[Federal Register Volume 70, Number 238 (Tuesday, December 13, 2005)]
[Rules and Regulations]
[Pages 73623-73634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-24020]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 405

[CMS-1908-F]
RIN 0938-AN81


Medicare Program; Application of Inherent Reasonableness Payment 
Policy to Medicare Part B Services (Other Than Physician Services)

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

ACTION: Final rule.

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SUMMARY: This final rule finalizes the process that was set forth in an 
interim final rule published on December 13, 2002, for establishing a 
realistic and equitable payment amount for Medicare Part B services 
(other than physicians' services) when the existing payment amounts are 
inherently unreasonable because they are either grossly excessive or 
grossly deficient. This process does not apply to services paid under a 
prospective payment system, such as outpatient hospital services or 
home health services. The December 2002 interim final rule also 
described the factors we (or our carriers) will consider and the 
procedures we will follow in establishing realistic and equitable 
payment amounts for Medicare Part B services.
    In addition, this final rule responds to public comments we 
received on two provisions in the December 13, 2002 interim final rule 
relating to how we define grossly excessive or deficient payment 
amounts and to the criteria for using valid and reliable data in 
applying the inherent reasonableness authority.

EFFECTIVE DATE: This final rule is effective on February 13, 2006.

FOR FURTHER INFORMATION CONTACT: William Long, (410) 786-5655.

SUPPLEMENTARY INFORMATION: 

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I. Background: Legislative and Regulatory Authority

    Title XVIII of the Social Security Act (the Act) contains various 
methodologies for making payment under Part B of the Medicare program. 
These payment methodologies vary among the different categories of 
items and services covered under Medicare Part B.

A. The Consolidated Omnibus Budget Reconciliation Act of 1985

    Section 9304(a) of the Consolidated Omnibus Budget Reconciliation 
Act of 1985 (COBRA of 1985), Public Law 99-272, effective September 10, 
1986, added section 1842(b)(8) to the Act, which expressly authorizes 
the Secretary to deviate from the payment methodologies prescribed in 
the Act if their application results in a payment amount for a 
particular service or group of services that is determined to be 
grossly excessive or deficient and, therefore, is not inherently 
reasonable. The statute also requires the Secretary to describe in 
regulations the factors to be considered in determining an amount that 
is realistic and equitable. The Secretary has always taken the position 
that the authority to regulate unreasonable payment amounts is inherent 
in his or her authority to determine reasonable charges according

[[Page 73624]]

to section 1842 of the Act, and, since January 1, 1991, has taken the 
position that this authority applies to other Part B payment 
methodologies, not just those payment methodologies under section 1842 
of the Act.
    On August 11, 1986, we published a final rule with comment period 
in the Federal Register (51 FR 28710) to implement the provisions of 
section 1842(b)(8) of the Act, as added by section 9304(a) of the COBRA 
of 1985, under regulations at 42 CFR 405.502(g) and (h). These 
regulations described the factors to be used in determining if the 
application of the reasonable charge methodology results in a charge 
that is grossly excessive or grossly deficient. The regulations also 
described the factors to be considered in establishing a reasonable 
charge that is realistic and equitable. When we implemented section 
1842(b)(8) of the Act, as added by section 9304(a) of the COBRA of 
1985, we interpreted the statute as applying not only to the 
Secretary's authority to establish national reasonable charge limits, 
but also to the Medicare carriers' authority to establish carrier-level 
reasonable charge limits on grossly excessive or deficient charges.

B. The Omnibus Budget Reconciliation Act of 1986

    Section 9333 of the Omnibus Budget Reconciliation Act of 1986 
(OBRA)(Pub. L. 99-509) amended section 1842(b)(8) of the Act and added 
new paragraphs (b)(9) and (b)(10). These amendments specified the 
distinct procedures under which the Secretary may establish special 
reasonable charge limits for physicians' services and provided for a 
limitation on the amount that nonparticipating physicians may charge 
for a service if a special reasonable charge limit is established for 
that physician service.
    On July 11, 1988, we issued a final rule in the Federal Register 
(53 FR 26067) that conformed the regulations to the provisions of 
section 1842(b)(8) of the Act, as amended by the OBRA, and sections 
1842(b)(9) and (b)(10) of the Act, as added by the OBRA. That final 
rule also responded to comments received on the August 11, 1986 final 
rule with comment period that implemented section 9304(a) of the COBRA 
of 1985.

C. The Balanced Budget Act of 1997

    Section 4316 of the Balanced Budget Act of 1997 (BBA), Public Law 
105-33, enacted on August 5, 1997, amended sections 1842(b)(8) and 
(b)(9) of the Act, which permit the Secretary to deviate from the 
payment methodologies prescribed in title XVIII of the Act if their 
application results in a payment amount that, because it is determined 
to be grossly excessive or deficient, is not inherently reasonable. 
Sections 1842(b)(8) and (b)(9) of the Act, as amended, also require the 
Secretary to describe the factors to be considered in determining an 
amount that is realistic and equitable. Specifically, section 4316 of 
the BBA amended section 1842(b)(8) of the Act to--
     Exclude physicians' services from application of the 
inherent reasonableness payment policy;
     Extend the authority to establish special payment limits 
to Medicare carriers, regardless of the methodology for determining 
payment;
     Simplify the inherent reasonableness process for 
adjustments to payment amounts that are 15 percent or less. 
Specifically, section 4316 of the BBA amended section 1842(b)(8) by 
adding provisions that apply if a reduction or increase would vary the 
payment amount by 15 percent or less ``during any year.'' (Other 
provisions apply to larger increases and decreases.) Under this 
authority, we (or a carrier) may determine that more than a 15-percent 
adjustment is warranted, but we may choose to apply only a 15-percent 
adjustment in any given year and use the ``15-percent'' methodology. 
For example, we (or a carrier) may determine that a 25-percent 
reduction is warranted. However, the adjustment could be accomplished 
over 2 years--15 percent applied the first year, and 10 percent applied 
the following year.
     Require the Secretary to consider the following factors in 
making inherent reasonableness determinations concerning payment for 
Part B services (other than physicians' services) and permit the 
Secretary to consider any additional factors determined to be 
appropriate:
    (1) Medicare and Medicaid are the sole or primary sources of 
payment for a category of items or services.
    (2) The payment amount for a category of items or services does not 
reflect changing technology, increased facility with that technology, 
or changes in acquisition, production, or supplier costs.
    (3) The payment amounts for a category of items or services are 
grossly higher or lower than the payments made for the same category of 
items or services by other purchasers in the same locality.
    Section 4316 of the BBA also made minor changes to section 
1842(b)(9) of the Act relating to the process for formally notifying 
the public of, and obtaining public comment on, a proposed inherent 
reasonableness determination and a proposed payment adjustment and for 
announcing the final payment adjustment determination.
    On January 7, 1998, we published in the Federal Register (63 FR 
687) an interim final rule that implemented sections 1842(b)(8) and 
(b)(9) of the Act, as amended by section 4316 of the BBA. In the 
January 7, 1998 interim final rule, we revised Sec.  405.502(g) and (h) 
to exclude references to physicians' services from the application of 
the inherent reasonableness policy. We also deleted specific references 
to the reasonable charge payment methodology because the inherent 
reasonableness provisions apply to all Part B services, except 
physicians' services, irrespective of the payment methodology. However, 
we specified that the rule did not apply to services paid under a 
prospective payment system, such as outpatient hospital services or 
home health services. We also reflected the change in the statute that 
permitted us to simplify the process for making adjustments to payment 
amounts for a category of items or services when the increase or 
decrease in the payment amount is no more than 15 percent per year. 
(For purposes of Sec.  405.502(g) and (h), a ``category of items or 
services'' may consist of a single item or service or any number of 
items or services.)
    Although the BBA gave the Secretary discretion to reduce the number 
of factors that are used to make inherent reasonableness 
determinations, in the January 1998 interim final rule, we retained 
four of the five factors that appeared in Sec.  405.502(g)(1) because 
they remain as appropriate factors for determining deficient or 
excessive payment amounts. We removed the factor related to the use of 
new technology for which an extensive charge history does not exist 
because there was already in place an alternative process for 
establishing payment amounts for new items or services for which an 
extensive charge history does not exist. (We note that we reinserted 
this example of a factor in the December 13, 2002 interim final rule 
discussed in section I.D. of this final rule because we had received 
requests that this example factor not be deleted.) We included the 
following additional factors we may (but we are not limited to) 
consider:
     The market place is not competitive.
     The payment amounts in a particular locality grossly 
exceed amounts paid in other localities for the category of items or 
services.
     The payment amounts grossly exceed acquisition or 
production costs for the category of items or services.

