[Federal Register Volume 70, Number 42 (Friday, March 4, 2005)]
[Proposed Rules]
[Pages 10746-10773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3992]



[[Page 10745]]

-----------------------------------------------------------------------

Part II





Department of Health and Human Services





-----------------------------------------------------------------------



Centers for Medicare & Medicaid Services



-----------------------------------------------------------------------



42 CFR Part 414



Medicare Program; Competitive Acquisition of Outpatient Drugs and 
Biologicals Under Part B; Proposed Rule

  Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed 
Rules  

[[Page 10746]]


-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 414

[CMS-1325-P]
RIN 0938-AN58


Medicare Program; Competitive Acquisition of Outpatient Drugs and 
Biologicals Under Part B

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would implement provisions of the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 that 
require the implementation of a competitive acquisition program for 
certain Medicare Part B drugs not paid on a cost or prospective payment 
system basis. Beginning January 1, 2006, physicians will generally be 
given a choice between obtaining these drugs from vendors selected 
through a competitive bidding process or directly purchasing these 
drugs and being paid under the average sales price system. We are 
seeking comments on which of the proposed approaches we should use to 
implement the competitive acquisition program as well as the criteria 
and standards that should be applied in the selection and enrollment of 
vendors.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on April 26, 2005.

ADDRESSES: In commenting, please refer to file code CMS-1325-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word.)
    2. By mail. You may mail written comments (one original and two 
copies) to the following address ONLY: Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Attention: CMS-1325-
P, P.O. Box 8010, Baltimore, MD 21244-8010.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Lia Prela, (410) 786-6508.

SUPPLEMENTARY INFORMATION: Submitting Comments: We welcome comments 
from the public on all issues set forth in this rule to assist us in 
fully considering issues and developing policies. You can assist us by 
referencing the file code CMS-1325-P and the specific ``issue 
identifier'' that precedes the section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. CMS posts all electronic 
comments received before the close of the comment period on its public 
website as soon as possible after they have been received. Hard copy 
comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, at the headquarters of the Centers for 
Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 
Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 
p.m. To schedule an appointment to view public comments, phone 1-800-
743-3951.
    Information on the competitive acquisition program can be found on 
the CMS homepage. You can access this data by going to the following 
Web site: http://www.cms.hhs.gov/providers/drugs/compbid.
    To assist readers in referencing sections contained in this 
preamble, we are providing the following table of contents.

Outline of Contents

I. Background
    A. Covered Drugs and Biologicals
    1. Drugs Furnished Incident to a Physician's Service
    2. Durable Medical Equipment (DME) Drugs
    3. Statutorily Covered Drugs and Other Drugs
    4. Types of Providers
    5. Drugs Paid on a Cost or Prospective Payment Basis
    B. History of the Current Payment System
    C. Revised Drug Payment Methodology
    D. Competitive Acquisition Program (CAP)
II. Provisions of the Proposed Rule
    A. Policies for the CAP
    1. General Overview of the CAP
    2. Categories of Drugs To Be Included Under the CAP 3. 
Competitive Acquisition Areas
    B. Operational Aspects of the CAP
    1. Statutory Requirements Concerning Claims Processing
    2. Proposed Claims Processing Overview
    3. Dispute Resolution
    C. CAP Contracting Process
    1. Quality and Product Integrity Aspects
    2. Bidding Entity Qualifications
    3. CAP Bidding Process `` Evaluation and Selection
    4. Contract Requirements
    5. Judicial Review
    D. Implementation of the CAP
    1. Physician Election Process
    2. Vendor or Physician Education
    3. Beneficiary Education
III. Collection of Information Requirements
IV. Response to Public Comments
V. Regulatory Impact Analysis
    A. Anticipated Effects
    B. Impact of Establishment of a Competitive Acquisition Program
    C. Alternatives Considered
    D. Impact on Beneficiaries Regulations Text

    In addition, because of the many organizations and terms to which 
we refer by acronym in this proposed rule, we are listing these 
acronyms and their corresponding terms in alphabetical order below.

Alphabetical List of Acronyms Appearing in the Proposed Rule

ASP--Average sales price.

[[Page 10747]]

AWP--Average wholesale price.
BBA--Balanced Budget Act of 1997, Public Law 105-33.
CAP--Competitive Acquisition Program.
CFR--Code of Federal Regulations.
CMS--Centers for Medicare & Medicaid Services (formerly Health Care 
Financing Administration).
DAW--Dispense as written.
DME--Durable medical equipment.
DMERC--Durable medical equipment regional carrier.
DOJ--Department of Justice.
EAC--Estimated acquisition cost.
ESRD--End-stage renal disease.
FAR--Federal Acquisition Regulation.
FDA--Food and Drug Administration.
GAO--Government Accountability Office.
GPOs--Group Purchasing Organizations.
GPO Access--Government Printing Office Access.
HCPCS--Healthcare Common Procedure Coding System.
HHS--Health and Human Services.
HIC--Health Insurance Number.
HIPAA--Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191.
ICD-9--International Classification of Diseases--Ninth Edition.
IVIG--Intravenous immune globulin.
LCDs--Local coverage determinations.
MMA--Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, Public Law 108-173.
MSN--Medical summary notice.
NDC--National Drug Code.
OIG--Office of Inspector General.
OPPS--Outpatient prospective payment system.
PIN--Provider identification number.
PSCs--Program Safeguard Contractors.
RFA--Regulatory Flexibility Act (September 19, 1980, Public Law 96-
354).
RFI--Request for information.
RTI--Research Triangle Institute.
UPIN--Unique provider identification number.
WAC--Wholesale acquisition cost.

I. Background

A. Covered Drugs and Biologicals

    Medicare Part B currently covers a limited number of prescription 
drugs. For the purposes of this proposed rule, the term ``drugs'' will 
hereafter refer to both drugs and biologicals. Currently covered 
Medicare Part B drugs generally fall into three categories: drugs 
furnished incident to a physician's service, drugs administered via a 
covered item of durable medical equipment (DME), and drugs covered by 
statute.
1. Drugs Furnished Incident to a Physician's Service
    These are injectable or intravenous drugs that are administered 
incident to a physician's service (section 1861(s)(2)(A) of the Social 
Security Act (the Act)). Under the ``incident-to'' provision, the 
physician must incur a cost for the drug, and must bill for it. The 
Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 
2003 revised the ``incident-to'' provision, permitting payment of 
``incident-to'' drugs under the CAP even though the physician 
participating in the CAP would not, in fact, incur a cost for the drug 
or actually bill for the drug. The Act limits coverage to drugs that 
are not usually self-administered. Examples include injectable prostate 
cancer drugs (such as lupron acetate for depot suspension, goserelin 
acetate implant), injectable drugs used in connection with the 
treatment of cancer (such as epoetin alpha), intravenous drugs used to 
treat cancer (such as paclitaxel and docetaxel used to treat breast 
cancer), injectable anti-emetic drugs used to treat the nausea 
resulting from chemotherapy, infliximab used to treat rheumatoid 
arthritis, and rituximab used to treat non-Hodgkin's lymphoma.
2. Durable Medical Equipment (DME) Drugs
    These are drugs that are administered through a covered item of 
DME, such as a nebulizer or pump. Two of the most common drugs in this 
category are the inhalation drugs albuterol sulfate and ipratropium 
bromide.
3. Statutorily Covered Drugs and Other Drugs
    Drugs specifically covered by statute include-- immunosuppressive 
drugs; hemophilia blood clotting factor; certain oral anti-cancer 
drugs; oral anti-emetic drugs; pneumococcal, influenza and hepatitis B 
vaccines; antigens; erythropoietin for trained home dialysis patients; 
certain other drugs separately billed by end stage renal disease (ESRD) 
facilities (for example, iron dextran, vitamin D injections); and 
osteoporosis drugs.
4. Types of Providers
    Types of providers and suppliers that are paid based on the current 
drug payment methodology for all or some of the Medicare covered drugs 
they furnish include: physicians, pharmacies, DME suppliers, hospital 
outpatient departments, and ESRD facilities.
5. Drugs Paid on a Cost or Prospective Payment Basis
    Drugs paid on a cost or prospective payment basis that are outside 
of the scope of this proposed rule include--drugs furnished during an 
inpatient hospital stay (except clotting factor); drugs paid under the 
outpatient prospective payment system (OPPS); drugs furnished by ESRD 
facilities whose payments are included in Medicare's composite rate; 
and drugs furnished by critical access hospitals, skilled nursing 
facilities (unless outside of a covered stay), comprehensive outpatient 
rehabilitation facilities, rural health facilities, and federally 
qualified health centers.

B. History of the Current Payment System

    In the June 5, 1991 physician fee schedule proposed rule (56 FR 
25792), we proposed that the drug payment limit be based on 85 percent 
of the national average wholesale price (AWP) of the drug. For very 
high volume drugs, we proposed that the drug payment limits be based on 
the lesser of the 85 percent of the AWP or the estimated acquisition 
cost (EAC) of the drugs. Based on comments received, the 1992 physician 
fee schedule final rule established a payment limit based on the lower 
of 100 percent of AWP or the EAC. However, the EAC proved to be 
unworkable and was never implemented. Various legislative proposals 
were submitted to move away from payment based on 100 percent of AWP, 
including changing the percentage of AWP to a lower amount. In 1997, 
the Congress amended the Act to limit payment for drugs not paid on a 
cost or prospective payment basis to the lower of the actual charge or 
95 percent of AWP (section 1842(o)(1) of the Act as added by section 
4556 of the Balanced Budget Act of 1997 (BBA 1997) (Pub. L. 105-33)).
    Numerous reports by the General Accounting Office (GAO), and the 
Office of Inspector General (OIG), as well as data collected by the 
Department of Justice (DOJ), indicated that 95 percent of list AWP 
reflected in published compendia is significantly higher than the 
prices that drug manufacturers, wholesalers, physician supply houses, 
specialty pharmacies, and similar entities actually charge to 
physicians and other suppliers purchasing these drugs.

C. Revised Drug Payment Methodology

    Based on these numerous reports conducted by the OIG and the GAO as 
well as the data collected by the DOJ

[[Page 10748]]

that identified the well-documented flaws in the AWP drug payment 
system, significant changes were made to the manner in which Medicare 
Part B pays for covered drugs.
    The MMA revised the drug payment methodology creating a new pricing 
system based on a drug's Average Sales Price (ASP). The MMA also 
provides for a program beginning in 2006 to give physicians a choice 
between--(1) obtaining these drugs from vendors selected through a 
competitive bidding process; or (2) directly purchasing these drugs and 
being paid under the ASP.
    Effective January 2005, Medicare pays for the majority of Part B 
covered drugs using a drug payment methodology based on the ASP. In 
accordance with section 1847A of the Act, manufacturers submit to us 
the ASP data for their products. These data include all the 
manufacturer's sales of a drug to all purchasers in the United States 
in a calendar quarter (excluding certain sales exempted by statute) and 
the total number of units of the drug sold by the manufacturer in that 
same quarter, with limited exceptions. The sales price is net of 
discounts such as volume discounts, prompt pay discounts, cash 
discounts, free goods that are contingent on any purchase requirement, 
chargebacks, and rebates (other than rebates under section 1927 of the 
Act). The Medicare payment rate is based on 106 percent of the ASP (or 
for single source drugs, 106 percent of wholesale acquisition cost 
(WAC), if lower), less applicable deductible and coinsurance.

D. Competitive Acquisition Program (CAP)

    Section 303(d) of the MMA provides for an alternative payment 
methodology for most Part B covered drugs that are not paid on a cost 
or prospective payment basis. In particular, section 303(d) of the MMA 
amends Title XVIII of the Act by adding a new section 1847B, which 
establishes a competitive acquisition program for the acquisition of 
and payment for competitively biddable Part B covered drugs and 
biologicals furnished on or after January 1, 2006.
    Beginning January 1, 2006, physicians will have a choice between--
(1) obtaining these drugs from entities selected to participate in the 
CAP in a competitive bidding process ; or (2) acquiring and billing for 
competitively biddable Part B covered drugs under the ASP drug payment 
methodology. The provisions for acquiring and billing for drugs through 
this new system, as well as additional information about this new drug 
payment system, are described in this proposed rule.
    The competitive acquisition program may provide opportunities for 
Federal savings to the extent that aggregate bid prices are less than 
106 percent of ASP. However, the CAP has other purposes than the 
potential to achieve savings. The competitive acquisition program 
provides opportunities for physicians who do not wish to be in the 
business of drug acquisition. Engaging in drug acquisition may require 
physicians to bear financial burdens such as employing working capital 
and bearing financial risk in the event of non-payment for drugs. The 
CAP is designated to reduce this financial burden for physicians. In 
addition, physicians who furnish drugs often cite the burden of 
collecting coinsurance on drugs and that drug coinsurance can represent 
large amounts for a beneficiary and physician. The competitive 
acquisition program eliminates the need for physicians to collect 
coinsurance on CAP drugs from Medicare beneficiaries.

II. Provisions of the Proposed Rule

A. Policy for the CAP

1. General Overview of the CAP
    [If you choose to comment on issues in this section, please include 
the caption ``Overview of the CAP'' at the beginning of your comments.]
Implementation
    To implement the CAP, we need to complete a number of activities 
prior to January 1, 2006, including--

designating or developing quality, service, and financial performance 
standards for vendors, creating a pricing methodology, designing and 
running a bidding process from solicitation through contract award, 
providing physicians with an opportunity to elect to participate and 
select a vendor; educating beneficiaries about the program; and other 
activities specified in section 1847B of the Act and described 
elsewhere in this proposed rule.
    The statute provides some flexibility in the development of the CAP 
by requiring an appropriate ``phase-in'' of the program and providing 
the Secretary with the discretion to select appropriate categories of 
drugs and appropriate geographic areas for the program. Section 
1847B(a)(1)(B) of the Act states that for purposes of implementing the 
CAP, ``the Secretary shall establish categories of competitively 
biddable drugs and biologicals. The Secretary shall phase in the 
program with respect to those categories beginning in 2006 in such 
manner as the Secretary determines to be appropriate.'' Additionally, 
the statute states that the competitive acquisition areas for the CAP 
on which contracts are to be awarded (and vendors chosen) are 
``appropriate geographic regions established by the Secretary'.
Activities Prior to the Issuance of This Proposed Rule
    Subsequent to the enactment of the MMA, we initiated the following 
activities to enable us to implement the statutory provisions of 
section 1847B of the Act:

--We awarded a contract to Research Triangle Institute (RTI) to obtain 
information and develop alternatives regarding the implementation of a 
drug and biological competitive bidding program. As part of this 
contract, RTI consulted with groups representing beneficiaries, 
physicians and suppliers, drug suppliers, and drug manufacturers to 
obtain input on the implementation of this MMA provision.
--We conducted a Special Open Door Listening Session on April 1, 2004, 
to gather additional input, and to allow interested parties to hear and 
be heard by other members of the healthcare industry.
--We established an electronic mailbox, [email protected], for 
interested parties to submit comments on the CAP program prior to the 
issuance of this proposed rule.
--We issued a Request for Information (RFI) on December 13, 2004. The 
purpose of this RFI was to assess the public's interest in bidding on 
contracts to supply drugs and biologicals for the CAP. In reply to the 
RFI, we received 15 responses expressing an interest to participate in 
the CAP. Most responders indicated a willingness to provide selected 
Part B drugs on a national basis. Responders also provided information 
regarding the types of drugs they would be most interested in providing 
within the selected jurisdictions. Four responders indicated a 
willingness to provide nearly all the drugs listed on the RFI.
    In the specialty areas of oncology, hematology, internal medicine, 
infectious disease, urology, rheumatology, and obstetrics/gynecology, 
several responders indicated a willingness to provide the most costly 
and the most frequently used drugs in these areas. In addition, some 
responders indicated an interest in providing drugs or biologicals in 
the areas of oncology, hematology, pulmonary, and neurology.

