[Federal Register Volume 72, Number 101 (Friday, May 25, 2007)]
[Proposed Rules]
[Pages 29403-29423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2577]



  Federal Register / Vol. 72, No. 101 / Friday, May 25, 2007 / Proposed 
Rules  

[[Page 29403]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 423

[CMS-4130-P]
RIN 0938-A074


Medicare Program; Policy and Technical Changes to the Medicare 
Prescription Drug Benefit

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would both codify prior clarifications of 
our policies associated with the Medicare Prescription Drug Benefit 
(also known as Medicare Part D) and propose certain clarifications of 
these policies. These clarifications include the following: Codifying 
our expectations of Part D sponsors regarding providing adequate access 
to home infusion pharmacies for infused covered Part D drugs and 
proposing standards with respect to timeliness of delivery of drugs; 
codifying our guidance that certain supplies associated with the 
inhalation of insulin are included in the definition of Part D drug; 
refining our definition of what may be included in the drug costs Part 
D sponsors use as the basis for calculating beneficiary cost sharing, 
reporting drug costs to CMS for the purposes of reinsurance 
reconciliation and risk sharing, as well submitting bids to CMS; 
reiterating our previous guidance explaining how we interpret the 
statutory exclusion from the definition of a Part D drug for any drug 
when used for the treatment of sexual or erectile dysfunction, unless 
that drug was used for an FDA-approved purpose other than sexual or 
erectile dysfunction; and codifying our guidance on plan-to-plan 
reconciliation and reconciliation to a payer other than the Part D of 
record. In addition, we are correcting the regulations to ensure that 
they reflect the appropriate subsidy for partial subsidy individuals 
subject to a late enrollment penalty. We also propose changes to the 
retiree drug subsidy regulations, including permitting non-calendar 
year plans to choose between the current year's or the subsequent 
year's Part D cost limits in certain circumstances and codifying our 
previous guidance on aggregating plan options for purposes of meeting 
the net test for actuarial equivalence.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on July 24, 2007.

ADDRESSES: In commenting, please refer to file code CMS-4130-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-4130-P, 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 express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-4130-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHS 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: For overall questions about this 
proposed rule, please contact Alissa DeBoy, (410) 786-6041. For other 
detailed questions on clarifications and/or proposed changes herein, 
please contact the following individuals for the applicable subpart.

Subpart B--James Slade, (410) 786-1073.
Subpart C--Vanessa Duran, (410) 786-8697 or Gregory Dill, (312) 353-
1754.
Subparts F and G--Deondra Moseley, (410) 786-4577 or Meghan Elrington, 
(410) 786 8675.
Subpart I--James Slade, (410) 786-1073.
Subpart J--Deborah Larwood, (410) 786-9500 or Vanessa Duran, (410) 786-
8697.
Subpart K--Mark Smith, (410) 786-8015.
Subpart P--Deondra Moseley, (410) 786-4577 or Christine Hinds, (410) 
786-4578.
Subpart R--Adam Shaw, (410) 786-1091.
Subpart S--Christine Hinds, (410) 786-4578.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-4130-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also 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.

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I. Background

    The Medicare Prescription Drug Benefit (also known as Part D) is a 
voluntary prescription drug benefit program enacted into law on 
December 8, 2003 in section 101 of title I of the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-
173). In the January 28, 2005 Federal Register (70 FR 4194), we 
published a final rule implementing the provisions of Part D, and these 
provisions became effective March 22, 2005.
    Since publication of the January 28, 2005 final rule, we have 
issued several clarifications or interpretations of the final rule by 
way of interpretive guidance documents. In addition, we have issued 
guidance explaining how we will interpret a change to the Social 
Security Act (``Act'') that excludes drugs used in the treatment of 
erectile dysfunction from Part D, with a certain exception. In order to 
ensure public awareness of our policies, as well as to avoid potential 
confusion regarding them, in this preamble, we explain many of the 
respective clarifications or interpretations. Relatedly, we are 
proposing to codify some of these clarifications in regulation through 
this proposed rule, as well as making certain technical corrections to 
the January 28, 2005 final rule.
    In addition, due to our experience to date in implementing Part D, 
we are proposing several new clarifications of our policy for Part D 
plans, to be implemented in contract year 2009, on which we 
specifically invite public comment.