[[Page 73625]]

     There have been increases in payment amounts that cannot 
be explained by inflation or technology.
    We interpreted the provisions of section 4316 of the BBA relating 
to the Secretary's authority and a Medicare carrier's authority in the 
same manner that we had done for the COBRA of 1985. That is, we 
interpreted the statute as codifying both our authority and a carrier's 
authority to establish realistic and equitable payment amounts. Thus, 
in the January 7, 1998 interim final rule, we described the 
circumstances and factors our carriers and we would use in setting 
realistic and equitable payment amounts if the existing payment amounts 
are grossly excessive or deficient.

D. The Balanced Budget Refinement Act of 1999

    Section 223 of the Balanced Budget Refinement Act (BBRA) of 1999, 
Public Law 106-113, enacted on November 29, 1999, prohibited the use of 
the inherent reasonableness authority under section 1842(b) of the Act 
until the following events had occurred:
    Event 1: The Comptroller General had released a report regarding 
the impact of the Secretary's fiscal intermediaries' and carriers' use 
of the authority. (This report, entitled ``Medicare Payments-Use of 
Revised `Inherent Reasonableness' Generally Appropriate (GAO/HEHS-OO-
79),'' was released by the General Accounting Office (GAO) (now the 
Government Accountability Office) in July 2000.)
    Event 2: The Secretary had published a notice of final rulemaking 
in the Federal Register that related to the authority and that 
responded to the GAO report and to comments received in response to the 
Secretary's interim final regulation relating to the authority that was 
published on January 7, 1998. (The notice of final rulemaking was 
published in the Federal Register on December 13, 2002 (67 FR 76684), 
and is discussed below in this section I.D. of this final rule. That 
notice also responded to the GAO report.)
    Event 3: In publishing the final regulation, the Secretary had 
reevaluated the appropriateness of the criteria included in the interim 
final regulation for identifying payments that are excessive or 
deficient. (The December 13, 2002 interim final rule, discussed below 
in this section I.D. of this final rule, provided greater specificity 
of the criteria for identifying grossly excessive or deficient payments 
and provided opportunity for further public comment because of that 
specificity. We are responding to the public comments received on these 
more specific criteria under section II. of this final rule.)
    Event 4: The Secretary had taken appropriate steps to ensure the 
use of valid and reliable data when exercising the authority. (The 
December 13, 2002 interim final rule, discussed below in this section 
I.D. of this final rule, addressed the use of valid and reliable data 
and provided opportunity for further public comment on this area. We 
are responding to the public comments received on the use of data under 
section II. of this final rule.)
    As we indicated earlier, section 223 of the BBRA directed us to 
respond to the July 2000 GAO report. In its report, the GAO found that 
CMS' use of the revised inherent reasonableness process was generally 
appropriate and made four specific recommendations.
    Recommendation: In publishing the final rule on the inherent 
reasonableness process, CMS should define with sufficient clarity the 
terms ``grossly excessive'' and ``grossly deficient.''
    Recommendation: For future inherent reasonableness reviews based on 
survey data, CMS or the carriers should develop and implement a more 
structured survey design, including sample selection, survey 
instrumentation, and data collection methods, and ensure that the 
design is consistently used by all entities conducting the survey.
    Recommendation: CMS and the carriers should collect and analyze 
additional information to more precisely estimate any payment 
reductions for glucose test strips, albuterol sulfate, and enteral 
formulas, as well as for additional payment reductions in subsequent 
years for lancets, eyeglass frames, latex Foley catheters, and catheter 
insertion trays without drainage bags.
    Recommendation: CMS should monitor indicators that could signal 
potential problems with patient access to the product groups for which 
it is reducing maximum payments and act quickly to rectify any problems 
that arise.
    On December 13, 2002, we published in the Federal Register (67 FR 
76684) an interim final rule that constituted a notice of final 
rulemaking relating to the inherent reasonableness authority provisions 
as required by section 223 of the BBRA. In the December 13, 2002 
interim final rule, we responded to the recommendations of the GAO 
report and responded to the public comments received on the January 7, 
1998 interim final rule that implemented section 4316 of the BBA.
    We note that we issued the December 13, 2002 document as an interim 
final rule so that the public would have an additional opportunity to 
comment particularly on two provisions that contained further 
specificity than that found in the January 7, 1998 interim final rule. 
These provisions, discussed below, related to (1) defining grossly 
excessive and deficient payment amounts (Sec.  405.502(g)(1)(ii) of the 
regulations); and (2) taking appropriate steps to ensure the use of 
valid and reliable data when exercising the inherent reasonableness 
authority (Sec.  405.502(g)(4) of the regulations). We are responding 
to the public comments received on these two provisions in section II. 
of this final rule. We had already received public comments on the 
other BBRA provisions that were implemented when we published the 
January 7, 1998 interim final rule; these comments were addressed in 
section V. of the December 13, 2002 interim final rule. We also refer 
the readers to section IV. of the December 13, 2002 interim final rule 
(67 FR 76686) for a full discussion of CMS' responses to the GAO report 
recommendations.
    We note that the statute applies inherent reasonableness to Part B 
items and services, except for physicians' services as defined and paid 
for under section 1848 of the Act. Hospital outpatient services are not 
excluded from the inherent reasonableness provisions of the law. In 
addition, the inherent reasonableness authority can be used in cases 
for which the standard rules for determining payment amounts for drugs 
paid under section 1842(o) of the Act or laboratory services paid under 
section 1842 of the Act result in grossly deficient or excessive 
payment amounts. However, we decided that we would not apply the 
inherent reasonableness provisions to services paid under a prospective 
payment system such as outpatient hospital services or home health 
services. In 2002, we excluded those payment methodologies from the 
application of inherent reasonableness because we believe they have 
other mechanisms to address the concerns otherwise appropriately 
addressed through an inherent reasonableness mechanism. In addition, as 
discussed under section II. of this preamble, because of the new 
pricing methodology for Part B drugs established by section 303 of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(Pub. L. 108-173), we do not anticipate the need to apply the inherent 
reasonableness provisions to these drugs at this time; however, we

[[Page 73626]]

are retaining our authority to apply inherent reasonableness to these 
drugs if the need arises.