[[Page 10749]]

Regulations
    We propose to codify the requirements and provisions for the CAP in 
regulations at 42 CFR Part 414, Subpart K. We propose to revise the 
heading for subpart K to read ``Payment for Drugs and Biologicals under 
Part B''. We also propose to amend existing sections and section 
headings, and add new definitions and sections to set forth the 
proposed requirements with respect to the CAP. Specifically, we are 
proposing to revise existing Sec.  414.900, which sets forth the basis 
and scope for subpart K, to provide that the regulations in this 
subpart implement sections 1847A and 1847B of the Act. In the examples 
of drugs at Sec.  414.900, we propose to revise paragraph (b)(ii) to 
clarify that the hepatitis vaccine referred to in this paragraph is the 
hepatitis ``B'' vaccine. Under this subpart, we propose to add new 
Sec.  414.906 through Sec.  414.920 to address requirements with 
respect to payment under the CAP. We also are revising Sec.  414.902 to 
add definitions pertaining to the new CAP addressed in new Sec.  
414.906 through Sec.  414.920.
2. Categories of Drugs To Be Included Under the CAP
    [If you choose to comment on issues in this section, please include 
the caption ``Categories of Drugs to be Included under the CAP'' at the 
beginning of your comments.]
    Section 1847B of the Act describes a program that will permit 
physicians to elect to obtain drugs from contractors rather than 
purchasing and billing for those drugs themselves. The statute, 
therefore, most closely describes a system for the provision of and the 
payment for drugs provided incident to a physician's service. For 
example, the mechanisms described in the statute include the following:
     Only physicians are expressly given an opportunity to 
elect to participate in the CAP.
     The second sentence of section 1847B(a)(1)(A) of the Act 
explicitly indicates that section 1874B shall not apply in the case of 
a physician who elects section 1847A of the Act to apply.
     Physicians who elect to obtain drugs under the CAP make an 
annual selection of the vendor through which drugs will be acquired and 
delivered to the physician under Part B.
     Section 1847B(a)(3)(A) of the Act specifically applies the 
CAP to drugs and biologicals that are prescribed by a physician who has 
elected the CAP to apply.
     Payment for drugs furnished under the CAP is conditioned 
upon drug administration.
     The submission of information that will be used by the 
vendor for collection of cost sharing applies to physicians.
     The primary site for delivery of drugs furnished under the 
CAP is the physician's office.
     The statute requires the Secretary to make available to 
physicians on an ongoing basis a list of CAP vendors.
     The statute explicitly defines a ``selecting physician'' 
to be one who has elected the CAP program to apply.
    Section 1847B(a)(1)(B) of the Act specifically requires the 
Secretary to establish categories of drugs that will be included in the 
CAP, and requires the Secretary to phase in the program with respect to 
these categories, as the Secretary determines to be appropriate. 
Section 1847B(a)(1)(D) of the Act further authorizes the Secretary to 
exclude competitively biddable drugs and biologicals from the 
competitive bidding system if the application of competitive bidding to 
such drugs and biologicals--
    (1) Is not likely to result in significant savings; or
    (2) Is likely to have an adverse impact on access to such drugs and 
biologicals.
    Finally, the statute defines the term ``competitively biddable 
drugs and biologicals'' for purposes of the CAP as ``a drug or 
biological described in section 1842(o)(1)(C) of the Act and furnished 
on or after January 1, 2006.'' The drugs described in section 
1842(o)(1)(C) of the Act include most drugs paid under Medicare Part B 
and not otherwise paid under cost-based or prospective payment basis. 
Medicare Part B covered vaccines, drugs infused through a covered item 
of DME, and blood and blood products (not including clotting factor and 
intravenous immune globulin (IVIG)) are not included in the CAP because 
they are expressly excluded from section 1842(o)(1)(C) of the Act.
    The statutory definition of ``competitively biddable drugs'' 
therefore includes drugs administered incident to a physician's service 
(for example, drugs commonly furnished by oncologists), drugs 
administered through DME (for example, inhalation drugs) with the 
exception of DME infusion drugs, and some drugs usually dispensed by 
pharmacies (for example, oral immunosuppressive drugs). Although the 
statutory definition includes all these categories of drugs, as noted 
above, the specific mechanisms described under section 1847B of the Act 
relate to the provision of and the payment for drugs provided incident 
to a physician's service. There may be an alternative reading of the 
statute, under which the CAP is properly restricted to drugs 
administered incident to a physician's service. We welcome comments on 
this issue.
    Using our authority to establish drug categories and to phase in 
the CAP as appropriate, we could include in the CAP all drugs 
administered by physicians, or, for an initial period, only drugs that 
are usually administered by one or more physician specialties (for 
example, oncology or rheumatology). The CAP could be phased in with 
respect to categories of drugs in any number of ways. A phase-in could, 
for example, begin with drugs that are usually administered by 
oncologists, and later be extended to include all drugs administered by 
physicians. Given our concerns about the clear direction of the statute 
that the election to participate in this program rests with physicians, 
we do not believe it is possible to include drugs other than those 
administered as incident to a physician's service as part of this 
program. However, we also recognize that the statute provides a 
potentially broader definition of ``competitively biddable drugs and 
biologicals'' in section 1847B(a)(2)(A) of the Act. Therefore, we are 
soliciting comments on how an expansion of the drugs covered under this 
program might work, given that the option to participate clearly rests 
with the physician.
    We propose to set forth the definition for ``competitively biddable 
drugs'' and other terms relevant to the CAP in regulations under 
revised Sec.  414.902.
    Below we discuss the merits of these options for the drug 
categories to be included within the CAP. We also discuss our proposed 
approach to phasing in the program with respect to drug categories. We 
invite comments on all these options and on all aspects of our 
proposal. We welcome alternative suggestions for our consideration for 
the final rule.
Drugs Furnished Incident to a Physician's Service
    Under this option, all drugs furnished incident to a physician's 
service would be included in the CAP. The majority (more than 80 
percent) of Medicare Part B drug expenditures are for drugs furnished 
incident to a physician's service, such as chemotherapy drugs. 
Therefore, inclusion of all drugs furnished incident to a physician's 
service would be important to provide an alternative to physicians who 
did not want to be in the drug purchasing business and did not want to 
have to collect coinsurance on drugs. It may also provide more 
opportunity for realizing savings to the program than some other 
options.

[[Page 10750]]

Phasing in CAP Drugs by Physician Specialty
    As we have discussed above, it may be advisable to phase in the 
program by implementing the CAP initially for a limited set of drugs 
that are typically administered by a single physician specialty, such 
as a set of drugs commonly furnished by oncologists. Drugs commonly 
furnished by additional specialties could be included over the next few 
years of the program. Drugs typically furnished by oncologists 
constitute a large portion of the Part B drug market. In fact, drugs 
that are typically furnished incident to an oncologist's service 
represent the largest portion of expenditures for physician-
administered drugs under Medicare, followed by drugs typically 
furnished incident to a urologist's service, a rheumatologist's 
service, a gynecologist's service, an infectious disease specialist's 
service, and a primary care physician's service. Drugs typically 
administered by other physician specialties represent smaller portions 
of physician-administered drugs. We therefore believe that the basic 
phase-in decision with respect to drugs administered in physician 
offices is whether to begin implementation of the program only with 
drugs typically administered by oncologists, or with some set of drugs 
that other specialties (for example, urology) tend to administer. We 
discuss each of these options below.
Begin with Drugs Used by a Single Physician Specialty: Oncology
    Under this approach, we would initially implement the CAP for a 
limited set of drugs that are typically administered by oncologists. 
Drugs typically administered by other specialties would be included 
over the next few years of the program.
    The advantage of this approach is that during the phase-in we could 
focus our implementation efforts on one specialty with a more 
homogeneous set of concerns and issues. Also, by limiting the target 
drugs to those typically administered by oncologists, the required 
physician education process would be streamlined and potentially more 
effective. In addition, oncologists use a high proportion of the 
physician-administered drugs that could be included under the CAP. By 
initiating a phase-in with drugs that are typically administered by 
oncologists, we could thus begin to realize much of the benefit that is 
possible under the CAP. Therefore, we believe that it would be 
reasonable to include drugs typically administered by oncologists in 
the early stages of implementing the CAP.
    A potential disadvantage of singling out drugs typically 
administered by one physician specialty for the initial stages of 
phasing in the CAP is that the scope of the CAP in the early years may 
be too narrow for us to effectively identify issues or concerns for 
specialties that typically administer drugs not initially included. In 
addition, the CAP would not initially provide an alternative for 
physicians in other specialties. We welcome comments from oncologists 
and others about the merits of beginning the phase-in of the CAP with 
drugs typically administered by oncologists.
Begin with Specialties That Use Fewer Part B-Covered Drugs
    An alternative phase-in approach would be to choose a limited set 
of drugs that are typically administered by one or more physician 
specialties that use Part B-drugs less intensively. Focusing on Part B 
drugs typically administered by physicians in these specialties would 
limit the scope of the initial implementation, and allow operational 
issues to be addressed more gradually. This more limited scope would 
allow us to identify lessons and issues before phasing in larger drug 
classes (such as drugs typically administered by oncologists) at a 
later time. The disadvantage of this approach, however, is that such a 
limited scope may also restrict the potential benefits of the CAP, 
especially potential savings to the Medicare program and potential 
benefits to physicians in other specialties who do not want to be in 
the drug procurement and drug coinsurance collection business and who 
would prefer to obtain drugs that they typically administer under the 
CAP. The restricted scope of this approach might not elicit a response 
from potential bidders if they believe that the potential market is too 
limited.
    In light of these considerations, we are considering several 
alternative approaches to phasing in the CAP with respect to drug 
categories. One alternative would be to phase in the CAP by initially 
including all drugs typically administered by oncologists within the 
program. We would begin with drugs typically administered by 
oncologists primarily because these drugs constitute such a major 
portion of the physician-administered drugs under Part B. Another 
option is to begin with some set of the drugs that are typically 
administered in physician offices by other specialties (for example, 
drugs typically administered by urologists). This option would mean 
that implementation of the CAP would have a more limited impact 
initially on the provision and payment for Part B drugs than beginning 
with drugs typically administered by oncologists or with all Part B 
drugs furnished incident to a physician's service. A final option is to 
implement the CAP for all Part B drugs that are furnished incident to a 
physician's service. We are not considering categories smaller than 
drugs typically administered by a physician specialty. For the oncology 
option, for example, we are not considering to include only the top 
three oncology drugs. All drugs typically administered by oncologists 
would be included under this option.
    We are actively considering all these options, but we are not 
proposing any particular option at this time. Rather, we encourage 
comments on all the options that we have discussed. We also welcome 
recommendations of other options for consideration, and will also 
consider other options presented by commenters for adoption in the 
final rule. We especially encourage comments from physicians concerning 
their preferences about how a phase-in should be designed and more 
generally how the categories of drugs under the CAP should be 
structured. For example, physicians may prefer relatively broad drug 
categories that encompass all the drugs that they commonly furnish, 
which presumably would allow those physicians to largely avoid 
purchasing drugs for their Medicare patients. Under this proposed 
approach one category of drugs might be all the drugs commonly 
furnished incident to an oncologist's (or other specialist's) service. 
Other narrower ways of structuring the categories are also possible. 
After further analysis and consideration of the comments, we may adopt 
one of the options described above, or an option brought to our 
attention through the comment process, in the final rule.
    It is important to note that, if we choose to phase in the CAP by 
restricting the program initially to drugs typically administered by 
members of one specialty, all physicians who administer the drugs 
selected would still be eligible to elect to obtain these drugs through 
the CAP and to select a vendor of these drugs. For example, if we 
choose to phase in the program initially with drugs typically 
administered by oncologists, participation in the CAP would not be 
restricted to oncologists: non-oncologists who prescribe these drugs 
would still be eligible to elect the CAP and to select a vendor from 
which to obtain these drugs.
    It is also important to note that the categories that are 
established for

[[Page 10751]]

physicians to select will be the same categories that would be open for 
bids by potential vendors. For example, if a category embracing all 
drugs typically administered by oncologists is established, vendors 
would bid on all the HCPCS codes contained in the category and an 
oncologist who elects to participate in the CAP would be electing to 
acquire that category from the vendor. Vendors would not be able to 
submit bids on only some of the HCPCS codes in the category, and 
physicians would not be able to elect to acquire only some of the HCPCS 
codes in that category from the vendor. Table 1 below illustrates a 
potential category.

                 Table 1.--Most Commonly Used HCPCS by Oncologists Defined by Specialty Code 90
   [Using 2003 Medicare Claims Data, Allowed Services Greater Than 100 and Allowed Charges (Adjusted for 2005)
                                              Greater Than $10,000]
----------------------------------------------------------------------------------------------------------------
        HCPC                         Description                        HCPC                 Description
----------------------------------------------------------------------------------------------------------------
J0207...............  Amifostine.                               J9040..............  Bleomycin sulfate
                                                                                      injection.
J0637...............  Caspofungin acetate.                      J9045..............  Carboplatin injection.
J0640...............  Leucovorin calcium injection.             J9050..............  Carmus bischl nitro inj.
J0696...............  Ceftriaxone sodium injection.             J9060..............  Cisplatin 10 mg injection.
J0800...............  Corticotropin injection.                  J9062..............  Cisplatin 50 mg injection.
J0880...............  Darbepoetin alfa injection.               J9065..............  Inj cladribine per 1 mg.
J0895...............  Deferoxamine mesylate inj.                J9090..............  Cyclophosphamide 500 mg
                                                                                      inj.
J1190...............  Dexrazoxane HCl injection.                J9096..............  Cyclophosphamide
                                                                                      lyophilized.
J1260...............  Dolasetron mesylate.                      J9160..............  Denileukin diftitox, 300
                                                                                      mcg.
J1440...............  Filgrastim 300 mcg injection.             J9170..............  Docetaxel.
J1441...............  Filgrastim 480 mcg injection.             J9178..............  Inj, epirubicin hcl, 2 mg.
J1450...............  Fluconazole.                              J9181..............  Etoposide 10 mg inj.
J1626...............  Granisetron HCl injection.                J9182..............  Etoposide 100 mg inj.
J1642...............  Inj heparin sodium per 10 u.              J9185..............  Fludarabine phosphate inj.
J1645...............  Dalteparin sodium.                        J9190..............  Fluorouracil injection.
J1650...............  Inj enoxaparin sodium.                    J9201..............  Gemcitabine HCl.
J1655...............  Tinzaparin sodium injection.              J9202..............  Goserelin acetate implant.
J1745...............  Infliximab injection.                     J9206..............  Irinotecan injection.
J1750...............  Iron dextran.                             J9208..............  Ifosfomide injection.
J1756...............  Iron sucrose injection.                   J9209..............  Mesna injection.
J2353...............  Octreotide injection, depot.              J9213..............  Interferon alfa-2a inj.
J2355...............  Oprelvekin injection.                     J9214..............  Interferon alfa-2b inj.
J2405...............  Ondansetron hcl injection.                J3305..............  Inj trimetrexate
                                                                                      glucoronate.
J2430...............  Pamidronate disodium/30 mg.               J9217..............  Leuprolide acetate
                                                                                      suspension.
J2505...............  Injection, pegfilgrastim 6 mg.            J9265..............  Paclitaxel injection.
J2820...............  Sargramostim injection.                   J9280..............  Mitomycin 5 mg inj.
J2997...............  Alteplase recombinant.                    J9293..............  Mitoxantrone hydrochl/5 mg.
J3370...............  Vancomycin hcl injection.                 J9310..............  Rituximab cancer treatment.
J3487...............  Zoledronic acid.                          J9340..............  Thiotepa injection.
J9000...............  Doxorubic hcl 10 mg vl chemo.             J9350..............  Topotecan.
J9001...............  Doxorubicin hcl liposome inj.             J9355..............  Trastuzumab.
J9010...............  Alemtuzumab injection.                    J9390..............  Vinorelbine tartrate/10 mg.
J9015...............  Aldesleukin/single use vial.              Q0136..............  Non esrd epoetin alpha inj.
J9017...............  Arsenic trioxide.                         Q3025..............  IM inj interferon beta 1-a.
J9031...............  Bcg live intravesical vac.
----------------------------------------------------------------------------------------------------------------

    In addition, it is important to keep in mind that HCPCS codes 
describe products represented by multiple National Drug Codes (NDC). 
For example, the drug cyclophosphamide is manufactured by a number of 
different pharmaceutical companies and has multiple NDC codes.
    As discussed in proposed Sec.  414.908(d), we are proposing that 
vendors will not be required to provide every National Drug Code 
associated with a HCPCS code. Section 1847B(b)(1) of the Act states 
that ``in the case of a multiple source drug, the Secretary shall 
conduct such competition among entities for the acquisition of at least 
one competitively biddable drug and biological within each billing and 
payment code within each category for each competitive acquisition 
area.'' However, we are also proposing that vendors will be required to 
provide potential physician participants in the competitive acquisition 
program the specific NDCs within each HCPCS code that they will be able 
to provide to the physician. Potential vendors would also need to 
provide this same information to us as part of the bidding application. 
In addition, we are proposing that this information will be provided to 
physicians who request it no later than the beginning of the election 
period during which the physician chooses whether to participate in the 
CAP and, if so, selects a vendor. We anticipate that the first 
physician election process will occur in the fall of 2005.
    Finally, we would like to emphasize that, in framing these options, 
we are relying solely on the Secretary's statutory authority under 
section 1847B(a)(1)(B) of the Act to establish categories of drugs that 
will be included in the CAP, and to phase in the program with respect 
to these categories. We do not propose to rely at this time on the 
Secretary's authority under section 1847B(a)(1)(D) of the Act to 
exclude competitively biddable drugs and biologicals from the CAP on 
the grounds that including those drugs and biologicals would not result 
in significant savings or would have an adverse impact on access to 
those drugs and biologicals. At this time, we have made no findings 
that including certain drugs in the CAP would not result in significant 
savings or would have an adverse impact on access to those drugs. We 
propose to set forth the circumstances for which we may exclude 
competitively biddable drugs and biologicals (including categories of

[[Page 10752]]

drugs) from the CAP at proposed Sec.  414.906(b) of our regulations.
3. Competitive Acquisition Areas
Definition of Competitive Acquisition Areas
    (If you choose to comment on issues in this section, please include 
the caption ``Competitive Acquisitions Areas'' at the beginning of your 
comments.)
    Section 1847B(a)(1)(A)(i) of the Act provides that, under the 
competitive acquisition program (CAP), competitive acquisition areas 
are established for contract award purposes. Section 1847B(a)(2)(C) of 
the Act further defines the term ``competitive acquisition area,'' for 
purposes of the CAP, as ``an appropriate geographic region established 
by the Secretary.'' Section 1847B(b)(1) of the Act also requires that 
the Secretary conduct a competition among entities for the acquisition 
of at least one competitively biddable drug and biological within each 
billing and payment code within each category of competitively biddable 
drugs for each competitive acquisition area. Finally, section 
1847B(b)(3) of the Act states that the Secretary may limit (but not 
below two) the number of qualified entities that are awarded contracts 
for any competitively biddable drug category and competitive 
acquisition area.
    Under this statutory scheme, competitive acquisition areas (that 
is, the geographic areas the contractor would be responsible for 
serving) have an important role in the CAP. These areas constitute the 
geographic boundaries within which entities will compete for contracts 
to provide competitively biddable drugs. The definition of these areas 
will therefore be a crucial factor in determining--the number of 
entities that bid for contracts; the number of entities that are 
ultimately awarded these contracts; the level of savings from the 
successful bids; and the efficiency with which the system delivers 
competitively biddable drugs to physicians. At the same time, the 
statute grants the Secretary broad discretion in defining competitive 
acquisition areas under the CAP. We believe that several factors must 
be considered in defining competitive acquisition areas for 
competitively biddable drugs and biologicals. In particular, the 
designation of competitive acquisition areas are to take into account 
how promptly physicians need drugs provided to their practices if 
distribution capacity varies geographically. In addition, aspects of 
vendors and their distribution systems, such as current geographic 
service areas; density of distribution centers, distances drugs and 
biologicals are typically shipped, and costs associated with shipping 
and handling; the relationships between vendors and their suppliers 
(manufacturers, wholesalers, etc.); and state licensing laws that may 
preclude vendors from operating in a State are to be taken in account. 
These factors can affect the price of supplying drugs to different 
regions as well as the size of the market in which vendors are allowed 
or able to operate.
    Section 1847B(a)(1)(B) of the Act specifically requires the 
Secretary to phase in the CAP with respect to the categories of drugs 
and biologicals in the program, in such a manner as the Secretary 
determines to be appropriate. We believe that this provision, 
particularly in conjunction with the statutory definition of 
``competitive acquisition area'' (``an appropriate geographic region 
established by the Secretary'') (emphasis added), provides broad 
authority for the Secretary to phase in the CAP with respect to the 
geographical areas in which the program will be implemented. Below we 
discuss several options for defining ``competitive acquisition areas'' 
for purposes of the CAP. Each of these definitions could be adopted 
initially in a manner that allows for the program to be phased in 
geographically. For example, defining ``competitive acquisition areas'' 
in terms of regions or in terms of States is compatible with phasing in 
the program by implementing it initially in one or more, but not all, 
regions or States. Under this phase-in plan, the program would 
eventually be expanded to all regions or States. Conversely, the 
program could be phased in by initially employing a national 
competitive acquisition area. This would limit participation in the 
program initially to those vendors that could compete to bid and supply 
drugs nationally, to the exclusion of the vendors that could bid and 
supply drugs on a regional or State basis. Under this phase-in plan, 
the definition of competitive acquisition area would ultimately be 
established on the basis of regions, States, or some other smaller 
geographic area, which might expand the number of vendors that could 
bid to participate in the program.
    We have identified several basic options for defining the 
competitive acquisition areas required under the CAP. The basic options 
for defining these areas include--establishing a national competitive 
acquisition area; establishing regional competitive acquisition areas; 
and establishing statewide competitive acquisition areas. We invite 
comment on these possible approaches.
National Competitive Acquisition Area
    Under this option, the competitive acquisition program would 
require participating vendors to offer competitively biddable drugs and 
biologicals to physicians in any State within the United States, as 
well as the District of Columbia, Puerto Rico, and the U.S. 
territories. In other words, there would be only a single national 
competitive acquisition area. Bidders that seek to compete in a 
national competitive acquisition area would need a national network of 
distribution points that could serve physicians in a timely manner with 
products that are properly stored and shipped. In addition, drug 
vendors would need to be appropriately licensed in all 50 States, the 
District of Columbia, Puerto Rico, and the U.S. territories in order to 
comply with FDA rules.
    Establishing a single national competitive acquisition area may 
have several advantages. First, in a single national area, the number 
of Medicare beneficiaries and physicians is sufficiently large to 
encourage vendors to participate to gain market share. This option may 
also impose less administrative burden on potential bidders than other 
options, because all applicants would be applying for contracts to 
cover the same region. The administrative burden on CMS might also be 
less: the fewer the number of acquisition areas, the fewer bids that 
must be submitted and evaluated. However, smaller regional drug 
distributors would be less likely to participate in the CAP under this 
option, because they may not be able to serve the entire country. This 
would reduce competition in the bidding process.
Regional Competitive Acquisition Areas
    Under this general category, there are several possible options. 
One option is that we could establish multi-State acquisition areas 
based on existing markets. Under this option, we could define 
acquisition areas based on existing markets of regional distributors 
and specialty pharmacies. As an alternative regional approach, we could 
define four large competitive acquisition areas, which would limit the 
administrative burden of implementation. With just four acquisition 
areas, it may be less likely that there would be an insufficient number 
of vendors in any one area. We could also determine competitive 
acquisition areas that coincide with the prescription drug plan regions

