[Federal Register Volume 70, Number 116 (Friday, June 17, 2005)]
[Proposed Rules]
[Pages 35204-35220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11775]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare and Medicaid Services

42 CFR Parts 400 and 421

[CMS-6030-P2]
RIN 0938-AN72


Medicare Program; Medicare Integrity Program, Fiscal Intermediary 
and Carrier Functions, and Conflict of Interest Requirements

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish the Medicare Integrity 
Program (MIP) and implement program integrity activities that are 
funded from the Federal Hospital Insurance Trust Fund. This proposed 
rule would set forth the definition of eligible entities; services to 
be procured; competitive requirements based on Federal acquisition 
regulations and exceptions (guidelines for automatic renewal); 
procedures for identification, evaluation, and resolution of conflicts 
of interest; and limitations on contractor liability.
    This proposed rule would bring certain sections of the Medicare 
regulations concerning fiscal intermediaries and carriers into 
conformity with the Social Security Act (the Act). The rule would 
distinguish between those functions that the statute requires to be 
included in agreements with fiscal intermediaries and those that may be 
included in the agreements. It would also provide that some or all of 
the functions may be included in carrier contracts. Currently all these 
functions are mandatory for carrier contracts.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. e.d.t on August 16, 
2005.

ADDRESSES: In commenting, please refer to file code CMS-6030-P2. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments to http://www.cms.hhs.gov/regulations/ecomments, (attachments should be in 
Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft 
Word).
    2. By mail. You may mail written comments (one original and two 
copies) to the following address ONLY: Centers for Medicare & Medicaid 
Services,

[[Page 35205]]

Department of Health and Human Services, Attention: CMS-6030-P2, P.O. 
Box 8014, Baltimore, MD 21244-8014.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number 1-800-743-3951 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.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Brenda Thew, (410) 786-4889.

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. Comments will be most useful if they are 
organized by the section of the proposed rule to which they apply. You 
can assist us by referencing the file code [CMS-6030-P2] and the 
specific ``issue identifier'' that precedes the section on which you 
choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. After the close of the 
comment period, CMS posts all electronic comments received before the 
close of the comment period on its public website. 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.

I. Background

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

A. Current Medicare Contracting Environment

    Since the inception of the Medicare program, the Medicare 
contracting authorities have been in place and largely unchanged until 
the last few years. At the inception of the Medicare program, the 
health insurance and medical communities raised concerns that the 
enactment of Medicare could result in a large Federal presence in the 
provision of health care. In response, under sections 1816(a) and 
1842(a) of the Social Security Act (the Act), the Congress provided 
that public agencies or private organizations may participate in the 
administration of the Medicare program under agreements or contracts 
entered into with CMS.
    These Medicare contractors are known as fiscal intermediaries 
(section 1816(a) of the Act) and carriers (section 1842(a) of the Act). 
With certain exceptions, fiscal intermediaries perform bill processing 
and benefit payment functions for Part A of the program (Hospital 
Insurance) and carriers perform claims processing and benefit payment 
functions for Part B of the program (Supplementary Medical Insurance).
    (For the following discussion, the terms ``provider'' and 
``supplier'' are used as those terms are defined in Sec.  400.202. That 
is, a provider is a hospital, rural care primary hospital, skilled 
nursing facility (SNF), home health agency (HHA), a hospice that has in 
effect an agreement to participate in Medicare, or a clinic, a 
rehabilitation agency, or a public health agency that has a similar 
agreement to furnish outpatient physical therapy or speech pathology 
services. Supplier is defined as a physician or other practitioner or 
an entity other than a ``provider,'' that furnishes health care 
services under Medicare.)
    Section 1842(a) of the Act authorizes us to contract with private 
entities (carriers) for the purpose of administering the Medicare Part 
B program. Medicare carriers determine payment amounts and make 
payments for services (including items) furnished by physicians and 
other suppliers such as nonphysician practitioners (NPP), laboratories, 
and durable medical equipment (DME) suppliers. In addition, carriers 
perform other functions required for the efficient and effective 
administration of the Part B program. Section 1842(f) of the Act 
provides that a carrier must be a ``voluntary association, corporation, 
partnership, or other nongovernmental organization which is lawfully 
engaged in providing, paying for, or reimbursing the cost of, health 
services under group insurance policies or contracts, medical or 
hospital service agreements, membership or subscription contracts, or 
similar group arrangements, in consideration of premiums or other 
periodic charges payable to the carrier, including a health benefits 
plan duly sponsored or underwritten by an employee organization.'' No 
entity may be considered for a carrier contract unless it can 
demonstrate that it meets this definition of carrier.
    Section 1842(b) of the Act provides us with the discretion to enter 
into carrier contracts without regard to any provision of the statute 
requiring competitive bidding. Many other provisions of generally 
applicable Federal contract law and regulations, as well as the 
Department of Health and Human Services (HHS) procurement regulations, 
remain in effect for carrier contracts.
    Section 1816(a) of the Act authorizes us to enter into agreements 
with public agencies or private organizations (fiscal intermediaries) 
for the purpose of administering Part A of the Medicare program. These 
entities are responsible for determining the amount of payment due to 
providers in consideration of services provided to beneficiaries, and 
for making these payments. We may enter into an agreement with an 
entity to serve as a fiscal intermediary if the entity was first 
``nominated'' by a group or association of providers to make Medicare 
payments to it. Effective October 1, 2005, section 911 of the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 (MMA) 
(Pub. L. 108-173) eliminates the requirement that fiscal intermediaries 
be nominated, and establishes the requirement that Medicare contracts 
awarded to Medicare Administrative Contractors (MACs) be competitively 
bid.
    Section 421.100 requires that the agreement between us and a fiscal 
intermediary specify the functions the fiscal intermediary must 
perform. In addition to requiring any items

[[Page 35206]]

specified by us in the agreement that are unique to that fiscal 
intermediary, our regulations require that all fiscal intermediaries 
perform activities relating to determining and making payments for 
covered Medicare services, fiscal management, provider audits, 
utilization patterns, resolution of cost report disputes, and 
reconsideration of determinations. Finally, our regulations require 
that all fiscal intermediaries furnish information and reports, perform 
certain functions for provider-based HHAs and provider-based hospices, 
and comply with all applicable laws and regulations and with any other 
terms and conditions included in their agreements.
    Similarly, Sec.  421.200 requires that the contract between CMS and 
a Part B carrier specify the functions the carrier must perform. In 
addition to requiring any items specified by CMS in the contract that 
are unique to that carrier, we require that all Part B carriers perform 
activities relating to determining and making payments (on a cost or 
charge basis) for covered Medicare services, fiscal management, 
provider audits, utilization patterns, and Part B beneficiary hearings. 
In addition, Sec.  421.200 requires that all carriers furnish 
information and reports, maintain and make available records, and 
comply with any other terms and conditions included in their contracts. 
It is within this context that Medicare fiscal intermediary and carrier 
contracts are significantly different from standard Federal Government 
contracts.
    Specifically, the Medicare fiscal intermediary and carrier 
contracts are normally renewed automatically from year to year, in 
contrast to the typical Government contract that is recompeted at the 
conclusion of the contract term. The Congress, in providing for the 
nomination process under section 1816 of the Act, and authorizing the 
automatic renewal of the carrier contracts in section 1842(b)(5) of the 
Act, contemplated a contracting process that would permit us to 
noncompetitively renew the Medicare contracts from year to year.
    For both fiscal intermediaries and carriers, Sec.  421.5 states 
that we have the authority not to renew a Part A agreement or a Part B 
contract when it expires. Section 421.126 provides for termination of 
the fiscal intermediary agreements in certain circumstances, and, 
similarly, Sec.  421.205 provides for termination of carrier contracts.
    Each year, the Congress appropriates funds to support Medicare 
contractor activities. These funds are distributed to the contractors 
based on annual budget and performance negotiations, which allocate 
funds by program activity to each of the current Medicare contractors. 
Historically, approximately one-half of the funds were for payment for 
the processing of claims; an additional one-quarter of the funds were 
for program integrity activities to fund activities such as conducting 
medical review of claims to determine whether services are medically 
necessary and constitute an appropriate level of care, deterring and 
detecting potential Medicare fraud, auditing provider cost reports, and 
ensuring that Medicare acts as a secondary payer when a beneficiary has 
primary coverage through other insurance. The remainder of the funds 
was allocated for beneficiary and provider or supplier services and for 
various productivity investments.

B. Discussion About Medicare Administrative Contractors (MACs)

    The MMA was enacted on December 8, 2003. Section 911 of the MMA 
adds new section 1874A to the Act, establishing the Medicare Fee-for-
Service (FFS) Contracting Reform (MCR) initiative that will be 
implemented over the next several years. Under this provision, 
effective October 1, 2005, we have the authority to replace the current 
Medicare fiscal intermediary and carrier contracts with new MACs using 
competitive procedures.
    Between 2005 and 2011, we will conduct full and open competitions 
to replace the current contracts with MACs. These MACs will handle many 
of the same basic functions that are now performed by fiscal 
intermediaries and carriers. Additionally, MACs may be charged with 
performing functions under the Medicare Integrity Program under section 
1893 of the Act. The statute does not preclude the current fiscal 
intermediaries and carriers from competing for the MAC contracts.
    Among other provisions, section 1874A of the Act establishes 
eligibility requirements for the MACs, describes the functions these 
new contractors may perform (which may include functions of section 
1893 of the Act so long as these responsibilities do not duplicate 
activities that are being carried out under a Medicare Integrity 
Program contract), and specifies various requirements for the 
structure, terms and conditions of these new MAC contracts. In 
particular, section 1874A of the Act specifies that the Federal 
Acquisition Regulation (FAR) will apply to the MAC contracts, except to 
the extent inconsistent with a specific requirement of section 1874A of 
the Act. Unlike the contracting authority of section 1893 of the Act, 
the new authority of section 1874A of the Act does not mandate that the 
Secretary publish either a proposed or final regulation prior to 
entering into MAC contracts. Instead, the Congress when enacting the 
authority of section 1874A of the Act, placed a clear reliance on the 
existing well-defined regulatory framework of the FAR.
    We considered whether we should propose regulations for the MAC 
authority in conjunction with this proposed rule to implement the 
authority of section 1893 of the Act. Since we are still analyzing 
whether any of the specific requirements of section 1874A of the Act 
need elaboration in the regulations, we are not prepared to do so at 
this time. As section 1874A of the Act places reliance on the FAR for 
MAC contracts and since section 1874A of the Act does not impose any 
requirement to issue additional rules in order to initiate procurements 
under the MAC authority, we do not believe such rules are required to 
initiate the implementation of section 1874A of the Act. We will, 
however, continue to analyze issues posed by the new contracting 
authority and the transition to that framework, and will propose rules 
for the authority of new section 1874A of the Act if and when we 
identify issues that need to be addressed through rulemaking.
    However, because the history and structure of the Medicare program 
dictate that claims processing, customer service, and program integrity 
functions are highly interdependent, and since sections 1816, 1842, 
1893 and 1874A of the Act are part of the same legislative development 
relating to Medicare administration, we will from time-to-time discuss 
the section 1874A of the Act authority and its potential impact on 
fiscal intermediaries, carriers, and the MIP contractors in this 
preamble. Further, this proposed rule was modified from our earlier 
proposal on this topic to make clear that section 1874A of the Act 
authorizes MAC contractors to perform functions of section 1893 of the 
Act. We also make clear that we may impose certain MIP requirements 
(for example, those proposed for Sec.  421.302(a)) on the MACs when we 
elect to include functions of section 1893 of the Act in their 
contracts. Finally, it is our intention that the proposed rule changes 
at Sec.  421.100 and Sec.  421.200 discussed below would remain in 
effect only until all the Medicare fiscal intermediary and carrier 
contracts are replaced by MAC contracts in accordance with the MMA.
    The MMA establishes a phase-in process for the transition of the 
current contractors to MACs. We are currently in the process of 
developing the Statement of Work (SOW) and

[[Page 35207]]

performance requirements for MACs, and further regulatory and 
administrative guidance will be published as these details are 
developed. More information about our plans to implement Medicare 
contracting reform, including our Report to the Congress on this 
subject, can be obtained by accessing the Internet at http://www.cms.hhs.gov/medicarereform/contractingreform/.