II. Provisions of the Proposed Rule

A. Subpart B--Eligibility and Enrollment

1. Approval of Marketing Materials and Enrollment Forms (Sec.  423.50)
    In the preamble of the January 28, 2005 final rule, we discussed 
the approval of marketing materials and enrollment forms, to correspond 
with the regulations text at Sec.  423.50. (70 FR 4223) In our response 
to public comments, we stated that it was ``appropriate to allow 
providers and pharmacies to market to beneficiaries.'' (emphasis 
added). (70 FR 4223) When we used the term ``market'' in the final 
rule, we used the term ``market'' in a more general sense, to mean 
assisting in enrollment or education directed at beneficiaries.
    Subsequent to our publication of the final rule, we issued the 
Medicare Marketing Guidelines (``The Guidelines''). (See Centers for 
Medicare & Medicaid Services, Medicare Marketing Guidelines for: 
Medicare Advantage Plans (MAs); Medicare Advantage Prescription Drug 
Plans (MA-PDs); Prescription Drug Plans (PDPs); 1876 Cost Plans http://www.cms.hhs.gov/PrescriptionDrugCovContra/Downloads/FinalMarketingGuidelines.pdf (last updated July 25, 2006).) The 
Guidelines contain a specific definition of the term, ``marketing.'' 
The Guidelines define ``marketing'' as ``[s]teering, or attempting to 
steer, an undecided potential enrollee towards a plan, or limited 
number of plans, and for which the individual or entity performing 
marketing activities expects compensation directly or indirectly from 
the plan for such marketing activities.'' (The Guidelines, page 8.) 
This definition further clarifies that neither ``[a]ssisting in 
enrollment'' nor ``education'' constitute ``marketing.'' (The 
Guidelines, page 8.) The Guidelines require Part D plan sponsors to 
ensure that their contracted providers agree to refrain from 
``marketing'' to beneficiaries, as that term is defined by The 
Guidelines (that is, steering or attempting to steer an undecided 
beneficiary toward a plan based on the provider's financial interest). 
Thus, our intent in the preamble was to acknowledge that providers and 
pharmacies are free to engage in either ``assisting in enrollment'' or 
``education'' (as those terms are defined on page 6 of The Guidelines), 
including provider promotional activities as permitted under The 
Guidelines. We believe that the context of our discussion in the 
preamble demonstrates that we were discussing providers and pharmacies 
assisting in beneficiary enrollment, based on the beneficiary's needs, 
and education. This is consistent with The Guidelines, which encourage 
providers to assist beneficiaries in objective assessments of the 
beneficiaries' needs and potential plan options that may meet those 
needs. Given that the Guidelines' definition of ``market'' was not 
issued until after publication of the final rule, we wish to emphasize 
our consistent policy: providers and pharmacies that are contracted 
with plan sponsors may not ``market'' to beneficiaries, as the term is 
defined in The Guidelines. However, providers and pharmacies may assist 
in enrollment, including participating in provider promotion activities 
within the parameters established in The Guidelines, and educate 
beneficiaries. We clarify this policy here in this proposed rule so as 
to avoid any confusion arising from our inaccurate use of the term 
``market'' in our discussion of the approval of marketing materials and 
enrollment forms in the January 28, 2005 final rule.
    Section 423.50(f)(1)(v) states that in conducting marketing 
activities, a Part D plan may not ``[u]se providers, provider groups, 
or pharmacies to distribute printed information comparing the benefits 
of different Part D plans unless the providers, provider groups or 
pharmacies accept and display materials from all Part D plan 
sponsors.'' (70 FR 4532) One might infer from this language that when a 
Part D plan uses providers, provider groups, or pharmacies to 
distribute printed information comparing the benefits of different Part 
D plans, that the providers, provider groups, or pharmacies must not 
only accept and display printed information comparing the benefits of 
the Part D plans with whom they contract, but that they also must 
accept and display printed information comparing the benefits of 
different Part D plans with whom they do not contract. This 
interpretation would likely lead to beneficiary confusion because if a 
provider were required, per its contract with Part D plan sponsors, to 
display materials for plans with which the provider does not contract, 
beneficiaries, who may want to continue using the applicable provider 
because the provider has a history with the beneficiary, may mistakenly 
believe that he or she may continue to use the applicable non-
contracted provider and receive the maximum amount of benefit. Even 
though we are requiring that plan sponsors only require their 
contracted providers to accept and display comparative materials from 
plans with which the provider contracts, the Guidelines require that 
providers in a health care setting inform prospective enrollees where 
they can obtain information on the full range of plan options, 
including referring beneficiaries to 1-800-MEDICARE, http://www.medicare.gov, State Health Insurance Assistance Programs. (The 
Guidelines, page 124.) We clarify here that a Part D plan can use 
providers, provider groups, or pharmacies to distribute printed 
information comparing the benefits of different Part D plans, so long 
as the providers, provider groups, or pharmacies accept and display 
printed information comparing the benefits of different Part D plans 
with whom they contract; the providers, provider groups, or pharmacies 
are not obliged to accept and display any comparative information 
regarding those Part D plans with whom they do not contract. This