[[Page 10753]]

established under section 1860D-11 of the Act (http://www.cms.hhs.gov/medicarereform/mmaregions/) for more information.
    Establishing sub-national regions could be a natural first step in 
a geographic phase-in of the program. As discussed above, for example, 
we could implement the CAP in only a few areas at first. Overcoming 
challenges in the first phase would be important in gaining wide 
physician and vendor participation and successful implementation on a 
large scale. If we chose this approach, we would consider factors such 
as the number of potential bidders, the capacity of existing 
distribution networks, and the distribution of physician specialties in 
selecting a limited geographic area for the first competitive 
acquisition bidding process. This approach would also allow regional 
distributors to participate more easily in the CAP, thereby potentially 
increasing competition in the bidding process.
    However, this approach may impose additional administrative burden 
on national vendors since they may need to submit multiple bids to 
cover the entire country.
Competitive Acquisition Areas Based on Single States
    Under this option, we would define CAP areas based on State 
boundaries, the District of Columbia, Puerto Rico, and the territories. 
This option has the advantage of using clearly defined geopolitical 
borders as the basis for acquisition areas. As we have noted, current 
licensing for specialty pharmacies and vendors operates at the State 
level. Also, establishing State-based regions could support a 
geographic phase-in of the program, and we could implement the CAP in 
only some States at first. (As in the case of a possible phase-in of a 
region-based approach, we would consider factors such as the number of 
potential bidders, the capacity of existing distribution networks, and 
the distribution of physician specialties in selecting one or more 
States for the first competitive acquisition bidding process.) 
Overcoming challenges in the first phase would be important in gaining 
wide physician and vendor participation and successful implementation 
on a large scale. This approach would also allow State-based regional 
distributors to more easily participate in CAP, thereby potentially 
increasing competition in the bidding process.
    We encourage comments on all the options that we have discussed. We 
also welcome recommendations of other options for consideration. We 
believe that defining competitive acquisition areas, at least 
initially, on the basis of a level no smaller than the States is the 
most feasible approach. To our knowledge, there are few, distributors 
of drugs administered incident to physician services that operate on a 
scale smaller than a State level. However, we welcome comments on this 
issue, and all other aspects of this discussion. We are still 
considering all the options described above, and will also consider 
other options presented by commenters. After further analysis and 
consideration of the comments, in the final rule, we may adopt one of 
the options described above, or an option brought to our attention 
through the comment process.

B. Operational Aspects of the CAP

1. Statutory Requirements Concerning Claims Processing
    [If you choose to comment on issues in this section, please include 
the caption ``Statutory Requirements Concerning Claims Processing'' at 
the beginning of your comments.]
    Section 1847B(a)(3)(A) of the Act sets forth specific requirements 
that have a direct impact on the administrative and operational 
parameters for instituting a CAP. This section of the statute requires 
the following: (1) Vendors participating in the Part B Drug Competitive 
Acquisition Program bill the Medicare program for the drug or 
biological supplied, and collect any applicable deductibles and 
coinsurance from the Medicare beneficiary. (For purposes of this 
preamble the term ``vendor'' means the term ``contractor'' as referred 
to in the statute.) (2) Any applicable deductible and coinsurance may 
not be collected unless the drug was administered to the beneficiary. 
(For purposes of this preamble the term ``drug'' refers to drugs and 
biologicals) (3) Medicare can make payments only to the vendor and 
these payments are conditioned upon the administration of the drug.
    In addition, the Secretary is required to provide for a process for 
adjustments to payments in those cases when payment was made for the 
drugs, but they were not actually administered to the beneficiary. The 
Secretary is also required to provide a process by which physicians 
submit information to vendors for purposes of the collection of 
applicable deductible or coinsurance. Payment may not be made for 
competitively biddable drugs supplied to a physician who has elected to 
participate in CAP unless the vendor supplying the drugs has a contract 
to provide them in that geographic area and the physician receiving 
them has elected the vendor to supply that category of drug in that 
geographic area.
    Section 1847B(b)(4)(E) of the Act requires that the vendor only 
supply drugs directly to the selecting physicians and not directly to 
individuals, except under circumstances and settings where the 
individual currently receives drugs in his or her home or another non-
physician office setting, as provided by the Secretary. In addition, 
the vendor may not provide drugs to a physician participating in the 
CAP, unless the physician submits a written order or prescription, and 
any other data specified by the Secretary, to the vendor. However, the 
statute also makes it clear that the physician is not required to 
submit an order (prescription) for individual treatments of a drug or 
biological, and that the statute is not intended to change a 
physician's flexibility to choose whether to write a prescription for a 
single treatment or a course of treatments. In certain sections of this 
proposed rule, we have used the term prescription and the term order 
interchangeably. Section 1847B of the Act uses the term 
``prescription'' but does not define it. For purposes of the CAP, we 
propose to interpret the term to include a written order submitted to 
the vendor. We note that section 1847B(b)(4)(E) of the Act, in 
requiring that vendors deliver drugs only upon receipt of a 
``prescription,'' expressly indicates that the statute does not 
``require a physician to submit a prescription for each individual 
treatment'' or ``change a physician's flexibility in terms of writing a 
prescription for drugs or biologicals for a single treatment or a 
course of treatment.'' It is not our intention to restrict the 
physician's flexibility when ordering drugs from a CAP vendor, or to 
require that a physician participating in CAP would order drugs 
differently from a CAP vendor than he or she would a non-CAP vendor. 
(For purposes of this preamble the term ``order'' and ``prescription'' 
are used interchangeably.)
    Section 1847B(b)(5) of the Act requires the Secretary to establish 
rules under which drugs acquired under the CAP may be used to resupply 
inventories of these drugs administered by physicians. This process 
will apply only if the physician can demonstrate all of the following 
to the Secretary: the drugs are required immediately, the physician 
could not have anticipated the need for the drugs, the vendor could not 
have delivered the drugs in a timely manner, and the drugs were 
administered in an emergency situation.

[[Page 10754]]

2. Proposed Claims Processing Overview
    [If you choose to comment on issues in this section, please include 
the caption ``Claims Processing Overview'' at the beginning of your 
comments.]
    To comply with the statutory requirements described above, we 
propose to implement a claims processing system that will enable 
selected vendors to bill the Medicare program directly, and to bill the 
Medicare beneficiary and/or his or her third party insurance after 
verification that the drug has been administered. We propose to set 
forth the requirements for payment under the CAP at proposed Sec.  
414.906 of our regulations. For the initial implementation of the CAP, 
we plan to designate one Medicare fee-for-service claims processing 
carrier to process all drug vendor's Medicare claims. (In this preamble 
this entity will be referred to as the designated carrier.) Physicians 
who elect to participate in the program will continue to bill their 
local Medicare fee-for-service claims processing carrier for 
physicians' services.
    This proposed rule uses the term ``carrier'' to describe an entity 
that processes Medicare benefit claims and performs related functions 
under Part B. These entities may service a particular type of provider, 
or they may service all Part B suppliers within a specified geographic 
area.
    The designated carrier and the physician's local carrier would each 
be charged with keeping track of the physician's vendor selection and 
making sure that the physician is administering drugs provided by the 
vendor with whom he or she has elected to participate. This process 
also would involve our central claims processing system. The following 
diagram describes the procedures for claims processing under the CAP.
[GRAPHIC] [TIFF OMITTED] TP04MR05.000

    At this time we are proposing to incorporate only drugs incident to 
a physician's service into the CAP. As noted earlier in section II.B.2. 
of this preamble, we are seeking comment on a broader definition of 
``competitively biddable drugs''. As described below, consistent with 
the statute, we propose that when a physician who has elected to 
participate in the CAP prepares an order for a drug to be administered 
to a Medicare beneficiary, the physician would provide basic 
information about the beneficiary and the beneficiary's third party 
insurance to the drug vendor.
    As we specify at proposed Sec.  414.906(a)(4) of our regulations, 
we are proposing that CAP vendors would deliver drugs directly to 
physicians in their offices. Although the statute allows CMS to provide 
for the shipment of drugs to other settings under certain conditions, 
we are not proposing to implement the CAP in alternative settings at 
this time.
    The vendor would use order form information to bill the beneficiary 
and/or his or her third party insurance for applicable deductible and 
coinsurance after drug administration has been verified by the Medicare 
carrier.
    The claims processing methodology we propose to implement would 
verify drug administration to the beneficiary by means of a 
prescription number that would be placed on the physician claim for 
drug administration and the drug vendor claim for the drug. Our claims 
processing system would use the prescription number to match the two 
claims and authorize payment to the vendor.
    We propose that the physician could place an order for a 
beneficiary's entire course of treatment at one time however; the 
vendor may split the order into appropriately spaced shipments. The 
vendor would create a separate prescription number for each shipment 
and the physician would track each prescription number separately and 
place the appropriate prescription number(s) on each drug 
administration claim. The physician would also have the ability to 
modify the course of treatment and submit a separate order as 
necessary.
    The drug vendor would generate the prescription number when it 
prepares the drug for shipping. The drug and prescription number would 
be shipped to the physician and would be maintained until the date of 
drug administration. At the time the drug was administered to the 
beneficiary, the physician or his or her staff would place the 
prescription number for each drug administered on the claim form. 
Similarly, when the vendor billed Medicare for the drug it shipped to 
the physician, it would place the relevant prescription number on the 
claim form. The electronic version of the Medicare carrier claim form 
has space for a series

[[Page 10755]]

of prescription numbers, which CMS has not utilized previously for Part 
B drugs.
    As part of implementing the CAP program, we would require that 
vendors and physicians who elect to participate in CAP have the 
capability of submitting these prescription numbers to us in their 
claims processing systems. If physicians and potential vendors are not 
already billing other payors using prescription numbers, they would 
need to work with their internal information systems staff or practice 
management software vendors to make the necessary changes to submit 
these data elements to Medicare in a manner consistent with HIPAA 
transaction guidelines for capturing prescription numbers.
    Our claims processing methodology would use the prescription number 
to match the two claims and authorize payment to the vendor. Under our 
proposed approach, payment to the vendor would be dependent upon the 
filing of the drug administration claims by the physician, and the 
physician's claim being approved for payment by the CMS claims 
processing system. We are seeking public comment on whether there are 
demonstrable, compelling reasons why CMS should consider making a 
partial payment to the vendor in cases where the drug administration 
claim is not received by the CMS claims processing system within 28 
calendar days of the anticipated date of administration. We are also 
seeking public comment on what the appropriate percentage of the 
partial payment should be.
    Although we are not proposing to make a partial payment at this 
time, the following section describes how we would propose that the 
partial payment methodology would work, if we decide to implement this 
option. After the designated carrier makes the partial payment, the CMS 
claims processing system would continue to attempt to match the 
physician claim and the vendor claim for 90 days. We would not pay 
interest on interim payments. If a match of the two claims occurred, 
the vendor would receive Medicare payment for the remaining amount of 
money due on the claim. If no match between the two claims was made 
within 90 days, recovery of the amount already paid by Medicare would 
occur using normal Medicare overpayment recovery processes.
    As required by the statute, the vendor would not be allowed to bill 
the beneficiary and/or his or her third party insurance for any 
applicable deductible and coinsurance until the Medicare carrier had 
verified that the physician has administered the drug to the 
beneficiary, and final payment is made by the Medicare program. Proof 
that the drug was administered to the beneficiary would be established 
by the physician's claim being matched with the drug vendor's claim in 
the Medicare central claims processing system. After the two claims are 
matched the claims processing system would notify the designated 
carrier to issue final payment to the vendor. The obligation to pay 
interest on a clean claim would not arise until drug administration had 
been verified by the Medicare claims processing system. We propose that 
issuance of final payment by the Medicare program would serve as 
notification to the vendor that drug administration had been verified 
and that the vendor could proceed with billing the beneficiary or his 
or her third party insurance.
    We propose that in accordance with section 1847B(b)(5) of the Act, 
in emergency situations drugs acquired under the CAP could be used to 
resupply inventories of drugs administered by physicians. We propose 
that this process would apply if the physician could demonstrate all of 
the following to the local carrier: (1) The drugs were required 
immediately. (2) The physician could not have anticipated the need for 
the drugs. (3) The vendor could not have delivered the drugs in a 
timely manner. (4) The drugs were administered in an emergency 
situation.
    As discussed in section C.2.a. of the preamble, we are seeking 
public comment on how to define timeframes for timely delivery, and for 
emergency delivery.
    We propose that in emergency situations that met the criteria 
outlined above, the physician would treat the Medicare beneficiary with 
a drug from his or her own stock. After administering the drug to the 
beneficiary, the physician would prepare an order, identifying the drug 
as an emergency replacement. When the drug was received from the vendor 
the physician would return the drug to his stock. Both the physician 
and the vendor would bill normally for the drug or its administration 
as applicable. We seek comment on the additional criteria we will use 
to define the replacement process.
    We also propose to allow the physician to obtain a drug under the 
ASP methodology in ``furnish as written'' cases when medical necessity 
requires that a specific formulation of a drug be furnished to the 
patient. This situation closely parallels dispense as written (DAW) 
prescription orders. In cases when the vendor has not been contracted 
to furnish a specific formulation of a drug or a product defined by the 
product's NDC number, and the specified product is medically necessary, 
the physician could purchase the product for the beneficiary from a 
source other than the CAP vendor and bill Medicare for it using the ASP 
methodology. We would establish this method of alternative payment for 
a competitively biddable drug under proposed Sec.  414.906(c)(2) of our 
regulations.
    We propose that physicians who elect to participate in the CAP 
would continue to bill their local carrier for drug administration. In 
addition, we are proposing that for those drugs that are not included 
in the CAP, and for drug categories that the physician does not select, 
the physician would continue to bill and be paid under the ASP 
methodology. We are seeking public comment on whether physicians must 
obtain all categories of drugs that a particular CAP vendor provides 
from the vendor, or whether the physician should be allowed to choose 
the categories drugs he wishes to obtain from the vendor.
    Some physicians have expressed concern that participation in the 
CAP would be administratively burdensome, for example, involve clerical 
and inventory resources. We do not believe that the clerical and 
inventory resources associated with participation in the CAP exceed the 
clerical and inventory resources associated with buying and billing 
drugs under the ASP system. The payment for clerical and inventory 
resources associated with buying and billing for drugs under the ASP 
system is bundled into the drug administration payment under the 
physician fee schedule. Taking these factors into account we are not 
proposing to make a separate payment to physicians for the clerical and 
inventory resources associated with participation in the CAP program.
    In addition, we propose to require prompt claim filing on the part 
of physicians who elect to participate in the CAP in order to 
facilitate the match between the physician claim and the drug vendor 
claim so that drug administration can be verified. Statistics obtained 
from Medicare claims filing data indicate that more than 75 percent of 
physician's claims are currently filed within 14 days of the date of 
service. We propose that in their CAP election agreements, physicians 
who choose to participate in CAP would be required to agree to bill 
their claims within 14 calendar days of the date the drug was 
administered to the beneficiary, unless extenuating circumstances 
prevented

