[Federal Register Volume 70, Number 53 (Monday, March 21, 2005)]
[Rules and Regulations]
[Pages 13397-13400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-5592]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

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

CMS-4068-F2
RIN 0938-AN08


Medicare Program; Medicare Prescription Drug Benefit; 
Interpretation

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

ACTION: Final rule; interpretation.

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SUMMARY: This final rule modifies or clarifies our interpretations in 
several areas of the final rule titled ``Medicare Prescription Drug 
Benefit'' published in the Federal Register on January 28, 2005. First, 
it clarifies our interpretation of ``entity'', to respond to inquiries 
we received subsequent to the publication of the Prescription Drug 
Benefit (Part D) final rule on January 28, 2005. We were asked whether 
a joint enterprise could be considered an ``entity'' under section 
1860D-12(a)(1) of the Social Security Act (the Act), for purposes of 
offering a prescription drug plan (PDP). Our interpretation is 
discussed in the Supplementary Information section of this final rule.
    Second, also subsequent to the publication of the Prescription Drug 
Benefit (Part D) final rule on January 28, 2005, we received inquiries 
from parties about our discussion of the actuarial equivalence standard 
and the manner in which an employee health plan sponsor could apply the 
aggregate net value test in the regulatory text of the final rule. Our 
interpretation is discussed in the ``Provisions'' section of this final 
rule.
    In addition, subsequent to publishing the August 3, 2004 proposed 
rule (69 FR 46684), we received comments on how the late enrollment 
penalty would be coordinated with the late enrollment penalty for Part 
B, and whether the one percent penalty would be sufficient to control 
for adverse selection. We clarify in the Provisions section of this 
final rule that the example given in the proposed rule, published on 
August 3, 2004, did not accord with the proposed or final regulatory 
language because it did not account for the fact that the base 
beneficiary premium increases on an annual basis. To remedy this error 
and in response to comments received on the proposed rule, we provide 
an interpretation that as the base beneficiary premium increases, the 
late enrollment penalty must also increase, and is in keeping with how 
the Part B penalty is calculated.
    Finally, we are providing clarifying language related to 
transitioning Part D enrollees from their prior drug coverage to their 
new Part D plan coverage.
    The Medicare Prescription Drug Benefit final rule will take effect 
on March 22, 2005. Our interpretations are deemed to be included in 
that final rule.

DATES: Effective Date: These interpretations are effective on March 22, 
2005.

FOR FURTHER INFORMATION CONTACT: Tracey McCutcheon, (410) 786-6715.

SUPPLEMENTARY INFORMATION:

[[Page 13398]]

I. Background and Clarification of ``Entity''

    Subsequent to the publication of the Medicare Prescription Drug 
Benefit (Part D) final rule on January 28, 2005 (70 FR 4194), we have 
received inquiries from parties interested in offering a prescription 
drug plan (PDP) concerning what organizational requirements they must 
meet in order to be eligible to offer such a plan. Several health 
plans, each licensed by a State as a risk-bearing entity, have inquired 
as to whether they could jointly enter into a contract with us to offer 
a single PDP in a multistate region. The participating health plans 
would contract with each other to create a single ``joint enterprise.'' 
They have asked us whether such a joint enterprise could be considered 
an ``entity'' under section 1860D-12(a)(1) of the Act, for purposes of 
offering a PDP.
    The statute generally requires that the ``entity'' be licensed by 
the State as a risk bearing entity where it offers benefits. The health 
plans seeking jointly to offer a PDP propose to meet this requirement 
through the State license each participating health plan holds in the 
State in which it does business. Each plan would be at risk, and fully 
responsible, for each PDP enrollee in its State, or portion of a State 
in which it is licensed and operating. Together, the entire region will 
be covered by an insurer licensed by the State to bear risk in the 
State where the enrollee lives.
    We have determined that such a joint enterprise could be treated as 
a single ``entity'' for purposes of offering a PDP, as long as the 
enterprise as a whole meets all applicable Medicare requirements, and 
there is no substantive difference between this arrangement and a 
traditional entity from a Medicare enrollee's perspective. This means 
that the joint enterprise must, at a minimum: (1) Enter into a single 
contract under which it was accountable, through its participants 
individually or in the aggregate, for meeting all applicable Medicare 
requirements, including, since a regional entity cannot continue to 
operate in a service area that is less than the entire region, 
providing us with a description of the contracting entity's plan in the 
event that one or more parties in the joint enterprise terminates its 
participation (or is terminated by another party) in the enterprise in 
a contract year; (2) submit a single bid covering the entire PDP 
Region, which includes a uniform benefit, uniform cost-sharing, as well 
as a uniform premium, including how the joint enterprise will allocate 
risk among the multiple parties in the region; (3) offer a region-wide 
network of providers that is accessible to all enrollees in the plan, 
regardless of where in the region they live; (4) market the plan under 
a single name throughout the region; and (5) provide uniform enrollee 
customer service and appeal and grievance rights throughout the region. 
In addition, where the regulations specifically govern the activities 
of the entity, such as the requirement for fidelity bonds for officers, 
or certifications associated with receipt of payment, each State-
licensed plan comprising the joint enterprise will be required to meet 
such requirements individually. We will issue operational guidance 
concerning the process by which we will make payment to these joint 
enterprise entities. The preamble to the Part D final rule scheduled to 
take effect on March 22, 2005 is hereby deemed to include the foregoing 
clarification concerning our interpretation of the word ``entity.'' We 
may also issue further guidance on how individual requirements (such 
as, for example, those related to termination, apportionment of 
liability, and the imposition of sanctions) will apply to joint 
enterprises and the plans participating in such enterprises.

Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and 
requires the Secretary, in consultation with the Director of the Office 
of Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA also states that the timelines for these regulations may 
vary but shall not exceed 3 years after publication of the preceding 
proposed or interim final regulation except under exceptional 
circumstances.
    This final rule provides, prior to the effective date of the final 
regulations published on January 28, 2005, interpretations of the final 
regulations. In addition, this final rule was published within the 3-
year time limit imposed by section 902 of the MMA. Therefore, we 
believe that the final rule is in accordance with the Congress' intent 
to ensure timely publication of final regulations.

II. Provisions of the Final Regulations

    Subsequent to the publication of the Prescription Drug Benefit 
(Part D) final rule on January 28, 2005, we have received inquiries 
from parties about our discussion of the actuarial equivalence 
standard, as applied to a single retiree group health plan with 
multiple benefit options under Sec.  423.884(d)(5)(iv) of the final 
rule. Specifically, these parties have inquired as to whether an 
employee health plan sponsor could apply the aggregate net value test 
under that rule to a chosen subset of those benefit options that meet 
the gross value test, rather than to all of them. For the reasons that 
follow, while we had not considered this option when we drafted the 
final rule, we find that it will be consistent with the principle of 
letting the sponsor identify the benefit options to which it wants the 
net value test applied. We accordingly believe that this option should 
be added to the two options discussed in the preamble to the final 
rule.
    Section 423.884(d)(5)(iv) of the final rule provides that for a 
sponsor maintaining employment-based retiree health coverage with two 
or more benefit options, a sponsor must attest that all benefit options 
for which the sponsor claims the retiree subsidy separately satisfy the 
gross value test, and either separately or in the aggregate satisfy the 
net value test. This establishes the principle that the sponsor can 
identify the benefit options for which it is potentially seeking a 
subsidy. After considering the above inquiry, we believe that Sec.  
423.884(d)(5)(iv) can be read to permit a sponsor to claim the retiree 
subsidy for: (1) All benefit options that separately meet the gross 
value test and the net value test; (2) all benefit options that 
separately meet the gross value test and in the aggregate meet the net 
value test; and (3) a subset of the benefit options that separately 
meet the gross value test and in the aggregate meet the net value test. 
For example, if a retiree group health plan consists of five benefit 
options, all of which separately meet the gross value test, the plan 
could claim the subsidy for: (1) Each of the benefit options that 
separately meets the net value test; (2) all five benefit options if in 
the aggregate they meet the net value test; or (3) a subset of the five 
benefit options if in the aggregate this subset meet the net value test 
(for example, three of the five benefit options). If a sponsor should 
choose to aggregate a subset of the benefit options in a plan in order 
to meet the net value test, it could not collect the subsidy for the 
remaining options in the plan if the remaining options do not pass the 
net value test individually or in the aggregate.
    In response to comments on the application of the actuarial 
equivalence

[[Page 13399]]