II. Provisions of This Final Rule

    As discussed in section I.D. of this preamble, in the interim final 
rule published in the Federal Register on December 13, 2002, we 
provided an additional opportunity for public comment on two provisions 
of that interim final rule because the two provisions contained further 
specificity than that found in the January 7, 1998 interim final rule: 
(1) the definition of grossly excessive and deficient payment amounts; 
and (2) criteria for the use of valid and reliable data when exercising 
the inherent reasonableness authority.
    We received 189 timely pieces of correspondence in response to the 
December 13, 2002 interim final rule. A large number of these comments 
concerned issues (other than the two provisions on which we 
particularly invited additional public comments) that we had received 
public comments on and responded to in the December 13, 2002 interim 
final rule (67 FR 76684). The comments and our responses follow, along 
with a cross reference to the page in which they appeared in the 
December 13, 2002 Federal Register. These included comments on the use 
of an inherent reasonableness appeals process (page 76688); carriers' 
use of the inherent reasonableness authority (page 76691); the 
application of inherent reasonableness authority to laboratory services 
(page 76690); delaying application of the inherent reasonableness 
authority to laboratory services pending CMS' response to the Institute 
of Medicine's study on Medicare Part B laboratory services (page 
76688); the definition and clarification of factors used to determine 
grossly excessive or deficient payment amounts (the factors are the 
examples mentioned in Sec.  405.502(g)(1)(vii) and do not relate to the 
definition of grossly excessive and deficient payment amounts) (page 
76689); the use of cost and charges as factors for determining grossly 
excessive or deficient payment amounts (page 76690); the use of an all-
inclusive rather than a nonexclusive list of inherent reasonableness 
factors (page 76689); the use of the terms ``floor'' and ``ceiling'' 
rather than ``payment limit'' when referring to inherent reasonableness 
adjustments (page 76690); establishing a fair and open inherent 
reasonableness process (page 76688); delaying implementation of the 
inherent reasonableness authority rule (page 76687); establishing a 
petition process for inherent reasonableness determinations (page 
76692); detection of grossly deficient payment amounts (page 76688); 
and the reaction of other payors to Medicare payment limits established 
using inherent reasonableness authority (page 76688). Because we 
addressed these issues in promulgating the December 13, 2002 interim 
final rule, we refer the readers to that document; we will not repeat 
our responses in this final rule except for the effect on beneficiary 
access. As stated in our December 13, 2002 interim final rule, we will 
monitor patient access to items for which payment amounts are adjusted 
using the inherent reasonableness process by periodically checking the 
rate at which suppliers are accepting assignment for these items and by 
monitoring any beneficiary complaints regarding access (page 76687).
    A discussion of the two provisions on which we solicited additional 
public comments, summaries of the public comments that we received in 
response to them, and the Departmental responses follow.

A. Definition of Grossly Excessive and Deficient Payment Amounts

    In the December 13, 2002 interim final rule, in response to the GAO 
recommendation and in response to public comments received on the 
January 1998 interim final rule, we clarified when a payment amount is 
considered grossly excessive or deficient for purposes of applying the 
inherent reasonableness authority. We specified in Sec.  
405.502(g)(1)(ii) that a payment amount will not be considered grossly 
excessive or grossly deficient if the overall payment adjustment is 
less than 15 percent. This definition does not preclude adjustments of 
less than 15 percent in a given year once it is determined that an 
overall adjustment of 15 percent or more is justified.
    The statute provides two different processes once a determination 
is made that a payment amount is grossly excessive or deficient. That 
is, the statute specifies a process for adjustments of 15 percent or 
more in a given year and a simplified process for adjustments of less 
than 15 percent in a given year. However, the statute did not define 
what constitutes a grossly excessive or deficient payment amount. 
Nevertheless, the statute placed significant importance on a 15-percent 
criterion. For this reason, we have decided that differences between 
current and proposed payment amounts of less than 15 percent will not 
be considered grossly excessive or grossly deficient and, therefore, 
will not provide a sufficient basis for using inherent reasonableness 
authority. This definition does not preclude adjustments of less than 
15 percent in a given year once it is determined that an overall 
adjustment of 15 percent or more is justified.
    As directed by the statute, in the December 13, 2002 interim final 
rule, we reviewed the criteria for identifying payments that are 
excessive or deficient set forth in the January 7, 1998 interim final 
rule and codified in Sec.  405.502(g)(1)(vii) of the regulations. While 
amended section 1842(b)(8)(C) of the Act does not specifically require 
that we include all the factors for making inherent reasonableness 
determinations for a category of items or services in regulations, it 
permits the Secretary to consider any additional factors determined to 
be appropriate. The examples listed in Sec.  405.502(g)(1)(vii) are 
merely examples, and the regulation explicitly states that the list of 
examples is not all-inclusive. When making an inherent reasonableness 
determination, we can use one or more of the examples listed in the 
regulation or an example that is not listed in the regulation. This 
approach allows us to adapt the methodology we use to address the 
various specific issues that may pertain to any particular case 
regarding the use and availability of data as well as other factors 
relevant to making an inherent reasonableness determination in that 
case.
    In the December 13, 2002 interim final rule, we pointed out that 
the criteria in Sec.  405.502(g)(1)(vii) were never intended to include 
every set of circumstances where inherent reasonableness would be 
considered appropriate. These same criteria had also been included in 
the August 11, 1986 final regulation and, therefore, were not new; they 
had been in effect for over 10 years. These criteria were originally 
established by the Congress and were contained in section 1842(b)(8) of 
the Act until it was revised by section 4316 of the BBA. We also 
indicated that the criteria remain as appropriate at the time of 
issuance of the interim final rule as they were when the Congress 
established them. Further, we indicated that we would need compelling 
reasons for determining that any of the criteria were inappropriate. 
These criteria are furnished as examples of situations of possible 
grossly excessive or deficient payment amounts, and we believe they are 
realistic and continue to be relevant.
    Comment: Five commenters agreed with CMS' definition of grossly 
excessive and grossly deficient. Seven commenters stated that the 
regulations failed to provide a complete or adequate

[[Page 73627]]

definition of the terms. The commenters were concerned that the 
definition set forth in the regulations did not comply with the 
statutory requirement to fully describe all the factors that CMS or its 
carriers will use to determine whether a payment is grossly excessive 
or deficient. While some of the commenters indicated their support for 
using a quantitative value of 15 percent to define a grossly excessive 
payment amount, they argued that the definition should also incorporate 
the use of objective criteria for consistency in determining grossly 
excessive payment amounts. The commenters indicated that, in the 
absence of a clear and precise definition, CMS or its carriers could 
arbitrarily establish new factors or criteria for determining grossly 
excessive payment amounts.
    One commenter stated that CMS has rebuffed industry assistance in 
developing a definition that incorporates objective benchmarks. This 
commenter indicated that without a more precise definition, providers, 
suppliers, and beneficiaries would not receive adequate notice of 
program policies.
    Response: We appreciate the commenters' support for CMS' definition 
of grossly excessive and grossly deficient. The statute does not 
specifically require us to fully describe or include all the factors 
that may be used in making inherent reasonableness determinations. 
Section 1842(b)(8)(C) of the Act provides examples of factors that can 
result in payment amounts that are grossly excessive or grossly 
deficient. The Act also provides methods that can be used to establish 
reasonable payment amounts. We do not believe it is practical or 
necessary to further describe these lists of examples or to make them 
the only methods we can use. Rather, we believe it is more appropriate 
to establish general factors that allow us flexibility in adapting 
inherent reasonableness applications to a wide array of items of 
services encompassed under Medicare Part B, under different marketing 
conditions, and considering the availability of data. In addition, we 
believe that the proposed use of the 15-percent threshold to define a 
grossly excessive or deficient payment amount is appropriate and is an 
objective criterion.
    We note that no item or service is subject to a change in payment 
under the inherent reasonableness authority until the proposed change 
is published by either CMS in the Federal Register or its carriers in 
their own publication and after public comments received in response to 
the proposed notice are considered.

    Comment: One commenter stated that CMS' decision to set the 
percentage threshold definition for a grossly excessive or deficient 
payment amount at 15 percent did not appear to be consistent with 
section 1842(b)(8) of the Act and the GAO report. The commenter stated 
that section 1842(b)(8) of the Act appeared to anticipate the need for 
grossly excessive or deficient payment adjustments at percentages less 
than 15 percent. The commenter argued that the GAO report clearly 
stated that an adjustment of less than 15 percent could qualify as a 
grossly excessive or deficient payment amount. For these reasons, the 
commenter urged CMS to lower the 15-percent threshold to be consistent 
with section 1842(b)(8) of the Act and the GAO report and suggested 
setting the threshold at 7.5 percent.
    Response: While the commenter is correct regarding the statement 
included in the GAO report concerning the use of a 15-percent 
threshold, we explained in section IV. of the December 13, 2002 interim 
final rule in response to a GAO recommendation our reason for not 
setting the threshold at less than 15 percent. As stated in that rule, 
the statute does not define what constitutes a grossly excessive or 
deficient payment amount. Rather, the statute provides two different 
processes once a determination is made that a payment amount is grossly 
excessive or deficient. That is, the statute specifies a process for 
adjustments of 15 percent or more in a given year and a simplified 
process for adjustments of less than 15 percent in a given year. In so 
doing, the statute places significant importance on a 15-percent 
criterion. For these reasons, we determined that differences between 
current and proposed payment amounts of less than 15 percent will not 
be considered grossly excessive or grossly deficient and, therefore, do 
not provide a basis for using the inherent reasonableness authority. 
Our definition of grossly excessive or deficient does not preclude 
adjustments of less than 15 percent in a given year once it is 
determined that an overall adjustment of 15 percent or more is 
justified.

