
for each MA plan (other than an MSA plan) the organization intends to 
offer in the upcoming year in the service area (or segment of such an 
area if permitted under Sec.  422.262(c)(2)) that meets the 
requirements in paragraph (b) of this section. With each bid submitted, 
the MA organization must provide the information required in paragraph 
(c) of this section and, for plans with rebates as described at Sec.  
422.266(a), the MA organization must provide the information required 
in paragraph (d) of this section.
    (2) CMS has the authority to determine whether and when it is 
appropriate to apply the bidding methodology described in this section 
to ESRD MA enrollees.
    (3) If the bid submission described in paragraphs (a)(1) and (2) of 
this section is not complete, timely, or accurate, CMS has the 
authority to impose sanctions under subpart O of this part or may 
choose not to renew the contract.
    (b) Bid requirements. (1) The monthly aggregate bid amount 
submitted by an MA organization for each plan is the organization's 
estimate of the revenue required for the following categories for 
providing coverage to an MA eligible beneficiary with a national 
average risk profile for the factors described in Sec.  422.308(c):
    (i) The statutory non-drug bid amount, which is the MA plan's 
estimated average monthly required revenue for providing benefits under 
the original Medicare fee-for-service program option (as defined in 
Sec.  422.252).
    (ii) The amount to provide basic prescription drug coverage, if any 
(defined at section 1860D-2(a)(3) of the Act).

[[Page 4726]]

    (iii) The amount to provide supplemental health care benefits, if 
any.
    (2) Each bid is for a uniform benefit package for the service area.
    (3) Each bid submission must contain all estimated revenue required 
by the plan, including administrative costs and return on investment.
    (4) The bid amount is for plan payments only but must be based on 
plan assumptions about the amount of revenue required from enrollee 
cost-sharing. The estimate of plan cost-sharing for the unadjusted MA 
statutory non-drug monthly bid amount for coverage of original Medicare 
benefits must reflect the requirement that the level of cost sharing MA 
plans charge to enrollees must be actuarially equivalent to the level 
of cost sharing (deductible, copayments, or coinsurance) charged to 
beneficiaries under the original Medicare program option. The 
actuarially equivalent level of cost sharing reflected in a regional 
plan's unadjusted MA statutory non-drug monthly bid amount does not 
include cost sharing for out-of-network Medicare benefits, as described 
at Sec.  422.101(d).
    (c) Information required for coordinated care plans and MA private 
fee-for-service plans. MA organizations' submission of bids for 
coordinated care plans, including regional MA plans and specialized MA 
plans for special needs beneficiaries (described at Sec.  
422.4(a)(1)(iv)), and for MA private fee-for-service plans must include 
the following information:
    (1) The plan type for each plan.
    (2) The monthly aggregate bid amount for the provision of all items 
and services under the plan, as defined in Sec.  422.252 and discussed 
in paragraph (a) of this section.
    (3) The proportions of the bid amount attributable to-
    (i) The provision of benefits under the original Medicare fee-for-
service program option (as defined at Sec.  422.100(c));
    (ii) The provision of basic prescription drug coverage (as defined 
at section 1860D-2(a)(3) of the Act; and
    (iii) The provision of supplemental health care benefits (as 
defined Sec.  422.102).
    (4) The projected number of enrollees in each MA local area used in 
calculation of the bid amount, and the enrollment capacity, if any, for 
the plan.
    (5) The actuarial basis for determining the amount under paragraph 
(c)(2) of this section, the proportions under paragraph (c)(3) of this 
section, the amount under paragraph (b)(4) of this section, and 
additional information as CMS may require to verify actuarial bases and 
the projected number of enrollees.
    (6) A description of deductibles, coinsurance, and copayments 
applicable under the plan and the actuarial value of the deductibles, 
coinsurance, and copayments.
    (7) For qualified prescription drug coverage, the information 
required under section 1860D-11(b) of the Act with respect to coverage.
    (8) For the purposes of calculation of risk corridors under Sec.  
422.458, MA organizations offering regional MA plans in 2006 and/or 
2007 must submit the following information developed using the 
appropriate actuarial bases.
    (i) Projected allowable costs (defined in Sec.  422.458(a)).
    (ii) The portion of projected allowable costs attributable to 
administrative expenses incurred in providing these benefits.
    (iii) The total projected costs for providing rebatable integrated 
benefits (as defined in Sec.  422.458(a)) and the portion of costs that 
is attributable to administrative expenses.
    (9) For regional plans, as determined by CMS, the relative cost 
factors for the counties in a plan's service area, for the purposes of 
adjusting payment under Sec.  422.308(d) for intra-area variations in 
an MA organization's local payment rates.
    (d) Beneficiary rebate information. In the case of a plan required 
to provide a monthly rebate under Sec.  422.266 for a year, the MA 
organization offering the plan must inform CMS how the plan will 
distribute the beneficiary rebate among the options described at Sec.  
422.266(b).
    (e) Information required for MSA plans. MA organizations intending 
to offer MA MSA plans must submit--
    (1) The enrollment capacity (if any) for the plan;
    (2) The amount of the MSA monthly premium for basic benefits under 
the original Medicare fee-for-service program option;
    (3) The amount of the plan deductible; and
    (4) The amount of the beneficiary supplemental premium, if any.
    (f) Separate bids must be submitted for Part A and Part B enrollees 
and Part B-only enrollees for each MA plan offered.


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

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

[[Page 4727]]

outcome of CMS' regional benchmark calculations required under Sec.  
422.258(b) and the outcome of CMS' calculation of the national average 
monthly bid amount required under section 1860D-13(a)(4) of the Act.
    (d) Exception for private fee-for-service plans. For private fee-
for-service plans defined at Sec.  422.4(a)(3), CMS will not review, 
negotiate, or approve the bid amount, proportions of the bid, or the 
amounts of the basic beneficiary premium and supplemental premium.
    (e) Exception for MSA plans. CMS does not review, negotiate, or 
approve amounts submitted with respect to MA MSA plans, except to 
determine that the deductible does not exceed the statutory maximum, 
defined at Sec.  422.103(d).


Sec.  422.258   Calculation of benchmarks.

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


Sec.  422.262   Beneficiary premiums.

    (a) Determination of MA monthly basic beneficiary premium. (1) For 
an MA plan with an unadjusted statutory non-drug bid amount that is 
less than the relevant unadjusted non-drug benchmark amount, the basic 
beneficiary premium is zero.
    (2) For an MA plan with an unadjusted statutory non-drug bid amount 
that is equal to or greater than the relevant unadjusted non-drug 
benchmark amount, the basic beneficiary premium is the amount by which 
(if any) the bid amount exceeds the benchmark amount. All approved 
basic premiums must be charged; they cannot be waived.
    (b) Consolidated monthly premiums. Except as specified in paragraph 
(b)(2) of this section, MA organizations must charge enrollees a 
consolidated monthly MA premium.
    (1) The consolidated monthly premium for an MA plan (other than a 
MSA plan) is the sum of the MA monthly basic beneficiary premium (if 
any), the MA monthly supplementary beneficiary premium (if any), and 
the MA monthly prescription drug beneficiary premium (if any).
    (2) Special rule for MSA plans. For an individual enrolled in an 
MSA plan offered by an MA organization, the monthly beneficiary premium 
is the supplemental premium (if any).
    (c) Uniformity of premiums--(1) General rule. Except as permitted 
for supplemental premiums pursuant to Sec.  422.106(d), for MA 
contracts with employers and labor organizations, the MA monthly bid 
amount submitted under Sec.  422.254, the MA monthly basic beneficiary 
premium, the MA monthly supplemental beneficiary premium, the MA 
monthly prescription drug premium, and the monthly MSA premium of an MA 
organization may not vary among individuals enrolled in an MA plan (or 
segment of the plan as provided for local MA plans under paragraph 
(c)(2) of this section). In addition, the MA organization cannot vary 
the level of cost-sharing charged for basic benefits or supplemental 
benefits (if any) among individuals enrolled in an MA plan (or segment 
of the plan).
    (2) Segmented service area option. An MA organization may apply the 
uniformity requirements in paragraph (c)(1) of this section to segments 
of an MA local plan service area (rather than to the entire service 
area) as long as such a segment is composed of one or more MA payment 
areas. The information specified under Sec.  422.254 is submitted 
separately for each segment. This provision does not apply to MA 
regional plans.