standard to retiree group health plans with multiple benefit options, 
the preamble to the January 28, 2005 final rule (70 FR 4409) stated 
that ``the final rule provides sponsors with flexibility by allowing 
them to choose whether to apply the net prong of the actuarial 
equivalence test for each benefit option, or to apply the net prong of 
the actuarial equivalence test on an aggregated basis for all benefit 
options within a group health plan that satisfy the gross test.'' While 
we believe that both these options should be available, limiting 
sponsors to these two options will foreclose sponsors from claiming the 
retiree subsidy for a subset of the benefit options separately meeting 
the gross value that in the aggregate meet the net value test (the 
third option described above). We believe the following statement is a 
more accurate reflection of our policy of maximizing sponsor choice and 
flexibility, as reflected in the final rule at Sec.  423.884(d)(5)(iv): 
``The final rule provides sponsors with flexibility by allowing them to 
choose whether to apply the net prong of the actuarial equivalence test 
for each benefit option, or to apply the net prong of the actuarial 
equivalence test on an aggregated basis to two or more benefit options 
within a group health plan that satisfy the gross test and for which 
the sponsor is claiming the retiree subsidy.'' The preamble to the Part 
D final rule scheduled to take effect on March 22, 2005 is hereby 
amended to include the foregoing alternative interpretation in place of 
that set forth in the final rule published on January 28, 2005 
concerning application of the actuarial equivalence standard to 
employment-based retiree health coverage with multiple benefit options.
    We believe our policy, as described in this final rule, is a 
reasonable extension of the interpretation of section 1860D-22(a)(2)(A) 
of the Act set forth in the final rule. Section 1860D-22(a)(2)(A) of 
the Act provides that a sponsor's attestation regarding the actuarial 
equivalence of the prescription drug coverage under its plan to 
standard prescription drug coverage under Part D shall be made in 
accordance with the processes and methods described in section 1860D-
11(c) of the Act. As noted elsewhere in the preamble, we interpret 
section 1860D-11(c) of the Act as providing the Secretary with broad 
discretion to establish more than one process for determining the 
actuarial valuation of prescription drug coverage. Moreover, we believe 
the reference to ``the actuarial value of prescription drug coverage 
under the [sponsor's] plan'' in section 1860D-22(a)(2)(A) of the Act is 
ambiguous, and reasonably could be interpreted to mean the actuarial 
value of a single benefit option or multiple benefit options within the 
group health plan in the aggregate. At this point in time, we elect not 
to choose among these reasonable interpretations of section 1860D-
22(a)(2)(A) of the Act, and instead provide sponsors with flexibility 
that will accommodate their offering a wide variety of benefit options 
for their retirees while promoting our stated goals of maximizing the 
number of beneficiaries that retain their employer/union-sponsored 
retiree drug coverage while avoiding windfalls to sponsors.
    The final rule at Sec.  423.286(d)(3) contains our formula for 
calculation of the late enrollment penalty. That section states that 
for 2006 and 2007 the penalty equals one percent of the base 
beneficiary premium (computed under Sec.  423.286(c)) ``unless another 
amount is specified in a separate issuance based on available analysis 
or other information as determined by the Secretary.'' The same 
language for Sec.  423.286(d)(3) also was included in the proposed rule 
published on August 3, 2004. In the proposed rule, at 69 FR 46684, we 
provided an example stating that if the penalty amount is $.36 per 
month in 2004, and a beneficiary is subject to 12 months of penalty, 
the beneficiary will pay an additional $.36 * 12 or $4.32 per month as 
long as they are enrolled in Part D. We are clarifying in this final 
rule that the example provided in the proposed rule conflicted with 
regulatory language and could not be correct because it did not account 
for the fact that the base beneficiary premium, upon which the penalty 
is based, changes on an annual basis. Given these changes, the 
reference to the base beneficiary premium in Sec.  423.286(d) must be 
read to mean that as the base beneficiary premium changes, the late 
enrollment penalty, when set at one percent of the amount, also 
changes. Thus, assuming the one percent rule, the late enrollment 
penalty for 2007 would be based on the amount of the base beneficiary 
premium for 2007. In addition, during the comment period on the 
proposed rule, we received comments asking how the late enrollment 
penalty would be coordinated with the late enrollment penalty for Part 
B, and whether a one percent penalty would be sufficient to control for 
adverse selection. Our clarification also responds to these comments 
because it ensures that the late enrollment penalty is calculated in a 
manner that coordinates more properly with the Part B penalty, where 
the penalty is always a percentage of the current year's premium. 
Finally, in response to some the commenters' statements that any late 
enrollment penalty should properly account for adverse selection, the 
statute provides that the late enrollment penalty is the greater of an 
actuarially determined amount or one percent for each uncovered month. 
Given the newness of the program and the lack of data to determine an 
actuarially based penalty, we are initially implementing the penalty 
based on the one percent methodology. Once we have sufficient program 
experience, we will reassess this policy. To the extent that an 
actuarially determined amount provides a greater disincentive to late 
enrollment, we will move to that methodology given the statutory 
requirement that the penalty be the larger amount. The preamble to the 
Part D final rule scheduled to take effect on March 22, 2005 is hereby 
deemed to include the foregoing clarification.
    In the preamble to the final Medicare Prescription Drug Benefit 
regulation (FR 70 4194), published on January 28, 2005, we responded to 
comments on the need expressed by a number of commenters supporting a 
transition period for beneficiaries, particularly full-benefit dual 
eligibles who are transitioning to the Medicare Part D benefit from 
other drug coverage. We responded by agreeing with the commenters that 
Part D plans should have processes in place to transition current 
enrollees from their old coverage to their new Part D plan coverage, 
particularly in cases in which the beneficiary is taking Part D drugs 
that are not covered on the plan's formulary at time of enrollment. We 
further responded that ``we envision that the need for such a 
transition period will be limited for several reasons.'' We would like 
to clarify what we meant by this latter statement. We did not intend to 
signal with this statement that there should be a very limited 
application of, need for or duration of transition plans. What we 
intended to say is that there are other beneficiary protections in the 
formulary review and exceptions and appeals processes that would meet 
some of the same needs.
    Instead, we know that there are a variety of circumstances in which 
a beneficiary will need to be appropriately transitioned from their 
currently prescribed drugs to alternative drugs covered under the Part 
D plan's formulary. It is for these special circumstances that we 
require Part D plans to have an established transition process. To 
further clarify this transition