C. The Medicare Integrity Program

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191) was enacted on August 21, 1996. Section 202 
of HIPAA added new section 1893 to the Act establishing the Medicare 
Integrity Program (MIP). This program is funded from the Medicare 
Hospital Insurance Trust Fund for program integrity activities. 
Specifically, section 1893 of the Act expands our contracting authority 
to allow us to contract with eligible entities to perform Medicare 
program integrity activities. These activities include: Medical, 
potential fraud, and utilization review; cost report audits; Medicare 
secondary payer determinations; overpayment recovery; education of 
providers, suppliers, beneficiaries, and other persons regarding 
payment integrity and benefit quality assurance issues; and, developing 
and updating a list of DME items that, under section 1834(a)(15) of the 
Act, are subject to prior authorization.
    Section 1893(d) of the Act requires us to set forth, through 
regulations, procedures for entering into contracts for the performance 
of specific Medicare program integrity activities. These procedures are 
to include the following:
     Procedures for identifying, evaluating, and resolving 
organizational conflicts of interest that are consistent with rules 
generally applicable to Federal acquisition and procurement.
     Competitive procedures for entering into new contracts 
under section 1893 of the Act and for entering into contracts that may 
result in the elimination of responsibilities of an individual fiscal 
intermediary or carrier, and other procedures we deem appropriate.
     A process for renewing contracts entered into under 
section 1893 of the Act.
    Section 1893(d) of the Act also specifies the process for 
contracting with eligible entities to perform program integrity 
activities. In addition, section 1893(e) of the Act requires us to set 
forth, through regulations, the limitation of a contractor's liability 
for actions taken to carry out a contract.
    The Congress established section 1893 of the Act to strengthen our 
ability to deter potential fraud and abuse in the Medicare program in a 
number of ways. First, it provides a separate and stable long-term 
funding mechanism for MIP activities. Historically, Medicare contractor 
budgets were subject to wide fluctuations in funding levels from year 
to year. The variations in funding did not have anything to do with the 
underlying requirements for program integrity activities. This 
instability made it difficult for us to invest in innovative strategies 
to control potential fraud and abuse. Our contractors also found it 
difficult to attract, train, and retain qualified professional staff, 
including auditors and fraud investigators. A dependable funding source 
allows us the flexibility to invest in innovative strategies to combat 
potential fraud and abuse. The funding mechanism will help us shift 
emphasis from post-payment recoveries on potentially fraudulent claims 
to prepayment strategies designed to ensure that more claims are paid 
correctly the first time.
    Second, to allow us to more aggressively carry out the MIP 
functions and to require us to use procedures and technologies that 
exceed those generally in use in 1996, section 1893 of the Act greatly 
expands our contracting authority relative to the contracting authority 
of original sections 1816 and 1842 of the Act. Previously, we had a 
limited pool of entities with whom to contract. This limited our 
ability to maximize efforts to effectively carry out the MIP functions. 
Section 1893 of the Act allows us to attract a variety of offerors with 
potentially new and different skill sets and permits those offerors to 
propose innovative approaches to implement MIP to deter potential fraud 
and abuse. By using competitive procedures, as established in the FAR 
and supplemented by the Department of Health and Human Services 
Acquisition Regulation (HHSAR), our ability to manage the MIP 
activities is greatly enhanced, and we can seek to obtain the best 
value for our contracted services.
    Third, section 1893 of the Act requires us to address potential 
conflicts of interest among prospective MIP contractors before entering 
into any contracting arrangements with them. Section 1893 of the Act 
instructs the Secretary to establish procedures for identifying, 
evaluating, and resolving organizational conflicts of interest that are 
generally applicable to FAR contracts.

D. Experience With MIP Contractors

    The MIP authority, established by HIPAA, gave CMS specific 
contracting authority, consistent with the FAR, to enter into contracts 
with entities to promote the integrity of the Medicare program.
    On March 20, 1998, we issued a proposed rule to implement 
provisions of section 1893 of the Act to which we received comments (63 
FR 13590). We reviewed and considered all the comments received 
concerning the MIP regulation. Comments received addressed a variety of 
issues, such as conflict of interest issues, coordination among 
Medicare contractors, contractor functions, and eligibility 
requirements. Overall, we found that few changes were needed to the 
regulatory text. Due to time constraints, however, a final rule was 
never published. Notwithstanding, section 1893 of the Act granted us 
the authority to contract with eligible entities to perform program 
integrity activities prior to publication of the final rule.
    Section 902 of the MMA mandated that final rules relating to the 
Medicare program based on a previous publication of a proposed 
regulation or an interim final regulation be published within three 
years except under exceptional circumstances. Given that it has been 
greater than three years since the publication of the initial proposed 
MIP regulations, we are reissuing these regulations in proposed form at 
this time.
    The publication of the 1998 proposed rule (63 FR 13590) enabled us 
to contract with entities to perform Medicare program integrity 
functions to promote the integrity of the Medicare program prior to the 
publication of a final rule.
    Since the publication of the 1998 proposed rule and in accordance 
with this MIP authority, we currently maintain the following MIP 
contracts: 12 Indefinite Delivery-Indefinite Quantity (IDIQ) contracts 
for the Program Safeguard Contractor (PSC) effort; one Coordination of 
Benefits (COB) contract, and 8 IDIQ contracts for the Medicare Managed 
Care (MMC) Program Integrity Contractors effort. (IDIQ contracts are 
explained in detail in FAR 48 CFR subpart 16.5.) After being awarded an 
IDIQ contract, organizations can competitively bid on task orders 
released by CMS to specifically address program integrity issues within 
the scope of the IDIQ contract. These MIP contractors are discussed 
below.

[[Page 35208]]

1. Program Safeguard Contractors (PSCs)
    Since 1999, we have awarded more than 40 individual task orders 
under the PSC IDIQ contract, including 17 Benefit Integrity (BI) Model 
PSCs. These BI PSCs are tasked with performing fraud and abuse 
detection and prevention activities for their respective jurisdictions. 
Specific activities include fraud case development, local and national 
data analysis to identify potentially fraudulent billing schemes or 
patterns, law enforcement support, medical review for a BI purpose, and 
identification and development of appropriate administrative actions. 
Four of the 17 BI PSCs have additional medical review functions. The 
remaining task orders issued under the PSC IDIQ contract have focused 
on specific program vulnerabilities and problem areas (for example, 
Comprehensive Error Rate Testing (CERT), Correct Coding Initiative 
(CCI), and Data Assessment & Verification (DAVe)). More information on 
PSCs can be accessed on the Internet at http://www.cms.hhs.gov/PROVIDERS/PSC/pscwebp2.asp.
    Overall, we have seen success in the implementation of the PSC 
program. Since 2002, 12 of the 17 BI Model PSCs were awarded and 
transitioned. Typically, a 3 to 6 month period was allowed for the PSCs 
to transition the BI workload from the Fiscal Intermediary and Carrier 
that had previously been performing this workload.
2. Coordination of Benefits Contractor (COB)
    In November 1999, we awarded one COB contract to consolidate 
activities that support the collection, management, and reporting of 
other health insurance coverage for Medicare beneficiaries. The 
purposes of the COB program are to identify the health benefits 
available to a Medicare beneficiary and to coordinate the payment 
process to prevent mistaken payment of Medicare benefits. In January 
2001, the COB contractor assumed all Medicare Secondary Payer (MSP) 
claims investigations. Implementing this single-source development 
approach greatly reduced the amount of duplicate MSP investigations. It 
also offered a centralized, one-stop customer service approach for all 
MSP-related inquiries, including those seeking general MSP information, 
except for those related to specific claims or recoveries that serve to 
protect the Medicare Trust Funds.
3. Medicare Managed Care Program Integrity Contractors (MMC-PICs)
    MMC-PICs supplement our regional office integrity responsibilities 
related to Medicare Advantage (MA), formerly known as Medicare+Choice 
(M+C). Similar to the PSC, MMC-PIC was designed specifically to 
identify, stop, and prevent fraud, waste, and abuse.
    Services performed under MMC-PIC include--
     Complete monthly analysis of plan discrepancies and report 
to MA Organizations;
     Review and analyze State regulatory practices;
     Evaluate marketing operations;
     Audit financial and medical records including claims, 
payments, and benefit packages;
     Evaluate enrollment and encounter data;
     Collect information and review matters that may contain 
evidence of fraud, waste, and abuse and make referrals to the 
appropriate government authority;
     Compliance testing of internal controls of Health Care 
Prepayment Plan (HCPP) contracting organizations;
     Complete all Retroactive Payment Adjustments and 
Retroactive Enrollments or Disenrollments submitted by MA 
Organizations;
     Complete final reconciliation of payment for non-renewals 
of MA contracts; and,
     Make reconsideration determinations with plans that 
request decisions regarding payments.