[[Page 4728]]

    (d) Monetary inducement prohibited. An MA organization may not 
provide for cash or other monetary rebates as an inducement for 
enrollment or for any other reason or purpose.
    (e) Timing of payments. The MA organization must permit payments of 
MA monthly basic and supplemental beneficiary premiums and monthly 
prescription drug beneficiary premiums on a monthly basis and may not 
terminate coverage for failure to make timely payments except as 
provided in Sec.  422.74(b).
    (f) Beneficiary payment options. An MA organization must permit 
each enrollee, at the enrollee's option, to make payment of premiums 
(if any) under this part to the organization through-
    (1) Withholding from the enrollee's Social Security benefit 
payments, or benefit payments by the Railroad Retirement Board or the 
Office of Personnel Management, in the manner that the Part B premium 
is withheld;
    (2) An electronic funds transfer mechanism (such as automatic 
charges of an account at a financial institution or a credit or debit 
card account);
    (3) According to other means that CMS may specify, including 
payment by an employer or under employment-based retiree health 
coverage on behalf of an employee, former employee (or dependent), or 
by other third parties such as a State.
    (i) Regarding the option in paragraph (f)(1) of this section, MA 
organizations may not impose a charge on beneficiaries for the election 
of this option.
    (ii) An enrollee may opt to make a direct payment of premium to the 
plan.


Sec.  422.264   Calculation of savings.

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


Sec.  422.266   Beneficiary rebates.

    (a) General rule. An MA organization must provide to the enrollee a 
monthly rebate equal to 75 percent of the average per capita savings 
(if any) described in Sec.  422.264(b) for MA local plans and Sec.  
422.264(d) for MA regional plans.
    (b) Form of rebate. The rebate required under this paragraph must 
be provided by crediting the rebate amount to one or more of the 
following:
    (1) Supplemental health care benefits. MA organizations may apply 
all or some portion of the rebate for a plan toward payment for non-
drug supplemental health care benefits for enrollees as described in 
Sec.  422.102, which may include the reduction of cost sharing for 
benefits under original Medicare and additional health care benefits 
that are not benefits under original Medicare. MA organizations also 
may apply all or some portion of the rebate for a plan toward payment 
for supplemental drug coverage described at Sec.  423.104(f)(1)(ii), 
which may include reduction in cost sharing and coverage of drugs not 
covered under Part D. The rebate, or portion of rebate, applied toward 
supplemental benefits may only be applied to a mandatory supplemental 
benefit, and cannot be used to fund an optional supplemental benefit.
    (2) Payment of premium for prescription drug coverage. MA 
organizations that offer a prescription drug benefit may credit some or 
all of the rebate toward reduction of the MA monthly prescription drug 
beneficiary premium.
    (3) Payment toward Part B premium. MA organizations may credit some 
or all of the rebate toward reduction of the

[[Page 4729]]

Medicare Part B premium (determined without regard to the application 
of subsections (b), (h), and (i) of section 1839 of the Act).
    (c) Disclosure relating to rebates. MA organizations must disclose 
to CMS information on the amount of the rebate provided, as required at 
Sec.  422.254(d). MA organizations must distinguish, for each MA plan, 
the amount of rebate applied to enhance original Medicare benefits from 
the amount of rebate applied to enhance Part D benefits.


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

    (a) Definitions. As used in this section-
    (1) Amounts incorrectly collected-
    (i) Means amounts that-
    (A) Exceed the limits approved under Sec.  422.262;
    (B) In the case of an MA private fee-for-service plan, exceed the 
MA monthly basic beneficiary premium or the MA monthly supplemental 
premium submitted under Sec.  422.262; and
    (C) In the case of an MA MSA plan, exceed the MA monthly 
beneficiary supplemental premium submitted under Sec.  422.262, or 
exceed permissible cost sharing amounts after the deductible has been 
met per Sec.  422.103; and
    (ii) Includes amounts collected from an enrollee who was believed 
to be entitled to Medicare benefits but was later found not to be 
entitled.
    (2) Other amounts due are amounts due for services that were--
    (i) Emergency, urgently needed services, or other services obtained 
outside the MA plan; or
    (ii) Initially denied but, upon appeal, found to be services the 
enrollee was entitled to have furnished by the MA organization.
    (b) Basic commitments. An MA organization must agree to refund all 
amounts incorrectly collected from its Medicare enrollees, or from 
others on behalf of the enrollees, and to pay any other amounts due the 
enrollees or others on their behalf.
    (c) Refund methods--(1) Lump-sum payment. The MA organization must 
use lump-sum payments for the following:
    (i) Amounts incorrectly collected that were not collected as 
premiums.
    (ii) Other amounts due.
    (iii) All amounts due if the MA organization is going out of 
business or terminating its MA contract for an MA plan(s).
    (2) Premium adjustment or lump-sum payment, or both. If the amounts 
incorrectly collected were in the form of premiums, or included 
premiums as well as other charges, the MA organization may refund by 
adjustment of future premiums or by a combination of premium adjustment 
and lump-sum payments.
    (3) Refund when enrollee has died or cannot be located. If an 
enrollee has died or cannot be located after reasonable effort, the MA 
organization must make the refund in accordance with State law.
    (d) Reduction by CMS. If the MA organization does not make the 
refund required under this section by the end of the contract period 
following the contract period during which an amount was determined to 
be due to an enrollee, CMS will reduce the premium the MA organization 
is allowed to charge an MA plan enrollee by the amounts incorrectly 
collected or otherwise due. In addition, the MA organization would be 
subject to sanction under subpart O of this part for failure to refund 
amounts incorrectly collected from MA plan enrollees.

0
50-51. Subpart G is revised to read as follows:
Subpart G--Payments to Medicare Advantage Organizations
Sec.
422.300 Basis and scope.
422.304 Monthly payments.
422.306 Annual MA capitation rates.
422.308 Adjustments to capitation rates, benchmarks, bids, and 
payments.
422.310 Risk adjustment data.
422.311 Announcement of annual capitation rate, benchmarks, and 
methodology changes.
422.314 Special rules for beneficiaries enrolled in MA MSA plans.
422.316 Special rules for payments to Federally qualified health 
centers.
422.318 Special rules for coverage that begins or ends during an 
inpatient hospital stay.
422.320 Special rules for hospice care.
422.322 Source of payment and effect of MA plan election on payment.
422.324 Payments to MA organizations for graduate medical education 
costs.

Subpart G--Payments to Medicare Advantage Organizations


Sec.  422.300   Basis and scope.

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


Sec.  422.304   Monthly payments.

    (a) General rules. Except as provided in paragraph (b) of this 
section, CMS makes advance monthly payments of the amounts determined 
under paragraphs (a)(1) and (a)(2) of this section for coverage of 
original fee-for-service benefits for an individual in an MA payment 
area for a month.
    (1) Payment of bid for plans with bids below benchmark. For MA 
plans that have average per capita monthly savings (as described at 
Sec.  422.264(b) for local plans and Sec.  422.264(d) for regional 
plans), CMS pays:
    (i) The unadjusted MA statutory non-drug monthly bid amount defined 
in Sec.  422.252, risk-adjusted as described at Sec.  422.308(c) and 
adjusted (if applicable) for variations in rates within the plan's 
service area (described at Sec.  422.258(a)(2)) and for the effects of 
risk adjustment on beneficiary premiums under Sec.  422.262; and
    (ii) The amount (if any) of the rebate described in paragraph 
(a)(3) of this section.
    (2) Payment of benchmark for plans with bids at or above benchmark. 
For MA plans that do not have average per capita monthly savings (as 
described at Sec.  422.264(b) for local plans and Sec.  422.264(d) for 
regional plans), CMS pays the unadjusted MA area-specific non-drug 
monthly benchmark amount specified at Sec.  422.258, risk-adjusted as 
described at Sec.  422.308(c) and adjusted (if applicable) for 
variations in rates within the plan's service area (described at Sec.  
422.258(a)(2)) and for the effects of risk adjustment on beneficiary 
premiums under Sec.  422.262.
    (3) Payment of rebate for plans with bids below benchmarks. The 
rebate amount under paragraph (a)(1)(ii) of this section is the amount 
of the monthly rebate computed under Sec.  422.266(a) for that plan, 
less the amount (if any) applied to reduce the Part B premium, as 
provided under Sec.  422.266(b)(3)).
    (b) Separate payment for Federal drug subsidies. In the case of an 
enrollee in an MA-PD plan, defined at Sec.  422.252, the MA 
organization offering such a plan also receives-
    (1) Direct and reinsurance subsidy payments for qualified 
prescription drug coverage, described at section 1860D-15(a) and (b) of 
the Act (other than payments for fallback prescription drug plans 
described at section 1860D-11(g)(5) of the Act); and
    (2) Reimbursement for premium and cost sharing reductions for low-
income individuals, described at section 1860D-14 of the Act.
    (c) Special rules--(1) Enrollees with end-stage renal disease. (i) 
For enrollees determined to have end-stage renal