    Comment: Four commenters believed that CMS' interpretation and 
definition of grossly excessive in relation to overpayment for Medicare 
Part B drugs is incorrect and without a factual basis. The commenters 
indicated that the statute does not define what constitutes a grossly 
excessive payment amount. Some of the commenters urged CMS to adopt a 
more realistic understanding of the implications of its stated policy 
on the delivery of health care to patients with cancer in this country.
    Response: The commenters are correct in stating that the statute 
does not define what constitutes a grossly excessive payment amount. 
The statute applies inherent reasonableness to Part B items and 
services other than physicians' services as defined and paid for under 
section 1848 of the Act. Drugs are paid under section 1842(o) of the 
Act and not section 1848 of the Act. The inherent reasonableness 
authority can and should be used in cases for which the standard rules 
for determining payment amounts for drugs result in grossly deficient 
or excessive payment amounts. Effective January 1, 2004, section 303 of 
Public Law 108-173, enacted on December 8, 2003, established a new 
pricing methodology for Part B drugs, including those furnished by 
oncologists to their cancer patients, that are not paid on a cost or 
prospective payment basis. Because of this new pricing methodology, we 
do not anticipate the need to apply the inherent reasonableness 
authority to Part B drugs at this time, although we retain our 
authority to do so. Public Law 108-173 did not amend section 1848 of 
the Act to explicitly exclude Part B drugs from the inherent 
reasonableness authority. Therefore, although we believe we have the 
authority to do so, we will not exclude Part B drugs from the group of 
services for which we would consider using the inherent reasonableness 
authority.

    Comment: One commenter stated that CMS and the carriers must 
consider the service components (for example, transportation, set-up, 
patient education, and servicing) of all Part B therapies and items 
when defining the grossly excessive payment amounts.
    Response: We agree with the commenter. The regulations require that 
when using wholesale costs, the cost of services necessary to furnish a 
product will be taken into account in making an inherent reasonableness 
determination. However, we believe that for other types of comparison, 
for example, using a retail price, that price generally includes the 
service component. Should the retail price not include recognition of a 
service component, the service component will, of course, be considered 
in making an inherent reasonableness determination.

    Comment: Three commenters urged CMS to revise its definition of 
grossly excessive or grossly deficient to provide sufficient notice 
about the specific payment allowances that would be subject to the 
inherent reasonableness authority. The commenters believed that

[[Page 73628]]

the 15-percent threshold should be based on objective criteria that 
would measure market reality rather than basing it on a nonexclusive 
list of factors. The commenters recommended that CMS revise the 
definition of grossly excessive or grossly deficient to state that a 
Medicare payment amount for a category of items or services will be 
considered grossly excessive or deficient ``only if the average amount 
paid by all non-Medicare payers for the same category of items or 
services is at least 15 percent greater or less than such Medicare 
amount.''
    Response: We do not believe it is necessary to revise our 
definition of grossly excessive or grossly deficient to provide notice 
about the specific payment allowances. The statute applies inherent 
reasonableness to Part B items and services other than physicians' 
services as defined and paid for under section 1848 of the Act. 
However, we decided not to apply this rule to services paid under a 
prospective payment system such as hospital outpatient services or home 
health services. As previously stated, no item or service is subject to 
a change in payment under the inherent reasonableness authority until 
the proposed change is published by either CMS in the Federal Register 
or its carriers in their own publications after public comments are 
received in response to the proposed notice and are considered. In 
addition, we believe that our definition is appropriate and does 
include an objective criterion, that is, 15 percent.

    Comment: Three commenters suggested that the definition of grossly 
excessive or grossly deficient clearly indicate that all available data 
sources will be evaluated before we make an inherent reasonableness 
determination and that a single non-Medicare payor's payment amounts 
for an item would not be used to establish a Medicare payment amount 
using inherent reasonableness authority. The commenters indicated that 
the wide variation among the various sources available for price data 
warrants the evaluation of all sources before making any inherent 
reasonableness determination.
    Response: We do not believe that it is necessary to modify our 
definition of grossly excessive and grossly deficient as the commenters 
suggested. Section 1842(b)(8) of the Act provides that comparing 
Medicare payments made by other purchasers is an appropriate way to 
determine whether or not Medicare payment amounts are reasonable. 
Section 405.502(g)(4) of the regulations was added in response to a GAO 
recommendation to ensure the use of valid and reliable data in making 
an inherent reasonableness determination. Under this regulation, CMS 
and its carriers must meet 11 criteria, to the extent they are 
applicable, in determining whether a payment amount is grossly 
excessive or deficient. For these reasons, the use of prices from a 
single payor would not be used to determine Medicare's payment amounts.

    Comment: Three commenters stated that the definition of grossly 
excessive or grossly deficient must ensure that Medicare's policy of 
affording beneficiaries choices among a wide selection of services, 
products, and brands is retained.
    Response: We do not believe that using the inherent reasonableness 
authority will limit beneficiaries' choices of Medicare items and 
services because the purpose of the authority is to ensure that 
Medicare makes payments that are realistic and equitable, and better 
reflect market prices. If a payment amount is adjusted upward because 
it is deficient, it will benefit suppliers and beneficiaries. A more 
generous payment amount may result in greater availability of items and 
services to Medicare beneficiaries. If the payment amount is adjusted 
downward, the lower payment amount should not necessarily result in a 
lack of availability of items and services because the revised payment 
amount would be realistic and equitable. We believe that a realistic 
and equitable payment amount would ensure continued availability of 
items and services. Thus, we believe that the application of an 
adjustment will merely serve as a vehicle for eliminating excessive 
profits. An adjustment would benefit the Medicare program by reducing 
costs and benefit beneficiaries by reducing coinsurance payments. 
Moreover, we will monitor all complaints from beneficiaries, suppliers, 
providers, and others regarding patient access to items and services 
for which payment amounts may be adjusted using the inherent 
reasonableness process.

    Comment: One commenter believed it was inappropriate to set the 
threshold at 15 percent to define a grossly excessive or deficient 
payment amount for certain orthotics and prosthetics. The commenter 
stated that these items are highly customized, vary in complexity based 
on the patient, are priced differently by manufacturers based on 
various factors, and require extensive labor and skill to manufacturer 
them. The commenter suggested that CMS increase the threshold from 15 
percent to 20 percent for orthotics and prosthetics.
    Response: While the statute does not define what constitutes a 
grossly excessive or deficient payment amount, it nevertheless places 
significant importance on a 15-percent criterion. For this reason, we 
believe that it is appropriate to adopt and apply a 15-percent 
criterion consistently to all Medicare Part B items and services, 
including orthotics and prosthetics.

    Comment: Fifteen commenters were concerned that applying the 
definition of grossly excessive to payment amounts for Medicare Part B 
chemotherapy drugs administered in physicians' offices will greatly 
impede beneficiaries' access to care, force physicians to abandon their 
oncology practices, and completely undermine the efficacy of cancer 
care in this country.
    Response: We are aware that oncologists and cancer patients 
continue to raise concerns about access to chemotherapy. Effective 
January 1, 2004, section 303 of Public Law 108-173 established a new 
pricing methodology for drugs and biologicals that are not paid on a 
cost or prospective payment system basis. It also increased the 
physician fee schedule amounts for chemotherapy drug administration 
services. In addition, for 2005 CMS initiated a demonstration in which 
providers were reimbursed for measuring and providing data on patient 
outcomes in three areas of concern often cited by patients undergoing 
chemotherapy: Controlling pain, minimizing nausea and vomiting, and 
reducing fatigue. Following extensive discussions with various groups 
representing the interests of oncologists and advocates for patient 
care, we decided to retain the demonstration project for 2006, but we 
will revise the codes for reporting in order to take a further step 
toward encouraging quality care and promoting best clinical practices 
that should lead to improved patient outcomes. We will eliminate the CY 
2005 codes specific to the assessment of patient symptoms, while 
maintaining our focus on quality cancer care, including the management 
of debilitating symptoms, to assure the best possible quality of life 
for cancer patients. At this time, we do not have evidence to suggest 
that access problems have occurred as a result of the payment policy 
changes enacted by Public Law 108-173. Office-based chemotherapy care 
appears to be continuing at historical levels. We will continue to 
monitor patient access closely.