[[Page 10756]]

them from filing the claim. We seek public comment on how we should 
define the extenuating circumstances.
    All drug vendors would submit their claims to the designated 
carrier who would be designated to receive them.
    After a physician saw a Medicare beneficiary and ordered a CAP 
drug, the physician would check that he or she was planning to use the 
drug consistent with any local coverage determination policies (LCDs), 
just as he or she would do now if obtaining a drug under the current 
payment methodology. The physician would prepare a drug order and 
forward it to the drug vendor.
    The order transmitted between the physician and the drug vendor may 
occur in a variety of HIPAA-compliant formats, such as by telephone 
with a follow-up written order. We propose that the physician would 
transmit the following information to the CAP drug vendor from whom he 
or she has elected to receive drugs. Abbreviated information could be 
sent for repeat patients.
     Date of order
     Beneficiary name
     Physician identifying information
    Name, practice location, group practice information (if 
applicable), PIN and UPIN
     Drug name
     Strength
     Quantity ordered
     Dose
     Frequency/instructions
     Anticipated date of administration
     Beneficiary Medicare information/Health insurance (HIC) 
number
     Supplementary Insurance info (if applicable)
     Medicaid info (if applicable)
     Shipping address
     Additional Patient Info: date of birth, allergies, Ht/Wt/
ICD-9, etc.
    We are interested in receiving comments on the information we are 
proposing to require as well as any additional information that might 
be necessary.
    In emergency replacement situations, the physician would also make 
a notation on the order that the drug was a replacement for a drug 
already administered to the beneficiary. This notation may involve the 
use of a modifier to a HCPCS code, or another standardized means of 
incorporating the information into a claim. The vendor would prepare 
the drug order, assign the unique transaction identification (or 
prescription) number and ship the replacement product to the physician. 
Standard CAP billing and claim processing procedures would follow. We 
anticipate that the physician's carrier would, at times, conduct a post 
payment review of emergency drug replacement in order to determine 
whether physicians were complying with conditions for emergency drug 
replacement.
    We propose that in ``furnish as written'' situations, when the 
physician has determined that it is medically necessary to use another 
brand of product within the HCPCS or a product with an NDC that is not 
being furnished by the vendor that the physician would be allowed to 
bill for the drug under ASP, even though he or she had elected to 
participate in the CAP. We propose that the physician would obtain the 
specific product through normal distribution channels and bill the 
product using the ASP methodology. The physician would be instructed to 
place a ``furnish as written'' modifier on his or her claim form and 
bill his or her Medicare carrier for the drug and the administration 
fee. The modifier would alert the carrier to allow the physician to 
bill under ASP in this case. We anticipate that the physician's carrier 
would, at times, conduct a post payment review of the use of the 
``furnish as written'' modifier. If the carrier determined that the 
physician had not complied with furnish as written requirements and 
that a specific NDC or brand name drug was not medically necessary, the 
carrier could deny the claim for the drug and the administration fee.
    After the physician submitted an order for the drug, the drug 
vendor would receive it and check the physician's CAP eligibility from 
a list provided by the designated carrier and would verify the 
beneficiary's Medicare eligibility with the designated carrier.
    After those checks were completed, the vendor would generate a 
prescription number that would include the vendor's assigned 
identification number and the drug HCPCS code. The vendor would 
assemble the order and prepare it for shipping. The vendor would ship 
the drug to the physician using a delivery method specified by its 
contract with CMS.
    We anticipate that the physician's office staff would receive the 
CAP drug(s) and store them until the time of administration. Although 
the statute discusses a patient-specific drug ordering process, it does 
not address the methods that may be used to store and inventory drugs 
in an office or clinic setting, or the potential burden associated with 
storing a patient's CAP drugs separately from other drugs. We believe 
that less burdensome alternatives to keeping separate inventories 
exist; however, any alternatives would be required to maintain program 
integrity and product integrity and to minimize the risk of diversion, 
and medication errors. We do not believe that separate physical storage 
of CAP drugs is required. However, we are proposing that physicians 
participating in the CAP would be required to maintain a separate 
electronic or paper inventory for each CAP drug obtained. We seek 
public comment on additional requirements that we should impose on 
maintaining CAP inventory.
    If for some reason the drug could not be administered to the 
beneficiary on the expected date of administration, we propose that the 
physician would notify the vendor and reach an agreement on how to 
handle the unused drug, consistent with applicable State and Federal 
law. The notification would also serve to inform the vendor not to 
submit a claim for the drug. If the vendor and the physician agreed 
that the drug could be maintained in the physician's inventory for 
administration to another Medicare beneficiary at a later time, the 
physician would generate a new order form at that time. Included in the 
order would be a notation that the drug was being obtained from the 
physician's inventory of the vendor's drugs and that the vendor need 
not ship the drug.
    We note that billing beneficiaries for applicable deductible and 
coinsurance would not be allowed at the time the drug is administered 
at the physician's office as is the current customary practice outside 
of the CAP. The statute requires that the vendor bill Medicare and the 
beneficiary, and that the beneficiary may not be billed until after the 
drug has been administered to the beneficiary. As discussed earlier, we 
are proposing that the vendor be allowed to bill the beneficiary and/or 
his or her third party insurance after drug administration has been 
verified by matching the physician claim with the vendor claim using 
the prescription number, and final payment is made by the Medicare 
program.
    After administering the drug, the physician would submit a claim to 
his or her local carrier for drug administration. We propose that the 
claim would include the drug administration fee, the HCPCS code for the 
drug administered, the prescription number for each drug administered, 
and the date of service.
    The local carrier would adjudicate the claim and check that the 
physician was billing for appropriate drugs from the selected drug 
vendor, and that the claim was compliant with all local coverage 
determinations (LCDs). If the physician's claim failed LCD edits, the 
local carrier would deny the claim and

[[Page 10757]]

would notify the central CMS claims processing system that the drug 
vendor's claim for the drug should not be paid.
    If the claim passes all edits, the local carrier would forward it 
to the CMS central claims processing system for additional editing and 
approval for payment.
    After shipping the drug to the physician, we propose that the drug 
vendor would file a claim for the drug with the designated carrier no 
sooner than the expected date of administration. The claim form would 
contain the prescription number for each drug administered to the 
beneficiary on one calendar date, the unique provider identification 
number (UPIN) for the physician to whom the drug was supplied, and the 
expected date of service.
    The designated carrier would submit the claim to the central claims 
processing system after the claim had passed all edits.
    The central claims processing system would match the physician 
claim with the vendor claim using the prescription number. If the 
physician claim for administering the drug had not been received in the 
central claims processing system but the vendor claim had received 
initial approval for payment, the claims processing system may pay the 
vendor a percentage of the claim payment amount. (Note: At this time, 
we are not proposing to implement a partial claims payment. However, as 
described earlier in this section, we are seeking comments on 
compelling reasons for making such a payment. The following section 
describes the process that we would follow if a partial payment 
methodology were implemented.)
    If CMS decides to make an initial payment to the vendor, the vendor 
would be paid for the remaining amount of the claim when the 
physician's claim was matched with the vendor claim in the claims 
processing system. We note that CMS would not pay interest on partial 
payments.
    If the physician's claim was not received within 90 days, or the 
claim was not approved for payment, the initial partial payment made to 
the vendor would be recouped using CMS overpayment recovery processes.
    As noted previously, after the Medicare program makes the final 
payment, the vendor would be allowed to bill the beneficiary or the 
beneficiary's third party insurance, or both.
    The following diagram demonstrates the proposed delivery system:
    [GRAPHIC] [TIFF OMITTED] TP04MR05.001
    
3. Dispute Resolution
    [If you choose to comment on issues in this section, please include 
the caption ``Dispute Resolution'' at the beginning of your comments.]
    Section 1847B of the Act is generally silent with regard to the 
treatment of disputes surrounding the delivery of drugs and the denial 
of drug claims. Section 1847B(b)(2)(A)(ii)(II) of the Act does contain 
a reference to a grievance process which is included among the quality 
and service requirements expected of vendors.
    We have given substantial consideration to the applicability of the 
Medicare Part B administrative appeals process found at 42 CFR 405.801 
et seq. We believe the traditional Part B appeals process continues to 
be the appropriate dispute resolution process for beneficiaries and 
physicians seeking review of drug administration claims that have been 
denied by the local carrier for any of the reasons described

[[Page 10758]]

in Sec.  405.803(a). Those reasons include the following: (1) Services 
were not a covered benefit; (2) Deductible was not met; (3) No evidence 
of acceptable payment; (4) Charges for services were unreasonable; and 
(5) Services furnished were not reasonable and necessary.
    We see several reasons why disputes raised by the vendor regarding 
the nonpayment of a drug claim by the designated carrier cannot be 
adjudicated by application of the traditional Part B appeals process. 
First, the designated carrier's denial is based on the lack of a unique 
prescription ID number match in the central claims processing system. 
This reason does not meet any of the appeal criteria in Sec.  
405.803(a). Second, given the ministerial aspect of the designated 
carrier's prescription number matching task, an informal process 
focused on getting the underlying physician drug administration claim 
properly filed and adjudicated is a more effective remedy. Finally, we 
believe application of the progressive alternative dispute resolution 
process described below represents a better use of program 
administration resources.
    We encourage physicians, beneficiaries and vendors to use informal 
communication to resolve service-related administration issues that 
occur in a delivery and payment system of this complexity. However, we 
recognize a certain percentage of these disputes will require the 
intervention of a neutral third party. Our proposed dispute resolution 
process is set forth in regulations at proposed Sec.  414.916.
    a. Resolution of Vendor's Claim Denial. The physician has exclusive 
control of the claim filed with the local carrier for drug 
administration services.
    The vendor will not be a party to the appeal a physician may file 
if his or her drug administration claim is denied. The vendor's drug 
claim may be denied by the designated carrier if there is no unique 
prescription number match in the central claims processing system. The 
vendor cannot bill Medicare for the cost of a drug and cannot bill the 
beneficiary for the appropriate deductible or coinsurance.
    The vendor may track its business with the individual physicians 
who order drugs. When a vendor is not paid and the total dollar amount 
of the vendor's loss exceeds an acceptable threshold, then the vendor 
may ask the designated carrier to counsel the physician on his or her 
obligation under the CAP election agreement to file a clean claim and 
pursue an administrative appeal in accordance with his or her CAP 
participation agreement. The particulars of the participating CAP 
physician's CAP election agreement are outlined in Sec.  414.908(a)(3) 
of our regulations. We seek comment on the appropriate amount for the 
vendor's loss threshold. If problems persist, we propose the vendor may 
ask the designated carrier to review the situation and potentially 
recommend a suspension of the physician's CAP participation agreement. 
The designated carrier will gather and review the relevant facts, and 
make a recommendation to CMS on whether the physician has been filing 
his or her CAP administration claims in accordance with the 
requirements for CAP participation. We would review the recommendation 
of the designated carrier and, if necessary, gather additional 
information before deciding whether to revoke the physician's election 
to participate in the CAP for a period not to exceed the end of the 
following CAP election cycle.
    The physician may appeal our initial decision through the process 
articulated in proposed Sec.  414.916.
    b. Resolution of Physicians' Drug Quality and Service Complaints. 
Issues connected with drug quality will be given a top priority. Both 
the vendor and the designated carrier will be required to have 
qualified staff available to address drug quality complaints upon their 
receipt. The physician's first point of contact for quality related 
issues will be the vendor. If the issue is not resolved to the 
physician's satisfaction through the vendor's grievance process, the 
physician may escalate the matter to the designated carrier 
immediately.
    We recognize the physician's need for a process to treat vendor 
service issues as well. Service issues may include timeliness of 
delivery and quantity of the drug ordered. We propose that a physician 
be allowed to request intervention from the designated carrier. We 
propose the designated carrier will attempt to develop solutions that 
will satisfy both parties. The designated carrier will create a 
quarterly compendium of the issues and solutions to share with us.
    c. Resolution of Beneficiary Billing Issues. The beneficiary would 
receive a medical summary notice (MSN) from the local carrier 
indicating whether the physician's drug administration claim has been 
paid or denied. If the drug administration claim has been denied, the 
MSN will reflect a message instructing the beneficiary no deductible or 
coinsurance may be collected for the drug. If the beneficiary receives 
a bill for coinsurance from the vendor, the beneficiary may participate 
in the vendor's grievance process to request correction of the vendor's 
file. If the beneficiary is dissatisfied with the result of the 
vendor's grievance process, the beneficiary may request intervention 
from the designated carrier. The designated carrier will first 
investigate the facts and then facilitate correction to the appropriate 
claim record and beneficiary file. If the vendor requires targeted 
education on the subject of beneficiary billing the designated carrier 
will initiate that effort.

C. CAP Contracting Process

1. Quality and Product Integrity Aspects
    [If you choose to comment on issues in this section, please include 
the caption ``Contracting Process-Quality and Product Integrity 
Aspects'' at the beginning of your comments.]
    Sections 1847B(b)(2), 1847B(b)(3), and 1847B(b)(4) of the Act 
address the issue of quality under the competitive acquisition process 
at both the product and vendor level. We propose to use the evaluation 
process to ensure that these quality aspects are met.
    a. Information to Assess and Ensure Quality. Sections 
1847B(b)(2)and 1847B(b)(3) of the Act specifically require that 
potential CAP vendors meet financial and quality of care requirements 
aimed at assuring the stability and safety of the CAP program. Section 
1847B(b)(2)(A) of the Act requires that vendors have sufficient 
capacity to acquire and deliver drugs in a timely manner within the 
geographic area, to deliver drugs in emergency situations, and to ship 
drugs at least 5 days each week. This section also requires that 
vendors meet quality, service, financial performance, and solvency 
standards, which include having procedures for dispute resolution with 
physicians and beneficiaries regarding product shipment, and having an 
appeals process for the resolution of disputes. We propose that CMS be 
allowed to suspend or terminate a vendor's contract if the vendor falls 
out of compliance with any of these quality requirements. Section 
1847B(b)(2)(B) of the Act states that the Secretary may refuse to award 
a contract, and may terminate a contract if the entity's license to 
distribute drugs (including controlled substances) has been suspended, 
or revoked, or if the entity is excluded from participation under 
section 1128 of the Act. We note this requirement is enforced through 
the routine provider enrollment form monitoring process. Finally, 
section 1847B(b)(3)(C) of the Act states that the ability to ensure 
product integrity must be included in the criteria for awarding vendor 
contracts.

[[Page 10759]]

    At a minimum, we seek to define a set of overall financial and 
quality standards that would ensure that reputable, and experienced 
vendors are chosen to participate in the CAP. These features are 
important for a number of reasons. Physicians would be reluctant to 
participate in the CAP if they have little confidence that CAP vendors 
would be reliable and provide quality CAP products. Also, given the 
importance of the drugs and biologicals currently covered under 
Medicare Part B to beneficiaries, CAP vendors would be required to 
provide quality products in a timely manner.
    Section 1847B(b)(4)(C) of the Act specifies that any contractor 
selected for this program ``shall (i) acquire all drugs and biological 
products it distributes directly from the manufacturer or from a 
distributor that has acquired the products directly from the 
manufacturer; and (ii) comply with any product integrity safeguards as 
may be determined to be appropriate by the Secretary.'' We propose to 
include this requirement in the contracts signed between CMS and 
vendors providing drugs or biologicals under this section. However, we 
invite comment on what records or other evidence that bidders would be 
required to furnish and approved vendors would be required to maintain 
during the contract period.
    b. Product Integrity. Section 1847B(b)(3)(C) of the Act states that 
the Secretary must consider the ability of the applicant to ensure 
product integrity. We propose that the evaluation include, but not be 
limited to, the applicants' ability to assure that products are not 
adulterated, misbranded, spoiled, contaminated, expired, or 
counterfeit. This means that at a minimum, all drugs and biologics 
utilized in this program must be licensed under section 351 of the 
Public Health Service Act or approved under section 505 of the Federal 
Food, Drug, and Cosmetic Act. Vendors would also be required to comply 
with sections 501 and 502 of the Federal Food, Drug, and Cosmetic Act 
concerning adulteration and misbranding.
    Additionally, applicants would be required to employ trained 
personnel, have appropriate physical facilities, and utilize adequate 
security measures to assure that processing, handling, storage, and 
shipment of drugs and biologicals are adequate to maintain product 
integrity. Because Federal statutory and regulatory requirements are 
designed to meet the standards in the paragraph above, we propose to 
require that all applicants comply with State licensing requirements 
and be in full compliance with any State or Federal requirements for 
wholesale distributors of drugs or biologics in States where they 
furnish drugs for the CAP.
    Although we are not proposing to require applicants to employ 
measures beyond those required for licensure and regulatory compliance, 
we do believe those are a minimum standard, and we will request that 
applicants discuss any additional measures they have taken to assure 
product integrity. For a more complete discussion of measures available 
for wholesale distributors to deter and detect counterfeit drugs, we 
ask applicants to review the report on counterfeit drugs issued by the 
Food and Drug Administration (FDA) on February 18, 2004. This report, 
``Combating Counterfeit Drugs,'' is available on the FDA Web site at 
http://www.fda.gov/counterfeit. At this time, we propose that 
applicants describe measures taken to ensure drug product integrity on 
the vendor application form.
    Examples of additional measures that pose minimal burden, but 
greatly enhance the ability to detect adulterated, misbranded or 
counterfeit drugs that wholesale distributors have taken to assure 
product integrity include the following:

--Complying with the ``Recommended Guidelines for Pharmaceutical 
Distribution System Integrity'' developed by the Healthcare 
Distribution Management Association, available at 
www.healthcaredistribution.org. Among other things, these guidelines 
contain recommended measures for due diligence to ensure the integrity 
and legitimacy of supply chain business partners including the 
performance, by a wholesale distributor, of extensive corporate and 
personnel background checks as well as a physical facility inspection 
of another wholesale distributor prior to entering into a business 
relationship.
--Cooperating with Federal and State authorities in their 
investigations of suspected counterfeit drugs.
--Establishing mechanisms to obtain timely information about suspected 
counterfeits in the marketplace and to educate their employees on how 
to identify them.
--Notifying appropriate State and Federal authorities within 5 business 
days of any suspected counterfeit products discovered by the 
wholesaler.
    c. Financial Performance and Solvency Standards. Section 
1847B(b)(2) of the Act discusses the financial performance and solvency 
standards we must develop for entities that seek to become vendors. We 
propose to fold integrity and internal control aspects of fiscal 
responsibility into this analysis.
    While licensure by the State to distribute drugs may assess some 
degree of financial responsibility, we believe the focus and depth of 
financial capability evaluations associated with licensure may vary 
across States. We seek to assess bidders' financial solvency in a 
consistent manner that will demonstrate appropriate scrutiny without 
creating unnecessary burden on the bidders. We propose using criteria 
from the Federal Acquisition Regulation (FAR) Section 9.104 and 
following standards for ``responsible contractors'' as a baseline 
standard. The FAR standards also contain nonfinancial components that 
address areas such as integrity, performance, and ethics. We seek to 
add standards that would demonstrate the following:

--Overall Capitalization and Financial Capability. We propose that 
bidders furnish a copy of their most recent year's audited financial 
statements. Specific items, such as net worth, could be used in the 
evaluation process. We seek comment on the potential validity of 
specific financial indicators for this process and whether or not 
specific thresholds would be applicable. We also seek comment on this 
overall requirement from potential bidders, such as group purchasing 
organizations (GPOs), who do not routinely take possession of drug 
products.
--Working Capital. We propose to review the audited financial 
statements to determine if the bidder has adequate working capital to 
meet contractual obligations. Ratios of current assets to current 
liabilities, total liabilities to net worth, and cash or cash 
equivalents to current liabilities are commonly used to assess 
financial capability (see the form at FAR 53.301-1407). Given the 3-
year contract duration, we seek comments regarding the appropriateness 
of these tests, and thresholds to apply for the ratios.
--Record of Integrity. We propose that the bidders supply us with 
applicable information on whether any of the bidder's Board of 
Directors, employees, affiliated companies, or subcontractors--
     Know they are under investigation by any State, Federal, 
or Local Government agency related to a fraud issue; and
     Have escrowed money in anticipation of, or entered into a

[[Page 10760]]

settlement agreement or corporate integrity agreement with any State or 
Federal Government agency related to a fraud issue.
    We would also request bidders to provide a conflict of interest 
mitigation plan to address financial relationships the bidder may have 
with manufacturers of drugs or biologicals in the CAP.
    --Internal Control. We propose to review information relating to 
the establishment and effectiveness of the bidder's internal control 
system designed to provide reasonable assurance financial and 
compliance objectives. Examples of information that we may review as 
evidence of the design and effectiveness of a bidder's internal control 
system include previous Statement on Auditing Standards 70 review 
results, independent third party reviews of the system, or other 
related information as we deem appropriate.
    We propose to set forth these requirements in regulations at 
proposed Sec.  414.908.
Deemed Compliance
    Some vendor applicants may already be subject to financial 
oversight by one or more State or Federal regulators. The vendor's 
current financial reporting may satisfy one or more of the above 
requirements. We propose to request documentation of this parallel 
oversight together with contact information for the regulator. We would 
contact the regulator to inquire as to the vendor's status and we may 
deem certain portions of the above requirements ``met'' at our 
discretion.
2. Bidding Entity Qualifications
    a. Quality and Financial Information--Vendor Application.
    [If you choose to comment on issues in this section, please include 
the caption ``Bidding Entity Qualifications'' at the beginning of your 
comments.]
    The vendor would be responsible for completing and meeting all 
criteria on both the Vendor Application Form and the Provider/Supplier 
Enrollment Application (Form CMS 855B) (for this purpose, vendors will 
be considered suppliers) by the established deadlines in order to be 
considered as a potential vendor under the CAP. For example, if a 
vendor has been excluded from participation in a Federal health 
program, or has been convicted of a fraud-related crime, the vendor 
must record that on the form 855B. CMS would treat these admissions 
from vendors in the same manner as it does for other suppliers. Both 
the Vendor Application Form and the Provider/Supplier Enrollment 
Application (Form CMS 855B) would be available on the CMS Web site at 
the following address: http://www.cms.hhs.gov/providers/drugs/). Both 
forms are needed to cover all required vendor qualifications. However, 
the forms cannot be completed online. They must be printed, completed 
and mailed to CMS.
    We would require that the vendor be prepared to offer complete 
information in four major areas and also to complete a certification 
statement. The vendor's business experience would be required to be 
within the United States. Also required on the Vendor Application Form 
would be a complete list of drugs that the vendor would intend to bid 
by National Drug Code (NDC) number.
Management and Operations
    We propose to require that the vendor attest that adequate 
administrative arrangements are in place to ensure effective 
operations, such as but not limited to, policies that assure that 
business is conducted in the best interest of the customer, maintenance 
of fidelity bonds, and insurance policies to cover losses. General 
identifying information would also be required such as business name, 
address, taxpayer identification number, contacts representing the 
organization, and a description of the organization's structure. In 
addition, each subcontractor, subsidiary, or business affiliate that is 
used by the vendor under the CAP would be required to provide the same 
information.
Experience and Capabilities
    The vendor would be required to maintain the operation of a 
grievance process so that physician, beneficiary, and beneficiary 
caregiver complaints can be addressed. We expect vendors to provide a 
prompt response to any inquiry as outlined in the vendor application 
form. We would require that vendors maintain business hours on weekdays 
and weekends with staff available to provide customer assistance for 
the disabled, including the hearing impaired, and to Spanish speaking 
inquirers. Vendors would also be required to provide toll free 
emergency assistance when the call center is closed. Customer service 
is a primary consideration, especially the ability to respond on an 
emergency basis to physicians. In addition, we would require that a 
working telephone customer service number be submitted and will be 
verified during the bid evaluation process.
    Section 1847B (b)(2)(A)(i)(II) of the Act gives some guidance 
regarding timeframes for routine and emergency shipment, however, the 
statute does not provide specific definitions of these timeframes. 
Therefore, we are seeking public comment on how to define timely 
delivery for routine and emergency drug shipments. For the purposes of 
this discussion, we propose that the delivery time period would begin 
when a drug order is received by the vendor and would end at the time 
of delivery to the physician's office or other intended setting. We 
propose that routine shipments of drugs furnished under the CAP would 
occur within a one to two business day time period. However, the 
duration of the delivery time period must not exceed the drug's 
stability in appropriate shipping containers and packaging. We seek 
comments on the feasibility of requiring a shorter duration for routine 
delivery of CAP drugs. We also propose that emergency drug orders be 
furnished on the next day for orders received by the vendor before 3 
p.m. (vendor's local time), however, we seek comments on the 
feasibility of providing same-day deliveries for orders received for 
emergency situations.
    We propose to require that vendors maintain a formal mechanism for 
responding to complaints from physicians, beneficiaries, and their 
caregivers (if applicable). We propose that evidence of this mechanism, 
in the form of any complaint resolution manuals, agendas, and minutes 
from complaint resolution committee meetings, or other evidence would 
be submitted as part of the bid application.
    In addition to providing an audited financial statement as an 
attachment, we propose that the vendor be required to present a 
standardized summary of financial information on the collection form. 
We would require the vendor to have been in the business of furnishing 
Part B injectable drugs for at least 3 years. We seek comment on this 
standard, especially on whether the requirement of 3 tax reporting 
years of experience would prevent newer vendors with sufficient 
experience and resources from being included in the program. The vendor 
would be prepared to offer and substantiate the drug volume managed 
(dollars and units) for the immediate previous calendar year. Also, the 
vendor would be asked to provide specific personnel statistics such as 
the number of staff assigned to various activities, and its policy-
making organizational structure within the United States, including a 
discussion of the membership of this body and to whom it reports.
    Finally, by virtue of the fact that selected vendors would be 
enrolled Medicare suppliers, a vendor would be a health care provider 
and would be a covered entity under the HIPAA

[[Page 10761]]

Administrative Simplification Rules, to the extent that it conducts any 
of the standard HIPAA transactions electronically. As a covered entity, 
vendors would be required to comply with the Administrative 
Simplification rules, including the Privacy Rule.
Licensure
    The vendor would be required to maintain an appropriate license in 
each State in which the drug vendor seeks to operate under the CAP. We 
would also require that the vendor certify that any subcontractor or 
subsidiary also maintains a license that complies with State 
regulations in every applicable State.
Business Integrity
    The vendor is responsible for identifying and disclosing business 
relationships and conflicts of interest as well as potential conflicts 
of interest with other organizations. Also, the vendor is required to 
answer questions and provide information about fraud investigations, 
settlement agreements, and Federal government exclusions.
Certification
    We propose that the vendor be prepared to certify that all the 
information in the Vendor Application Form is true, accurate, and 
complete and to certify to any other requirements as specified by CMS. 
Failure to provide correct and updated information when it becomes 
available, if it affects the information provided on the Vendor 
Application Form may be cause for termination of the vendor's contract 
under the CAP.
    b. Specific Information Relating to Prevention of Fraud and Abuse.
    [If you choose to comment on issues in this section, please include 
the caption ``Contracting Process-Quality and Product Integrity 
Aspects'' at the beginning of your comments.]
    Section 1847B(b)(4)(D)(ii) of the Act requires that the drug vendor 
comply with all applicable provisions relating to the prevention of 
fraud and abuse. This includes compliance with applicable guidelines of 
the Department of Justice (DOJ) and the Inspector General of the 
Department of Health and Human Services (OIG). In accordance with this 
statutory authority, we propose that each CAP vendor develop and 
maintain a compliance plan to control program fraud, waste, and abuse, 
that includes at a minimum, the requirements proposed at Sec.  
414.914(c) of our regulations. These requirements already apply to many 
of the entities participating in the Medicare program, such as 
prescription drug plans administering the prescription drug benefit and 
Medicare Advantage organizations. In addition, the OIG has recommended 
these minimum elements in published guidance.
    A compliance plan should contain policies and procedures that 
control program fraud, waste and abuse. In developing written policies, 
procedures, and standards of conduct for detecting and preventing 
waste, fraud and abuse, CAP vendors should consult a variety of sources 
including applicable statutes and regulations and compliance guidance 
issued by CMS, its contractors, Program Safeguard Contractors (PSCs), 
and the OIG. Publications that may provide relevant information include 
the OIG's Program Compliance Guidance for Pharmaceutical Manufacturers, 
(68 FR 23731) and OIG's voluntary Provider Self-Disclosure Protocol, 
(63 FR 58399). We propose that CAP vendors also consider industry best 
practices in developing their compliance plans.
    We propose that vendors establish effective training and education 
programs related to waste, fraud, and abuse that address pertinent laws 
related to fraud and abuse including the Anti-Kickback law and the 
False Claims Act. In addition, we propose that CAP vendors and 
contracted entities be trained on detecting and preventing common 
fraudulent schemes in the pharmaceutical industry, as identified by 
CMS, the OIG, and/or the DOJ. Some examples of common fraudulent or 
abusive problems within the pharmaceutical industry include--
    Lack of integrity of data used to establish payment amounts;
    Kickbacks and other illegal remuneration; and
    Lack of compliance with laws regulating drug samples.
    To ensure successful internal monitoring and auditing of waste, 
fraud, and abuse under Part B, we propose that CAP vendors should 
regularly monitor and audit their processes and procedures to assure 
that they are in fact taking the steps necessary to comply with all 
Federal and State regulations and to mitigate the potential for waste, 
fraud, and abuse within their organizations. Industry best practices 
related to fraud, waste, and abuse detection include the use of 
proactive data analysis and or other analytical processes to detect and 
address potential fraud. Establishing procedures to ensure prompt 
responses to potential fraud violations is an important element in an 
effective fraud and abuse plan. CAP vendors would be responsible for 
monitoring and identifying potentially fraudulent or abusive activity. 
For assistance in identifying what constitutes abusive or fraudulent 
activity, CAP vendors may consult a variety of sources including media 
reports, DOJ litigation history, OIG published guidance and CMS policy 
manuals. After a CAP vendor has determined that any misconduct has 
violated or may violate criminal, civil or administrative law, the CAP 
drug vendor should report the existence of the misconduct to OIG or 
other appropriate government authority within a reasonable period, but 
no later than 60 days after the determination that a violation may have 
occurred. Self-reporting of fraud and abuse is a critical element to an 
effective compliance plan, and CAP vendors are strongly encouraged to 
alert CMS, the PSCs, the OIG, or law enforcement of any potential fraud 
or misconduct relating to the CAP. We investigate all cases referred as 
potentially fraudulent and then refer them to the appropriate law 
enforcement agency as warranted. Likewise, we expect that the CAP 
vendors fully cooperate in any investigation that we or our law 
enforcement partners pursue related to fraud identified in a particular 
drug vendor's organization.
    We are aware that there are many possible approaches to developing 
an effective compliance plan to implement a successful waste, fraud, 
and abuse program. Therefore, we are seeking comments on the scope and 
implementation of an effective compliance plan.
    c. Conflicts of Interest. Section 1847B(b)(4)(D)(i)of the Act 
requires that drug vendors participating in the CAP comply with a code 
of conduct, specified or recognized by the Secretary. The statute 
authorizes CMS to establish codes of conduct related to conflicts of 
interest in bidding and performance for drug vendors.
    A code of conduct should function much like a constitution, that 
is, it should be a document that details the fundamental principals, 
values, and framework for action within an organization. We propose 
that the code of conduct for CAP vendors articulate the vendor's 
expectations of commitment to compliance by management, employees, and 
agents, and summarize the broad ethical and legal principles under 
which the company must operate.
    Avoiding conflicts of interest or the appearance of such conflicts 
is critical to the operations of CAP. In accordance with our statutory 
authority under the Act, we propose to require that each CAP vendor 
establish and follow a code of conduct that addresses their policies

[[Page 10762]]

and procedures for identifying and resolving any conflict of interest. 
A conflict of interest may occur where a drug vendor, its 
representative, or contractor provides a product or service for a 
Medicare provider or beneficiary and the drug vendor, representative or 
contractor has a relationship with another person, entity, product or 
service that impairs or appears to impair the drug vendor's or 
contractor's objectivity to provide the Medicare covered product or 
service. Situations that compromise or appear to compromise a drug 
vendor's ability to avoid self-dealing when providing a Medicare 
product or service create a conflict of interest and must be resolved. 
Drug vendors should take steps to identify and mitigate any conflict of 
interest that may arise in the provision of a product or service for a 
Medicare provider or beneficiary.
    We propose that the code of conduct communicates the need for all 
management, board of directors, employees, and agents to comply with 
the CAP vendor's code of conduct and policies and procedures for 
addressing and resolving conflicts of interest. We propose that the 
code of conduct reflects the CAP vendor's commitment to detect and 
resolve any conflict of interest. We propose further that the code of 
conduct establish procedures for determining whether or not a conflict 
exists, and if so, how the conflict will be resolved. We propose that 
the code of conduct address issues such as whether or not the offer or 
acceptance of some remuneration to or from a vendor, physician, 
beneficiary, or manufacturer would diminish, or appear to diminish, the 
objectivity of professional judgment; or whether or not certain 
transactions raise patient safety or quality of care concerns.
    In addition, throughout the solicitation of CAP contracts, we 
propose that drug vendors comply with the requirements of the FAR 
organizational conflict of interest guidance, found under 48 CFR 
Subpart 9.5, and the requirements and standards contained in each 
individual contract awarded to perform functions under section 1847B of 
the Act. Consistent with FAR 9.507-2, in making awards to drug vendors, 
we propose that each contract contain a conflict of interest clause 
specific to the CAP vendor for inclusion in the contract.
    We are proposing fairly general conflict of interest requirements 
because we believe that individual contracts may be a better venue to 
address specific conflicts of interest. However, we solicit and welcome 
comments regarding what may or may not constitute a conflict of 
interest in the CAP program and how such conflicts might be identified 
and mitigated.
    We propose to set forth our conflict of interest policies and 
procedures in regulations at proposed Sec.  414.912.

3. CAP Bidding Process--Evaluation and Selection

    a. Evaluating Bid Prices by the Composite Bid Price.
    [If you choose to comment on issues in this section, please include 
the caption ``Cap Bidding Process-Evaluation and Selection'' at the 
beginning of your comments.]
    In selecting vendors, the statute requires consideration of both 
price and non-price (for example, quality of service and financial 
qualifications) aspects of the bid. Once we have adopted technical and 
financial criteria for selecting CAP vendors, and bids have been 
submitted, the bids must be evaluated to determine which bidders will 
be awarded contracts to furnish drugs under the CAP. In the final rule, 
our ultimate choice of an appropriate evaluation process will take into 
account the final policies concerning the drug categories that will be 
bid, the geographic areas chosen for the program, and comments on our 
proposed evaluation process. In this proposed rule, we are proposing a 
basic approach to the evaluation and bidding selection process. We 
encourage comments on this proposal, and recommendations for 
alternative approaches. In the discussion of our proposal for the 
bidding process as set forth in Sec.  414.910, and the various other 
options that we have identified, we assume that we are conducting 
competitive bidding for some number of distinct drug categories. We 
also assume that bidders with relatively large (including national) 
distribution networks might also want to submit bids for multiple 
acquisition areas (depending upon the area definitions that we adopt in 
the final rule). These bidders will be permitted to submit the same bid 
price for all areas in which they wish to compete, or to submit 
completely separate bid prices for each acquisition area. The procedure 
for evaluating the price component of bids (and setting payment rates) 
would be the same regardless of the exact method for defining 
categories of HCPCS drugs that is adopted in the final rule. Section 
1847B(c)(6) of the Act requires that the submitted bid price include 
all costs related to the delivery of the drug to the selecting 
physician, and the costs of dispensing (including shipping) of the drug 
and management fees. Costs related to the administration of the drug or 
wastage, spillage, or spoilage may not be included in the submitted 
bid. We proposed to specify these requirements at proposed Sec.  
414.910 of the bidding process.
    The purpose of requiring vendors to bid for all drugs in a category 
would be to determine a set of vendors that can supply the range of 
drugs in that category at an appropriate overall cost. Because bidders 
have different expectations of the discounts they can negotiate for 
drugs, one vendor may be able to bid a lower price for one drug, but 
may expect a lesser discount on another. We have therefore sought to 
identify a selection process that, in the aggregate, can provide drugs 
at reasonable cost to the program while maintaining the required 
quality standards.
    We are therefore proposing to employ a ``composite bid,'' 
constructed from the bid prices for the individual drugs in the CAP 
category, in the process of selected bidders for the CAP. The composite 
bid would be constructed by weighing each HCPCS bid by the HCPCS code's 
share of volume (measured in HCPCS units) of drugs in a particular drug 
category during the prior year. Within each CAP category, the drug 
weights would sum to one. Based on data availability, the volume data 
used for bids in the first CAP bidding cycle (for supplying drugs 
starting January 1, 2006) would be from 2004 since bidding is 
anticipated to occur in mid-2005. (At this time, we have not developed 
a method to weight drugs introduced during and after 2004, but invite 
public comment on methods for consideration.) The calculated composite 
bid would be equal to the average price per HCPCS unit for drugs in 
that category. In this way, the composite bid will be proportional to 
the expected cost to the program of acquiring drugs from that vendor 
(assuming the 2004 volume in each HCPCS category is roughly 
proportional to volume in 2006). If one vendor has a lower composite 
bid than another, it will also have a lower expected cost of supplying 
all drugs in the particular CAP category.
    To illustrate how the composite bid would be calculated, we are 
providing the following example. Suppose that there are four drugs in a 
particular CAP drug category (Drug A, Drug B, Drug C, and Drug D). The 
first column of Table 2 below provides the total volume (HCPCS units) 
of these drugs administered in 2004 for this hypothetical drug 
category.