[[Page 4730]]

disease (ESRD), CMS establishes special rates that are actuarially 
equivalent to rates in effect before the enactment of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003.
    (ii) CMS publishes annual changes in these capitation rates no 
later than the first Monday in April each year, as provided in Sec.  
422.312.
    (iii) CMS applies appropriate adjustments when establishing the 
rates, including risk adjustment factors.
    (iv) CMS reduces the payment rate for each renal dialysis treatment 
by the same amount that CMS is authorized to reduce the amount of each 
composite rate payment for each treatment as set forth in section 
1881(b)(7) of the Act. These funds are to be used to help pay for the 
ESRD network program in the same manner as similar reductions are used 
in original Medicare.
    (2) MSA enrollees. In the case of an MSA plan, CMS pays the 
unadjusted MA area-specific non-drug monthly benchmark amount for the 
service area, determined in accordance with Sec.  422.314(c) and 
subject to risk adjustment as set forth at Sec.  422.308(c), less 1/12 
of the annual lump sum amount (if any) CMS deposits to the enrollee's 
MA MSA.
    (3) RFB plan enrollees. For RFB plan enrollees, CMS adjusts the 
capitation payments otherwise determined under this subpart to ensure 
that the payment level is appropriate for the actuarial characteristics 
and experience of these enrollees. That adjustment can be made on an 
individual or organization basis.
    (d) Payment areas--(1) General rule. Except as provided in 
paragraph (e) of this section--
    (i) An MA payment area for an MA local plan is an MA local area 
defined at Sec.  422.252.
    (ii) An MA payment area for an MA regional plan is an MA region, 
defined at Sec.  422.455(b)(1).
    (2) Special rule for ESRD enrollees. For ESRD enrollees, the MA 
payment area is a State or other geographic area specified by CMS.
    (e) Geographic adjustment of payment areas for MA local plans--(1) 
Terminology. ``Metropolitan Statistical Area'' and ``Metropolitan 
Division'' mean any areas so designated by the Office of Management and 
Budget in the Executive Office of the President.
    (2) State request. A State's chief executive may request, no later 
than February 1 of any year, a geographic adjustment of the State's 
payment areas for MA local plans for the following calendar year. The 
chief executive may request any of the following adjustments to the 
payment area specified in paragraph (c)(1)(i) of this section:
    (i) A single statewide MA payment area.
    (ii) A metropolitan-based system in which all non-metropolitan 
areas within the State constitute a single payment area and any of the 
following constitutes a separate MA payment area:
    (A) All portions of each single Metropolitan Statistical Area 
within the State.
    (B) All portions of each Metropolitan Statistical Area within each 
Metropolitan Division within the State.
    (iii) A consolidation of noncontiguous counties.
    (3) CMS response. In response to the request, CMS makes the payment 
adjustment requested by the chief executive. This adjustment cannot be 
requested or made for payments to regional MA plans.
    (4) Budget neutrality adjustment for geographically adjusted 
payment areas. If CMS adjusts a State's payment areas in accordance 
with paragraph (d)(2) of this section, CMS at that time, and each year 
thereafter, adjusts the capitation rates so that the aggregate Medicare 
payments do not exceed the aggregate Medicare payments that would have 
been made to all the State's payments areas, absent the geographic 
adjustment.


Sec.  422.306   Annual MA capitation rates.

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


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

    CMS performs the following calculations and adjustments to 
determine rates and payments:
    (a) National per capita growth percentage. The national per capita 
growth percentage for a year, applied under Sec.  422.306, is CMS' 
estimate of the rate of growth in per capita expenditures under this 
title for an individual entitled to benefits under Part A and enrolled 
under Part B. CMS may make separate estimates for aged enrollees, 
disabled enrollees, and enrollees who have ESRD.
    (b) Adjustment for over or under projection of national per capita 
growth percentages. CMS will adjust the minimum percentage increase 
rate at Sec.  422.306(a)(2) and the adjusted average per capita cost 
rate at Sec.  422.306(b)(2) for the previous year to reflect any 
differences between the projected national per capita growth 
percentages for that year and previous years, and the current estimates 
of those percentages for those years. CMS will not make this adjustment 
for years before 2004.
    (c) Risk adjustment--(1) General rule. CMS will adjust the payment 
amounts under Sec.  422.304(a)(1), (a)(2), and (a)(3) for age, gender, 
disability status, institutional status, and other factors CMS 
determines to be appropriate, including health status, in order to 
ensure actuarial equivalence. CMS may add to, modify, or substitute for 
risk adjustment factors if those changes will improve the determination 
of actuarial equivalence.
    (2) Risk adjustment: Health status--(i) Data collection. To adjust 
for health status, CMS applies a risk factor based on data obtained in 
accordance with Sec.  422.310.

[[Page 4731]]

    (ii) Implementation. CMS applies a risk factor that incorporates 
inpatient hospital and ambulatory risk adjustment data. This factor is 
phased as follows:
    (A) 100 percent of payments for ESRD MA enrollees in 2005 and 
succeeding years.
    (B) 75 percent of payments for aged and disabled enrollees in 2006.
    (C) 100 percent of payments for aged and disabled enrollees in 2007 
and succeeding years.
    (3) Uniform application. Except as provided for MA RFB plans under 
Sec.  422.304(c)(3), CMS applies this adjustment factor to all types of 
plans.
    (d) Adjustment for intra-area variations. CMS makes the following 
adjustments to payments.
    (1) Intra-regional variations. For payments for an MA regional plan 
for an MA region, CMS will adjust the payment amount specified at Sec.  
422.304(a)(1) and (a)(2) to take into account variations in local 
payment rates among the different MA local areas included in the 
region.
    (2) Intra-service area variations. For payments to an MA local plan 
with a service area covering more than one MA local area (county), CMS 
will adjust the payment amount specified in Sec.  422.304(a)(1) and 
(a)(2) to take into account variations in local payment rates among the 
different MA local areas included in the plan's service area.
    (e) Adjustment relating to risk adjustment: the government premium 
adjustment. CMS will adjust payments to an MA plan as necessary to 
ensure that the sum of CMS' monthly payment made under Sec.  422.304(a) 
and the plan's monthly basic beneficiary premium equals the unadjusted 
MA statutory non-drug bid amount, adjusted for risk and for intra-area 
or intra-regional payment variation.
    (f) Adjustment of payments to reflect number of Medicare 
enrollees--(1) General rule. CMS adjusts payments retroactively to take 
into account any difference between the actual number of Medicare 
enrollees and the number on which it based an advance monthly payment.
    (2) Special rules for certain enrollees. (i) Subject to paragraph 
(f)(2)(ii) of this section, CMS may make adjustments, for a period (not 
to exceed 90 days) that begins when a beneficiary elects a group health 
plan (as defined in Sec.  411.1010) offered by an MA organization, and 
ends when the beneficiary is enrolled in an MA plan offered by the MA 
organization.
    (ii) CMS does not make an adjustment unless the beneficiary 
certifies that, at the time of enrollment under the MA plan, he or she 
received from the organization the disclosure statement specified in 
Sec.  422.111.
    (g) Adjustment for national coverage determination (NCD) services 
and legislative changes in benefits. If CMS determines that the cost of 
furnishing an NCD service or legislative change in benefits is 
significant, as defined in Sec.  422.109, CMS will adjust capitation 
rates, or make other payment adjustments, to account for the cost of 
the service or legislative change in benefits. Until the new capitation 
rates are in effect, the MA organization will be paid for the 
significant cost NCD service or legislative change in benefits on a 
fee-for-service basis as provided under Sec.  422.109(b).
    (h) Adjustments to payments to regional MA plans for purposes of 
risk corridor payments. For the purpose of calculation of risk 
corridors under Sec.  422.458, MA organizations offering regional MA 
plans in 2006 and/or 2007 must submit, after the end of a contract year 
and before a date CMS specifies, the following information:
    (1) Actual allowable costs (defined in Sec.  422.458(a)) for the 
previous contract year.
    (2) The portion of the costs attributable to administrative 
expenses incurred in providing these benefits.
    (3) The total costs for providing rebatable integrated benefits (as 
defined in Sec.  422.458(a)) and the portion of the costs that is 
attributable to administrative expenses in addition to the 
administrative expenses described in paragraph (h)(2) of this section.