II. Provisions of the Proposed Rule

[If you choose to comment on issues in this section, please include the 
caption ``Provisions of the Proposed Rule'' at the beginning of your 
comments.]
    This regulation is part of our overall contracting strategy, which 
is designed to build on the strengths of the marketplace. We are 
committed to conducting procurements using full and open competition 
that will provide opportunities for a wide range of contractors to 
participate in the program. We will continue to encourage new and 
innovative approaches in the marketplace to protect the Medicare Trust 
Funds.
    As discussed earlier in the background section, the implementation 
of section 1874A of the Act is also a major element of our contracting 
strategy. We are not including extensive rules relating to that 
authority in this proposal, for the reasons discussed earlier, but 
interested parties can gain information about our plans for 
implementing section 1874A of the Act by accessing the Internet at 
http://www.cms.hhs.gov/medicarereform/contractingreform. In addition, 
the public can also send us informal questions about the Medicare 
administrative contractor (MAC) implementation through this site; any 
official comments on this proposed rule should be submitted in 
accordance with the instructions contained in the ``Addresses'' section 
of this preamble.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability
    In accordance with section 1893 of the Act, this proposed rule 
would amend part 421 by adding a new subpart D entitled, ``Medicare 
Integrity Program Contractors.'' This subpart will:
     Define the types of entities eligible to become MIP 
contractors. We also clarify that, in accordance with section 1874A of 
the Act, a MAC may perform MIP functions under certain conditions;
     Identify program integrity functions a MIP contractor may 
perform;
     Describe procedures for awarding and renewing contracts;
     Establish procedures for identifying, evaluating, and 
resolving organizational conflicts of interest consistent with the FAR;
     Prescribe responsibilities; and,
     Set forth limitations on MIP contractor liability.
    Subpart D will apply to entities that seek to compete for, or 
receive award of, a contract under section 1893 of the Act including 
entities that perform functions under this subpart emanating from the 
processing of claims for individuals entitled to benefits as qualified 
railroad retirement beneficiaries. We would set forth the basis, scope, 
and applicability of subpart D in Sec.  421.300.
2. Definition of Eligible Entities (Sec.  421.302)
    In accordance with section 1893(c) of the Act, proposed Sec.  
421.302(a) would provide that an entity is eligible to enter into a MIP 
contract if it:
     Demonstrates the capability to perform MIP contractor 
functions;
     Agrees to cooperate with the Office of Inspector General 
(OIG), the Department of Justice (DOJ), and other law enforcement 
agencies in the investigation and deterrence of potential fraud and 
abuse in the Medicare program, including making referrals;
     Complies with the conflict of interest standards in 48 CFR 
Chapters 1 and 3 and is not excluded under the conflict of interest 
provisions established by this rule;
     Maintains an appropriate written code of conduct and 
compliance

[[Page 35209]]

policies that include, without limitation, an enforced policy on 
employee conflicts of interest;
     Meets financial and business integrity requirements to 
reflect adequate solvency and satisfactory legal history; and,
     Meets other requirements that we may impose.
    Also, in accordance with the undesignated paragraph following 
section 1893(c)(4) of the Act, we would specify that Medicare carriers 
are deemed to be eligible to perform the activity of developing and 
periodically updating a list of DME items that are subject to prior 
authorization.
    It is not possible to identify in this rule each and every possible 
contractor eligibility requirement that may appear in a future 
solicitation. In order to permit us maximum flexibility to tailor our 
contractor eligibility requirements to specific solicitations while 
satisfying the intent of section 1893 of the Act, any contractor 
eligibility requirements in addition to those specified in proposed 
Sec.  421.302(a)(1) through (a)(4) will be contained in the applicable 
solicitation.
    At Sec.  421.302(b)(1), we propose to make clear that a MAC under 
section 1874A of the Act may perform any or all of the MIP functions as 
are listed and described in Sec.  421.304. However, in performing such 
functions, the MAC may not duplicate work being performed under a MIP 
contract. We believe this proposed provision is consistent with 
sections 1874A(a)(4)(G) and 1874A(a)(5) of the Act, as added by the 
MMA.
    At Sec.  421.302(b)(2), we also make clear our discretion to 
require a MAC performing any of the MIP functions under Sec.  421.304 
to abide by the eligibility requirements applicable to MIP contracts, 
that is, the four elements listed at Sec.  421.302(a). The first 
requirement at Sec.  421.302(a) relating to demonstrated capability and 
the third requirement relating to addressing conflicts of interest are 
consistent with provisions in the authorizing statute for MAC contracts 
(section 1874A(a)(2)of the Act). While the second requirement, which 
pertains to cooperation with the OIG and other forms of law 
enforcement, is not reiterated in section 1874A of the Act, we believe 
this requirement is not inconsistent with section 1874A of the Act or 
the FAR. This requirement is, in fact, compatible with our general 
practices, multiple statutes and regulations governing HHS operations 
and contracts, and finally also with provisions within title XI of the 
Act. Once again, the fourth requirement makes clear our authority to 
impose additional reasonable requirements through contract and it makes 
sense to apply this element to MAC contractors. Our specific approach 
to all these issues, of course, will be made clear in any solicitation 
for MAC contracts.
    Note that, in accordance with section 1893(d) of the Act, we may 
continue to contract, for the performance of MIP activities, with 
fiscal intermediaries and carriers that had a contract with us on 
August 21, 1996 (the effective date of enactment of Pub. L. 104-191). 
However, in accordance with sections 1816(l) or 1842(c)(6) of the Act 
(both added by Pub. L. 104-191), and section 1874A(a)(5)(A) of the Act 
(added by the MMA), these contractors as well as MACs may not duplicate 
activities under a fiscal intermediary agreement or carrier contract 
and a MIP contract, with one excepted activity. The exception permits a 
carrier or a MAC to develop and update a list of items of DME that are 
subject to prior authorization both under the MIP contract and its 
contract under section 1842 of the Act. This discretion to continue the 
performance of MIP activities through the fiscal intermediary and 
carrier contracts until they are phased out in accordance to section 
911(d) of the MMA, is provided for in proposed changes to Sec.  421.100 
and Sec.  421.200 discussed later in this preamble.
3. Definition of MIP Contractor (Sec.  400.202)
    We propose to define ``Medicare integrity program contractor,'' at 
Sec.  400.202 (Definitions specific to Medicare), as an entity that has 
a contract with us under section 1893 of the Act to perform exclusively 
one or more of the program integrity activities specified in that 
section. The inclusion of the word ``exclusively'' in this definition 
is intended to conform with section 1874A(a)(5)(B) of the Act as added 
by the MMA.
4. Services to be Procured (Sec.  421.304)
    A MIP contractor may perform some or all of the MIP activities 
listed in Sec.  421.304. Section 421.304 would state that the contract 
between CMS and a MIP contractor specifies the functions the contractor 
performs. In accordance with section 1893(b) of the Act, proposed Sec.  
421.304 identifies the following as MIP activities.
    (a) Medical, utilization, and potential fraud review. Medical and 
utilization review includes the processes necessary to ensure both the 
appropriate utilization of services and that services meet the 
professionally recognized standards of care. These processes include 
review of claims, medical records, and medical necessity documentation 
and analysis of patterns of utilization to identify inappropriate 
utilization of services. This would include reviewing the activities of 
providers or suppliers and other individuals and entities (including 
health maintenance organizations, competitive medical plans, health 
care prepayment plans, and MA plans). This function results in the 
identification of overpayments, prepayment denials, recommendations for 
changes in national coverage policy, changes in local coverage 
determinations (LCD) policies and payment screens, referrals for 
potential fraud and abuse, and the identification of the education 
needs of beneficiaries, providers, and suppliers.
    Potential fraud review includes fraud prevention initiatives, 
responding to external customer complaints of alleged fraud, the 
development of strategies to detect potentially fraudulent activities 
that may result in improper Medicare payment, and the identification 
and development of potential fraud cases for referral to law 
enforcement. Each solicitation will specify when cases should be 
referred to the OIG or other law enforcement agency. In general, 
however, identified overpayments, recurring acts of improper billing, 
and substantiated allegations of potentially fraudulent activity will 
be promptly referred to a Regional OIG.
    (b) Cost report audits. Providers and managed care plans receiving 
Medicare payments are subject to audits for all payments applicable to 
services furnished to beneficiaries. The audit ensures that proper 
payments are made for covered services, provides verified financial 
information for making a final determination of allowable costs, 
identifies potential instances of fraud and abuse, and ensures the 
completion of special projects. This functional area includes the 
receipt, processing, and recommended settlement terms for cost reports 
based on reasonable costs, prospective payment, or any other basis, and 
the establishment or adjustment of the interim payment rate using cost 
report or other information.
    (c) Medicare secondary payer activities. The Medicare secondary 
payer function is a process developed as a payment safeguard to protect 
the Medicare program against making mistaken primary payments. The 
focus of this process is to ensure that the Medicare program pays only 
to the extent required by statute. Entities under a MIP contract that 
includes Medicare secondary payer functions would be responsible for 
identifying Medicare secondary payer situations and pursuing recovery 
of mistaken

[[Page 35210]]

payments from the appropriate entity or individual, depending on the 
specifics of the contract. This functional area includes the processes 
performed to identify beneficiaries for whom there is coverage which is 
primary to Medicare. Through these processes, information may be 
acquired for subsequent use in beneficiary claims adjudication, 
recovery, and litigation.
    (d) Education. This functional area includes educating 
beneficiaries, providers, suppliers, and other individuals regarding 
payment integrity and benefit quality assurance issues.
    (e) Developing prior authorization lists. This functional area 
includes developing and periodically updating a list of DME items that, 
in accordance with section 1834(a)(15) of the Act, are subject to prior 
authorization. Prior authorization is a determination that an item of 
DME is covered prior to when the equipment is delivered to the Medicare 
beneficiary. Section 1834(a)(15) of the Act requires prior 
authorization to be performed on the following items of DME:
     Items identified as subject to unnecessary utilization;
     Items supplied by suppliers that have had a substantial 
number of claims denied under section 1862(a)(1) of the Act as not 
reasonable or necessary or for whom a pattern of overutilization has 
been identified; or
     A customized item if the beneficiary or supplier has 
requested an advance determination.
    We note that the MIP functions are not limited to services 
furnished under fee-for-service payment methodologies. MIP functions 
apply to all types of claims. They also apply to all types of payment 
systems including, but not limited to, managed care and demonstration 
projects. MIP functions will also apply to payments made under the 
Medicare Part D prescription drug benefit that will be implemented on 
January 1, 2006.
5. Competitive Requirements (Sec.  421.306)
    We would specify, in Sec.  421.306(a), that MIP contracts will be 
awarded in accordance with 48 CFR chapters 1 and 3, 42 CFR part 421 
subpart D, and all other applicable laws and regulations. Furthermore, 
in accordance with section 1893(d)(2) of the Act, we would specify that 
the procedures set forth in these authorities will be used: (a) When 
entering into new contracts; (b) when entering into contracts that may 
result in the elimination of responsibilities of an individual fiscal 
intermediary or carrier; and (c) at any other time we consider 
appropriate.
    In proposed Sec.  421.306(b), we will establish an exception to 
competition that allows a successor in interest to a fiscal 
intermediary agreement or carrier contract to be awarded a contract for 
MIP functions without competition if its predecessor performed program 
integrity functions under the transferred agreement or contract and the 
resources, including personnel, which were involved in performing those 
functions, were transferred to the successor. This provision will 
remain in effect until all fiscal intermediary agreements and carrier 
contracts are transitioned to MACs in accordance with section 911(d) of 
the MMA.
    This proposal is made in anticipation that some fiscal 
intermediaries and carriers, prior to the competition of their 
contracts in accordance with the MMA, may engage in transactions under 
which the recognition of a successor in interest by means of a novation 
agreement may be appropriate, and the resources involved in the fiscal 
intermediary's or carrier's MIP activities are transferred along with 
its other Medicare-related resources to the successor in interest. For 
example, the fiscal intermediary or carrier may undergo a corporate 
reorganization under which the corporation's Medicare business is 
transferred entirely to a new subsidiary corporation. When all of a 
contractor's resources or the entire portion of the resources involved 
in performing a contract are transferred to a third party, we may 
recognize the third party as the successor in interest to the contract 
through approval of a novation agreement. (See 48 CFR 42.12.)
    If the fiscal intermediary or carrier was performing program 
integrity activities under its contract on August 21, 1996, the date of 
the enactment of the MIP legislation, the statute permits us to 
continue to contract with the fiscal intermediary or carrier for the 
performance of those activities without using competitive procedures 
(but only through and, no later than, September 30, 2011). In the 
context of a corporate reorganization under which all of the resources 
involved in performing the contract, including those involved in 
performing MIP activities, are transferred to a successor in interest, 
we may determine that breaking out the MIP activities and competing 
them separately (prior to the MAC contract competitions) would not be 
in the best interest of the Government.
    Inherent in the requirement of section 1893(d) of the Act that the 
Secretary establish competitive procedures to be used when entering 
into contracts for MIP functions is the authority to establish 
exceptions to those procedures. (See 48 CFR 6.3) Moreover, the statute 
states that fiscal intermediary agreements and carrier contracts will 
be noncompetitively awarded under sections 1816(a) and 1842(b)(1) of 
the Act. Furthermore, those agreements and contracts have, in recent 
years prior and subsequent to the enactment of the MIP legislation, 
included program integrity activities, a fact that the Congress 
acknowledged in section 1893(d)(2) of the Act. Creating an exception to 
the use of competition for cases in which the same resources, including 
the same personnel, continue to be used by a third party as successor 
in interest to a fiscal intermediary agreement or carrier contract is 
consistent with the Congress' authorization to forego competition when 
the contracting entity was carrying out the MIP functions on the date 
of enactment of the MIP legislation. Section 421.306(b) permits 
continuity in the performance of the MIP functions until such time as 
we determine a need to procure MIP functions on the basis of full and 
open competition.
    The exception to competition will operate only where a fiscal 
intermediary or carrier that performed program integrity functions 
under an agreement or a contract in place on August 21, 1996, transfers 
its functions by means of a valid novation agreement in accordance with 
the requirements of the FAR. This exception is intended to be applied 
only until we are prepared to award MIP contracts on the basis of FAR 
competitive procedures, or until we compete the full fiscal 
intermediary and carrier workloads (both MIP and non-MIP functions) in 
accordance with the MMA. The exception is not intended, and will not be 
used, to circumvent the competitive process when we make competitive 
awards of MIP and MAC contracts. This provision is intended to provide 
us with flexibility in handling Medicare functions in the face of bona 
fide changes in corporate structure that often have little, if 
anything, to do with the Medicare program.
    We further specify, in Sec.  421.306(c), that an entity must meet 
the eligibility requirements established in proposed Sec.  421.302 to 
be eligible to be awarded a MIP contract.
6. Renewal of MIP Contracts (Sec.  421.308)
    Proposed Sec.  421.308(a) specifies that an initial contract term 
will be defined in the MIP contract and that contracts may contain 
renewal clauses. Contract renewal provides a mutual benefit to both 
parties. Renewing a contract, when appropriate, results in continuity 
both for us and the contractor and is in the best interest of the 
Medicare program. The benefits are realized through early