[[Page 10763]]



        Table 2.--Example Drug Volumes and Relative Volumes, 2004
------------------------------------------------------------------------
                                                   Total
                     Drug                          HCPCS       Relative
                                                   units        volume
------------------------------------------------------------------------
Drug A........................................    1,452,472       0.3520
Drug B........................................      988,586       0.2395
Drug C........................................    1,671,567       0.4050
Drug D........................................       14,302       0.0035
                                               --------------
    Total.....................................    4,126,927       1.0000
------------------------------------------------------------------------

    Three drugs (Drugs A, B, and C) have volumes (total HCPCS units) 
much greater than that of the fourth (Drug D). The second column of 
Table 2 gives the relative volumes, computed by dividing the volumes of 
the individual components of this CAP category by the total volume of 
HCPCS units for drugs in this category. These relative volumes are the 
weights used to construct the composite bids.
    The computation of the composite bids for these four bidders is 
shown in Table 3. The composite bid for Bidder 1 is computed as the 
weighted sum of the bids for the four drugs: ($520 x 0.3520) + ($400 x 
0.2395) + ($135 x 0.4050) + ($4,780 x 0.0035), which is equal to 
$350.25. The composite bids for the other three bidders are computed 
similarly.

                                   Table 3.--Example Composite Bid Computation
----------------------------------------------------------------------------------------------------------------
                                                                                                          Low
                     Drug                         Weight    Bidder 1   Bidder 2   Bidder 3   Bidder 4    bidder
----------------------------------------------------------------------------------------------------------------
Drug A........................................     0.3520       $520       $530       $550       $530          1
Drug B........................................     0.2395        400        410        380        390          3
Drug C........................................     0.4050        135        105        135        120          2
Drug D........................................     0.0035      4,780      4,830      4,430      4,800          3
Composite Bid.................................  .........     350.25     344.19     354.79     345.37          2
----------------------------------------------------------------------------------------------------------------

    As Table 3 illustrates, it is possible for a bidder to be the low 
bidder on more individual drugs than other bidders (Bidder 3, the low 
bidder for Drug B and Drug D), but have the highest composite bid. This 
is due to Bidder 3's relatively high bid for Drug A and Drug C, which 
have the largest volumes (in HCPCS units). Also note that although 
Bidder 4 is not the low bidder for any of the four drugs, its composite 
bid is the second lowest.
    As we have noted above, the statute requires consideration of price 
and non-price (for example, quality of service and financial 
qualifications) aspects of the bid. In order to implement this 
requirement, we propose a two-step bidder selection:
     First, certain quality and financial thresholds must be 
met by all bidders.
     Then, winning bidders would be selected from those that 
meet the quality and financial thresholds on the basis of a method for 
evaluating the composite bids.
    We have considered several basic methods for evaluating the 
composite bids. From these alternatives, we have decided to propose a 
method that bases the selection of winning bidders on a predetermined 
threshold. Specifically, under the method we are proposing, we would 
select, from all those bidders that meet the quality and financial 
thresholds, up to the five lowest bidders for a drug category in each 
area. However, we would not select any bid for the category that is 
higher than 106 percent of the weighted ASP for the drugs in that 
category. We believe that limiting the maximum bid price that we would 
accept is consistent with Congressional intent that the CAP promote 
savings.
    As an example of this computation, suppose that the ASPs for four 
drugs in the composite bid example above (see Table 2) are as follows: 
$516 for Drug A, $376 for Drug B, $111 for Drug C, and $4,831 for Drug 
D. Using the relative weights in Table 2, we would compute the 
composite bid threshold as 1.06 x ($516 x 0.3520 + $376 x 0.2395 + $111 
x 0.4050 + $4,831 x 0.0035), which is equal to $353.56. In this 
example, three bidders (Bidder 1, 2 and 4) would be selected as CAP 
vendors. (See Table 4.)

                           Table 4.--Example: Proposed Composite Bid Selection Method
----------------------------------------------------------------------------------------------------------------
                                                                                                         Bids
               Drug                    Weight      Bidder 1     Bidder 2     Bidder 3     Bidder 4     selected
----------------------------------------------------------------------------------------------------------------
Drug A............................       0.3520         $520         $530         $550         $530  ...........
Drug B............................       0.2395          400          410          380          390  ...........
Durg C............................       0.4050          135          105          135          120  ...........
Drug D............................       0.0035        4,780        4,830        4,430        4,800  ...........
                                   --------------
    Composite bid.................  ...........       350.25       344.19       354.79       345.37  ...........
                                   --------------
    Maximum bid...................  ...........       353.56       353.56       353.56       353.56      1, 2, 4
----------------------------------------------------------------------------------------------------------------

    We are proposing this method for selecting bids for several 
reasons. This method is straightforward and relatively easy to 
implement. In addition, accepting no bid prices that exceed the payment 
level under the new ASP payment methodology is consistent with one 
major purpose of the new competitive acquisition system, since it 
creates the possibility of realizing savings to the Medicare program. 
We believe that this method is preferable to other options. For 
example, one alternative to the method that we are proposing is simply 
to accept any composite bid for a drug category that is less than 106 
percent of the weighted ASP for the drugs in that category. Under this 
method, it would be possible for every bidder to submit a bid price 
just below ASP plus 6 percent, in the confidence that the bid would be 
accepted. This method would thus limit the potential for savings to the 
program, compared to the bidding process that we are proposing. Under 
the process that we are proposing, bidders retain an

[[Page 10764]]

incentive to submit the best bid price that is possible for them. Thus, 
restricting the number of bidders that might be accepted provides for 
more competition in the bidding process than accepting all bidders 
under a designated threshold. In this proposed rule, we are therefore 
proposing to accept up to five composite bids, for a category of drugs, 
but we do not propose to accept any bid that exceeds a composite bid 
threshold of 106 percent of ASP. We would compute the composite bids, 
and the 106 percent composite bid threshold, in the manner described in 
the examples above. We welcome comments on this proposal, and 
recommendations for alternative approaches. In the final rule, after we 
have considered the comments, we may adopt some variation of this 
proposal, or some alternative recommended by the commenters.
    b. Determining the Single Price for a Category of Drugs. Once the 
winning bidders have been identified, section 1847B(d)(1) of the Act 
requires that a single price must be determined for each drug in a 
competitive acquisition area, ``based on bids submitted and accepted.'' 
We have considered a number of options for determining this single 
price on the basis of the accepted bid prices. In this proposed rule at 
Sec.  414.906(c)(1), (which describes the computation of the payment 
amount), we are proposing to establish a single price, for each drug in 
a competitive acquisition area, based on the median bid of the winning 
bidders. As a simple example of how this method might work, consider 
the bids for one drug submitted by the winning bidders under our 
proposed composite bid selection method (see Table 4). For Drug D, 
Bidder 1 submitted a bid of $4,780, Bidder 2 submitted a bid of $4,830, 
and Bidder 4 submitted a bid of $4,800. The median of these three bids 
is $4,800. Under this version of our proposed method, then, the single 
price for this drug would be $4,800.
    We are proposing to employ the median bid for several reasons. 
First, this method is straightforward and relatively easy to implement. 
In addition, this method could realize some savings to the Medicare 
program. Unless all accepted bids are at the level of the maximum 
allowable bid (106 percent of ASP), this method for determining the 
single price would yield savings to the program. Finally, using the 
median of the acceptable bids is an obvious statistical method to 
determine a single price on the basis of using the information provided 
by these bids, as required by the statute.
    In cases where there are four winning bidders for a drug category 
in an area, we will employ the average of the two bid prices in the 
middle of the array for a particular drug in that category in order to 
set the single prices for that drug. Specifically, if four bidders are 
selected, we would employ the average of the bids of the second and 
third highest bidders on each drug to set the price for the drug. If 
only two bidders are selected, we would use the average of the two bids 
for the drug to set the price for that drug. The qualified vendors 
would be made aware of the established price set for the CAP drugs 
before he or she signs the contract to be an approved vendor.
    We invite comments on this proposal and also invite commenters to 
recommend alternative approaches. After analyzing the comments, we may 
adopt some variation of this proposal, or some alternative recommended 
by the commenters, in the final rule.
    Section 1847B(d)(2) of the Act requires the Secretary to 
``establish rules regarding the use * * * of the alternative payment 
amount provided under section 1847A of the Act'' for payment of a new 
drug or biological under the CAP. Section 1847A of the Act establishes 
the average sales price methodology for most drugs paid under Part B of 
the Medicare program. Section 1847A(c)(4) of the Act further provides 
alternatives for the Secretary to determine the amount payable for new 
drugs during an initial period. In accordance with the requirement at 
section 1847B(d)(2) of the Act, we are proposing to apply the payment 
amount that we establish under section 1847A of the Act in the case of 
any drug or biological for which we determine that--(1) The drug or 
biological is properly assigned to a category established under the 
CAP; and (2) issuance of a new HCPCS code is required for the drug or 
biological. We would employ the payment amount determined in accordance 
with the methodology provided under section 1847A(c)(4) of the Act 
until the next annual update of the single price amounts that we are 
proposing below.
    Section 1847B(b)(4)(B) of the Act provides that contracts for the 
acquisition of competitively biddable drugs under the CAP must be for a 
period of 3 years. Therefore, it is necessary to determine some 
mechanism for setting the single price for each category of drugs in 
the second and third years of this 3-year contract. We are proposing to 
employ the mechanism provided under section 1847B(b)(7) of the Act for 
this purpose. That section provides for drug price adjustments on the 
basis of cost information provided by vendors to the Secretary. 
Specifically, that section provides that each contract must provide for 
disclosure to the Secretary of the vendor's ``reasonable, net 
acquisition costs'' on a regular basis (not more often than quarterly). 
It further requires that contracts must provide for ``appropriate price 
adjustments over the period of the contract to reflect significant 
increases or decreases in a vendor's reasonable, net acquisition costs, 
as so disclosed.'' We are therefore proposing at Sec.  414.906(c)(1) to 
update the CAP prices for each drug in a category in year 2 and year 3 
based on the vendor's ``reasonable, net acquisition costs'' for that 
category as determined by CMS based, in part, on information disclosed 
to the Secretary and limited by the weighted payment amount established 
under 1847A of the Act across all drugs in that category.
    Section 1847B(c)(7) of the Act gives the Secretary the discretion 
to establish an appropriate schedule for the CAP vendor's disclosure of 
this cost information to us, provided that disclosure is not required 
more frequently than quarterly. There are obviously a number of 
possible disclosure schedules. We are proposing to require that each 
vendor disclose to the Secretary its reasonable, net acquisition costs 
for the drugs covered under the contract annually during the period of 
its contract. Annual disclosure imposes the minimal burden on vendors 
consistent with employing this provision to determine the single price 
for drugs in the second and third years of a contract. More frequent 
disclosure (for example, quarterly) is, of course, also consistent with 
this purpose. We anticipate that the annual disclosure will be required 
in or around October of each year, to provide sufficient time to 
determine what, if any, update in drug prices would be appropriate for 
the following year. We invite comments regarding an appropriate 
disclosure schedule under section 1847B(b)(7) of the Act for this 
purpose.
    There are also a number of methods that we could adopt to develop 
an appropriate adjustment on the basis of the net reasonable cost 
information disclosed by vendors.
    We are proposing the following methodology. We would employ the net 
reasonable cost information disclosed by each vendor to determine 
whether the vendor has experienced significant increases or decreases 
in the reasonable, net acquisition costs across a category of drugs. 
For this purpose, we may establish a threshold percentage change (for 
example, 5 percent) in these costs, to determine whether the changes 
warrant computing an adjustment to the

[[Page 10765]]

single prices for the drugs in that category. If the change in the 
costs reported by a particular vendor meet this threshold, we would use 
a two-step process to recompute the single price for each drug in that 
class. First, we would adjust the bid price that the vendor originally 
submitted by the percentage change indicated in the information that 
the vendor disclosed. To return to the example discussed earlier, 
Bidder 1 submitted a bid of $4,780, Bidder 2 submitted a bid of $4,830, 
and Bidder 4 submitted a bid of $4,800 for Drug D. The price for the 
drug in the first year of the contract is therefore the median of these 
three bids, or $4,800. Suppose that Bidder 1 submits information prior 
to the second year of the contract indicating that the reasonable, net 
acquisition costs for the drugs in a category have increased by 7 
percent. At the same time, Bidder 4 submits information indicating that 
costs have increased by 10 percent. We would adjust each of the 
original bid prices for the drug accordingly. The bid price of Bidder 1 
would increase from $4,780 to $5,115 ($4,780 x 1.07). Similarly, the 
bid price of Bidder 4 would increase from $4,800 to $5,280 ($4,800 x 
1.10). Next, we would recompute the single price for the drug as the 
median of these adjusted bid prices. Specifically, the new single price 
for the drug would be $5,115, the median of $5,115, $4,830, and $5,280.
    It is important to note that this mechanism would apply in the case 
of any significant change in reasonable, net acquisition costs, whether 
those changes reflect increase or decreases in costs. It is therefore 
possible that the single price for a drug could decrease in the second 
or third year of a contract where, for example, acquisition costs for 
the drug have decreased because of the introduction of a generic 
equivalent.
    We would consider ``reasonable, net acquisition costs'' to be those 
costs actually incurred by the vendor that are necessary and proper for 
acquiring the drugs that the vendor is obligated to provide under a CAP 
contract. Actual acquisition costs are net of all discounts and rebates 
provided by the vendor's own suppliers. We would require full 
disclosure of the vendor's acquisition costs for drugs included in the 
CAP contract. We propose that this disclosure would reflect the 
vendor's purchases of these drugs from all manufacturers, and the total 
number of units purchased from each manufacturer. The vendor would be 
required to submit full documentation reflecting these purchases, 
including contracts, invoices, and other agreements that reflect the 
actual purchase prices. This documentation would include all records 
reflecting discounts that result in a reduction of actual cost to the 
vendor. These discounts would include volume discounts, prompt pay 
discounts, cash discounts, free goods that are contingent on any 
purchase requirement, chargebacks, rebates, refunds, and other price 
concessions.
    We also propose to make more frequent adjustments (but not more 
often than quarterly) in three cases: introduction of a new drug, 
expiration of a drug patent, or a material shortage that results in a 
significant price increase for a drug. We may restrict the 
circumstances in which we would make adjustments to account for 
shortages to those in which the Secretary has declared a public health 
emergency under section 319 of the Public Health Service Act. We invite 
comments on this approach.
    We also welcome comments on every aspect of this discussion, 
especially on the frequency with which we would collect the requisite 
data and the precise manner in which we would calculate the changes in 
single drug prices.
4. Contract Requirements
    [If you choose to comment on issues in this section, please include 
the caption ``Contract Requirements'' at the beginning of your 
comments.]
    Sections 1847B(b)(4) of the Act discusses items to be incorporated 
in the contract entered into with a CAP vendor. These include the 
following:

--The length of the contract.
--Assurance of the integrity of the drug distribution system.
--A pledge to comply with code of conduct and fraud and abuse rules.
--Assurance that drugs are only supplied directly to CAP physicians 
upon receipt of a prescription and other necessary data.

    We propose to set forth the contract terms between CMS and the 
approved vendor as well as vendor responsibilities in proposed Sec.  
414.914.
5. Judicial Review
    [If you choose to comment on issues in this section, please include 
the caption ``Judicial Review'' at the beginning of your comments.]
    Provisions of 1847(B)(g) of the Act concerning administrative and 
judicial review are set forth in regulations at proposed Sec.  414.920. 
This section of the Act specifies aspects of the CAP that are not 
subject to administrative or judicial review.

D. Implementation of the CAP

1. Physician Election Process
    [If you choose to comment on issues in this section, please include 
the caption ``Physician Election Process'' at the beginning of your 
comments.]
    Section 1847B(a)(1)(A) of the Act specifies that each physician is 
given the opportunity annually to elect to participate in the CAP. 
Payment for a charge for any drug or biological may be made only on an 
assignment-related basis in accordance with section 1842(o)(3)(A) of 
the Act. Physicians who do not elect to participate in the CAP would 
continue to buy the drugs they provide to beneficiaries incident to a 
physician's service and bill the Medicare program for them under 
section 1847A of the Act, the ASP methodology.
    Section 1847B(a)(5)(A) of the Act requires that we develop a 
process that physicians who wish to participate in the CAP may use on 
an annual basis to select the vendor from whom they wish to obtain 
drugs and the categories of drugs they wish to obtain under the CAP 
program. The statute also requires that we coordinate the physician's 
election to participate in the CAP with the Medicare Participating 
Physician Process described in section 1842(h) of the Act. To inform 
physicians about the choices of drugs and vendors available to them 
under the CAP, we are required to post a directory on the CMS Web site 
or to make such a directory available to interested physicians on an 
ongoing basis.
    We propose that physicians who elect to participate in the CAP 
would remain in the program for at least 1 calendar year. As described 
in more detail later in this section, physicians who elect to 
participate in the CAP would be required to complete a CAP election 
agreement. We propose that by completing this CAP election agreement, 
the physician would select the approved vendor that he or she would use 
under the CAP and would agree to the CAP participating physician 
requirements. Under these requirements, the physician would agree to--
     Share information with the vendor to facilitate the 
collection of applicable deductible and coinsurance.
     Promptly file claims.
     Timely and appropriately pursue claims that are denied 
because of medical necessity issues.
     Notify the vendor when a drug is not administered.
     Maintain an inventory for each CAP drug he or she obtains.