[[Page 73629]]

    As we stated previously, we have decided not to subject Part B 
drugs paid under a prospective payment system such as the hospital 
outpatient prospective payment system to the inherent reasonableness 
provisions. In addition, because of the recent legislative changes in 
payment for Part B covered drugs, including chemotherapy drugs, we do 
not anticipate an immediate need to apply the inherent reasonableness 
authority to Part B drugs, but we are retaining our authority for these 
drugs in the future should the need arise.

B. Use of Valid and Reliable Data

    In the December 2002 interim final rule, we revised the regulation 
to include a new section that provided a methodology taken from the GAO 
report to ensure the use of valid and reliable data in making an 
inherent reasonableness determination (Sec.  405.502(g)(4)). Because 
the GAO found that the carriers did not use consistent methods to 
collect and analyze pricing data and did not develop written guidelines 
for data collection and analysis, in the December 13, 2002 interim 
final rule, we included in the regulations at Sec.  405.502(g)(4) the 
following 11 steps to be completed:
     Developing written guidelines for data collection and 
analysis.
     Ensuring consistency in any survey to collect and analyze 
pricing data.
     Developing a consistent set of survey questions to use 
when requesting retail prices.
     Ensuring that sampled prices fully represent the range of 
prices nationally.
     Considering the geographic distribution of Medicare 
beneficiaries.
     Considering relative prices in the various localities to 
ensure that an appropriate mix of areas with high, medium, and low 
consumer prices was included.
     Considering criteria to define populous State, less 
populous State, urban area, and rural area.
     Considering a consistent approach in selecting retail 
outlets within selected cities.
     Considering whether the distribution of sampled prices 
from localities surveyed is fully representative of the distribution of 
the U.S. population.
     Considering the products generally used by beneficiaries 
and collecting prices of these products.
     When using wholesale costs, considering the cost of the 
services necessary to furnish a product to beneficiaries.
    In addition, based on the GAO concerns about the carriers' price 
survey, the durable medical equipment regional carriers (DMERCs) did 
not finalize their September 1998 proposed adjustments because the 
methodology used by the carriers' for making the proposed adjustments 
did not reflect our revised regulatory criteria, based on 
recommendations by GAO, for making inherent reasonableness 
determinations. Likewise, we did not finalize the CMS inherent 
reasonableness proposals that were published in August 1999 because the 
methodology used for making the proposed adjustments also did not 
reflect the revised criteria recommended by GAO and adopted in the 
December 13, 2002 interim final rule.
    We indicated that, in some instances, it may be appropriate to use 
cost rather than retail or wholesale prices in determining whether a 
payment amount is grossly excessive or deficient. In those instances in 
which we use cost data, we consider all costs of the supplier, that is, 
both direct and indirect costs, as well as any service component costs.
    As mentioned previously, section 223(b) of the BBRA required that, 
in publishing a final regulation on inherent reasonableness, the 
Secretary take appropriate steps to ensure the use of valid and 
reliable data when exercising inherent reasonableness authority. The 11 
criteria specified above in the December 13, 2002 interim final rule 
define the steps we will take to ensure the use of valid and reliable 
data. We specifically solicited public comments on these criteria. The 
comments we received and our responses appear below.

    Comment: One commenter, representing family physicians, family 
practice residents, and medical students, supported CMS' data 
collection methods for obtaining valid and reliable data for making 
inherent reasonableness determinations. However, another commenter 
believed that implementation of the inherent reasonableness regulation 
should be delayed until further research data are produced that depict 
the full range of socioeconomic and medical effects of payment 
adjustments. The commenter believed that a full research study that 
includes the results of these effects would have a better outcome on 
CMS' implemented decisions for reimbursement of oncology services.
    Response: We appreciate the commenter's support. In response to the 
suggestion that we delay implementation of the inherent reasonableness 
authority until research study results are available that assess the 
impact of payment adjustments made using the inherent reasonableness 
process on payment for oncology services, we do not believe that such a 
delay is warranted and would be beneficial. As previously mentioned, 
because of the recent legislative changes under Public Law 108-173 in 
payment for Part B drugs not subject to a prospective payment system, 
we do not now anticipate needing to apply the inherent reasonableness 
authority to these drugs, although we are retaining this authority 
should the need arise. Public Law 108-173 also increased the physician 
fee schedule amounts for chemotherapy drug administration services.

    Comment: Some commenters commended CMS for implementing the GAO 
recommendations. Other commenters suggested that CMS withdraw the 
inherent reasonableness rule until CMS sets forth valid and reliable 
data to assess reasonableness in the establishment of Medicare payment 
amounts. One commenter believed that the provision of Sec.  
405.502(g)(2)(i) that grants CMS or its carriers the authority to 
identify a ``price markup'' in the absence of verifiable data does not 
coincide with the GAO intent and contradicts the GAO recommendation 
that CMS'' decisions should be based on valid and reliable data.
    Response: The regulations themselves do not make an inherent 
reasonableness determination, nor do they contain data upon which such 
a determination would be based. Rather, the regulations provide a 
methodology to ensure the use of valid and reliable data in making an 
inherent reasonableness determination. With regard to the use of the 
valid and reliable data criteria, these criteria were adopted in their 
entirety from the GAO report and, thus, properly reflect the GAO's 
intent and recommendations.

    Comment: Several commenters stated that the regulation text 
containing the guidelines for data collection concerning retail and 
wholesale pricing surveys is vague; the text lacks specific criteria 
(for example, parameters for data collection and analysis) that link 
the data collection to the determination of the payment adjustments. 
The commenters believed that the criterion set forth for the data 
sample will not appropriately depict a ``valid and reliable'' data set. 
Two commenters pointed out that, although the inherent reasonableness 
rule clearly identifies geographic distribution in its data analysis, 
CMS failed to identify and define the measurable criteria for 
consideration of the involved geographic areas. The commenters 
suggested that CMS consider another survey methodology that includes

[[Page 73630]]

clearer and statistically sound techniques for collecting the data.
    Response: We believe that Sec.  405.502(g)(4) of the regulations 
appropriately sets forth the steps that we will take to ensure the use 
of valid and reliable data when exercising inherent reasonableness 
authority. We believe that it is impractical to adopt in regulations 
the level of specificity for data suggested by the commenters because 
the inherent reasonableness authority is applied to a wide array of 
Medicare Part B items and services and under an array of different 
marketing conditions.

    Comment: Several commenters stated that drug ``acquisition cost'' 
is not the true estimated measurement for the inflation of chemotherapy 
drug cost. The commenters believed that there are additional factors 
that CMS should take into account, such as facility overhead, 
procurement, and production cost. One commenter recommended that CMS 
use data that reflect technological advances. The commenter pointed out 
that as its company discovers new technological advances for cancer 
treatment, it alters the total cost of a drug therapy and that under 
the current policy CMS would not be able to capture these most current 
data set that would correlate with drug therapy technological advances 
and the most current drug therapy costs.
    Response: As previously stated in section II.A. of this final rule, 
we have decided not to subject Part B drugs paid under a prospective 
payment system such as the hospital outpatient prospective payment 
system to the inherent reasonableness provisions. In addition, because 
of the recent legislative changes under Public Law 108-173 in payment 
for Part B drugs not subject to a prospective payment system, we do not 
now anticipate needing to apply the inherent reasonableness authority 
to these drugs, although we are retaining our authority should the need 
arise.
    We recognize that there are costs associated with procuring drugs 
beyond the actual ingredient cost such as shipping. In the event that 
the inherent reasonableness authority were applied to Part B drugs, we 
would consider these costs to the extent that they are not already 
reimbursed through our drug administration payments.