[[Page 35211]]

communication of our intention whether to renew a contract, which 
permits both parties to plan for any necessary changes in the event of 
nonrenewal. Furthermore, as a prudent administrator of the Medicare 
program, we must ensure that we have sufficient time to transfer the 
MIP functions if a reassignment of the functions becomes necessary 
(either because the contractor has given notice of its intent to non-
renew or because we have determined that reassignment is in the best 
interest of the Medicare program). Therefore, in Sec.  421.308(a), we 
would specify that we may renew a MIP contract, as we determine 
appropriate, by giving the contractor notice, within timeframes 
specified in the contract, of our intention to do so. (The solicitation 
document that results in the contract will contain further details 
regarding this provision.)
    The renewal clause referred to in this section is not an ``option'' 
as defined in the FAR at 48 CFR 2.101. Section 1893 of the Act allows 
for the renewal of MIP contracts without regard to any provision of the 
law requiring competition if the contractor has met or exceeded 
performance requirements. As stated in FAR 48 CFR 2.101, `` `Option' 
means a unilateral right in a contract by which, for a specified time, 
the Government may elect to purchase additional supplies or services 
called for by the contract, or may elect to extend the term of the 
contract.''
    As described in the FAR, 48 CFR subpart 17.2, an option is 
different than a renewal clause in several respects. The length of time 
of an option is established in a contract. In contrast, the length of a 
renewal period in a MIP contract may not be defined. Furthermore, an 
option must be exercised during the life of the contract. A MIP renewal 
clause can be invoked only after the exhaustion of the initial contract 
period of performance, including any option provisions. Finally, an 
option allows us to extend the term of a contract only up to 60 months, 
the maximum term allowed by the FAR (excluding GSA awards). A MIP 
contract renewal clause allows the term of a MIP contract to surpass 
that limit, as long as the contractor meets the conditions in the 
regulation and the contract (including performance standards 
established in its contract) and we have a continuing need for the 
supplies or services under contract.
    Based on section 1893(d)(3) of the Act, we would specify, in Sec.  
421.308(b), that we may renew a MIP contract without competition if the 
contractor continues to meet all the requirements of proposed subpart D 
of part 421, the contractor meets or exceeds the performance standards 
and requirements in the contract, and it is in the best interest of the 
Government.
    We would provide, at Sec.  421.308(c), that, if we do not renew the 
contract, the contract will end in accordance with its terms, and the 
contractor does not have a right to a hearing or judicial review 
regarding the non-renewal. This is consistent with our longstanding 
policy for fiscal intermediary and carrier contracts.
7. Conflict of Interest Rules
    This proposed rule would establish the process for identifying, 
evaluating, and resolving conflicts of interest as required by section 
1893(d)(1) of the Act. The process was designed to ensure that the more 
diversified business arrangements of potential contractors do not 
inhibit competition between providers, suppliers, or other types of 
businesses related to the insurance industry, or have the potential for 
harming Government interests.
    When soliciting for MIP contracts, we will adhere to the 
requirements of the FAR organizational conflict of interest guidance, 
found at 48 CFR subpart 9.5. Given the sensitive nature of the work to 
be performed under the contract, the need to preserve the public trust, 
and the history of fraud and abuse in the Medicare Program, we will 
maintain the rebuttable presumption that each prospective contract 
involves a significant potential organizational conflict of interest. 
In light of this presumption, we will apply the general rules in FAR 
905.5 and such requirements as may be applicable to an individual 
procurement.
    Prior to awarding a MIP contract, our contracting officer will 
fashion an organizational conflict of interest clause specific to the 
contractor for inclusion in the contract. In general, we will not enter 
into a MIP contract with an offeror or contractor that we have 
determined has, or has the potential for, an unresolved organizational 
conflict of interest.
    In Sec.  421.310(a), we will specify that an offeror for MIP 
contracts is, and MIP contractors are, subject to the conflict of 
interest standards and requirements of the FAR organizational conflict 
of interest guidance, found at 48 CFR subpart 9.5, and the requirements 
and standards as are contained in each individual contract awarded to 
perform functions found at section 1893 of the Act.
    In Sec.  421.310(b), we state that we consider that a conflict of 
interest has occurred if, during the term of the contract, the 
contractor or its employee, agent or subcontractor has received, 
solicited, or arranged to receive any fee, compensation, gift, payment 
of expenses, offer of employment, or any other thing of value from any 
entity that is reviewed, audited, investigated, or contacted during the 
normal course of performing activities under the MIP contract. We 
incorporate the definition of ``gift'' from 5 CFR 2635.203(b) of the 
Standards of Ethical Conduct for Employees of the Executive Branch, 
which excludes from the definition items such as greeting cards, soft 
drinks, and coffee.
    We also specify in Sec.  421.310(b), if we determine that the 
contractor's activities are creating a conflict, then a conflict of 
interest has occurred during the term of the contract. In addition, we 
would specify that, if we determine that a conflict of interest exists, 
among other actions, we may, as we deem appropriate:
     Not renew the contract for an additional term;
     Modify the contract; or
     Terminate the contract for default.
    We would also specify that the solicitation may require more 
detailed information than identified above. Our proposed provisions do 
not describe all of the information that may be required, or the level 
of detail that would be required, because we wish to have the 
flexibility to tailor the disclosure requirements to each specific 
procurement.
    We intend to reduce the reporting and recordkeeping requirements as 
much as is feasible, while taking into consideration our need to have 
assurance that a conflict of interest does not exist in the MIP 
contractors.
    Because potential offerors may have questions about whether 
information submitted in response to a solicitation, including 
information regarding potential conflicts of interest, may be 
redisclosed under the Freedom of Information Act (FOIA), we provide the 
following information.
    To the extent that a proposal containing information is submitted 
to us as a requirement of a competitive solicitation under 41 U.S.C. 
Chapter 4, Subchapter IV, we will withhold the proposal when requested 
under the FOIA. This withholding is based upon 41 U.S.C. 253b(m). 
However, there is one exception to this policy. It involves any 
proposal that is set forth or incorporated by reference in the contract 
awarded to the proposing bidder. Such a proposal may not receive 
categorical protection. Rather, we will withhold, under 5 U.S.C. 
552(b)(4), information within the proposal that is required to be 
submitted that constitutes

[[Page 35212]]