[[Page 10766]]

    Participating CAP physicians would also agree to comply with 
emergency drug replacement rules and requirements for using the 
``furnish as written'' provision. If we find it necessary, we may 
revoke the physician's election to participate in the CAP if the 
physician fails to abide by the CAP election agreement.
    We propose to initiate an annual CAP physician election process. We 
have modeled our proposed CAP physician election process after the 
Medicare Participating Physician Process to the extent possible. In 
addition, we communicated information to physicians about the upcoming 
CAP through the fact sheet that accompanied the 2005 Participating 
Physician Mailing, and plan to continue to use that vehicle to 
communicate information about CAP to physicians in future years. 
However, we note that the annual Physician Participation election 
process runs from November 14 to December 31 of each year. Waiting 
until December 31 to receive information about physicians' CAP election 
choices would not provide sufficient time for us and our claims 
processing contractors to record information about CAP physicians and 
their drug category selections, update claims processing files, perform 
testing, and inform vendors so that we are ready to pay CAP claims on 
January 1, 2006. In addition, a deadline of December 31 would not allow 
sufficient time for vendors to meet the operational timeframe of 
January 1. Therefore, we propose that the CAP physician election 
process would run from October 1 to November 15 of each calendar year. 
We propose that physicians who intend to continue into subsequent years 
may signal that preference by executing an abbreviated CAP election 
agreement. The abbreviated agreement may be used to indicate a 
preference to change vendors or drug categories from year to year. We 
propose that a CAP participating physician may select a vendor outside 
the annual election process if the previously selected vendor ceases 
participation in CAP, or if the physician leaves the group practice 
that had selected the given vendor or relocates to another competitive 
area. We propose to specify the exceptions to the annual selection 
process at proposed Sec.  414.908(a)(2) of our regulations.
    We seek comment on the potential options available to affected 
physicians when a vendor leaves the program during the middle of the 
CAP year. Proposed physician options would include leaving the CAP or 
switching vendors as is required by the proposed CAP election agreement 
for the physician to participate in the CAP. We propose that, 
consistent with the Medicare Participating Physician Process, if 
members of a group practice elect to participate in the CAP, the entire 
practice would participate. Group practices enroll as a group, and are 
assigned a group PIN number to bill Medicare. Physician groups that 
elect to participate in the CAP would be paid for drug administration 
based on the group PIN number that they place on their claim. We 
propose that when a physician bills as a member of a group using the 
group PIN, he or she must follow the group's election to participate or 
not to participate in the CAP. However, we also propose that if the 
physician in the group practice also has a solo practice, he or she may 
make a different determination to participate or not to participate in 
the CAP when using his or her individual PIN.
    We also propose that consistent with the Medicare Participating 
Physician Process, new physicians would be given 90 days in which to 
decide to elect to participate in the CAP. They would receive 
information about CAP when they enroll as a Medicare provider and would 
be instructed how to find the election information and forms on the CMS 
Web site. If they elect to participate, they would download the forms 
and submit them to their Medicare carrier.
    We propose to implement the following process:
    (1) We would prepare a posting on our Web site by October 1, 
describing the vendors we have selected to participate in the CAP, the 
categories of drugs they would be providing, and the geographic areas 
within which each vendor would operate.
    (2) We would publicize the availability of the CAP physician 
election information on our Web site via our physician listservs, and 
our Medicare fee for service contractors' Web sites and newsletters. We 
would also coordinate with physician specialty organizations to enlist 
their assistance in informing their members that the physician election 
information is available.
    (3) Physicians would be asked to access the CAP election agreement 
on our Web site and determine whether they would like to elect to 
participate in the program.
    (4) Physicians who elect to participate would be asked to download, 
complete and sign the CAP election agreement. The CAP election 
agreement would require that they select the vendor(s) in their area 
from which they would like to obtain drugs and the categories of drugs 
they wish to obtain through the program.
    (5) Physicians would be instructed to return completed CAP election 
agreement to their local carrier. The CAP election agreement must be 
postmarked by November 15.
    (6) The local carrier would make note of the physician's decision 
to participate in the CAP, and the vendor(s) and categories of drugs 
selected.
    (7) The local carrier would forward information from the CAP 
election agreement to the CAP designated carrier.
    (8) The designated carrier would compile a master list of all 
Medicare physician's vendor and drug selections. In addition, the 
designated carrier would notify each CAP vendor of the physician who 
has elected to enroll with that vendor.
    (9) After the necessary claims processing files are prepared, the 
local carrier and the designated carrier would begin system testing to 
be ready to pay claims by January 1, 2006.
    As we become more experienced with the CAP program, we plan to 
evaluate these timeframes to determine if adjustments should be made to 
the dates for the CAP election process. The requirements concerning a 
physician's election to participate in the CAP are set forth in 
regulations at proposed Sec.  414.908(a).
2. Vendor or Physician Education
    [If you choose to comment on issues in this section, please include 
the caption ``Vendor or Physician Education'' at the beginning of your 
comments.]
    To ensure that vendors and physicians have timely access to 
accurate Medicare program information regarding the CAP, we would 
instruct the CAP designated carrier to utilize various communication 
channels at the local and national levels to disseminate information 
about the CAP and assist vendors and physicians in understanding the 
Medicare program's operations, policy, and billing and administration 
procedures regarding the CAP. The CAP designated carrier would be 
instructed to utilize data analyses in tailoring its outreach and 
educational efforts for vendors and physicians regarding identified 
areas of confusion about the CAP. Additionally, the CAP designated 
carrier would be instructed to utilize mass media, as well as 
educational and outreach products, services, forums, and partnerships 
in an effort to disseminate information about, and provide assistance 
regarding, the CAP to the vendor and healthcare practitioner 
communities. The

[[Page 10767]]

fundamental goal of the CMS provider outreach and education 
requirements of the CAP designated carrier would be to ensure that 
those who provide service(s) to beneficiaries receive the information 
they need to understand the Medicare program so that it is administered 
appropriately and billed correctly. As such, we would be involved in 
oversight of, and partnership with, the CAP designated carrier's vendor 
and physician outreach and educational program regarding the CAP.
3. Beneficiary Education
    [If you choose to comment on issues in this section, please include 
the caption ``Beneficiary Education'' at the beginning of your 
comments.]
    The CAP would have an impact on beneficiaries who receive physician 
administered drugs. If a physician elects to participate in the CAP, 
beneficiaries receiving services from this physician would receive a 
separate MSN from the designated carrier that processes invoices for 
the drug vendor as well as a bill from the drug vendor for the 
copayment of the drug. This may cause confusion for the beneficiary 
because he or she would only know that the drugs were administered by a 
physician. In addition, because the activity of the drug vendor would 
be transparent to the beneficiaries, they may question why they are 
receiving a bill from an unknown entity.
    To educate beneficiaries in a proactive fashion, we propose to 
develop a beneficiary-focused fact sheet, and to update existing 
related educational materials, to reflect these changes. The fact sheet 
would be available for physicians who elect to participate in the CAP 
to provide to beneficiaries at the time of service. It would explain 
the CAP and its impact on the beneficiary. We would also make this fact 
sheet available at 1-800-MEDICARE, as well as on the www.medicare.gov 
website. Although we are not proposing to require physicians to provide 
beneficiaries with the fact sheet, we seek comment on the 
administrative burden associated with this activity. In addition, while 
we are not proposing to require any additional options for specific 
outreach, we are also interested in obtaining comments on other 
mechanisms that might be utilized to inform the beneficiary of services 
provided as part of the CAP (such as a notice constructed to allow the 
physician to specifically identify the drugs administered and the CAP 
vendor which could be handed out to beneficiaries at the end of a 
physician encounter) and the burden that would be associated with this 
mechanism.
    We also propose to provide information about CAP in the 2006 
versions of the Medicare & You handbook and Your Medicare Benefits. The 
handbook is mailed annually to each beneficiary household. Your 
Medicare Benefits is available upon request at 1-800-MEDICARE, as well 
as on the http://www.medicare.gov Web site. Information would also be 
provided to the 1-800-MEDICARE helpline so that operators can answer 
CAP related questions. The http://www.medicare.gov Web site would also 
have consumer-friendly information available about CAP.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, 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 an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 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.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements:

Section 414.906 Competitive Acquisition Program as the Basis for 
Payment

    A physician who elects to participate in the program and has 
selected an approved vendor, must provide information to the approved 
vendor to facilitate collection of applicable deductible and 
coinsurance as described in Sec.  414.906(a)(3).
    The burden associated with this requirement is the time and effort 
necessary for the physician to provide the information to the vendor to 
facilitate collection of applicable deductible and coinsurance. CMS is 
requesting public comment on the extent of burden associated with this 
requirement. In the final rule CMS will quantify the amount of burden 
associated with this requirement based upon public input.

Section 414.908 Competitive Acquisition Program

    A physician is provided an application process for the selection of 
an approved vendor on an annual basis. The CAP election agreement will 
facilitate physician enrollment and designation of their approved CAP 
vendor and agreement to abide by the CAP program requirements.
    The burden associated with this requirement is the time and effort 
necessary for the physician to enroll and designate an approved CAP 
vendor. We estimate that it will require 70,000 physicians 15 minutes 
each to fulfill the application requirements.
    In addition, physicians participating in the CAP must elect to use 
an approved vendor for the drug category area as discussed in Sec.  
414.904(a)(1); submit a written order or prescription to the approved 
vendor; not receive payment for the competitively biddable drug except 
as described in Sec.  414.906(c)(2)(ii); provide information to the 
approved vendor to facilitate collection of applicable deductible and 
coinsurance as described in Sec.  414.906(a)(3); notify the approved 
vendor when a drug is not administered; maintain a separate electronic 
or paper inventory for each CAP drug obtained; agree to file the 
Medicare claim when the drug is administered.
    The burden associated with this requirement is the time and effort 
necessary for the physician to provide and/or maintain the information 
required as discussed above. CMS is requesting public comment on the 
extent of burden associated with this requirement. In the final rule 
CMS will quantify the amount of burden associated with this requirement 
based upon public input.

Section 414.910 Bidding Process

    Vendors may bid to furnish competitively biddable drugs in all 
areas of the United States, or a specific region that meets the 
requirements of this section.
    The burden associated with these requirements is the time and 
effort necessary to submit the bid application, supporting 
documentation, and maintain necessary documentation demonstrating that 
the requirements set forth in the contract have been or will be met.
    We estimate that it will require 25 bid applicants 40 hours each to 
meet the bidding and contract requirements.

[[Page 10768]]

Section 414.914 Terms of Contract

    The terms of the contract between CMS and the approved vendor will 
be for a term of 3 years. During the contract period the vendor must 
disclosure to CMS or its agent, the approved vendor's reasonable, net 
acquisition costs for a specified period of time, on at least an annual 
basis.
    The burden associated with these requirements is the time and 
effort necessary for the vendor to submit to CMS or its agent, the 
vendor's reasonable, net acquisition costs for a specified period of 
time, at least on an annual basis.
    We estimate that it will require each of the 10 vendors 8 hours on 
an annual basis to submit the necessary information, for total annual 
burden of 8 hours per vendor.

Section 414.916 Dispute Resolution

    Cases of an approved vendor's dissatisfaction with denied drug 
claims are resolved through a voluntary alternative dispute resolution 
process.
    Since the requirements set forth in this section are in accordance 
with administrative action, audit, or investigation, the requirements 
of this section are exempt from the PRA as stipulated under 5 CFR 
1320.4 (a)(2).
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development Group, Attn: 
John Burke, CMS-1325-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-1325-P, 
Christopher [email protected]. Fax (202) 395-6974.

IV. Response to Public Comments

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

V. Regulatory Impact Analysis

    [If you choose to comment on issues in this section, please include 
the caption ``Regulatory Impact Analysis'' at the beginning of your 
comments.]
    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
reassigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis must be prepared for final rules with 
economically significant effects (that is, a final rule that would have 
an annual effect on the economy of $100 million or more in any 1 year, 
or would adversely affect in a material way the economy, a sector of 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities).
    Since this rule is considered to be a major rule because it is 
economically significant, we have prepared a regulatory impact 
analysis. The RFA requires that we analyze regulatory options for small 
businesses and other entities. We prepare a Regulatory Flexibility 
Analysis unless we certify that a rule would not have a significant 
economic impact on a substantial number of small entities. The analysis 
must include a justification concerning the reason action is being 
taken, the kinds and number of small entities the rule affects, and an 
explanation of any meaningful options that achieve the objectives with 
less significant adverse economic impact on the small entities.
    For purposes of the RFA, physicians and non-physician practitioners 
are considered small businesses if they generate revenues of $8.5 
million or less. Approximately 96 percent of physicians are considered 
to be small entities. There are in excess of 20,000 physicians and 
other practitioners that receive Medicare payment for drugs. These 
physicians are more concentrated in the specialties of oncology, 
urology, and rheumatology. Of the physicians in these specialties, 
approximately 40 percent are in oncology and 45 percent in urology.
    The impact of this proposed rule on an individual physician is 
dependent on the drugs they provide to Medicare beneficiaries and 
whether these drugs are included in the categories of drugs considered 
for competitive acquisition and whether the physician chooses to obtain 
drugs administered to Medicare beneficiaries through the CAP.
    In addition, this proposed rule would have an impact on entities, 
either existing or formed specifically for this purpose, that are 
involved in the dispensing of drugs. This impact would be dependent on 
the categories of drugs and geographic areas that are determined to 
fall under the CAP and on their ability to successfully compete and 
receive approval as a vendor under the competitive acquisition program.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any proposed rule that may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 603 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside a 
Metropolitan Statistical Area and has fewer than 100 beds. We have 
determined that this proposed rule will have no significant impact on 
the operations of a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditures in any 1 year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million.
    We have examined this proposed rule in accordance with Executive 
Order 13132 and have determined that this regulation would have no 
consequential effect on the rights, roles, or responsibilities of 
State, local, or tribal governments.

A. Anticipated Effects

    We have prepared the following analysis, related to the assessment 
requirements. It explains the rationale for, and purposes of, the rule, 
details the costs and benefits of the rule, analyzes alternatives, and 
presents the measures we are using to minimize the burden on small 
entities. As indicated elsewhere, we are making changes to method of 
payment for drugs in response to the requirements of section 1847B of 
the Act. We provide information on the options being considered in the 
development of the CAP in the relevant sections in this rule. The 
provisions of this rule discuss changes to our payment for drugs 
through the establishment of a competitive

[[Page 10769]]

acquisition process as an alternative payment system for Part B drugs 
and biologicals. This rule does not impose reporting, record keeping, 
and other compliance requirements except as described in sections 
II.C.3 and II.D.1 of the preamble. We are unaware of any relevant 
Federal rules that duplicate, overlap, or conflict with this rule.
    The effect of this proposed rule on an individual physician would 
be dependent on the drugs they provide to Medicare beneficiaries and 
whether these drugs are included in the categories of drugs considered 
for competitive acquisition. For example, a physician may--(1) 
Determine the cost associated with acquiring drugs through the 
competitive acquisition program, (2) determine the cost associated with 
acquiring drugs through traditional means and billing Medicare under 
the ASP plus six percent methodology, and (3) determine if there is a 
cost savings associated with either program. Different outcomes may 
result from these calculations depending on the drug mix, overhead 
cost, and patient mix.
    A physician who elects to participate in the program would obtain 
all of their Medicare related drugs in categories for which CAP is 
implemented in their area through a competitive acquisition program 
vendor. The vendor would then collect applicable deductibles and 
coinsurance from the beneficiary. Under this option, the physician 
would never take legal ownership of the drug and would eliminate the 
cost associated with collecting deductibles and coinsurance. Because 
the drug remains the property of the vendor until the time of 
administration, the physician can also reduce the cost associated with 
storage and individual drug supplier negotiations. The CAP may also 
save physicians money since they would not be in the drug purchasing 
and procurement business and would not have to collect coinsurance from 
beneficiaries.
    This rule also proposes establishing rules whereby drugs and 
biologicals administered by the physician in emergency situations that 
were not originally acquired through a Medicare vendor may be 
resupplied through the Medicare competitive acquisition program vendor.

B. Impact of Establishment of a Competitive Acquisition Program

    We have simulated the impact of the costs of furnishing or 
administering drugs through the competitive acquisition program and 
found it to be negligible. At this time we anticipate no additional 
cost savings or increases associated with the competitive acquisition 
program, particularly relative to the ASP + 6 percentages since the 
specific parameters under which the CAP will be operating (for example, 
specific drugs, physicians electing to participate in CAP) will be 
directed by this rulemaking and are not yet determined. Moreover, some 
of the key purposes of the CAP program are to provide alternatives to 
physicians who do not wish to be in the drug purchasing and coinsurance 
collection business.

C. Alternatives Considered

    This proposed rule contains alternative approaches to implementing 
a competitive acquisition program for Part B drugs that we considered, 
each of which has been discussed in detail. We will select one of these 
approaches after reviewing all public comments received on the proposed 
rule and making any necessary modifications.

D. Impact on Beneficiaries

    We have simulated the effect of changes in beneficiary coinsurance 
for drugs and related changes in beneficiary Part B premium payments 
resulting from the implementation of competitive acquisition program 
for Part B drugs. We have concluded that there will be no appreciable 
difference to the beneficiaries if their drugs were to be administered 
by a physician participating in the CAP or purchasing them at ASP plus 
6 percent, thus there would be no cost or savings to the beneficiary 
whose physician participates in the CAP.
    We do not believe that any beneficiaries would experience drug 
access issues as a result of implementation of CAP. We intend to 
monitor beneficiary access closely and may propose additional changes 
to our payment system in the future if necessary.
    We propose to develop educational material to distribute to 
beneficiaries, such as pamphlets and a discussion in The Medicare 
Handbook, to help explain the CAP and the changes they will see on 
their Medicare summary notices. Specifically, under the CAP 
beneficiaries would now pay their coinsurance and deductibles to their 
CAP vendor instead of the administering physician.
    In accordance with the provisions of Executive Order 12866, the 
Office of Management and Budget has reviewed this regulation.

List of Subjects in 42 CFR Part 414

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

    For the reasons set forth in this preamble, the Centers for 
Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as set 
forth below:

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

    1. The authority citation for part 414 continues to read as 
follows:

    Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social 
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

Subpart K--Payment for Drugs and Biologicals Under Part B

    2. Revise the heading of subpart K as set forth above.
    3. Amend Sec.  414.900 by--
    A. Revising the section heading.
    B. Revising paragraph (a).
    C. Revising paragraph (b)(3)(ii).
    The revisions read as follows:


Sec.  414.900  Basis and scope.

    (a) This subpart implements sections 1842(o), 1847A, and 1847B of 
the Act and outlines the two payment methodologies applicable to drugs 
and biologicals covered under Medicare Part B that are not paid on a 
cost or prospective payment system basis.
    (b) * * *
    (3) * * *
    (ii) Pneumococcal and Hepatitis B vaccines.
* * * * *
    4. Republish the introductory text to Sec.  414.902 and add the 
definitions of ``Approved vendor,'' ``Bid,'' ``CAP election 
agreement,'' ``Competitive acquisition program,'' ``Competitive area,'' 
``Competitively biddable drugs,'' ``Designated carrier,'' ``Local 
carrier,'' and ``Participating CAP physician'' to read as follows:


Sec.  414.902  Definitions.

    As used in this subpart, unless the context indicates otherwise--
    Approved vendor means an entity that has been awarded a contract by 
CMS to participate in the competitive acquisition program.
    Bid means an offer to furnish a competitively biddable drug within 
a category of competitively biddable drugs in a competitive area for a 
particular price and time period.
    Competitive acquisition program (CAP) means a program as defined 
under section 1847B of the Act.
    CAP election agreement means the form that the physician must 
complete to notify CMS that he or she elects to participate in the CAP.