    Comment: Several commenters stated that major differences exist 
between the various health care payment programs and the Medicare 
program and suggested that CMS assure that the proposed use of payment 
data from the Veterans Administration (VA), the Medicaid program, and 
volume discounted programs in making inherent reasonableness 
determinations does not result in unreliable, flawed data.
    The commenters believed that the VA payment data are not valid or 
reliable for inherent reasonableness determinations under Medicare 
because the VA payment system requires VA to act as a provider and a 
distributor, while the Medicare payment system provides payments to 
individual providers and suppliers for the provision of services. 
Therefore, the commenter believed that the VA pricing is not an 
appropriate comparison for data analysis to determine payment for drug 
rates. One commenter stated that the Medicaid payment system has fixed 
rates and percentages for certain States and that these prearranged 
payment amounts would cause the data set to be skewed for purposes of 
inherent reasonableness determinations. The commenters disagreed with 
CMS' decision to include small businesses with small purchases in the 
data set for volume discounts with large businesses with large purchase 
volumes without CMS considering the difference in volume purchase 
commitments. The commenters believed that this is just one of the many 
fundamental differences between the VA and Medicare that would result 
in drastic differences in the cost of items and services. One commenter 
submitted data that compared the prices of motorized wheelchairs for 
Medicare Part B claims to the same products purchased by the VA and the 
results of its research study which, the commenter believed, prove that 
the CMS methodology is unreliable.
    Several commenters suggested that, because the purchasers' 
administrative costs are atypical of Medicare claims, CMS should either 
use the volume discounted data for specific categories or use the 
pricing data for analyses after carefully examining the data for 
validity and eliminating invalid data.
    Response: While the statute generally does not give CMS the 
authority to negotiate volume discounts with suppliers, it also does 
not permit CMS to subsidize the discounts that suppliers grant to other 
purchasers. CMS' charge is to calculate a fair and equitable payment 
amount, not to underwrite suppliers' profitability. Medicare is the 
largest volume purchaser for many medical items and services. As a 
payer, Medicare expenditures represent 17.6 percent of total national 
health expenditures by all payers. Expenditures for Part B, excluding 
physicians' services, are approximately $60 billion per year. Although 
Medicare does not give specific volume guarantees to suppliers and does 
not ask for volume discounts, there is a predictable volume of Medicare 
business, and suppliers have the opportunity to profit from this. To 
suggest that Medicare's payment be higher than other purchasers' 
payment in light of the large Medicare volume is unwarranted. 
Logically, it does not follow that a large purchaser such as Medicare 
should be expected to pay more than other smaller purchasers.

    Comment: Several commenters who supported the 11 criteria that CMS 
or its contractors will use to make grossly excessive and grossly 
deficient inherent reasonableness determinations suggested that 
``median retail pricing data'' should also be a part of the evaluating 
criteria; and that CMS define ``retail'' as the term relates to the 11 
criteria. The commenters recommended that CMS consider the frequency by 
which patients utilize various products. The commenters pointed out 
that products used more frequently are generally lower in price than 
products that are not used frequently and further added that the use of 
the reduced retail prices of products used by most beneficiaries would 
not conform to the valid and reliable data criterion. The commenters 
also suggested that CMS expand the survey to include products used by 
non-Medicare patients in an effort to eliminate a biased data set.
    Response: We do not believe that median pricing data must be used 
to ensure that data are valid and reliable. The selection of a median 
may be used as a measure of the reasonableness of a price and, if it 
were used, would be discussed in further detail in the public notice 
when CMS or its carriers elect to make an inherent reasonableness 
determination. ``Retail'' has the standard dictionary meaning, and we 
see no reason to further define it in regulation. With regard to the 
rates at which products are consumed, regulations already provide that 
we consider the rate at which the product is generally used by 
beneficiaries.
    Further, products used less frequently are also considered in the 
regulations, which provide that prices must represent the range of 
prices nationally and that prices must consider an appropriate mix of 
prices. In order to make like comparisons, we do not believe we should 
compare products used by Medicare beneficiaries to the types of 
products used by non-Medicare patients.

    Comment: One commenter opposed CMS' and its contractors' use of 
research data from outside of the United States

[[Page 73631]]

because of the difference in pricing systems.
    Response: At the present time, we do not anticipate using data from 
outside the United States but, if we do, we would take into account 
legitimate pricing differences.

    Comment: One commenter recommended that CMS provide and make 
available, possibly on the Internet, the full research study that 
entails the criteria, surveys, and resulting data utilized by CMS and 
its contractors in making inherent reasonableness determinations.
    Response: The regulations provide great specificity regarding the 
criteria and data that are to be used in making inherent reasonableness 
determinations and great specificity regarding public notice of such 
determinations. It is our intention to publish all data used in making 
determinations in any proposed notice. In the future, we also 
anticipate publishing data on the Internet.

C. Other Provisions Addressed in the December 13, 2002 Interim Final 
Rule

    In the December 13, 2002 interim final rule, we addressed the 
public comments that we had received on the January 7, 1998 interim 
final rule. In response to comments on the January 7, 1998 interim 
final rule, we made the following other changes in the December 13, 
2002 interim final rule:
     We clarified the difference between a national 
determination and a carrier determination (Sec.  405.502(g)(1)(iii)). 
We also revised Sec.  405.502(g)(3) to provide further clarification on 
the terms we use to distinguish between inherent reasonableness 
activities conducted by CMS and inherent reasonableness activities 
conducted by the carriers.
     We included an example of new technology that exists and 
is not reflected in the existing payment allowance (Sec.  
405.502(g)(2)(vii)(H)).
     We clarified language to provide suppliers the opportunity 
to comment on a carrier's proposed inherent reasonableness payment 
allowances as well as the factors a carrier considered; and added a 
requirement that a carrier notify us in writing of any final limits it 
proposes to establish (Sec.  405.502(g)(3)(ii)).
     We added language to provide that, when payment 
adjustments of more than 15 percent are spread out over multiple years, 
subsequent adjustments will be reviewed for their appropriateness 
(Sec.  405.502(g)(5)). As recommended in the GAO report, when 
adjustments of more than 15 percent are spread out over multiple years, 
we will review market prices in the years subsequent to the year that 
the initial 15-percent reduction is effective. The purpose of this 
review is to ensure that further reductions continue to be appropriate.
     We revised Sec.  405.502(g)(3)(ii) to clarify the 
procedures and the sequence of steps a carrier will follow in making an 
inherent reasonableness determination.
    In this Federal Register document, we are finalizing, with minor 
editorial changes, the above revisions that were included in the 
December 13, 2002 interim final rule.

D. Other Issues Addressed in the Public Comments Received

    Some of the timely correspondence received in response to the 
December 13, 2002 interim final rule included public comments on issues 
other than the two provisions on which we particularly invited 
additional public comments. These included comments on application of 
inherent reasonableness authority to ambulance services paid on a fee 
schedule basis; application of inherent reasonableness authority to 
oncology drugs administered in physicians' offices; use of current 
profit margins from oncology drugs administered in physicians' offices 
to subsidize certain oncology services; impact of inherent 
reasonableness policy on community oncologists; impact of inherent 
reasonableness policy on cancer patients' access to care; use of 
acquisition cost as a factor in determining inherently unreasonable 
oncology drug costs; application of inherent reasonableness policy to 
nonpass-through drugs and biologicals paid under the hospital 
outpatient prospective payment system; use of a comprehensive rather 
than isolated approach to implementing inherent reasonableness policy 
changes for oncology drugs administered in physicians' offices; 
consideration of a Congressionally-driven balanced solution for 
implementing inherent reasonableness policy changes; seeking the advice 
of key industry associations prior to implementing inherent 
reasonableness policy changes for oncology drugs administered in 
physicians' offices; and reaction to the quality of analysis included 
in the GAO report. Because these comments pertain to issues on which we 
had previously received and considered public comment, we consider them 
outside the scope of the solicitation of public comments on the interim 
final rule. Therefore, we are not addressing them in this final rule. 
We will consider them in development of future policy changes. We also 
refer the readers to the related public comments we addressed in the 
December 13, 2002 interim final rule.