trade secrets or commercial or financial information that is privileged 
or confidential provided the criteria established by National Parks & 
Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir 1974), as 
applicable, are met. For any such proposal, we will follow pre-
disclosure notification procedures set forth at 45 CFR 5.65(d).
    Any proposal containing the information submitted to us under an 
authority other than 41 U.S.C. Chapter 4, Subchapter IV, and any 
information submitted independent of a proposal will be evaluated 
solely on the criteria established by National Parks & Conservation 
Association v. Morton and other appropriate authorities to determine if 
the proposal in whole or in part contains trade secrets or commercial 
or financial information that is privileged or confidential and 
protected from disclosure under 5 U.S.C. 552(b)(4). Again, for any such 
proposal, we will follow pre-disclosure notification procedures set 
forth at 45 CFR 5.65(d) and will also invoke 5 U.S.C. 552(b)(6) to 
protect information that is of a highly sensitive personal nature. It 
should be noted that the protection of proposals under FOIA does not 
preclude CMS from releasing contractor proposals when necessitated by 
law, such as in the case of a lawful subpoena.
    We already protect information we receive in the contracting 
process. However, to allay any fears potential offerors might have 
about disclosure, at Sec.  421.312(d) we propose to provide, that we 
protect disclosed proprietary information as allowed under the FOIA and 
that we require signed statements from our personnel with access to 
proprietary information that prohibit personal use during the 
procurement process and term of the contract.
    In proposed Sec.  421.312, we describe how conflicts of interest 
are resolved. We specify that we may establish a Conflicts of Interest 
Review Board to assist the contracting officer in resolving conflicts 
of interest and we determine when or if the Board is convened. We would 
define resolution of an organizational conflict of interest as a 
determination that:
     The conflict has been mitigated;
     The conflict precludes award of a contract to the offeror;
     The conflict requires that we modify an existing contract;
     The conflict requires that we terminate an existing 
contract for default; or,
     It is in the best interest of the Government to contract 
with the offeror or contractor even though the conflict exists.
    The following are examples of methods an offeror or contractor may 
use to mitigate organizational conflicts of interest, including those 
created as a result of the financial relationships of individuals 
within the organization. These examples are not intended to be an 
exhaustive list of all the possible methods to mitigate conflicts of 
interest nor are we obligated to approve a mitigation method that uses 
one or more of these examples. (An offeror's or contractor's method of 
mitigating conflicts of interest would be evaluated on a case-by-case 
basis.)
     Divestiture of, or reduction in the amount of, the 
financial relationship the organization has in another organization to 
a level acceptable to us and appropriate for the situation.
     If shared responsibilities create the conflict, a plan, 
subject to our approval, to separate lines of business and management 
or critical staff from work on the MIP contract.
     If the conflict exists because of the amount of financial 
dependence upon the Federal Government, negotiating a phasing out of 
other contracts or grants that continue in effect at the start of the 
MIP contract.
     If the conflict exists because of the financial 
relationships of individuals within the organization, divestiture of 
the relationships by the individual involved.
     If the conflict exists because of an individual's indirect 
interest, divestiture of the interest to levels acceptable to us or 
removal of the individual from the work under the MIP contract.
    In the procurement process, we determine which proposals are in a 
``competitive range.'' The competitive range is based on cost or price 
and other factors that are stated in the solicitation and includes the 
most highly rated proposals that have a reasonable chance for contract 
award unless the range is further reduced for purposes of efficiency in 
accordance with FAR 15.306. Using the process proposed in this 
regulation, offerors will not be excluded from the competitive range 
based solely on conflicts of interest. If we determine that an offeror 
in the competitive range has a conflict of interest that is not 
adequately mitigated, we would inform the offeror of the deficiency and 
give it an opportunity to submit a revised mitigation plan. At any time 
during the procurement process, we may convene the Conflict of Interest 
Review Board to evaluate and assist the contracting officer in 
resolving conflicts of interest.
    By providing a better process for the identification, evaluation, 
and resolution of conflicts of interest, we not only protect Government 
interests but help ensure that contractors will not hinder competition 
in their service areas by misusing their position as a MIP contractor.
8. Limitation on MIP Contractor Liability and Payment of Legal Expenses
    Contractors which perform activities under the MIP contract will be 
reviewing activities of providers and suppliers that provide services 
to Medicare beneficiaries. Their contracts will authorize them to 
evaluate the performance of providers, suppliers, individuals, and 
other entities that may subsequently challenge their decisions. To 
reduce or eliminate a MIP contractor's exposure to possible legal 
action from those it reviews, section 1893(e) of the Act requires that 
we, by regulation, limit a MIP contractor's liability for actions taken 
in carrying out its contract. We must establish, to the extent we find 
appropriate, standards and other substantive and procedural provisions 
that are the same as, or comparable to, those contained in section 1157 
of the Act.
    Section 1157 of the Act limits liability and provides for the 
payment of legal expenses of a Quality Improvement Organization (QIO) 
(formerly Peer Review Organization (PRO)) that contracts to carry out 
functions under section 1154(e) of the Act. Specifically, section 1157 
of the Act provides that QIOs, their employees, fiduciaries, and anyone 
who furnishes professional services to a QIO, are protected from civil 
and criminal liability in performing their duties under the Act or 
their contract, provided these duties are performed with due care. 
Following the mandate of section 1893(e) of the Act, this proposed 
rule, at Sec.  421.316(a), would protect MIP contractors from liability 
in the performance of their contracts provided they carry out their 
contractual duties with care.
    In accordance with section 1893(e) of the Act, we propose to employ 
the same standards for the payment of legal expenses as are contained 
in section 1157(d) of the Act. Therefore, Sec.  421.316(b) will provide 
that we will make payment to MIP contractors, their members, employees, 
and anyone who provides them legal counsel or services for expenses 
incurred in the defense of any legal action related to the performance 
of a MIP contract. We propose that the payment be limited to the 
reasonable amount of expenses incurred, as determined by us, provided 
funds are available and that the payment is otherwise allowable under 
the terms of the contract.

[[Page 35213]]

    In drafting Sec.  421.316(a), we considered employing a standard 
for the limitation of liability other than the due care standard. For 
example, we considered whether it would be appropriate to provide that 
a contractor would not be criminally or civilly liable by reason of the 
performance of any duty, function, or activity under its contract 
provided the contractor was not grossly negligent in that performance. 
However, section 1893(e) of the Act requires that we employ the same or 
comparable standards and provisions as are contained in section 1157 of 
the Act. We do not believe that it would be appropriate to expand the 
scope of immunity to a standard of gross negligence, as it would not be 
a comparable standard to that set forth in section 1157(b) of the Act.
    We also considered indemnifying MIP contractors employing 
provisions similar to those contained in the current Medicare fiscal 
intermediary agreements and carrier contracts. Generally, fiscal 
intermediaries and carriers are indemnified for any liability arising 
from the performance of contract functions provided the fiscal 
intermediary's or carrier's conduct was not grossly negligent, 
fraudulent, or criminal. However, we may indemnify a MIP contractor 
only to the extent we have specific statutory authority to do so. 
Section 1893(e) of the Act does not provide that authority. Note 
however, that section 1874A of the Act as added by the MMA would 
provide us with some discretion to indemnify MAC contractors. In 
addition, proposed Sec.  421.316(a) provides for immunity from 
liability in connection with the performance of a MIP contract provided 
the contractor exercised due care. Indemnification is not necessary 
since the MIP contractors will have immunity from liability under Sec.  
421.316(a).

B. Intermediary and Carrier Functions

    Section 1816(a) of the Act, which provides that providers may 
nominate a fiscal intermediary, requires only that nominated fiscal 
intermediaries perform the functions of determining payment amounts and 
making payment, and section 1842(a) of the Act requires only that 
carriers perform some or all of the functions cited in that section. 
Section 911 of the MMA eliminates the requirement that fiscal 
intermediaries be nominated, and effective October 1, 2005, establishes 
the requirement that Medicare contracts awarded to MACs be 
competitively bid by September 30, 2011.
    Our existing requirements at Sec.  421.100 and Sec.  421.200 
concerning functions to be included in fiscal intermediary agreements 
and carrier contracts far exceed those of the statute. Therefore, on 
February 22, 1994, we published a proposed rule (59 FR 8446) that would 
distinguish between those functions that the statute requires be 
included in agreements with fiscal intermediaries and those functions, 
which although not required to be performed by fiscal intermediaries, 
may be included in fiscal intermediary agreements at our discretion. We 
also proposed that any functions included in carrier contracts would be 
included at our discretion. In addition, we proposed to add payment on 
a fee schedule basis as a new function that may be performed by 
carriers.
    The February 1994 proposed rule was never finalized, but its 
content was re-proposed in our initial 1998 proposed rule for the MIP 
program (63 FR 13590). This second proposed rule sets forth a new 
proposal to bring those sections of the regulations that concern the 
functions Medicare fiscal intermediaries and carriers perform into 
conformity with the provisions of sections 1816(a), 1842(a), and 
1893(b) of the Act, for so long as the fiscal intermediary and carrier 
contracts exist until they are all replaced by MAC contracts.
    As noted in section I.A. of this preamble, our current regulations 
at Sec.  421.100 specify a list of functions that must, at a minimum, 
be included in all fiscal intermediary agreements. Similarly, Sec.  
421.200 specifies a list of functions that must, at a minimum, be 
included in all carrier contracts. These requirements far exceed those 
of the statute.
    Until October 1, 2005, section 1816(a) of the Act, in its present 
form, requires only that a fiscal intermediary agreement provide for 
determination of the amount of payments to be made to providers and for 
the making of the payments. Pending the effective date of changes made 
by the MMA, section 1816(a) permits, but does not require, a fiscal 
intermediary agreement to include provisions for the fiscal 
intermediary to provide consultative services to providers to enable 
them to establish and maintain fiscal records or to otherwise qualify 
as providers. It also provides that, for those providers to which the 
fiscal intermediary makes payments, the fiscal intermediary may serve 
as a channel of communications between us and the providers, may make 
audits of the records of the providers, and may perform other functions 
as are necessary.
    Section 1816(a) of the Act, in its present form until October 1, 
2005, mandates only that a fiscal intermediary make payment 
determinations and make payments and, because of the nomination 
provision of section 1816(a) of the Act, these functions must remain 
with fiscal intermediaries. We believe that, pending the effective date 
of changes made by the MMA, section 1816(a) of the Act does not require 
that the other functions set forth at Sec.  421.100(c) through (i) be 
included in all fiscal intermediary agreements. Furthermore, section 
1893 of the Act permits the performance of functions related to 
Medicare program integrity by other entities. Thus, Sec.  421.100 would 
be revised to be consistent with section 1893 of the Act and the 
implementing regulation. The mandatory inclusion of all functions in 
all agreements limits our ability to efficiently and effectively 
administer the Medicare program. For example, if an otherwise competent 
fiscal intermediary performs a single function poorly, it would be 
efficient and effective to have that function transferred to another 
contractor that could carry it out in a satisfactory manner. The 
alternative is to not renew or to terminate the agreement of that 
fiscal intermediary and to transfer all functions to a new contractor, 
which may not have had an ongoing relationship with the local provider 
community.
    Therefore, we will revise Sec.  421.100 to state that an agreement 
between CMS and a fiscal intermediary specifies the functions to be 
performed by the fiscal intermediary and that these must include 
determining the amount of payments to be made to providers for covered 
services furnished to Medicare beneficiaries and making the payments 
and may include any or all of the following functions:
     Any or all of the MIP functions identified in proposed 
Sec.  421.304, provided that they are continuing to be performed under 
an agreement entered into under section 1816 of the Act that was in 
effect on August 21, 1996, and they do not duplicate work being 
performed under a MIP contract.
     Undertaking to adjust overpayments and underpayments and 
to recover overpayments when it is determined that an overpayment has 
been made.
     Furnishing to us timely information and reports that we 
request in order to carry out our responsibilities in the 
administration of the Medicare program.
     Establishing and maintaining procedures that we approve 
for the review and reconsideration of payment determinations.
     Maintaining records and making available to us the records 
necessary for verification of payments and with other related purposes.

[[Page 35214]]

     Upon inquiry, assisting individuals with matters 
pertaining to a fiscal intermediary contract.
     Serving as a channel of communication to and from us of 
information, instructions, and other material as necessary for the 
effective and efficient performance of a fiscal intermediary contract.
     Undertaking other functions as mutually agreed to by us 
and the fiscal intermediary.
    In Sec.  421.100(c), we specify that, for the responsibility for 
services to a provider-based HHA or a provider-based hospice, when 
different fiscal intermediaries serve the HHA or hospice and its parent 
provider under Sec.  421.117, the designated regional fiscal 
intermediary determines the amount of payment and makes payments to the 
HHA or hospice. The fiscal intermediary or MIP contractor serving the 
parent provider performs fiscal functions, including audits and 
settlement of the Medicare cost reports and the HHA and hospice 
supplement worksheets.
    Pending the effective date of changes made by the MMA, section 
1842(a) of the Act, which pertains to carrier contracts, requires that 
the contracts provide for some or all of the functions listed in that 
paragraph, but does not specify any functions that must be included in 
a carrier contract. As in the case of fiscal intermediary agreements, 
our experience has been that mandatory inclusion of a long list of 
functions in all contracts restricts our ability to administer the 
carrier contracts with optimum efficiency and effectiveness. We believe 
that the requirements of the regulations for both fiscal intermediaries 
and carriers should be brought into conformity with the statutory 
requirements. Therefore, we would revise existing Sec.  421.200, 
``Carrier functions,'' to make it consistent with section 1893 of the 
Act and the implementing regulations. We state that a contract between 
CMS and a carrier specifies the functions to be performed by the 
carrier, which may include the following:
     Any or all of the MIP functions described in Sec.  421.304 
if the following conditions are met: (1) The carrier is continuing 
those functions under a contract entered into under section 1842 of the 
Act that was in effect on August 21, 1996; and (2) they do not 
duplicate work being performed under a MIP contract, except that the 
function related to developing and maintaining a list of DME may be 
performed under both a carrier contract and a MIP contract.
     Receiving, disbursing, and accounting for funds in making 
payments for services furnished to eligible individuals within the 
jurisdiction of the carrier.
     Determining the amount of payment for services furnished 
to an eligible individual.
     Undertaking to adjust incorrect payments and recover 
overpayments when it has been determined that an overpayment has been 
made.
     Furnishing to us timely information and reports that we 
request in order to carry out our responsibilities in the 
administration of the Medicare program.
     Maintaining records and making available to us the records 
necessary for verification of payments and for other related purposes.
     Establishing and maintaining procedures under which an 
individual enrolled under Part B will be granted an opportunity for a 
fair hearing.
     Upon inquiry, assisting individuals with matters 
pertaining to a carrier contract.
     Serving as a channel of communication to and from us of 
information, instructions, and other material as necessary for the 
effective and efficient performance of a carrier contract.
     Undertaking other functions as mutually agreed to by us 
and the carrier.