[[Page 10770]]

    Competitive area means the geographic area established by the 
Secretary for purposes of implementing the CAP required by section 
1847B of the Act.
    Competitively biddable drugs means a physician-administered drug or 
biological furnished on or after January 1, 2006 described in section 
1842(o)(1)(C) of the Act.
    Designated carrier means an entity assigned by CMS to process and 
pay claims for drugs and biologicals under the Part B drug competitive 
acquisition program.
* * * * *
    Local carrier means an entity assigned by CMS to process and pay 
claims for administration of drugs and biologicals under the Part B 
drug competitive acquisition program.
* * * * *
    Participating CAP physician means a Medicare physician electing to 
participate in the CAP described in this subpart. The participating CAP 
physician must complete and sign the CAP election agreement.
* * * * *
    5. Amend Sec.  414.904 by revising the section heading to read as 
follows


Sec.  414.904  Average sales price as the basis of payment.

* * * * *
    6. Add Sec.  414.906 to read as follows:


Sec.  414.906  Competitive acquisition program as the basis for 
payment.

    (a) Program payment. Beginning in 2006, as an alternative to 
payment under Sec.  414.904, payment for a drug may be made through 
competitive acquisition if the following occurs:
    (1) The competitively biddable drug is supplied under the program 
by an approved vendor as specified in Sec.  414.908(b).
    (2) The claim for the prescribed drug is submitted by the approved 
vendor that supplied the drug and payment is only made to that vendor.
    (3) The approved vendor collects applicable deductible and 
coinsurance with respect to the drug furnished under the CAP only after 
the drug is administered to the individual.
    (4) The approved vendor delivers the drugs directly to the 
participating CAP physician.
    (b) Exceptions to competitive acquisition. Specific competitively 
biddable drugs, including a category of these drugs, may be excluded 
from the CAP if the application of competitive bidding to these drugs--
    (1) Is not likely to result in significant savings; or
    (2) Is likely to have an adverse impact on access to such drugs.
    (c) Computation of payment amount. (1) Except as specified in 
paragraph (c)(2) of this section, payment for competitively biddable 
drugs is based on bids submitted and accepted as described in Sec.  
414.910. Based on these bids, a single payment amount for each 
competitively biddable drug in the competitive area is determined. This 
payment is updated on an annual basis based on the approved vendor's 
reasonable net acquisition costs for that category as determined by CMS 
based, in part, on information disclosed to CMS and limited by the 
weighted payment amount established under section 1847A of the Act 
across all drugs in that category. Adjustment to the payment amounts 
may be made more often than annually, but no more often than quarterly, 
in any of the following cases:
    (i) Introduction of new drugs.
    (ii) Expiration of a drug patent.
    (iii) Material shortage that results in a significant price 
increase for the drug.
    (2) The alternative payment amount established under section 1847A 
of the Act may be used to establish payment for a competitively 
biddable drug--
    (i) For which a payment and BILLING CODE has not been established; 
or
    (ii) When medical necessity requires a certain brand of drug that 
the approved vendor has not been contracted to furnish under the CAP.
    (d) Adjustments. There is an established process for adjustments to 
payments to account for drugs that were billed at the time of 
dispensing but which were not administered.
    (e) Resupply of participating CAP physician drug inventory. A 
participating CAP physician may acquire drugs under the CAP to resupply 
his or her inventory if all of the following requirements are met:
    (1) The drugs were required immediately.
    (2) The participating CAP physician could not have anticipated the 
need for the drugs.
    (3) The vendor could not have delivered the drugs in a timely 
manner.
    (4) The participating CAP physician administered the drugs in an 
emergency situation.
    7. Add Sec.  414.908 to read as follows:


Sec.  414.908  Competitive acquisition program.

    (a) Physician selection of an approved vendor. (1) CMS provides the 
physician with a process for the selection of an approved vendor on an 
annual basis, with exceptions as specified in Sec.  414.908(a)(2), and 
will also receive information about the CAP in the enrollment process 
for Medicare participation discussed in section 1842(h) of the Act.
    (2) A physician may select an approved vendor outside the annual 
selection process when--
    (i) The approved vendor ceases participation in the CAP; or
    (ii) Other exigent circumstances defined by the Secretary, for 
example the participating CAP physician relocates to another 
competitive area or the physician leaves a group practice participating 
in the CAP.
    (3) The physician participating in the CAP--
    (i) Elects to use an approved vendor for the drug category area as 
set forth in Sec.  414.904(a)(1);
    (ii) Completes and signs the CAP election agreement;
    (iii) Submits a written order or prescription to the approved 
vendor;
    (iv) Does not receive payment for the competitively biddable drug 
except as described in Sec.  414.906(c)(2)(ii);
    (v) Provides information to the approved vendor to facilitate 
collection of applicable deductible and coinsurance as described in 
Sec.  414.906(a)(3);
    (vi) Notifies the approved vendor when a drug is not administered;
    (vii) Maintains a separate electronic or paper inventory for each 
CAP drug obtained;
    (viii) Agrees to file the Medicare claim within 14 days of the date 
of drug administration; and
    (ix) Agrees to submit an appeal accompanied by all required 
documentation (such as medical records or a certification) necessary to 
support payment if the participating CAP physician's drug 
administration claim is denied.
    (4) Physician group practices. If a physician group practice using 
a group billing number elects to participate in the CAP, all physicians 
in the group are considered to be participating CAP physicians when 
using the group number.
    (b) Program requirements. (1) CMS selects approved vendors through 
a competition among entities based on the following:
    (i) Submitting the bid prices for competitively biddable drugs 
within the category and competitive area that--
    (A) Place the vendor among the lowest five qualified bidders; and
    (B) Do not exceed the weighted payment amount established under 
section 1847A of the Act across all drugs in that category.
    (ii) Ability to ensure product integrity.
    (iii) Customer service.

[[Page 10771]]

    (iv) At least 3 years experience in furnishing Part B injectable 
drugs.
    (v) Financial performance and solvency.
    (vi) Record of integrity and the implementation of internal 
integrity measures.
    (vii) Internal financial controls.
    (viii) Acquisition of all drugs and biological products directly 
from the manufacturer or from a distributor that has acquired the 
products directly from the manufacturer.
    (ix) Other factors as determined by the Secretary.
    (2) Approved vendors must also meet the contract requirements under 
Sec.  414.914.
    (c) Additional considerations. CMS may refuse to award a contract 
or terminate an approved vendor contract based upon the following:
    (1) Suspension or revocation by the Federal or State government of 
the entity's license for distribution of drugs, including controlled 
substances.
    (2) Exclusion of the entity under section 1128 of the Act from 
participation in Medicare or other Federal health care programs.
    (d) Multiple source drugs. In the case of multiple source drugs, 
there must be a competition among entities for the acquisition of at 
least one competitively biddable drug with each billing and payment 
code within each category for each competitive area.
    (e) Multiple contracts for a category. The number of bidding 
qualified entities that are awarded a contract for a given category and 
area may be limited to no fewer than two.
    8. Add Sec.  414.910 to read as follows:


Sec.  414.910  Bidding process.

    (a) Entities may bid to furnish competitively biddable drugs in all 
competitive areas of the United States, or a specific competitive area.
    (b) There will be uniformity among the bids for any specific 
competitive area.
    (c) A submitted bid price must include the following:
    (1) All costs related to the delivery of the drug to the 
participating CAP physician.
    (2) The costs of dispensing (including shipping) of the drug and 
management fees. The costs related to the administration of the drug or 
wastage, spillage or spoilage may not be included.
    9. Add Sec.  414.912 to read as follows:


Sec.  414.912  Conflicts of interest.

    (a) Approved vendors and applicants that bid to participate in the 
CAP are subject to the following:
    (1) The conflict of interest standards and requirements of the 
Federal Acquisition Regulation (FAR) organizational conflict of 
interest guidance, found under 48 CFR subpart 9.5.
    (2) Those requirements and standards contained in each individual 
contract awarded to perform functions under section 1847B of the Act.
    (b) Post-award conflicts of interest. Approved vendors must have a 
code of conduct that establishes policies and procedures for 
recognizing and resolving conflicts of interest between the approved 
vendor and any entity, including the Federal Government, with whom it 
does business. The code of conduct must--
    (1) State the need for management, employees, and agents to comply 
with the approved vendor's code of conduct, and policies and procedures 
for conflicts of interest; and
    (2) State the approved vendor's expectations of commitment to 
compliance by management, employees, and agents.
    10. Add Sec.  414.914 to read as follows:


Sec.  414.914  Terms of contract.

    (a) The terms of the contract between CMS and the approved vendor 
will be for a term of 3 years. The contract may be terminated--
    (1) By CMS for default if the approved vendor violates any term of 
the contract; or
    (2) In the absence of a contract violation, by either CMS or the 
approved vendor, if the terminating party notifies the other party by 
June 30 for an effective date of termination of December 31 of that 
year.
    (b) The contract will provide for a code of conduct for the 
approved vendor that includes standards relating to conflicts of 
interest standards at Sec.  414.912.
    (c) The vendor will have a compliance plan that contains policies 
and procedures that control program fraud, waste, and abuse, and 
consists of the following minimum elements:
    (1) Written policies, procedures, and standards of conduct 
articulating the organization's commitment to comply with all 
applicable Federal and State standards.
    (2) The designation of a compliance officer and compliance 
committee accountable to senior management.
    (3) Effective training and education between the compliance officer 
and organization employees, contractors, agents, and directors.
    (4) Enforcement of standards through well publicized disciplinary 
guidelines.
    (5) Procedures for effective internal monitoring and auditing.
    (6) Procedures for ensuring prompt responses to detected offenses 
and development of corrective action initiatives relating to the 
organization's contract as a drug vendor.
    (i) If the drug vendor discovers evidence of misconduct related to 
payment or delivery of drugs or biologicals under the contract, it will 
conduct a timely and reasonable inquiry into that conduct.
    (ii) The drug vendor will conduct appropriate corrective actions 
including, but not limited to, repayment of overpayments and 
disciplinary actions against responsible individuals, in response to 
potential violations referenced at paragraph (c)(6)(i) of this section.
    (7) Procedures to voluntarily self-report potential fraud or 
misconduct related to the CAP to the appropriate government agency.
    (d) The contract must provide for disclosure of the approved 
vendor's reasonable, net acquisition costs for a specified period of 
time, not to exceed quarterly.
    (e) The contract must provide for appropriate adjustments as 
described in Sec.  414.906(c)(1).
    (f) Under the terms of the contract, the approved vendor must 
also--
    (1) Have sufficient arrangements to acquire and deliver 
competitively biddable drugs within the category in the competitive 
area specified by the contract;
    (2) Have arrangements in effect for shipment at least 5 days each 
week of competitively biddable drugs under the contract, including 
emergency situations, and for timely delivery of such drugs in the 
competitive area;
    (3) Have procedures in place to address and resolve complaints of 
participating CAP physicians and individuals and inquiries regarding 
shipment of competitively biddable drugs;
    (4) Have a grievance and appeals process for dispute resolution;
    (5) Meet applicable licensure requirements in each State in which 
it distributes drugs under the CAP;
    (6) Enroll in Medicare as a participating provider; and
    (7) Comply with all necessary provisions related to the prevention 
of fraud and abuse.
    11. Add Sec.  414.916 to read as follows:


Sec.  414.916  Dispute resolution.

    (a) General rule. Cases of an approved vendor's dissatisfaction 
with denied drug claims are resolved through a voluntary alternative 
dispute resolution process delivered by the designated carrier, and a 
reconsideration process provided by CMS.

[[Page 10772]]

    (b) Dispute resolution. (1) When an approved vendor is not paid on 
claims submitted to the designated carrier, the vendor may appeal to 
the designated carrier to counsel the responsible participating CAP 
physician on his or her agreement to file a clean claim and pursue an 
administrative appeal in accordance with subpart H of part 405 of this 
chapter. If problems persist, the vendor may ask the designated carrier 
to--
    (i) Review the participating CAP physician's performance; and
    (ii) Potentially recommend a suspension of the participating CAP 
physician's CAP election agreement.
    (2) Responsibility of the designated carrier. The designated 
carrier--
    (i) Investigates and makes a recommendation to CMS on whether the 
participating CAP physician has been meeting the claims and appeals 
obligations in his or her CAP election agreement;
    (ii) Gathers information from the local carrier and the approved 
vendor; and
    (iii) Makes a recommendation to CMS on whether the participating 
CAP physician has been filing his or her CAP drug administration claims 
in accordance with the requirements for physician participation in the 
CAP as set forth in Sec.  414.908(a)(3).
    (3) CMS reviews the recommendation of the designated carrier and, 
if necessary, gathers additional information before deciding whether to 
suspend the participating CAP physician's CAP election agreement for a 
period not to exceed the end of the following CAP election cycle. This 
suspension is limited to the participating CAP physician's ability to 
order drugs from the specific vendor.
    (4) The participating CAP physician may appeal that exclusion by 
requesting a reconsideration. A determination must be made as to 
whether the participating CAP physician's denied claims and appeals 
were the result of the participating CAP physician's failure to 
participate in accordance with the requirements of Sec.  414.908(a)(3).
    (c) Reconsideration. (1) Right to reconsideration. A participating 
CAP physician dissatisfied with a determination that his or her CAP 
election agreement has been suspended by CMS is entitled to a 
reconsideration as provided in this subpart.
    (2) Eligibility for reconsideration. CMS reconsiders any 
determination to suspend a participating CAP physician's election 
agreement if the participating CAP physician files a written request 
for reconsideration in accordance with paragraphs (c)(3) and (c)(4) of 
this section.
    (3) Manner and timing of request for reconsideration. A 
participating CAP physician who is dissatisfied with a CMS decision to 
suspend his or her CAP election agreement may request a reconsideration 
of the decision by filing a request with CMS. The request must be filed 
within 30 days of receipt of the CMS decision letter. From the date of 
receipt of the decision letter until the day the reconsideration 
determination is final. The ASP payment methodology under section 1847A 
of the Act applies.
    (4) Content of request. The request for reconsideration must 
specify--
    (i) The findings or issues with which the participating CAP 
physician disagrees;
    (ii) The reasons for the disagreement;
    (iii) A recital of the facts and law supporting the participating 
CAP physician's position;
    (iv) Any supporting documentation; and
    (v) Any supporting statements from vendors, local carriers, or 
beneficiaries.
    (5) Withdrawal of request for reconsideration. A participating CAP 
physician may withdraw his or her request for reconsideration at any 
time before the issuance of a reconsideration determination.
    (6) Discretionary informal hearing. In response to a request for 
reconsideration, CMS may, at its discretion, provide the participating 
CAP physician the opportunity for an informal hearing that--
    (i) Is conducted by a hearing officer appointed by the director of 
the CMS Center for Medicare Management or his or her designee; and
    (ii) Provides the participating CAP physician the opportunity to 
present, by telephone or in person, evidence to rebut CMS' decision to 
suspend or terminate a participating CAP physician's CAP election 
agreement.
    (7) Informal hearing procedures. (i) CMS provides written notice of 
the time and place of the informal hearing at least 10 days before the 
scheduled date.
    (ii) The informal reconsideration hearing will be conducted in 
accordance with the following procedures:
    (A) The hearing is open to CMS and the participating CAP physician 
requesting the reconsideration, including--
    (1) Authorized representatives;
    (2) Technical advisors (individuals with knowledge of the facts of 
the case or presenting interpretation of the facts);
    (3) Representatives from the local carrier;
    (4) Representatives from the approved vendor; and
    (5) Legal counsel.
    (B) The hearing is conducted by the hearing officer who receives 
relevant testimony;
    (C) Testimony and other evidence may be accepted by the hearing 
officer even though it would be inadmissible under the rules of 
evidence applied in Federal courts;
    (D) Either party may call witnesses from among those individuals 
specified in the paragraph (c)(7)(ii)(A) of this section; and
    (E) The hearing officer does not have the authority to compel by 
subpoena the production of witnesses, papers, or other evidence.
    (8) Hearing officer's findings. (i) Within 30 days of the hearing 
officer's receipt of the hearing request, the hearing officer presents 
the findings and recommendations to the participating CAP physician who 
requested the reconsideration. If the hearing officer conducts a 
hearing in person or by phone, the findings and recommendations are due 
to the participating CAP physician within 30 days from of the hearing's 
conclusion.
    (ii) The written report of the hearing officer includes separate 
numbered findings of fact and the legal conclusions of the hearing 
officer.
    (9) Final reconsideration determination. (i) The hearing officer's 
decision is final unless the director of the CMS Centers for Medicare 
Management or his or her designee chooses to review that decision 
within 30 days.
    (ii) The CMS official may accept, reject, or modify the hearing 
officer's findings.
    (iii) If the CMS official reviews the hearing officer's decision, 
the CMS official issues a final reconsideration determination to the 
participating CAP physician on the basis of the hearing officer's 
findings and recommendations and other relevant information.
    (iv) The reconsideration determination of the CMS official is 
final.
    (v) CMS publishes a final reconsideration determination against a 
participating CAP physician in the Federal Register.
    (d) The approved vendor treats quality and service issues through 
its grievance process. If the approved vendor does not resolve a 
quality issue to the participating CAP physician's satisfaction, the 
participating CAP physician may escalate the matter to the designated 
carrier. The designated carrier attempts to develop solutions that 
satisfy program requirements and the needs of both the participating 
CAP physician and the approved vendor.

[[Page 10773]]

    (e) The approved vendor may not charge the beneficiary for the full 
drug coinsurance amount if the designated contractor did not pay the 
approved vendor in full. When a beneficiary receives a coinsurance bill 
under these circumstances, the beneficiary may participate in the 
approved vendor's grievance process to request correction of the 
approved vendor's file. If the beneficiary is dissatisfied with the 
result of the approved vendor's grievance process, the beneficiary may 
request intervention from the designated carrier. This is in addition 
to, rather than is place of, any other beneficiary appeal rights. The 
designated carrier will first investigate the facts and then facilitate 
correction to the appropriate claim record and beneficiary file.
    12. Add Sec.  414.918 to read as follows:


Sec.  414.918  Assignment.

    Payment for a charge for a competitively biddable drug for which 
payment is made may be made only on an assignment-related basis.
    13. Add Sec.  414.920 to read as follows:


Sec.  414.920  Judicial review.

    The following areas under the CAP are not subject to administrative 
or judicial review:
    (a) The establishment of payment amounts.
    (b) The awarding of vendor contracts.
    (c) The establishment of competitive acquisition areas.
    (d) The selection of competitively biddable drugs
    (e) The bidding structure.
    (f) The number of vendors selected.

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

    Dated: February 10, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 24, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-3992 Filed 2-25-05; 4:00 pm]
BILLING CODE 4120-01-P