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clarification applies to comparative marketing materials and is in 
accord with The Guidelines. (The Guidelines, page 125.) We are 
codifying the policy in regulation by revising Sec.  423.50(f)(1) to 
indicate a Part D plan may use providers, provider groups and 
pharmacies to distribute printed information comparing the benefits of 
different plans, so long as the providers, provider groups or 
pharmacies accept and display materials from all Part D plan sponsors 
with which the providers, provider groups or pharmacies contract.
2. Procedures To Determine and Document Creditable Status of 
Prescription Drug Coverage (Sec.  423.56)
    In the regulation text of the January 28, 2005 final rule, we have 
identified a typographical error in Sec.  423.56(b)(6). As published, 
Sec.  423.56(b)(6) directs the reader to reference Sec.  423.205 for a 
definition of the term ``Medicare supplemental policy''. (70 FR 4532) 
However, the proper reference for the definition of the term ``Medicare 
supplemental policy'' is Sec.  403.205. Therefore, we are revising the 
regulation text accordingly to state the correct reference; that is, 
Sec.  403.205.

B. Subpart C--Benefits and Beneficiary Protections

1. Definitions
a. Part D Drug
(1) Erectile Dysfunction
    In the preamble of the January 28, 2005 final rule (70 FR 4228 et 
seq.), we addressed the regulatory definition of the term ``Part D 
drug'' in Sec.  423.100. (70 FR 4534) We stated that in accordance with 
section 1860D-2(e)(2) of the Act, the definition of a Part D drug would 
specifically exclude drugs or classes of drugs, or their medical uses, 
which may be excluded from coverage or otherwise restricted under 
Medicaid under section 1927(d)(2) of the Act, with the exception of 
smoking cessation agents. On October 26, 2005, section 1860D-2(e)(2)(A) 
of the Act was amended to exclude from the statutory definition of a 
Part D drug ``a drug when used for the treatment of sexual or erectile 
dysfunction, unless such drug were used to treat a condition, other 
than sexual or erectile dysfunction, for which the drug has been 
approved by the Food and Drug Administration.'' Consequently, beginning 
January 1, 2007, erectile dysfunction (ED) drugs will not be classified 
as Part D drugs under Sec.  423.100 when they are used for the 
treatment of sexual or erectile dysfunction, unless they are used to 
treat a condition, other than sexual or erectile dysfunction, for which 
the drug has been approved by the FDA. We note here that ED drugs will 
also not meet the definition of a Part D drug for off-label uses that 
by definition are not approved by the FDA. This includes non-FDA-
approved uses contained in one of the compendia listed in section 
1927(g)(1)(B)(i) of the Act: American Hospital Formulary Service Drug 
Information, United States Pharmacopeia-Drug Information (or its 
successor publications), and the DRUGDEX Information System.
    This ED exclusion is cited in 1927(d)(2)(K), and because our 
definition of a Part D drug in Sec.  423.100(2)(ii) excludes drugs 
which may be excluded under section 1927(d)(2) of the Act, no 
regulation text change is required. Similar to other excluded drugs 
contained in section 1927(d)(2) of the Act, those plans that wish to 
continue coverage of ED drugs may do so as a supplemental benefit 
through enhanced alternative coverage, consistent with existing policy. 
To ensure adequate notice of this new ED exclusion, we issued a 
question and answer (Q&A) notice to plans throughout our Healthcare 
Plan Management System (HPMS) on July 10, 2006 (Q&A 7682 http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=F*VR*Ygi). We believe that this Q&A, coupled with a considerable 