C. Technical and Editorial Changes

    Because we propose to add a new subpart D to part 421 that would 
apply to MIP contractors, and because we may eventually propose 
regulations pertaining to MAC contracts, we propose to change the title 
of part 421 from ``Intermediaries and Carriers'' to ``Medicare 
Contracting.'' We also propose to revise Sec.  421.1, which sets forth 
the basis, scope, and applicability of part 421. We would revise this 
section to add section 1893 of the Act to the list of provisions upon 
which the part is based. We would also make editorial and other changes 
(such as reorganizing the contents of the section and providing 
headings) that improve the readability of the section without affecting 
its substance.
    In addition, numerous sections of our regulations specifically 
refer to an action being taken by a fiscal intermediary or a carrier. 
If the action being described may now be performed by a MIP contractor 
that is not a fiscal intermediary or a carrier, we would revise those 
sections to indicate that this is the case. For example, Sec.  424.11, 
which sets forth the responsibilities of a provider, specifies, in 
paragraph (a)(2), that the provider must keep certification and 
recertification statements on file for verification by the fiscal 
intermediary. A MIP contractor now may also perform the verification. 
Therefore, we will revise Sec.  424.11(a)(2) to specify that the 
provider must keep certification and recertification statements on file 
for verification by the fiscal intermediary or MIP contractor. Because 
our regulations are continuously being revised and sections 
redesignated, we have not identified all sections that will have 
technical changes in this proposed rule, but we may do so in the final 
rule. If we determine that substantive changes to our regulations are 
necessary, we will make those changes through separate rulemaking.

III. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, 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, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

IV. Collection of Information Requirements

    This document does not impose new information collection and 
recordkeeping requirements subject to the Paperwork Reduction Act of 
1995 (PRA). Consequently, it need not be reviewed by the Office of 
Management and Budget under the authority of the PRA of 1995.

V. Regulatory Impact Statement

A. Introduction

[If you chose to comment on issues in this section, please include the 
caption ``Regulatory Impact Statement'' at the beginning of your 
comments.]
    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Pub. L. 
96-354). Executive Order 12866 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). The RFA requires agencies 
to analyze options for regulatory relief of small businesses. For 
purposes of the RFA, small entities include small businesses, non-
profit organizations, and governmental agencies. Most hospitals and 
most other providers and suppliers are small entities, either by 
nonprofit status or by having revenues of $5 million or less annually. 
Fiscal

[[Page 35215]]

intermediaries and carriers are not considered to be small entities.
    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 50 beds.

B. Summary of the Proposed Rule

    This rule implements section 1893 of the Act, which encourages 
proactive measures to combat waste, fraud, and abuse, and to protect 
the integrity of the Medicare program. On March 20, 1998, we issued a 
proposed rule to implement provisions of section 1893 of the Act (63 FR 
13590). Section 1893 of the Act grants us the authority to contract 
with eligible entities to perform program integrity activities prior to 
a final rule being published. Since the publication of the 1998 
proposed rule, this authority has allowed us to enter into contracts, 
consistent with FAR, with new specialty contractors to promote the 
integrity of the Medicare program, despite a final rule never being 
published.
    Section 902 of the MMA mandates that final rules based on a 
previous publication of a proposed regulation or an interim final 
regulation must be published within three years except under 
exceptional circumstances. Given that it has been greater than three 
years since the publication of the initial proposed Medicare Integrity 
Program regulations, we are publishing this new proposed rule in order 
to maintain our authority to enter into contracts with contractors to 
promote the integrity of the Medicare program. However, our experience 
in contracting with entities to perform MIP functions allows us to 
discuss some of the successes we have had with MIP.
    The objective of this proposed regulation is to maintain our 
authority to contract with entities to perform program integrity 
functions, and to provide a procurement procedure to supplement the 
requirements of the FAR and specifically address contracts to perform 
MIP functions identified in the law.
    According to the previously published proposed rule and mirrored in 
this current proposed rule, the following functions, as specified 
below, may be performed under MIP contracts:
     Review of provider activities such as medical review, 
utilization review, and potential fraud review.
     Audit of cost reports.
     Medicare secondary payer review and payment recovery.
     Provider and beneficiary education on payment integrity 
and benefit quality assurance issues.
     Developing and updating lists of DME items that are to be 
subject to prior approval provisions.

C. Discussion of Impact

    Our MIP experience since 1999 suggests that this rule will continue 
to have a positive impact on the Medicare program, Medicare 
beneficiaries, providers, suppliers, and entities that have not 
previously contracted with us. Existing MIP contractors that seek 
renewal of MIP contracts should not expect any additional costs in 
complying with the requirements set forth in the rule, as these 
requirements are similar yet more streamlined than those set forth in 
the 1998 proposed rule and are currently applied by MIP contractors. To 
the extent that small entities could be affected by the rule, and 
because the rule raises certain policy issues for conflict of interest 
standards, we provide an impact analysis for those entities that we 
believe will be most heavily affected by the rule.
    We believe that this rule will have an impact, although not a 
significant one, in five general areas: (1) The Medicare program and 
Health Insurance Trust Fund; (2) Medicare beneficiaries and taxpayers; 
(3) current fiscal intermediaries and carriers; (4) entities that have 
not previously contracted with us; and (5) Medicare providers and 
suppliers.
1. The Medicare Program and Health Insurance Trust Fund
    HIPAA provides for a direct apportionment from the Health Insurance 
Trust Fund for program integrity activities to thwart improper billing 
practices. Appropriations totaled $700 million for 2002, and $720 
million for FY 2003 and all subsequent years.
    A separate and dependable long-term funding source for MIP allows 
us the flexibility to invest in innovative strategies to combat the 
fraud and abuse drain of the Medicare Trust Funds. By shifting emphasis 
from post-payment recoveries on incorrectly paid claims to pre-payment 
strategies, most claims will be paid correctly the first time.
    Improper billing and health care fraud are difficult to quantify 
because of their hidden nature. However, estimates suggest that the 
percentage of improper Medicare fee for service payments as compared to 
total fee for service payments have declined since the implementation 
of MIP contractors:

------------------------------------------------------------------------
                                     Improper    Percentage   Total FFS
                                     payment       of FFS      payments
               Year                    (in         total         (in
                                    billions)    (percent)    billions)
------------------------------------------------------------------------
1998.............................        $12.6          7.1       $176.1
1999.............................         13.5         7.97        169.5
2000.............................         11.9          6.8        173.6
2001.............................         12.1          6.3        191.8
2002.............................         13.3          6.3        212.7
2003.............................         11.6          5.8          200
2004.............................         19.9          9.3   \1\ 213.5
------------------------------------------------------------------------
\1\ Since 1996, HHS has annually determined the rate of improper
  payments for fee-for-service claims paid by Medicare contractors. The
  survey measures claims found to be medically unnecessary, inadequately
  documented, or improperly coded. From 1996 until 2002, the survey was
  conducted by the OIG based on a survey of some 6,000 claims. In 2003,
  CMS launched an expanded effort, reviewing approximately 128,000
  Medicare claims to learn more precisely where errors are being made.
  The 2003 figures used in the above table reflect the adjusted error
  rate figures. The unadjusted figures, calculated using CMS' expanded
  effort, were $19.6 billion for improper payment and an error rate of
  9.8. The numbers reported for 2004 are unadjusted and reflect CMS''
  findings since employing its expanded effort.

    We should note that the positive error rate trend also relates to 
other initiatives including fiscal intermediary and carrier education 
efforts, partnering with the American Medical Association (AMA), and 
anti-fraud and abuse efforts such as Operation Restore Trust.
    In 2004, we announced new steps to measure error rates in Medicare 
payments more accurately and comprehensively at the contractor level,

[[Page 35216]]

and to further reduce improper payments through targeted error 
improvement initiatives. Under the new measurement process for the 
Medicare error rate, the net national rate for fiscal year 2004 was 9.3 
percent. This error rate is not comparable to the rates determined by 
the previous method used by CMS. We hope to reduce the error rate by 
more than half to 4.7 percent in four years, by building on recent 
reforms in payment oversight and new authorities in the Medicare law.
    In addition to economic advantages, MIP funding and contracting 
improvements will allow us to better serve Medicare beneficiaries in a 
qualitative way. MIP gives us a tool to better administer the Medicare 
program and accomplish our mission of providing access to quality 
health care for Medicare beneficiaries. We will continue to use 
competitive procedures to contract separately for the performance of 
integrity functions. In general, economic theory postulates that 
competition results in a better price for the consumer which, in this 
instance, is CMS on behalf of Medicare beneficiaries and taxpayers. 
Competition should also encourage the use of innovative techniques to 
perform integrity functions that will, in turn, result in more 
efficient and effective safeguards for the Trust Funds.
2. Medicare Beneficiaries and Taxpayers
    MIP contracts have had, and we expect will continue to have, an 
overall positive effect on Medicare beneficiaries and taxpayers. 
Beneficiaries pay deductibles and Part B Medicare premiums. Taxpayers, 
including those who are not yet eligible for Medicare, contribute part 
of their earnings to the Part A Trust Fund. Taxpayers and beneficiaries 
contribute indirectly to the Part B Trust Fund because it is funded, in 
part, from general tax revenues. Consistent performance of program 
integrity activities will ensure that less money is wasted on 
inappropriate treatment or unnecessary services. As evidence, MIP funds 
have contributed to a reduction in the total percentage of improper 
payments made for fee-for-service (FFS) claims paid in 2003 to 5.8 \2\ 
percent of all FFS claims, down from 7.1 percent of FFS claims in 
1998.\3\ As a result, current and future beneficiaries will obtain more 
value for every Medicare dollar spent.
---------------------------------------------------------------------------

    \2\ This 2003 figure reflects the adjusted error rate figures. 
The unadjusted figures, calculated using CMS' expanded effort, were 
$19.6 billion for improper payment and an error rate of 9.8%. See 
note 1 for more detail.
    \3\ From 1996 until 2002, the HHS OIG used a sample size of 
about 6,000 claims to conduct the process used to measure Medicare 
payment error rates. The measured error rate declined from 13.8 
percent in 1996 to 6.3 percent in 2002. In fiscal year 2003, and as 
part of the agency's enhanced efforts to improve payment accuracy, 
CMS began calculating the Medicare FFS error rate and estimate of 
improper claim payments using a new methodology approved by the OIG. 
Under the new measurement process for the Medicare error rate, the 
net national rate for fiscal year 2004 was 9.3 percent.
---------------------------------------------------------------------------