Sec.  422.310   Risk adjustment data.

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

[[Page 4732]]

March deadline until December 31 of the payment year. After the payment 
year is completed, CMS recalculates the risk factors for affected 
individuals to determine if adjustments to payments are necessary. Risk 
adjustment data that are received after the annual December 31 late 
data submission deadline will not be accepted for the purposes of 
reconciliation.


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

    (a) Capitation rates--(1) Initial announcement. Not later than the 
first Monday in April each year, CMS announces to MA organizations and 
other interested parties the following information for each MA payment 
area for the following calendar year:
    (i) The annual MA capitation rate.
    (ii) The risk and other factors to be used in adjusting those rates 
under Sec.  422.308 for payments for months in that year.
    (2) CMS includes in the announcement an explanation of assumptions 
used and a description of the risk and other factors.
    (3) Regional benchmark announcement. Before the beginning of each 
annual, coordinated election period under Sec.  422.62(a)(2), CMS will 
announce to MA organizations and other interested parties the MA 
region-specific non-drug monthly benchmark amount for the year involved 
for each MA region and each MA regional plan for which a bid was 
submitted under Sec.  422.256.
    (b) Advance notice of changes in methodology. (1) No later than 45 
days before making the announcement under paragraph (a)(1) of this 
section, CMS notifies MA organizations of changes it proposes to make 
in the factors and the methodology it used in the previous 
determination of capitation rates.
    (2) The MA organizations have 15 days to comment on the proposed 
changes.


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

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


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

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


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

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


Sec.  422.320   Special rules for hospice care.

    (a) Information. An MA organization that has a contract under 
subpart K of this part must inform each Medicare enrollee eligible to 
select hospice care under Sec.  418.24 of this chapter about the 
availability of hospice care (in a manner that objectively presents all 
available hospice providers, including a statement of any ownership 
interest in a hospice held by the MA organization or a related entity) 
if--
    (1) A Medicare hospice program is located within the plan's service 
area; or
    (2) It is common practice to refer patients to hospice programs 
outside that area.
    (b) Enrollment status. Unless the enrollee disenrolls from the MA 
plan, a

[[Page 4733]]

beneficiary electing hospice continues his or her enrollment in the MA 
plan and is entitled to receive, through the MA plan, any benefits 
other than those that are the responsibility of the Medicare hospice.
    (c) Payment. (1) No payment is made to an MA organization on behalf 
of a Medicare enrollee who has elected hospice care under Sec.  418.24 
of this chapter, except for the portion of the payment attributable to 
the beneficiary rebate for the MA plan, described in Sec.  
422.266(b)(1) plus the amount of the monthly prescription drug 
beneficiary premium (described at Sec.  422.252). This no-payment rule 
is effective from the first day of the month following the month of 
election to receive hospice care, until the first day of the month 
following the month in which the election is terminated.
    (2) During the time the hospice election is in effect, CMS' monthly 
capitation payment to the MA organization is reduced to the sum of--
    (i) An amount equal to the beneficiary rebate for the MA plan, as 
described in Sec.  422.304(a)(3) or to zero for plans with no 
beneficiary rebate, described at Sec.  422.304(a)(2); and
    (ii) The amount of the monthly prescription drug beneficiary 
premium (if any).
    (3) In addition, CMS pays through the original Medicare program 
(subject to the usual rules of payment)--
    (i) The hospice program for hospice care furnished to the Medicare 
enrollee; and
    (ii) The MA organization, provider, or supplier for other Medicare-
covered services to the enrollee.


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

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


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

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

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

0
52. Section 422.402 is revised to read as follows:


Sec.  422.402  Federal preemption of State law.

    The standards established under this part supersede any State law 
or regulation (other than State licensing laws or State laws relating 
to plan solvency) with respect to the MA plans that are offered by MA 
organizations.

0
53. Amend Sec.  422.404 by revising paragraph (a) to read as follows:


Sec.  422.404  State premium taxes prohibited.

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

0
54. A new subpart J is added to read as follows:
Subpart J--Special Rules for MA Regional Plans
Sec.
422.451 Moratorium on new local preferred provider organization 
plans.
422.455 Special rules for MA Regional plans.
422.458 Risk sharing with regional MA organizations for 2006 and 
2007.

Subpart J--Special Rules for MA Regional Plans


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

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


Sec.  422.455   Special rules for MA Regional Plans.

    (a) Coverage of entire MA region. The service area for an MA 
regional plan

[[Page 4734]]