E. Adoption of December 13, 2002 Interim Final Rule as Final

    After analysis of the public comments received, we have determined 
that no further changes, other than minor editorial and drafting 
changes, are necessary to the regulations under Sec.  405.502(g) and 
(h) relating to inherent reasonableness determinations. These changes 
are editorial in nature or involve coding and language changes to 
conform to established CFR drafting rules. The provisions of the 
December 13, 2002 interim final rule are finalized, effective 60 days 
after the publication date of this document in the Federal Register.

III. Collection of Information Requirements

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

IV. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.

A. Executive Order 12866

    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This regulation has no immediate economic effect on current Medicare 
payments. However, it establishes a process that could be used in the 
future to set reasonable and equitable payment amounts. Because this 
rule does not include any actual inherent reasonableness 
determinations, it has no immediate impact on Medicare payment amounts. 
However, we believe that the

[[Page 73632]]

future application of the inherent reasonableness authority has the 
potential to have significant impact on Medicare payment amounts. 
Therefore, this final rule is considered to be economically significant 
and is a major rule. We base our belief on the June 2002 OIG report 
that indicated that Medicare may be overpaying between $130 million and 
$958 million per year for 16 items of medical equipment. In addition, 
the GAO indicated that Medicare may be overpaying for medical equipment 
by more than 20 percent. However, these reports were not done to the 
specifications we are finalizing in this rule and, therefore, they may 
not be an accurate estimate of the specific dollar impact that could 
result from the future application of inherent reasonableness under 
these requirements. Because we recognize the potential for future 
payment adjustments, either upward or downward, when CMS makes 
adjustments we will publish in the Federal Register regulatory impact 
statements that will comply with Executive Order 12866 and the 
Regulatory Flexibility Act whenever the dollar impact of inherent 
reasonableness determinations exceed $100 million in any 1 year.
    At this time, we lack sufficient data to conduct a quantitative 
analysis of the impact of this rule. We lack such data because, until 
we are able to conduct an inherent reasonableness study using the 
published criteria, we are unable to determine whether Medicare is 
overpaying or underpaying for items or services and to what degree. We 
do not know if, or when, or for which services, we would make payment 
adjustments, or the percentage adjustment we would make, or even the 
particular industry that would be affected. In addition, we do not know 
if these adjustments would increase or decrease Medicare payment 
amounts. As a result, we cannot anticipate the specific dollar effect 
or impact on suppliers and beneficiaries.

B. Regulatory Flexibility Analysis

    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities either by nonprofit status or by having revenues of $6 million 
to $29 million or less in any 1 year (see 65 FR 69432 for details). For 
purposes of the RFA, all suppliers of Medicare Part B services are 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity. Because this final rule 
does not include any actual inherent reasonableness determinations, it 
will not have an impact on small businesses. However, it finalizes the 
establishment of a process that could be used in the future to 
establish reasonable and equitable payment amounts.
    We do not expect suppliers of Part B services to be immediately 
affected by this rule because the rule will have no immediate impact on 
Medicare payment amounts. However, we do believe that use of inherent 
reasonableness has the potential to significantly impact small 
businesses in the future. This belief is based on a June 2002 OIG 
report cited earlier which indicated that Medicare may be overpaying 
between $130 million and $958 million per year for 16 items of medical 
equipment. In addition, the GAO indicated that Medicare may be 
overpaying for medical equipment by more than 20 percent. However, we 
are still unable to predict the specific dollar impact on the future 
application of inherent reasonableness. Because we recognize the 
potential for future payment adjustments, either upward or downward, 
when CMS makes adjustments, we will publish in the Federal Register 
impact statements that will comply with Executive Order 12866 and the 
Regulatory Flexibility Act whenever the dollar impact of inherent 
reasonableness determinations exceed $100 million in any 1 year, or 
when the adjustments will have a significant impact on a substantial 
number of small entities.
    We do not have sufficient data to predict exactly the nature of the 
future impact of this rule or the magnitude of the impact. Below, we 
discuss likely outcomes. Should the provisions of these regulations be 
applied, the resultant payment amounts will no longer be grossly 
excessive or deficient. If a payment amount is adjusted upward because 
it is deficient, it will benefit suppliers and beneficiaries. A more 
generous payment amount may result in greater availability of items and 
services to Medicare beneficiaries. If the payment amount is adjusted 
downward, a lower payment amount should not necessarily result in a 
lack of availability of items and services because the revised payment 
amount would be realistic and equitable and would better reflect market 
prices for the given item or service. We believe that a realistic and 
equitable payment amount would ensure continued availability of items 
and services. This adjustment would benefit the Medicare program by 
reducing costs, thereby protecting the Medicare Trust Fund, and benefit 
beneficiaries by reducing coinsurance payments. In addition, this 
regulation only specifies the criteria and methodology for determining 
when payment for a service or item is inherently unreasonable and does 
not result in any adjustments.
    If CMS initiates an inherent reasonableness determination that 
results in payment adjustments in excess of $100 million in any 1 year, 
we will publish in the Federal Register an analysis in compliance with 
Executive Order 12866. If the CMS adjustment will have a significant 
impact on a substantial number of small entities, we will also conduct 
an analysis in accordance with the Regulatory Flexibility Act. In cases 
where one or more of our carriers undertake an adjustment using this 
inherent reasonableness authority that either has an impact of $100 
million or more in any 1 year or has a significant effect on a 
substantial number of small entities, the carrier(s) will notify 
providers of the planned adjustment and the analysis on which it is 
based. In this way, affected parties would be able to comment on the 
planned adjustment.

C. Impact on Rural Areas

    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 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 of a Metropolitan 
Statistical Area and has fewer than 100 beds. We are not preparing a 
rural impact analysis because we have determined that this final rule 
will not have a significant economic impact on the operation of a 
substantial number of small rural hospitals.

D. Unfunded Mandates

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal government, in the aggregate, or by the private sector 
of $110 million. This final rule does not mandate expenditures by 
State, local, or tribal governments, or by the private sector. 
Therefore, the requirements of section 202 do not apply.

E. Executive Order 13132

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes a proposed

[[Page 73633]]

rule (and subsequent final rule) that imposes substantial direct 
requirement costs on State and local governments, preempts State law, 
or otherwise has Federalism implications. Because this regulation does 
not impose any costs on State or local governments, the requirements of 
Executive Order 13132 are not applicable.

F. Executive Order 12866

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

List of Subjects in 42 CFR Part 405

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements, Rural areas, X-rays.


0
For the reasons set forth in the preamble, 42 CFR chapter IV, part 405 
is amended as follows:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

Subpart E--Criteria for Determining Reasonable Charges

0
1. The authority citation for part 405, subpart E, continues to read as 
follows:

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


0
2. Section 405.502 is amended by revising paragraphs (g) and (h) to 
read as follows:


Sec.  405.502  Criteria for determining reasonable charges.