3. Current Fiscal Intermediaries and Carriers
    Although fiscal intermediaries and carriers are not considered 
small entities for purposes of the RFA, and effective October 1, 2005, 
we have the authority to replace the current Medicare fiscal 
intermediary and carrier contracts with new MAC contracts, we are 
providing the following analysis.
    There are currently 25 Medicare fiscal intermediaries and 18 
Medicare carriers plus 4 DME regional contractors which are also 
carriers. Presently, all these contractors perform general program 
integrity activities addressed in this proposed rule apart from, but 
not duplicative of, MIP contractors. In FY 2004, approximately 29 
percent of the total contractor budget was dedicated to program 
integrity.
    Current fiscal intermediaries and carriers are not prohibited from 
entering into MIP contracts when we compete contracts for section 1893 
of the Act activities. Medical directors continue to play an important 
role in medical review activities, and locally-based medical directors 
improve our relationship with local physicians by using groups like 
Carrier Advisory Committees. Locally-based fraud investigators and 
auditors are being used as necessary. Upon the publication of this 
proposed regulation, we anticipate that review policies will continue 
to be coordinated across contractors to ensure consistency, while local 
practice will continue to be incorporated where appropriate.
    This rule may have had a negative impact on current fiscal 
intermediaries and carriers in some respects. Many current fiscal 
intermediaries and carriers may have lost a portion of their Medicare 
business since 1998 as fraud review functions were transferred to MIP 
contractors. These contractors may have some additional functions 
transferred to MIP contractors in the next few years. Nevertheless, the 
effects of section 911 of the MMA will be more significant on the 
current fiscal intermediary and carrier.
    However, current contractors have benefited from the MIP program 
and will benefit from this proposed rule. Under the provisions of this 
proposal, they are eligible to compete for MIP contracts as long as 
they comply with all conflict of interest and other requirements. 
(Current contractors may not receive payment for performing the same 
program integrity activities under both a MIP contract and their 
existing contract.) We considered proposing rules that identified 
specific conflict of interest situations that would prohibit the award 
of a MIP contract. We also considered prohibiting a MIP contractor 
whose contract was completed but not renewed or terminated from 
competing for another MIP contract for a certain period. Instead, the 
proposed rule would establish a process for evaluating, on a case-by-
case basis at the time of contracting, situations that may constitute 
conflicts of interest in accordance with the FAR, subpart 9.5. It 
permits current contractors to position themselves to be eligible for a 
MIP contract by mitigating any conflicts of interest they may have in 
order to compete. The economic impact on fiscal intermediaries and 
carriers is lessened by the proposed approach when compared to the 
alternatives we considered.
    The current contractors that are awarded MIP contracts, or that 
continue to perform MIP functions under their fiscal intermediary or 
carrier contracts, will also benefit from more consistent funding 
provided by the law for program integrity activities. This more stable, 
long-term funding mechanism enables Medicare contractors to attract, 
train, and retain qualified professional staff to assist these 
contractors to fulfill their program integrity functions.
    There will be an economic impact on current contractors that 
propose to perform MIP contracts using subcontractors. A MIP contractor 
would apply to its subcontractors the same conflict of interest 
standard to which it must adhere. It is impossible to assess the 
precise economic impact of this portion of the proposed rule because a 
MIP contractor is free to contract with any subcontractor. A MIP 
contractor may seek out subcontractors that are conflict free, which 
would reduce or eliminate the time expended monitoring conflict of 
interest situations. However, our requirements rely heavily on FAR 
subpart 9.5, which normally apply to both prime contractors and 
subcontractors. Thus, we do not believe this provision imposes any 
additional negative burden on current fiscal intermediaries or 
carriers.
4. New Contracting Entities
    Entities that have not previously performed Medicare program 
integrity activities will experience a positive

[[Page 35217]]

effect from this rule. Integrity functions such as audit, medical 
review, and potential fraud investigation may be consolidated in a MIP 
contract to allow suspect claims to be identified and investigated from 
all angles. Contractors may subcontract for these specific integrity 
functions, thus creating new markets and opportunities for small, small 
disadvantaged, and woman-owned businesses.
    Since the publication of the 1998 proposed rule and in accordance 
to this MIP authority, we have awarded 12 Indefinite Delivery-
Indefinite Quantity (IDIQ) contracts for the Program Safeguard 
Contractor (PSC) effort, one Coordination of Benefits (COB) contract, 
and 8 IDIQ contracts for the Medicare Managed Care Program Integrity 
Contractors (MMC-PICs) effort. With the forthcoming implementation of 
the Part D prescription drug benefit included in the MMA, there will be 
further opportunities for new entities to compete for MIP contracts to 
perform program oversight activities for this new benefit.
    Use of full and open competition to award MIP contracts may 
encourage innovation and the creation of new technology. Historically, 
cutting edge technologies and analytical methodologies created for the 
Medicare program have benefited the private insurance arena.
5. Providers and Suppliers
    Because MIP contractors have been in place since 1998, we 
anticipate no additional burden imposed on providers and suppliers that 
are small businesses or not-for-profit organizations by the need to 
deal with a new set of contractors. There are approximately 1.1 million 
health care providers and suppliers (depending on how group practices 
and multiple locations are counted) that bill independently. The 
proposed rule does not necessarily impose any action on the part of 
these providers and suppliers.
    Overall, we expect that providers and suppliers will benefit 
qualitatively from this proposed rule. Many providers and suppliers 
perceive that their reputations are tarnished by the few dishonest 
providers and suppliers that take advantage of the Medicare program. 
The media often focus on the most egregious cases of Medicare fraud and 
abuse, leaving the public with the perception that physicians and other 
health care practitioners routinely make improper claims. This rule 
would allow us to take a more effective and wider ranging approach to 
identifying, stopping, and recovering from unscrupulous providers and 
suppliers. As the number of dishonest providers and suppliers and 
improper claims diminishes, ethical providers and suppliers will 
benefit.

D. Conclusion

    Since the publication of the 1998 proposed rule, we have awarded 
MIP contracts to contractors in order to perform program integrity 
activities and there has been a decrease in the percentage of improper 
claims paid. In anticipation of our continued authority to award 
contracts to entities to continue these activities, we have announced 
initiatives to measure error rates in Medicare payments more accurately 
and comprehensively, and to further reduce improper payments.
    We conclude that our continued authority would save the Medicare 
program additional money and extend the solvency of the Trust Funds as 
a result of this proposed rule. The dynamic nature of fraud and abuse 
is illustrated by the fact that wrongdoers continue to find ways to 
evade safeguards. This supports the need for constant vigilance and 
increasingly sophisticated ways to protect against ``gaming'' of the 
system. We solicit public comments as well as data on the extent to 
which any of the affected entities would be significantly economically 
affected by this proposed rule. However, based on the above analysis, 
we have determined, and certify, that this proposed rule would not have 
a significant economic impact on a substantial number of small 
entities. We also have determined, and certify, that this proposed rule 
would not have a significant impact on the operations of a substantial 
number of small rural hospitals. In accordance with the provisions of 
Executive Order 12866, this proposed rule was reviewed by the Office of 
Management and Budget.

List of Subjects

42 CFR Part 400

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

42 CFR Part 421

    Administrative practice and procedure, Health facilities, Health 
professions, Medicare, Reporting and recordkeeping requirements.
    For reasons set forth in the preamble in this proposed regulation, 
the Centers for Medicare & Medicaid Services propose to amend 42 CFR 
chapter IV as follows:

PART 400--INTRODUCTION; DEFINITIONS

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

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh) and 44 U.S.C. Chapter 35.

    2. Section 400.202 is amended by adding the following definition in 
alphabetical order, to read as follows:


Sec.  400.202  Definitions specific to Medicare.

* * * * *
    Medicare integrity program contractor means an entity that has a 
contract with CMS under section 1893 of the Act to perform exclusively 
one or more of the program integrity activities specified in that 
section.
* * * * *

PART 421--MEDICARE CONTRACTING

    3. The part heading is revised to read as set forth above.
    4. The authority citation for part 421 continues to read as 
follows:

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

    5. Section 421.1 is revised to read as follows:


Sec.  421.1  Basis, applicability, and scope.

    (a) Basis. This part is based on the provisions of the following 
sections of the Act:
    Section 1124--Requirements for disclosure of certain information.
    Sections 1816 and 1842--Use of organizations and agencies in making 
Medicare payments to providers and suppliers of services.
    Section 1893--Requirements for protecting the integrity of the 
Medicare program.
    (b) Additional basis. Section 421.118 is also based on 42 U.S.C. 
1395(b)-1(a)(1)(F), which authorizes demonstration projects involving 
fiscal intermediary agreements and carrier contracts.
    (c) Applicability. The provisions of this part apply to agreements 
with Part A (Hospital Insurance) fiscal intermediaries, contracts with 
Part B (Supplementary Medical Insurance) carriers, and contracts with 
Medicare integrity program contractors that perform program integrity 
functions.
    (d) Scope. The scope of this part is as follows:
    (1) Specifies that CMS may perform certain functions directly or by 
contract.
    (2) Specifies criteria and standards CMS uses in selecting fiscal 
intermediaries and evaluating their performance, in assigning or 
reassigning

[[Page 35218]]

a provider or providers to particular fiscal intermediaries, and in 
designating regional or national fiscal intermediaries for certain 
classes of providers.
    (3) Provides the opportunity for a hearing for fiscal 
intermediaries and carriers affected by certain adverse actions.
    (4) Provides adversely affected fiscal intermediaries an 
opportunity for judicial review of certain hearing decisions.
    (5) Sets forth requirements related to contracts with Medicare 
integrity program contractors.
    6. Section 421.100 is revised to read as follows:


Sec.  421.100  Intermediary functions.

    An agreement between CMS and an intermediary specifies the 
functions to be performed by the intermediary.
    (a) Mandatory functions. The contract must include the following 
functions:
    (1) Determining the amount of payments to be made to providers for 
covered services furnished to Medicare beneficiaries.
    (2) Making the payments.
    (b) Additional functions. The contract may include any or all of 
the following functions:
    (1) Any or all of the program integrity functions described in 
Sec.  421.304, provided the intermediary is continuing those functions 
under an agreement entered into under section 1816 of the Act that was 
in effect on August 21, 1996, and they do not duplicate work being 
performed under a Medicare integrity program contract.
    (2) Undertaking to adjust incorrect payments and recover 
overpayments when it is determined that an overpayment was made.
    (3) Furnishing to CMS timely information and reports that CMS 
requests in order to carry out its responsibilities in the 
administration of the Medicare program.
    (4) Establishing and maintaining procedures as approved by CMS for 
the review and reconsideration of payment determinations.
    (5) Maintaining records and making available to CMS the records 
necessary for verification of payments and for other related purposes.
    (6) Upon inquiry, assisting individuals for matters pertaining to 
an intermediary agreement.
    (7) Serving as a channel of communication to and from CMS of 
information, instructions, and other material as necessary for the 
effective and efficient performance of an intermediary agreement.
    (8) Undertaking other functions as mutually agreed to by CMS and 
the intermediary.
    (c) Dual intermediary responsibilities. For the responsibility for 
services to a provider-based HHA or a provider-based hospice, when 
different intermediaries serve the HHA or hospice and its parent 
provider under Sec.  421.117, the designated regional intermediary 
determines the amount of payment and makes payments to the HHA or 
hospice. The intermediary or Medicare integrity program contractor 
serving the parent provider performs fiscal functions, including audits 
and settlement of the Medicare cost reports and the HHA and hospice 
supplement worksheets.
    7. Section 421.200 is revised to read as follows:


Sec.  421.200  Carrier functions.