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


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

    (a) Terminology. For purposes of this section--
    Allowable costs means, with respect to an MA regional plan offered 
by an organization for a year, the total amount of costs that the 
organization incurred in providing benefits covered under the original 
Medicare fee-for-service program option for all enrollees under the 
plan in the region in the year and in providing rebatable integrated 
benefits, as defined in this paragraph, reduced by the portion of those 
costs attributable to administrative expenses incurred in providing 
these benefits.
    Rebatable integrated benefits means those non-drug supplemental 
benefits that are funded through beneficiary rebates (described at 
Sec.  422.266(b)(1)) and that CMS determines are additional health 
benefits not covered under the original Medicare program option and 
that require expenditures by the plan. For purposes of the calculation 
of risk corridors, these are the only supplemental benefits that count 
toward allowable costs.
    Target amount means, with respect to an MA regional plan offered by 
an organization in a year, the total amount of payments made to the 
organization for enrollees in the plan for the year (which includes 
payments attributable to benefits under the original Medicare fee-for-
service program option as defined in Sec.  422.100(c)(1), the total of 
the MA monthly basic beneficiary premium collectable for those 
enrollees for the year, and the total amount of rebatable integrated 
benefits), reduced by the amount of administrative expenses assumed in 
the portion of the bid attributable to benefits under original Medicare 
fee-for-service program option or to rebatable integrated benefits.
    (b) Application of risk corridors for benefits covered under 
original fee-for-service Medicare--(1) General rule. This section will 
only apply to MA regional plans offered during 2006 or 2007.
    (2) Notification of allowable costs under the plan. In the case of 
an MA organization that offers an MA regional plan in an MA region in 
2006 or 2007, the organization must notify CMS, before that date in the 
succeeding year as CMS specifies, of--
    (i) Its total amount of costs that the organization
    incurred in providing benefits covered under the original Medicare 
fee-for-service program option for all enrollees under the plan (as 
described in paragraph (a) of this section).
    (ii) Its total amount of costs that the organization incurred in 
providing rebatable integrated benefits for all enrollees under the 
plan (as described in paragraph (a) of this section), and, with respect 
to those benefits, the portion of those costs that is attributable to 
administrative expenses that is in addition to the administrative 
expense incurred in provision of benefits under the original Medicare 
fee-for-service program option.
    (c) Adjustment of payment--(1) No adjustment if allowable costs 
within 3 percent of target amount. If the allowable costs for the plan 
for the year are at least 97 percent, but do not exceed 103 percent, of 
the target amount for the plan and year, there will be no payment 
adjustment under this section for the plan and year.
    (2) Increase in payment if allowable costs above 103 percent of 
target amount--(i) Costs between 103 and 108 percent of target amount. 
If the allowable costs for the plan for the year are greater than 103 
percent, but not greater than 108 percent, of the target amount for the 
plan and year, CMS will increase the total of the monthly payments made 
to the organization offering the plan for the year under Sec.  
422.302(a) (section 1853(a) of the Act) by an amount equal to 50 
percent of the difference between those allowable costs and 103 percent 
of that target amount.
    (ii) Costs above 108 percent of target amount. If the allowable 
costs for the plan for the year are greater than 108 percent of the 
target amount for the plan and year, CMS will increase the total of the 
monthly payments made to the organization offering the plan for the 
year under section 1853(a) of the Act by an amount equal to the sum 
of--
    (A) 2.5 percent of that target amount; and
    (B) 80 percent of the difference between those allowable costs and 
108 percent of that target amount.
    (3) Reduction in payment if allowable costs below 97 percent of 
target amount--(i) Costs between 92 and 97 percent of target amount. If 
the allowable costs for the plan for the year are less than 97 percent, 
but greater than or equal to 92 percent, of the target amount for the 
plan and year, CMS will reduce the total of the monthly payments made 
to the organization offering the plan for the year under Sec.  
422.302(a) (section 1853(a) of the Act) by an amount (or otherwise 
recover from the plan an amount) equal to 50 percent of the difference 
between 97 percent of the target amount and those allowable costs.
    (ii) Costs below 92 percent of target amount. If the allowable 
costs for the plan for the year are less than 92 percent of the target 
amount for the plan and year, CMS will reduce the total of the monthly 
payments made to the organization offering the plan for the year under 
Sec.  422.302(a) (section 1853(a)of the Act) by an amount (or otherwise 
recover from the plan an amount) equal to the sum of-
    (A) 2.5 percent of that target amount; and
    (B) 80 percent of the difference between 92 percent of that target 
amount and those allowable costs.
    (d) Disclosure of information--(1) General rule. Each MA 
organization offering an MA regional plan must provide CMS with 
information as CMS determines is necessary to implement this section; 
and
    (2) According to existing Sec.  422.502(d)(1)(iii) (section 
1857(d)(2)(B) of the Act), CMS has the right to inspect and audit any 
books and records of the organization that pertain to the information 
regarding costs

[[Page 4735]]

provided to CMS under paragraph (b)(2) of this section.
    (3) Restriction on use of information. Information disclosed or 
obtained for the purposes of this section may be used by officers, 
employees, and contractors of DHHS only for the purposes of, and to the 
extent necessary in, implementing this section.
    (e) Organizational and financial requirements--(1) General rule. 
Regional MA plans offered by MA organizations must be licensed under 
State law, or otherwise authorized under State law, as a risk-bearing 
entity (as defined in Sec.  422.2) eligible to offer health insurance 
or health benefits coverage in each State in which it offers one or 
more plans. However, as provided for under this section, MA 
organizations offering MA regional plans may obtain a temporary waiver 
of State licensure. In the case of an MA organization that is offering 
an MA regional plan in an MA region, and is not licensed in each State 
in which it offers such an MA regional plan, the following rules apply:
    (i) The MA organization must be licensed to bear risk in at least 
one State of the region.
    (ii) For the other States in a region in which the organization is 
not licensed to bear risk, if it demonstrates to CMS that it has filed 
the necessary application to meet those requirements, CMS may 
temporarily waive the licensing requirement with respect to each State 
for a period of time as CMS determines appropriate for the timely 
processing of the application by the State or States.
    (iii) If the State licensing application or applications are 
denied, CMS may extend the licensing waiver through the end of the plan 
year or as CMS determines appropriate to provide for a transition.
    (2) Selection of appropriate State. In the case of an MA 
organization to which CMS grants a waiver and that is licensed in more 
than one State in a region, the MA organization will select one of the 
States, the rules of which shall apply in States where the organization 
is not licensed for the period of the waiver.
    (f) Regional stabilization fund--(1) Establishment. The MA Regional 
Plan Stabilization Fund (referred to in this paragraph (f) as the 
``Fund'') is available beginning in 2007 for two purposes:
    (i) Plan entry. To provide incentives to have MA regional plans 
offered in each MA region under paragraph (f)(4) of this section.
    (ii) Plan retention. To provide incentives to retain MA regional 
plans in certain MA regions with below-national-average MA market 
penetration under paragraph (f)(5) of this section.
    (2) Availability of funding from savings. Funds made available 
under section 1853(f) of the Act are transferred into a special account 
in the Treasury from the Federal Hospital Insurance Trust Fund and the 
Federal Supplementary Medical Insurance Trust Fund in the proportion 
specified in section 1853(f) of the Act, ``payments From Trust Funds,'' 
on a monthly basis.
    (3) Funding limitation--(i) General rule. The total amount expended 
from the Fund as a result of the application of this section through 
the end of a calendar year may not exceed the amount available to the 
Fund as of the first day of that year. For purposes of this section, 
amounts that are expended under this title insofar as those amounts 
would not have been expended but for the application of this section 
will be counted as amounts expended as a result of that application.
    (ii) Application of limitation. CMS will obligate funds from the 
Fund for a year only if the Chief Actuary of CMS and the appropriate 
budget officer certify that there are available in the Fund at the 
beginning of the year sufficient amounts to cover all of those 
obligations incurred during the year consistent with paragraph 
(f)(3)(i) of this section. CMS will take those steps, in connection 
with computing additional payment amounts under paragraphs (f)(4) and 
(f)(5) of this section and including limitations on enrollment in MA 
regional plans receiving those payments or computing lower payment 
amounts, to ensure that sufficient funds are available to make those 
payments for the entire year.
    (4) Plan entry funding--(i) General rule. Funding is available 
under this paragraph for a year in the following situations:
    (A) National plan. For a national bonus payment described in 
paragraph (f)(4)(ii) of this section, when a single MA organization 
offers an MA regional plan in each MA region in the year, but only if 
there was not a national plan offered in each region in the previous 
year. Funding under this paragraph is only available with respect to 
any individual MA organization for a single year, but may be made 
available to more than one such organization in the same year.
    (B) MA Regional Plans. Subject to paragraph (f)(4)(i)(C) of this 
section, for an increased amount under paragraph (f)(4)(iv) of this 
section for an MA regional plan offered in an MA region that did not 
have any MA regional plan offered in the prior year.
    (C) Limitation on MA regional plan funding in case of national 
plan. There will be no payment adjustment under paragraph (f)(4)(iii) 
of this section for a year for which a national bonus payment is made 
under paragraph (f)(4)(ii) of this section.
    (ii) National bonus payment. The national bonus payment under this 
paragraph will--
    (A) Be available to an MA organization only if the organization 
offers MA regional plans in every MA region;
    (B) Be available for all MA regional plans of the organization 
regardless of whether any other MA regional plan is offered in any 
region; and
    (C) Be subject to amounts available under paragraph (f)(3) of this 
section for a year and be equal to 3 percent of the benchmark amount 
otherwise applicable for each MA regional plan offered by the 
organization.
    (iii) Regional payment adjustment--(A) General rule. The increased 
amount under this paragraph for an MA regional plan in an MA region for 
a year must be an amount, determined by CMS, based on the bid submitted 
for that plan (or plans) and will be available to all MA regional plans 
offered in that region and year. That amount may be based on the mean, 
mode, or median or other measure of those bids and may vary from region 
to region. CMS will not limit the number of plans or bids in a region.
    (B) Multi-year funding. Subject to amounts available under 
paragraph (f)(3) of this section, funding will be available for a 
period determined by CMS.
    (C) Application to all plans in a region. Funding under this 
paragraph for an MA region will be made available for all MA regional 
plans offered in the region.
    (D) Limitation on availability of plan retention funding in next 
year. If plans receive plan entry funding in a year, plans in that 
region are prohibited from receiving plan retention funding in the 
following year.
    (iv) Application. Any additional payment under this section 
provided for an MA regional plan for a year will be treated as if it 
were an addition to the benchmark amount otherwise applicable to that 
plan and year, but will not be taken into account in the computation of 
any benchmark amount for any subsequent year.
    (5) Plan retention funding--(i) General rule. Funding is available 
under this paragraph for a year with respect to MA regional plans 
offered in an MA region for the increased amount specified in paragraph 
(f)(5)(ii) of this