amount of media attention on the topic, has provided the industry a 
significant amount of notice regarding the implementation of this ED 
exclusion. Our provider and beneficiary outreach programs are also 
including the new ED exclusion in their broader education program to 
ensure all groups are prepared for the implementation of the ED 
exclusion on January 1, 2007.
(2) Morbid Obesity
    Section 423.100 defines the term ``Part D drug'' and excludes from 
that definition ``[d]rugs or classes of drugs, or their medical uses, 
which may be excluded from coverage or otherwise restricted under 
Medicaid under sections 1927(d)(2) or (d)(3) of the Act, except for 
smoking cessation agents.'' (70 FR 4534) In the corresponding preamble 
of the January 28, 2005 final rule, we explained that this list of 
excluded drugs included agents when used for anorexia, weight loss, or 
weight gain and agents when used for cosmetic purposes or hair growth. 
(70 FR 4228) However, in the preamble we erroneously asserted that to 
the extent that a drug was dispensed for a ``medically accepted 
indication'' (70 FR 4230) as described in section 1860D-2(e)(1) of the 
Act, weight loss agents could be covered for the treatment of morbid 
obesity. Therefore, we clarify here that agents, when used for 
anorexia, weight loss, or weight gain, are specifically excluded from 
the definition of Part D drugs. Thus, a weight loss agent, even when 
not used for cosmetic purposes, is still ``an agent used for anorexia, 
weight loss, or weight gain,'' for purposes of the exclusion from the 
definition of Part D drug. Similar to other excluded drugs contained in 
section 1927(d)(2) of the Act, those plans that wish to continue 
coverage of weight loss agents may do so as a supplemental benefit 
through enhanced alternative coverage, consistent with existing policy.
    Since publication of the January 28, 2005 final rule, we have 
received requests for clarification about our preamble language 
regarding drugs used to treat morbid obesity. We clarified our policy 
in Q&A guidance to Part D plans released in Spring 2005. (Q&A 5279 
http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=7KFqaChi.) There, we stated that weight loss agents 
prescribed for the treatment of morbid obesity are not Part D drugs 
covered under 1860D-2(e)(2) of the Act, because even though they are 
not used for other excluded purposes such as cosmetic or hair growth, 
they nevertheless remain agents for anorexia, weight loss, or weight 
gain that are excluded from the definition of Part D drugs under 
section 1860D-2(e)(2) of the Act. We note that we are not expanding or 
changing current policy regarding the exclusion of agents used for 
weight loss from the definition of Part D drug. Rather, we are 
clarifying existing policy regarding the definition of a Part D drug 
that excludes agents used for weight loss, including in connection with 
morbid obesity.
(3) Insulin Inhalation Drugs and Supplies
    [If you choose to comment on issues in this section, please include 
the caption ``INSULIN INHALATION DRUGS AND SUPPLIES'' at the beginning 
of your comments.]
    With the passage of the MMA, Congress included within the 
definition of ``Part D drug'' found in section 1860D-2(e) of the Act 
``medical supplies associated with the injection of insulin (as defined 
in regulations of the Secretary)'' as Part D drugs. We believe that 
Congress' intent was to ensure that a beneficiary with diabetes had 
access to both the insulin and the supplies required to deliver insulin 
into the body. For example, in the conference report for the MMA, the 
conferees