    A contract between CMS and a carrier specifies the functions to be 
performed by the carrier. The contract may include any or all of the 
following functions:
    (a) Any or all of the program integrity functions described in 
Sec.  421.304 provided the following conditions are met:
    (1) The carrier is continuing those functions under a contract 
entered into under section 1842 of the Act that was in effect on August 
21, 1996.
    (2) The functions do not duplicate work being performed under a 
Medicare integrity program contract, except that the function related 
to developing and maintaining a list of DME may be performed under both 
a carrier contract and a Medicare integrity program contract.
    (b) Receiving, disbursing, and accounting for funds in making 
payments for services furnished to eligible individuals within the 
jurisdiction of the carrier.
    (c) Determining the amount of payment for services furnished to an 
eligible individual.
    (d) Undertaking to adjust incorrect payments and recover 
overpayments when it is determined that an overpayment was made.
    (e) Furnishing to CMS timely information and reports that CMS 
requests in order to carry out its responsibilities in the 
administration of the Medicare program.
    (f) Maintaining records and making available to CMS the records 
necessary for verification of payments and for other related purposes.
    (g) Establishing and maintaining procedures under which an 
individual enrolled under Part B is granted an opportunity for a fair 
hearing so long as these functions are not being performed by a 
Qualified Independent Contractor under section 1869 of the Act.
    (h) Upon inquiry, assisting individuals with matters pertaining to 
a carrier contract.
    (i) Serving as a channel of communication to and from CMS of 
information, instructions, and other material as necessary for the 
effective and efficient performance of a carrier contract.
    (j) Undertaking other functions as mutually agreed to by CMS and 
the carrier.
    8. A new subpart D is added to part 421 to read as follows:
Subpart D--Medicare Integrity Program Contractors
Sec.
421.300 Basis, applicability, and scope.
421.302 Eligibility requirements for Medicare integrity program 
contractors.
421.304 Medicare integrity program contractor functions.
421.306 Awarding of a contract.
421.308 Renewal of a contract.
421.310 Conflict of interest requirements.
421.312 Conflict of interest resolution.
421.316 Limitation on Medicare integrity program contractor 
liability.
Subpart D--Medicare Integrity Program Contractors


Sec.  421.300  Basis, applicability, and scope.

    (a) Basis. This subpart implements section 1893 of the Act, which 
requires CMS to protect the integrity of the Medicare program by 
entering into contracts with eligible entities to carry out Medicare 
integrity program functions. The provisions of this subpart are based 
on section 1893 of the Act (and, where applicable, section 1874A of the 
Act) and the acquisition regulations set forth at 48 CFR Chapters 1 and 
3.
    (b) Applicability. This subpart applies to entities that seek to 
compete or receive award of a contract under section 1893 of the Act, 
including entities that perform functions under this subpart emanating 
from the processing of claims for individuals entitled to benefits as 
qualified railroad retirement beneficiaries.
    (c) Scope. The scope of this subpart follows:
    (1) Defines the types of entities eligible to become Medicare 
integrity program contractors.
    (2) Identifies the program integrity functions a Medicare integrity 
program contractor performs.
    (3) Describes procedures for awarding and renewing contracts.
    (4) Establishes procedures for identifying, evaluating, and 
resolving organizational conflicts of interest.
    (5) Prescribes responsibilities.
    (6) Sets forth limitations on contractor liability.

[[Page 35219]]

Sec.  421.302  Eligibility requirements for Medicare integrity program 
contractors.

    (a) CMS may enter into a contract with an entity to perform the 
functions described in Sec.  421.304 if the entity meets the following 
conditions:
    (1) Demonstrates the ability to perform the Medicare integrity 
program contractor functions described in Sec.  421.304. For purposes 
of developing and periodically updating a list of DME under Sec.  
421.304(e), an entity is deemed to be eligible to enter into a contract 
under the Medicare integrity program to perform the function if the 
entity is a carrier with a contract in effect under section 1842 of the 
Act.
    (2) Agrees to cooperate with the OIG, the DOJ, and other law 
enforcement agencies, as appropriate, including making referrals, in 
the investigation and deterrence of potential fraud and abuse of the 
Medicare program.
    (3) Complies with conflict of interest provisions in 48 CFR 
Chapters 1 and 3 and is not excluded under the conflict of interest 
provision at Sec.  421.310.
    (4) Maintains an appropriate written code of conduct and compliance 
policies that include, without limitation, an enforced policy on 
employee conflicts of interest.
    (5) Meets financial and business integrity requirements to reflect 
adequate solvency and satisfactory legal history.
    (6) Meets other requirements that CMS establishes.
    (b) A MAC as described in section 1874A of the Act may perform any 
or all of the functions described in Sec.  421.304, except that the 
functions may not duplicate work being performed under a Medicare 
integrity program contract.
    (c) If a MAC performs any or all functions described in Sec.  
421.304, CMS may require the MAC to comply with any or all of the 
requirements of paragraph (a) of this section as a condition of its 
contract.


Sec.  421.304  Medicare integrity program contractor functions.

    The contract between CMS and a Medicare integrity program 
contractor specifies the functions the contractor performs. The 
contract may include any or all of the following functions:
    (a) Conducting medical reviews, utilization reviews, and reviews of 
potential fraud related to the activities of providers of services and 
other individuals and entities (including entities contracting with CMS 
under parts 417 and 422 of this chapter) furnishing services for which 
Medicare payment may be made either directly or indirectly.
    (b) Auditing cost reports of providers of services, or other 
individuals or entities (including entities contracting with CMS under 
parts 417 and 422 of this chapter), as necessary to ensure proper 
Medicare payment.
    (c) Determining appropriate Medicare payment to be made for 
services, as specified in section 1862(b) of the Act, and taking action 
to recover inappropriate payments.
    (d) Educating providers, suppliers, beneficiaries, and other 
persons regarding payment integrity and benefit quality assurance 
issues.
    (e) Developing, and periodically updating, a list of items of DME 
that are frequently subject to unnecessary utilization throughout the 
contractor's entire service area or a portion of the area, in 
accordance with section 1834(a)(15)(A) of the Act.


Sec.  421.306  Awarding of a contract.

    (a) CMS awards and administers Medicare integrity program contracts 
in accordance with acquisition regulations set forth at 48 CFR chapters 
1 and 3, this subpart, all other applicable laws, and all applicable 
regulations. These requirements for awarding Medicare integrity program 
contracts are used as follows:
    (1) When entering into new contracts.
    (2) When entering into contracts that may result in the elimination 
of responsibilities of an individual fiscal intermediary or carrier 
under section 1816(l) or section 1842(c) of the Act, respectively.
    (3) At any other time CMS considers appropriate.
    (b) CMS may award an entity a Medicare integrity program contract 
without competition if all of the following conditions apply:
    (1) Through approval of a novation agreement in accordance with the 
requirements of the Federal Acquisition Regulation (FAR), CMS 
recognizes the entity as the successor in interest to a fiscal 
intermediary agreement or carrier contract under which the fiscal 
intermediary or carrier was performing activities described in section 
1893(b) of the Act on August 21, 1996.
    (2) The fiscal intermediary or carrier continued to perform 
Medicare integrity program activities until transferring the resources 
to the entity.
    (c) An entity is eligible to be awarded a Medicare integrity 
program contract only if it meets the eligibility requirements 
established in Sec.  421.302, 48 CFR chapters 1 and 3, and other 
applicable laws and regulations.


Sec.  421.308  Renewal of a contract.

    (a) CMS specifies an initial contract term in the Medicare 
integrity program contract. Contracts under this subpart may contain 
renewal clauses. CMS may, but is not required to, renew the Medicare 
integrity program contract, without regard to any provision of law 
requiring competition, as it determines to be appropriate, by giving 
the contractor notice, within timeframes specified in the contract, of 
its intent to do so.
    (b) CMS may renew a Medicare integrity program contract without 
competition if all of the following conditions are met:
    (1) The Medicare integrity program contractor continues to meet the 
requirements established in this subpart.
    (2) The Medicare integrity program contractor meets or exceeds the 
performance requirements established in its current contract.
    (3) It is in the best interest of the government.
    (c) If CMS does not renew a contract, the contract ends in 
accordance with its terms.


Sec.  421.310  Conflict of interest requirements.

    (a) Offerors for MIP contracts and MIP contractors 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) The standards and requirements as are contained in each 
individual contract awarded to perform section 1893 of the Act 
functions.
    (b) Post-award conflicts of interest. (1) CMS considers that a 
conflict of interest has developed if, during the term of the contract, 
if either of the following occurs:
    (i) The contractor or its employee, agent, or subcontractor 
receives, solicits, or arranges to receive any fee, compensation, gift 
(as defined at 5 CFR 2635.203(b)), payment of expenses, offer of 
employment, or any other thing of value from any entity that is 
reviewed, audited, investigated, or contacted during the normal course 
of performing activities under the Medicare integrity program contract.
    (ii) CMS determines that the contractor's activities are creating a 
conflict of interest.
    (2) In the event CMS determines that a conflict of interest exists 
during the term of the contract, among other actions, it may, as it 
deems appropriate:
    (i) Not renew the contract for an additional term.
    (ii) Modify the contract.
    (iii) Terminate the contract for default.

[[Page 35220]]

Sec.  421.312  Conflict of interest resolution.

    (a) Review Board. CMS may establish a Conflicts of Interest Review 
Board to assist the contracting officer in resolving organizational 
conflicts of interest and determine when the Board is convened.
    (b) Resolution. Resolution of an organizational conflict of 
interest is a determination by the contracting officer that:
    (1) The conflict is mitigated.
    (2) The conflict precludes award of a contract to the offeror.
    (3) The conflict requires that CMS modify an existing contract.
    (4) The conflict requires that CMS terminate an existing contract 
for default.
    (5) It is in the best interest of the Government to contract with 
the offeror or contractor even though the conflict exists.


Sec.  421.316  Limitation on Medicare integrity program contractor 
liability.

    (a) A MIP contractor, a person or an entity employed by, or having 
a fiduciary relationship with, or who furnishes professional services 
to a MIP contractor is not in violation of any criminal law or civilly 
liable under any law of the United States or of any State (or political 
subdivision thereof) by reason of the performance of any duty, 
function, or activity required or authorized under this subpart or 
under a valid contract entered into under this subpart, provided due 
care was exercised in that performance and the contractor has a 
contract with CMS under this subpart.
    (b) CMS will pay a contractor, a person or an entity described in 
paragraph (a) of this section, or anyone who furnishes legal counsel or 
services to a contractor or person, a sum equal to the reasonable 
amount of the expenses, as determined by CMS, incurred in connection 
with the defense of a suit, action, or proceeding, if:
    (1) The suit, action, or proceeding was brought against the 
contractor, such person or entity by a third party and relates to the 
contractor's, person's or entity's performance of any duty, function, 
or activity under a contract entered into with CMS under this subpart;
    (2) The funds are available; and
    (3) The expenses are otherwise allowable under the terms of the 
contract.

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

    Dated: March 20, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 20, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-11775 Filed 6-10-05; 4:00 pm]
BILLING CODE 4120-01-P