[[Page 4736]]

section but only if the region meets the requirements of paragraphs 
(f)(5)(iii)(A), (f)(5)(iii)(B), (f)(5)(iii)(C) and (f)(5)(iii)(E) of 
this section.
    (ii) Payment increase. The increased amount under this paragraph 
for an MA regional plan in an MA region for a year will be an amount, 
determined by CMS, that does not exceed the greater of--
    (A) 3 percent of the benchmark amount applicable in the region; or
    (B) The amount as (when added to the benchmark amount applicable to 
the region) will result in the ratio of-
    (1) That additional amount plus the benchmark amount computed under 
section 1854(b)(4)(B)(i)of the Act, ``the risk-adjusted benchmark 
amount'' for the region and year, to the adjusted average per capita 
cost for the region and year, as estimated by CMS under section 
1876(a)(4) of the Act and adjusted as appropriate for the purpose of 
risk adjustment; being equal to--
    (2) The weighted average of those benchmark amounts for all the 
regions and that year, to the average per capita cost for the United 
States and that year, as estimated by CMS under section 1876(a)(4)of 
the Act and adjusted as appropriate for the purpose of risk adjustment.
    (iii) Regional requirements. The requirements of this paragraph for 
an MA region for a year are as follows:
    (A) Notification of plan exit. CMS has received notice (as 
specified by CMS), before a new contract year, that one or more MA 
regional plans that were offered in the region in the previous year 
will not be offered in the succeeding year.
    (B) Regional plans available from fewer than two MA organizations 
in the region. CMS determines that if the plans referred to in 
paragraph (f)(5)(iii)(A) of this section are not offered in the year, 
fewer than two MA organizations will be offering MA regional plans in 
the region in the year involved.
    (C) Percentage enrollment in MA regional plans below national 
average. For the previous year, CMS determines that the average 
percentage of MA eligible individuals residing in the region who are 
enrolled in MA regional plans is less than the average percentage of 
those individuals in the United States enrolled in those plans.
    (D) Application. Any additional payment under this paragraph 
provided for an MA regional plan for a year will be treated as if it 
were an addition to the benchmark amount otherwise applicable to that 
plan and year, but will not be taken into account in the computation of 
any benchmark amount for any subsequent year.
    (E) 2-consecutive-year limitation. In no case will plan retention 
funding be available under this paragraph in an MA region for more than 
2 consecutive years.

Subpart K-Application Procedures and Contracts for Medicare 
Advantage Organizations

0
55. Amend Sec.  422.500 by-
    A. Revising the section heading.
    B. Designating the undesignated introductory text as paragraph (b) 
and adding the heading ``Definitions.
    C. Adding new paragraph (a).
0
The revisions and addition read as follows:


Sec.  422.500   Scope and definitions.

    (a) Scope. This subpart sets forth application requirements for 
entities seeking a contract as a Medicare organization offering an MA 
plan. MA organizations offering prescription drug plans must, in 
addition to the requirements of this part, follow the requirements of 
part 423 of this chapter specifically related to the prescription drug 
benefit.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
* * * * *


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

0
56. Redesignate Sec.  422.501, Sec.  422.502, and Sec.  422.504 as 
Sec.  422.503, Sec.  422.504, and Sec.  422.505, respectively.

0
57. Add new Sec.  422.501 to read as follows:


Sec.  422.501   Application requirements.

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

0
58. Add new Sec.  422.502 to read as follows:


Sec.  422.502   Evaluation and determination procedures.

    (a) Basis for evaluation and determination. (1) CMS evaluates an 
application for an MA contract on the basis of information contained in 
the application itself and any additional information that CMS obtains 
through other means such as on-site visits, public hearings, and any 
other appropriate procedures.
    (2) After evaluating all relevant information, CMS determines 
whether the applicant's application meets the applicable requirements 
of Sec.  422.501.
    (b) Use of information from a prior contracting period. If an MA 
organization has failed to comply with the terms of a previous contract 
with CMS under title XVIII of the Act, or has failed to complete a 
corrective action plan during the term of the contract, CMS may deny an 
application based on the applicant's failure to comply with that prior 
contract with CMS even if the

[[Page 4737]]

contract applicant meets all of the current requirements.
    (c) Notice of determination. Within timeframes determined by CMS, 
it notifies each applicant that applies for an MA contract under this 
part of its determination and the basis for the determination. The 
determination is 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 an MA organization.
    (2) Intent to deny. (i)If CMS finds that the applicant does not 
appear to be able to meet the requirements for an MA organization and/
or has not provided enough information to evaluate the application, CMS 
gives the contract applicant notice of intent to deny the application 
for an MA contract and a summary of the basis for this preliminary 
finding.
    (ii) Within 10 days from the date of the intent to deny notice, the 
contract applicant must respond in writing to the issues or other 
matters that were the basis for CMS' preliminary finding and must 
revise its application to remedy any defects CMS identified.
    (3) Denial of application. If CMS denies the application, it gives 
written notice to the contract applicant indicating --
    (i) That the applicant is not qualified to contract as an MA 
organization under Part C of title XVIII of the Act;
    (ii) The reasons why the applicant is not qualified; and
    (iii) The applicant's right to request reconsideration in 
accordance with the procedures specified in subpart N of this part.
    (d) Oversight of continuing compliance. (1) CMS oversees an MA 
organization's continued compliance with the requirements for an MA 
organization.
    (2) If an MA organization no longer meets those requirements, CMS 
terminates the contract in accordance with Sec.  422.510.


Sec.  422.503  [Amended]

0
59. Amend newly redesignated Sec.  422.503 by-
    A. Redesignating paragraphs (b)(1) through (b)(5) as paragraphs 
(b)(2) through (b)(6) respectively.
    B. Adding new paragraph (b)(1).
    C. Revising newly redesignated paragraph (b)(4)(ii).
    D. Revising newly redesignated paragraph (b)(4)(vi)(F).
    E. Adding new paragraphs (b)(4)(vi)(G)(1), and (2).
    F. Adding new paragraph (b)(4)(vi)(H).
    G. Revising newly redesignated paragraph (b)(6) introductory text.
    H. Revising newly redesignated paragraph (b)(6)(i).
0
The revisions read as follows:


Sec.  422.503   General provisions.

* * * * *
    (b) * * *
    (1) Complete an application as described in Sec.  422.501.
* * * * *
    (4) * * *
    (ii) To operate a quality improvement program and have an agreement 
for external quality review as required under this part.
* * * * *
    (vi) * * *
    (F) Procedures for internal monitoring and auditing.
    (G) * * *
    (1) If the MA organization discovers evidence of misconduct related 
to payment or delivery of items or services under the contract, it must 
conduct a timely, reasonable inquiry into that conduct.
    (2) The MA organization must conduct appropriate corrective actions 
(for example, repayment of overpayments, disciplinary actions against 
responsible employees) in response to the potential violation 
referenced in paragraph (b)(4)(vi)(G)(1) of this section.
    (H) For MA-PDPs, A comprehensive fraud and abuse plan to detect and 
prevent fraud, waste, and abuse as specified at Sec.  
423.504(b)(4)(vi)(H) of this chapter.
* * * * *
    (6) The MA organization's contract must not have been non-renewed 
under Sec.  422.506 within the past 2 years unless--
    (i) During the 6-month period beginning on the date the 
organization notified CMS of the intention to non-renew the most recent 
previous contract, there was a change in the statute or regulations 
that had the effect of increasing MA payments in the payment area or 
areas at issue; or
* * * * *

0
60. Amend newly redesignated Sec.  422.504 by-
    A. Revising paragraph (e)(4) introductory text.
    B. Revising paragraph (e)(4)(ii)
    C. Revising paragraph (e)(4)(iii).
    D. Removing paragraph (f)(2)(vii).
    E. Redesignating paragraph (f)(2)(viii) as paragraph (f)(2)(vii).
    F. Revising paragraph (h).
    G. Revising paragraph (i)(3)(ii).
0
The revisions read as follows:


Sec.  422.504   Contract provisions.