* * * * *
    (g) Determination of payment amounts in special circumstances.--(1) 
General.
    (i) For purposes of this paragraph (g), a ``category of items or 
services'' may consist of a single item or service or any number of 
items or services.
    (ii) CMS or a carrier may determine that the standard rules for 
calculating payment amounts set forth in this subpart for a category of 
items or services identified in section 1861(s) of the Act (other than 
physicians' services paid under section 1848 of the Act and those items 
and services for which payment is made under a prospective payment 
system, such as outpatient hospital services or home health services) 
will result in grossly deficient or excessive amounts. A payment amount 
will not be considered grossly excessive or deficient if it is 
determined that an overall payment adjustment of less than 15 percent 
is necessary to produce a realistic and equitable payment amount. For 
CMS-initiated adjustments, CMS will publish in the Federal Register an 
analysis of payment adjustments that exceed $100 million per year in 
compliance with Executive Order 12866. If CMS makes adjustments that 
have a significant effect on a substantial number of small entities, it 
will publish an analysis in compliance with the Regulatory Flexibility 
Act.
    (iii) If CMS or the carrier determines that the standard rules for 
calculating payment amounts for a category of items or services will 
result in grossly deficient or excessive amounts, CMS, or the carrier, 
may establish special payment limits that are realistic and equitable 
for a category of items or services. If CMS makes a determination, it 
is considered a national determination. A carrier determination is one 
made by a carrier or intermediary or groups of carriers or 
intermediaries even if the determination applies to payment in all 
States.
    (iv) The limit on the payment amount is either an upper limit to 
correct a grossly excessive payment amount or a lower limit to correct 
a grossly deficient payment amount.
    (v) The limit is either a specific dollar amount or is based on a 
special method to be used in determining the payment amount.
    (vi) Except as provided in paragraph (h) of this section, a payment 
limit for a given year may not vary by more than 15 percent from the 
payment amount established for the preceding year.
    (vii) Examples of excessive or deficient payment amounts. Examples 
of the factors that may result in grossly deficient or excessive 
payment amounts include, but are not limited to, the following:
    (A) The marketplace is not competitive. This includes circumstances 
in which the marketplace for a category of items or services is not 
truly competitive because a limited number of suppliers furnish the 
item or service.
    (B) Medicare and Medicaid are the sole or primary sources of 
payment for a category of items or services.
    (C) The payment amounts for a category of items or services do not 
reflect changing technology, increased facility with that technology, 
or changes in acquisition, production, or supplier costs.
    (D) The payment amounts for a category of items or services in a 
particular locality are grossly higher or lower than payment amounts in 
other comparable localities for the category of items or services, 
taking into account the relative costs of furnishing the category of 
items or services in the different localities.
    (E) Payment amounts for a category of items or services are grossly 
higher or lower than acquisition or production costs for the category 
of items or services.
    (F) There have been increases in payment amounts for a category of 
items or services that cannot be explained by inflation or technology.
    (G) The payment amounts for a category of items or services are 
grossly higher or lower than the payments made for the same category of 
items or services by other purchasers in the same locality.
    (H) A new technology exists which is not reflected in the existing 
payment allowances.
    (2) Establishing a limit. In establishing a payment limit for a 
category of items or services, CMS or a carrier considers the available 
information that is relevant to the category of items or services and 
establishes a payment amount that is realistic and equitable. The 
factors CMS or a carrier considers in establishing a specific dollar 
amount or special payment method for a category of items or services 
may include, but are not limited to, the following:
    (i) Price markup. Price markup is the relationship between the 
retail and wholesale prices or manufacturer's costs of a category of 
items or services. If information on a particular category of items or 
services is not available, CMS or a carrier may consider the price 
markup on a similar category of items or services and information on 
general industry pricing trends.
    (ii) Differences in charges. CMS or a carrier may consider the 
differences in charges for a category of items or services made to non-
Medicare and Medicare patients or to institutions and other large 
volume purchasers.
    (iii) Costs. CMS or a carrier may consider resources (for example, 
overhead, time, acquisition costs, production costs, and complexity) 
required to produce a category of items or services.
    (iv) Use. CMS or a carrier may impute a reasonable rate of use for 
a category of items or services and consider unit costs based on 
efficient use.
    (v) Payment amounts in other localities. CMS or a carrier may 
consider payment amounts for a category of items or services furnished 
in another locality.
    (3) Notification of limits.--(i) National limits. CMS publishes in 
the Federal Register proposed and final notices announcing a special 
payment limit described in paragraph (g) of this section before it 
adopts the limit. The notices set forth the criteria and

[[Page 73634]]

circumstances, if any, under which a carrier may grant an exception to 
a payment limit for a category of items or services.
    (ii) Carrier-level limits. (A) A carrier proposing to establish a 
special payment limit for a category of items or services must inform 
the affected suppliers and Medicaid agencies of the proposed payment 
amounts and the factors it considered in proposing the particular 
limit, as described in paragraphs (g)(1) through (g)(4) of this section 
and must solicit comments. The notice must also consider the following:
    (1) The effects on the Medicare program, including costs, savings, 
assignment rates, beneficiary liability, and quality of care.
    (2) What entities would be affected, such as classes of providers 
or suppliers and beneficiaries.
    (3) How significantly would these entities be affected.
    (4) How would the adjustment affect beneficiary access to items or 
services.
    (B) Before publication of a final notice, the carrier must--
    (1) Evaluate the comments it receives on the proposed notice.
    (2) Notify CMS in writing of any final limits it plans to 
establish. CMS will acknowledge in writing to the carrier that it 
received the carrier's notification.
    (3) After receipt of CMS' acknowledgement, inform the affected 
suppliers and State Medicaid agencies of any final limits it 
establishes.
    (C) The effective date for a final payment limit may apply to 
services furnished at least 60 days after the date that the carrier 
notifies affected suppliers and State Medicaid agencies of the final 
limit.
    (4) Use of valid and reliable data. In determining whether a 
payment amount is grossly excessive or deficient and in establishing an 
appropriate payment amount, valid and reliable data are used. To ensure 
the use of valid and reliable data, CMS or the carrier must meet the 
following criteria to the extent applicable:
    (i) Develop written guidelines for data collection and analysis.
    (ii) Ensure consistency in any survey to collect and analyze 
pricing data.
    (iii) Develop a consistent set of survey questions to use when 
requesting retail prices.
    (iv) Ensure that sampled prices fully represent the range of prices 
nationally.
    (v) Consider the geographic distribution of Medicare beneficiaries.
    (vi) Consider relative prices in the various localities to ensure 
that an appropriate mix of areas with high, medium, and low consumer 
prices was included.
    (vii) Consider criteria to define populous State, less populous 
State, urban area, and rural area.
    (viii) Consider a consistent approach in selecting retail outlets 
within selected cities.
    (ix) Consider whether the distribution of sampled prices from 
localities surveyed is fully representative of the distribution of the 
U.S. population.
    (x) Consider the products generally used by beneficiaries and 
collect prices of these products.
    (xi) When using wholesale costs, consider the cost of the services 
necessary to furnish a product to beneficiaries.
    (5) Review of market prices. If CMS or a carrier makes a payment 
adjustment of more than 15 percent under this paragraph (g), CMS or the 
carrier will review market prices in the years subsequent to the year 
that the initial reduction is effective in order to ensure that further 
reductions continue to be appropriate.
    (h) Special payment limit adjustments greater than 15 percent of 
the payment amount. In addition to applying the general rules under 
paragraphs (g)(1) through (g)(5) of this section, CMS applies the 
following rules in establishing a payment adjustment greater than 15 
percent of the payment amount for a category of items or services 
within a year:
    (1) Potential impact of special limit. CMS considers the potential 
impact on quality, access, beneficiary liability, assignment rates, and 
participation of suppliers.
    (2) Supplier consultation. Before making a determination that a 
payment amount for a category of items or services is not inherently 
reasonable by reason of its grossly excessive or deficient amount, CMS 
consults with representatives of the supplier industry likely to be 
affected by the change in the payment amount.
    (3) Publication of national limits. If CMS determines under this 
paragraph (h) to establish a special payment limit for a category of 
items or services, it publishes in the Federal Register the proposed 
and final notices of a special payment limit before it adopts the 
limit. The notices set forth the criteria and circumstances, if any, 
under which a carrier may grant an exception to the limit for the 
category of items or services.
    (i) Proposed notice. The proposed notice--
    (A) Explains the factors and data that CMS considered in 
determining that the payment amount for a category of items or services 
is grossly excessive or deficient;
    (B) Specifies the proposed payment amount or methodology to be 
established for a category of items or services;
    (C) Explains the factors and data that CMS considered in 
determining the payment amount or methodology, including the economic 
justification for a uniform fee or payment limit if it is proposed;
    (D) Explains the potential impacts of a limit on a category of 
items or services as described in paragraph (h)(1) of this section; and
    (E) Allows no less than 60 days for public comment on the proposed 
payment limit for the category of items or services.
    (ii) Final notice. The final notice--
    (A) Explains the factors and data that CMS considered, including 
the economic justification for any uniform fee or payment limit 
established; and
    (B) Responds to the public comments.
* * * * *

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

    Dated: June 13, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: December 1, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-24020 Filed 12-12-05; 8:45 am]
BILLING CODE 4120-01-P