[[Page 13400]]

issue, we provide a brief discussion of the importance we place on 
protecting beneficiaries as they transition from a prior plan's drug 
coverage to a new Part D plan's coverage and an overview of our 
expectations for Part D plans as they develop their transitions 
processes.
    We strongly believe that this is an important issue not only for 
beneficiaries during the initial transition to the Medicare drug 
benefit on January 1, 2006, but also for new enrollees after the 
initial implementation of the program, and for individuals who switch 
from one plan to another after implementation of the benefit. We also 
believe it is important to differentiate the transition process to 
appropriately address the different needs of beneficiaries moving 
between treatment settings due to changes in level of care.
    As noted in the preamble and in Sec.  423.120(b)(3) of our final 
rule, Part D plans are required to establish an appropriate transition 
process for new enrollees who are transitioning to Part D from other 
prescription drug coverage, and whose current drug therapies may not be 
included in their Part D plan's formulary. Also as noted in the 
preamble we will review Part D plans' transition processes. Our 
proposed approach to evaluating a transition process review is 
consistent with our intent to provide potential plan sponsors with 
maximum flexibility to develop their own formularies in order to manage 
their prescription drug benefit offerings. We expect plans to document 
how it will ensure that new enrollees, who are stabilized on drugs that 
are not on the plan's formulary and that are known to have risks 
associated with any changes in the prescribed regimen, will continue to 
have access to medically necessary drugs without adverse health 
consequences. In addition, it is important that the transition process 
take into account the unique needs of residents of long term care (LTC) 
facilities enrolling into a new Part D plan, especially given the fact 
that a large proportion of residents may be dually eligible for both 
Medicare and full Medicaid benefits, and therefore, could be auto-
enrolled into the plan without making an affirmative selection based on 
the individual's existing treatment needs.

III. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IV. Waiver of 30-Day Delay in Effective Date

    We ordinarily provide an effective date 30 days after the 
publication of a final rule in the Federal Register. We can waive this 
delay, however, if we find good cause that it is impracticable, 
unnecessary, or contrary to the public interest, and we incorporate a 
statement of this finding and the reasons for it in the rule issued. 
The Medicare Prescription Drug Benefit final rule goes into effect on 
March 22, 2005. This final rule clarifies our interpretations in 
several areas that are deemed to be included in the January 28, 2005 
final rule. We believe that delaying the effective date of this 
interpretation would be contrary to the public interest because it 
would shorten the already tight time frame for the enrollment of health 
plans into the Part D program. Therefore, we believe it is necessary to 
have this interpretation of our existing policy take effect at the same 
time as the Medicare Prescription Drug Benefit final rule. Accordingly, 
we believe there is good cause to waive the 30-day delay in effective 
date, and this interpretation will be effective on the effective date 
of the Medicare Prescription Drug Benefit final rule, March 22, 2005.

V. Regulatory Impact

    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 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any one year). This rule 
does not reach the economic threshold and thus is not considered a 
major rule.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million in any one year. Individuals and States are not 
included in the definition of a small entity. We are not preparing an 
analysis for the RFA because we have determined that this rule will not 
have a significant economic impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. We are not preparing an 
analysis for section 1102(b) of the Act because we have determined that 
this rule will not have a 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 expenditure in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. This rule will have no consequential 
effect on the governments mentioned or on the private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. Since this regulation does not impose any costs on State 
or local governments, the requirements of E.O. 13132 are not 
applicable.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

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


    Dated: March 2, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: March 16, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-5592 Filed 3-18-05; 8:45 am]
BILLING CODE 4120-01-P