* * * * *
    (e) * * *
    (4) HHS, the Comptroller General, or their designee's right to 
inspect, evaluate, and audit extends through 10 years from the end of 
the final contract period or completion of audit, whichever is later 
unless-
* * * * *
    (ii) There has been a termination, dispute, or allegation of fraud 
or similar fault by the MA organization, in which case the retention 
may be extended to 6 years from the date of any resulting final 
resolution of the termination, dispute, fraud, or similar fault; or
    (iii) CMS determines that there is a reasonable possibility of 
fraud or similar fault, in which case CMS may inspect, evaluate, and 
audit the MA organization at any time.
* * * * *
    (h) Requirements of other laws and regulations. The MA organization 
agrees to comply with-
    (1) Federal laws and regulations designed to prevent or ameliorate 
fraud, waste, and abuse, including, but not limited to, applicable 
provisions of Federal criminal law, the False Claims Act (32 U.S.C. 
3729 et. seq.), and the anti-kickback statute (section 1128B(b)) of the 
Act); and
    (2) HIPAA administrative simplification rules at 45 CFR parts 160, 
162, and 164.
    (i) * * *
    (3) * * *
    (ii) Accountability provisions that indicate that the MA 
organization may only delegate activities or functions to a provider, 
related entity, contractor, or subcontractor in a manner consistent 
with the requirements set forth at paragraph (i)(4)of this section.
* * * * *

0
61. Amend newly redesignated Sec.  422.505 by adding paragraph (d).


Sec.  422.505   Effective date and term of contract.

* * * * *
    (d) Renewal of contract contingent on reaching agreement on the 
bid. Although an MA organization may be determined qualified to renew 
its contract under this section, if the organization and CMS cannot 
reach agreement on the bid under subpart F of this part, no renewal 
will take place, and the failure to reach an agreement is not subject 
to the appeals provisions in subpart N of this part.

0
62. Amend Sec.  422.506 by-
    A. Revising paragraph (a)(2)(i).
    B. Revising paragraph (a)(2)(ii).
    C. Revising paragraph (a)(3) introductory text.
0
The revisions read as follows:

[[Page 4738]]

Sec.  422.506   Nonrenewal of contract.

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

0
63. Amend Sec.  422.510 by revising paragraph (a)(4) to read as 
follows:


Sec.  422.510  Termination of Contract by CMS.

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

0
64. Amend Sec.  422.520 by-
    A. Revising the section heading.
    B. Revising paragraph (a)(3).
    C. Redesignating paragraph (b) introductory text as paragraph 
(b)(1).
    D. Adding new paragraph (b)(2).
    E. Adding new paragraph (d).
0
The revisions and additions read as follows:


Sec.  422.520   Prompt payment by MA organization.

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

0
65. Add new Sec.  422.527 at the end of subpart K to read as follows:


Sec.  422.527   Agreements with Federally qualified health centers.

    The contract between the MA organization and CMS must specify 
that--
    (a) The MA organization must pay a Federally qualified health 
center (FQHC) a similar amount to what it pays other providers for 
similar services.
    (b) Under such a contract, the FQHC must accept this payment as 
payment in full, except for allowable cost sharing which it may 
collect.
    (c) Financial incentives, such as risk pool payments or bonuses, 
and financial withholdings are not considered in determining the 
payments made by CMS under Sec.  422.316(a).

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

0
66. Amend Sec.  422.550 by revising paragraph (a)(2) to read as 
follows:


Sec.  422.550   General provisions.

    (a) * * *
    (2) Asset transfer. Transfer of title and property to another party 
constitutes change of ownership.
* * * * *

Subpart M--Grievances, Organization Determinations and Appeals

0
67. Amend Sec.  422.560 by-
    A. Adding paragraph (a)(3).
    B. Adding paragraph (c).
0
The additions read as follows:


Sec.  422.560   Basis and scope.

    (a) * * *
    (3) Section 1869 of the Act specifies the amount in controversy 
needed to pursue a hearing and judicial review and authorizes 
representatives to act on behalf of individuals that seek appeals. 
These provisions are incorporated for MA appeals by section 1852(g)(5) 
of the Act and part 405 of this chapter.
* * * * *
    (c) Relation to ERISA requirements. Consistent with section 
1857(i)(2) of the Act, provisions of this subpart may, to the extent 
applicable under regulations adopted by the Secretary of Labor, apply 
to claims for benefits under group health plans subject to the Employee 
Retirement Income Security Act.

0
68. Amend Sec.  422.561 by-
    A. Removing the definition of ``authorized representative''.
    B. Revising the definition of ``Enrollee''.
    C. Adding the definition of ``Representative''.
0
The revisions and addition read as follows:


Sec.  422.561   Definitions.

* * * * *
    Enrollee means an MA eligible individual who has elected an MA plan 
offered by an MA organization.
* * * * *
    Representative means an individual appointed by an enrollee or 
other party, or authorized under State or other applicable law, to act 
on behalf of an enrollee or other party involved in the appeal. Unless 
otherwise stated in this subpart, the representative will have all of 
the rights and responsibilities of an enrollee or party in obtaining an 
organization determination or in dealing with any of the levels of the 
appeals process, subject to the applicable rules described in part 405 
of this chapter.

0
68a. Amend Sec.  422.562 by--
    A. Revising paragraph (b)(4)(iv).
    B. Revising paragraph (b)(4)(vi).
    C. Revising paragraph (c)(1)(ii).
    D. Revising paragraph (d).
0
The revisions read as follows:


Sec.  422.562   General provisions.

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

0
69. Amend Sec.  422.564 by--
    A. Redesignating paragraphs (d) and (e) as paragraphs (f) and (g).
    B. Adding a new paragraph (d).
    C. Adding a new paragraph (e).
0
The additions read as follows:


Sec.  422.564   Grievance procedures.

* * * * *
    (d) Method for filing a grievance. (1) An enrollee may file a 
grievance with the MA organization 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 MA organization 
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

[[Page 4739]]

after the date the organization receives the oral or written grievance.
    (2) The MA organization may extend the 30-day timeframe by up to 14 
days if the enrollee requests the extension or if the organization 
justifies a need for additional information and documents how the delay 
is in the interest of the enrollee. When the MA organization extends 
the deadline, it must immediately notify the enrollee in writing of the 
reasons for the delay.
    (3) The MA organization 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 MA 
organization must cooperate with the QIO in resolving the complaint.
* * * * *

0
70. Amend Sec.  422.566 by revising paragraph (b)(4) to read as 
follows:


Sec.  422.566   Organization determinations.

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

0
71. Amend Sec.  422.568 by-
    A. Revising paragraph (a).
    B. Revising paragraph (c).
0
The revisions read as follows:


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

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

0
72. Amend Sec.  422.570 by revising paragraph (d)(2)(ii) to read as 
follows:


Sec.  422.570   Expediting certain organization determinations.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Informs the enrollee of the right to file an expedited 
grievance if he or she disagrees with the MA organization's decision 
not to expedite; and
* * * * *

0
73. Amend Sec.  422.572 by --
    A. Revising paragraph (b).
    B. Revising paragraph (c).
0
The revisions read as follows:


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

* * * * *
    (b) Extensions. The MA organization may extend the 72-hour deadline 
by up to 14 calendar days if the enrollee requests the extension or if 
the organization justifies a need for additional information and how 
the delay is in the interest of the enrollee (for example, the receipt 
of additional medical evidence from noncontract providers may change an 
MA organization's decision to deny). When the MA organization extends 
the deadline, it must notify the enrollee in writing of the reasons for 
the delay and inform the enrollee of the right to file an expedited 
grievance if he or she disagrees with the MA organization's decision to 
grant an extension. The MA organization must notify the enrollee of its 
determination as expeditiously as the enrollee's health condition 
requires, but no later than upon expiration of the extension.
    (c) Confirmation of oral notice. If the MA organization first 
notifies an enrollee of an adverse expedited determination orally, it 
must mail written confirmation to the enrollee within 3 calendar days 
of the oral notification.
* * * * *

0
74. Amend Sec.  422.582 by-
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    C. Revising paragraph (c)(2) introductory text.
0
The revisions read as follows:


Sec.  422.582   Request for a standard reconsideration.