[[Page 29406]]

specifically stated that: ``It is the intent of conferees that the 
definition of insulin, and medical supplies associated with the 
administration of insulin, as a covered prescription drug shall include 
medical supplies that the Secretary determines to be reasonable and 
necessary, such as insulin, insulin syringes, and insulin delivery 
devices that are not otherwise covered under the durable medical 
equipment benefit.'' (H.R. Conf. Rep. 108-391, 108th Cong., 1st Sess. 
at 442 (2003))
    Administration of insulin by injection, especially since it 
involves multiple injections daily, has fueled constant research into 
the delivery of insulin by another route. While there have been 
promising developments of an alternative delivery method over the past 
8 years, no other insulin delivery method had obtained FDA approval as 
of the time we were undertaking rulemaking to implement the Part D 
program. Thus, in the final rule, we interpreted the term ``medical 
supplies associated with the injection of insulin'' as comprising 
syringes, needles, alcohol swabs, gauze, and insulin delivery devices 
not otherwise covered by Part B, such as insulin pens, pen supplies, 
and needle-free syringes. In doing this, we provided greater detail to 
Part D sponsors on what exactly met the definition of a Part D drug, 
but, like Congress, we derived our definition based upon the only 
approved administration method available to diabetics at the time.
    On January 26, 2006, the FDA approved the first-ever inhaled 
insulin. This inhaled medication is a dry powder inhaler (``DPI'') that 
requires a patient to place a small amount of powdered insulin into a 
hand-held chamber that permits inhalation of the insulin into the 
lungs.
    Subsequent to the FDA approval, we began to receive questions 
regarding the reimbursement of this new product. For example, inquirers 
wanted to know whether the inhalation supplies associated with this new 
product would be included in the definition of a Part D drug, because 
while administration by inhalation offers the beneficiary an 
alternative method of receiving insulin for those appropriately 
qualified, the chamber and any associated accessories involved in 
inhalation are not specifically described in the definition of a Part D 
drug.
    Upon review of these issues, we concluded it was not Congress' 
intention to prevent access to this novel insulin delivery method, as 
doing so would deny millions of Medicare beneficiaries an alternative 
way to manage diabetes. Thus, we have determined that, consistent with 
Congressional intent, supplies associated with the inhalation of 
insulin meet the definition of a Part D drug. We propose to codify our 
existing guidance (Q&A 7940 http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=sXyWmkki) and revise the 
definition of Part D drug to include ``[s]upplies that are directly 
associated with delivering insulin into the body through inhalation, 
such as the inhalation chamber used to deliver the insulin.''
    While this new definition would make these insulin inhalation 
supplies eligible for reimbursement as a Part D drug, unless our 
formulary guidelines required otherwise, it would be the Part D 
sponsor's decision (through its Pharmacy and Therapeutics Committee) 
whether to place these products on the formulary. Additionally, we 
would expect sponsors to apply drug utilization management tools to 
ensure the appropriate use of these supplies.
    We note that our extension of insulin-related supplies extends only 
to those supplies that are directly associated with delivering the 
insulin into the body through inhalation, such as the inhalation 
chamber used to deliver the insulin. Where the relationship is more 
indirect, for example auxiliary supplies that might be used to hold the 
chamber, ease actuation or store the chamber, we would not consider 
such items to be an insulin delivery-related supply. We reiterate our 
statement in the final rule that our intention is to narrowly construe 
what constitutes these medical supplies in order to avoid an 
inappropriate expansion of the Part D benefit.
(4) Vaccine Administration Fee
    We also propose to amend the definition of Part D drug to include a 
reference to vaccine administration on or after January 1, 2008, to 
conform to Section 1860D-2(e)(1)(B) of the Act, which was recently 
amended by Section 202(b) of the Tax Relief and Health Care Act of 
2006. We intend to reflect the statutory change in the final rule.
b. Long-Term Care Facilities
    In the January 28, 2005 final rule, Sec.  423.100 defines the term 
``long term care facility'' as a ``skilled nursing facility as defined 
in section 1819(a) of the Act, or a medical institution or a nursing 
facility for which payment is made for an institutionalized individual 
under section 1902(q)(1)(B) of the Act.'' (70 FR 4534) However, in our 
corollary discussion of that term in the preamble, we inadvertently 
omitted institutions for mental disease (IMDs) from the list of 
facilities that meet the definition of a long term care (LTC) facility. 
(70 FR 4236)
    Since publication of the January 28, 2005 final rule, we have 
received numerous requests for clarification regarding the status of 
IMDs in terms of our definition of the term ``long term care 
facility''. Consequently, we have clarified, in Q&A guidance to Part D 
plans released on October 21, 2005 (http://www.cms.hhs.gov/PrescriptionDrugCovContra/Downloads/IMDICFPharmacyGuidance.pdf.), the 
status of IMDs. The definition of an LTC facility would include an IMD 
that is a nursing facility or other medical institution (which is a 
term defined at 42 CFR 4435.1009) and receives Medicaid payment for its 
services to an institutionalized individual under section 1902(q)(1)(B) 
of the Act. In other words, to the extent that a nursing facility or 
medical institution that is an IMD has as an inpatient any 
institutionalized individual (which means any full benefit dual 
eligible individual for whom payment is made for IMD services under 
Medicaid throughout a month, as provided in section 1902(q)(1)(B) of 
the Act), that IMD will fall within the definition of an LTC facility 
in Sec.  423.100. We are aware that there exists a statutory Federal 
financial participation exclusion under Medicaid affecting residents of 
IMDs between the ages of 22 and 64. However, the IMD exception to the 
definition of ``medical assistance'' under section 1902(q)(1)(B) of the 
Act does not apply to individuals who are age 65 and older. Thus, a 
State may elect to provide Medicaid coverage for services of an IMD to 
individuals over age 65. In these cases, all elderly full-benefit dual 
eligibles who are inpatients in an IMD for a full month are considered 
institutionalized individuals for that month. We note that we are not 
expanding or changing current policy regarding the definition of an LTC 
facility, but rather clarifying that IMDs are among the medical 
institutions that meet the definition of an LTC facility in Sec.  
423.100.
    We also clarify that as medical institutions, hospitals, (including 
long-term care hospitals) that receive payments under section 
1902(q)(1)(B) of the Act can meet the definition of an LTC facility. To 
the extent that inpatients in these hospitals exhaust their Part A 
inpatient days benefit, and payment is no longer available under Part A 
or Part B for drugs that would otherwise meet the definition of a Part 
D drug, such drugs are Part D drugs. Consequently, Part D sponsors must