    (a) Method and place for filing a request. A party to an 
organization determination must ask for a reconsideration of the 
determination by making a written request to the MA organization that 
made the organization determination. The MA organization may adopt a 
policy for accepting oral requests.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a party must file a request for reconsideration 
within 60 calendar days from the date of the notice of the organization 
determination.
    (c) * * *
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for reconsideration has expired, a party to 
the organization determination may file a request for reconsideration 
with the MA organization. The request for reconsideration and to extend 
the timeframe must--
* * * * *

0
75. Amend Sec.  422.584 by revising paragraph (e) to read as follows:


Sec.  422.584   Expediting certain reconsiderations.

* * * * *
    (e) Action following acceptance of a request. If an MA organization 
grants a request for expedited reconsideration, it must conduct the 
reconsideration and give notice in accordance with Sec.  422.590.
* * * * *

0
76. Amend Sec.  422.590 by --
    A. Revising paragraph (a)(1).
    B. Revising paragraph (d)(2).
0
The revisions read as follows:


Sec.  422.590   Timeframes and responsibility for reconsiderations.

    (a) Standard reconsideration: Request for services. (1) If the MA 
organization makes a reconsidered determination that is completely 
favorable to the enrollee, the MA organization must issue the 
determination (and effectuate it in accordance with Sec.  422.618(a)) 
as expeditiously as the enrollee's health condition requires, but no 
later than 30 calendar days from the date it receives the request for a 
standard

[[Page 4740]]

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

0
77. Amend Sec.  422.600 by-
    A. Revising paragraph (a).
    B. Revising paragraph (b).
0
The revisions read as follows:


Sec.  422.600   Right to a hearing.

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

0
78. Amend Sec.  422.602 by--
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    C. Revising paragraph (d).
0
The revisions read as follows:


Sec.  422.602   Request for an ALJ hearing.

    (a) How and where to file a request. A party 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 time 
frame as provided in part 405 of this chapter, a party must file a 
request for a hearing within 60 days of the date of the notice of a 
reconsidered determination. The time and place for a hearing before an 
ALJ will be set in accordance with Sec.  405.1020.
* * * * *
    (d) Insufficient amount in controversy. (1) If a request for a 
hearing clearly shows that the amount in controversy is less than that 
required under Sec.  422.600, the ALJ dismisses the request.
    (2) If, after a hearing is initiated, the ALJ finds that the amount 
in controversy is less than the amount required under Sec.  422.600, 
the ALJ discontinues the hearing and does not rule on the substantive 
issues raised in the appeal.

0
79. Revise Sec.  422.608 to read as follows:


Sec.  422.608   Medicare Appeals Council (MAC) review.

    Any party to the hearing, including the MA organization, who is 
dissatisfied with the ALJ hearing decision, may request that the MAC 
review the ALJ's decision or dismissal. The regulations under part 405 
of this chapter regarding MAC review apply to matters addressed by this 
subpart to the extent that they are appropriate.

0
80. Amend Sec.  422.612 by--
    A. Revising paragraph (a)(2).
    B. Revising paragraph (b).
    C. Revising paragraph (c).
0
The revisions read as follows:


Sec.  422.612   Judicial review.

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

0
81. Amend Sec.  422.616 by revising paragraph (a) to read as follows:


Sec.  422.616   Reopening and revising determinations and decisions.

    (a) An organization or reconsidered determination made by an MA 
organization, a reconsidered determination made by the independent 
entity described in Sec.  422.592, or the decision of an ALJ or the MAC 
that is otherwise final and binding may be reopened and revised by the 
entity that made the determination or decision, under the rules in part 
405 of this chapter.
* * * * *

0
82. Amend Sec.  422.620 by--
    A. Revising the section heading.
    B. Revising paragraph (b).
    C. Revising paragraph (c).
0
The revisions read as follows:


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

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

0
83. Amend Sec.  422.622 by revising paragraph (b)(1)(i) to read as 
follows:


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

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

[[Page 4741]]

Subpart N-Medicare Contract Determinations and Appeals

0
84. Amend Sec.  422.648 by adding paragraph (c) to read as follows:


Sec.  422.648  Reconsideration: Applicability.

* * * * *
    (c) Notice of any redetermination favorable to the MA organization 
applicant, including those resulting from a hearing or Administrator 
review conducted under this subpart, must be issued by July 15 for the 
contract in question to be effective on January 1 of the following 
year.

Subpart O-Intermediate Sanctions

0
85. Amend Sec.  422.752 by--
    A. Revising paragraph (a) introductory text.
    B. Revising paragraph (a)(8) introductory text.
    C. Revising paragraph (b)
0
The revisions read as follows:


Sec.  422.752   Basis for imposing sanctions.

    (a) All intermediate sanctions. For the violations listed in this 
paragraph (a), we may impose one, or more, of the sanctions specified 
in Sec.  422.750(a)(2), (a)(3), or (a)(4) on any MA organization that 
has a contract in effect. The MA organization may also be subject to 
other applicable remedies available under law.
* * * * *
    (8) Employs or contracts with an individual or entity who is 
excluded from participation in Medicare under section 1128 or 1128A of 
the Act (or with an entity that employs or contracts with such an 
excluded individual or entity) for the provision of any of the 
following:
* * * * *
    (b) Suspension of enrollment and marketing. If CMS makes a 
determination under Sec.  422.510(a), CMS may impose the intermediate 
sanctions in Sec.  422.750(a)(2) and (a)(4).

0
86. Amend Sec.  422.756 by-
    A. Revising paragraph (f)(2).
    B. Revising paragraph (f)(3).
0
The revisions read as follows:


Sec.  422.756   Procedures for imposing sanctions.

* * * * *
    (f) * * *
    (2) In the case of a violation described in paragraph (a) of Sec.  
422.752, or a determination under paragraph (b) of Sec.  422.752 based 
upon a violation under Sec.  422.510(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 MA 
organization 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.  422.752(b) other 
than a determination based upon a violation under Sec.  422.510(a)(4), 
CMS may impose civil money penalties on the MA organization in the 
amounts specified in Sec.  422.758 in addition to, or in place of, the 
sanctions that CMS may impose under paragraph (c) of this section.

0
87. Amend Sec.  422.758 by-
    A. Revising the introductory text.
    B. Revising paragraph (c).
0
The revisions read as follows:


Sec.  422.758   Maximum amount of civil money penalties imposed by CMS.

    If CMS makes a determination under Sec.  422.510(a), as described 
in Sec.  422.752(b) excepting those determinations under Sec.  
422.510(a)(4), CMS may impose civil money penalties in addition to, or 
in place of, the sanctions that CMS may impose under Sec.  422.756(c) 
in the following amounts:
* * * * *
    (c) If CMS makes a determination that a MA organization has 
terminated its contract other than in a manner described under Sec.  
422.512 and that the MA organization has therefore failed to 
substantially carry out the terms of the contract--$250 per Medicare 
enrollee from the terminated MA plan or plans at the time the MA 
organization terminated its contract, or $100, 000, whichever is 
greater.

Nomenclature Changes

0
88. In part 422, remove ``Departmental Appeals Board'' wherever it 
appears and add in its place ``Medicare Appeals Council''.
0
89. In part 422, remove ``DAB'' wherever it appears and add in its 
place ``MAC''.
0
90. In part 422, remove ``Medicare+Choice'' wherever it appears and add 
in its place ``Medicare Advantage''.
0
91. In part 422, remove ``M+C'' wherever it appears and add in its 
place ``MA''.
    (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. 05-1322 Filed 1-21-05; 11:19 am]
BILLING CODE 4120-01-S