[[Page 29407]]

ensure that they provide convenient access to network LTC pharmacies 
(which, in the case of a hospital, is typically the hospital's in-house 
pharmacy) for all of their enrollees who are inpatients in a hospital 
where the hospital is a ``medical institution'' under 1902(q)(1)(B) and 
therefore would meet the Part D definition of an LTC facility and whose 
Part A benefits have been exhausted.
c. Contracted Pharmacy Network
    Section 423.100 defines the ``contracted pharmacy network'' as 
``pharmacies, including retail, mail-order, and institutional 
pharmacies, under contract with a Part D sponsor to provide covered 
Part D drugs at negotiated prices to Part D enrollees.'' (70 FR 4533) 
There, we made a technical error by inadvertently omitting clarifying 
language indicating that a pharmacy in a contracted pharmacy network 
must be licensed. We view this change as necessary in order to bring it 
in line with our term ``retail pharmacy'' which requires that a retail 
pharmacy be ``licensed.'' (70 FR 4535) Further, we believe this is an 
important clarification to be made, given our commitment to safeguard 
beneficiaries' interests and health with respect to access to covered 
Part D drugs through network pharmacies, be they retail, home infusion, 
long-term care, I/T/U, or other types of pharmacies. Accordingly, we 
will revise the definition of ``contracted pharmacy network'' to state 
that a pharmacy participating in a contracted pharmacy network must be 
licensed.
d. Negotiated Prices
    [If you choose to comment on issues in this section, please include 
the caption ``NEGOTIATED PRICES'' at the beginning of your comments.]
    Under Sec.  423.104(d)(2)(i), beneficiary cost sharing under the 
initial coverage limit is equal to 25 percent of ``actual cost.'' (70 
FR 4535) In addition, in accordance with Sec.  423.104(g)(1), a Part D 
sponsor is required to provide beneficiaries with ``access to 
negotiated prices for covered Part D drugs * * * even if no benefits 
are payable to the beneficiary * * * because of the application of any 
deductible or 100 percent coinsurance requirement.'' (70 FR 4536) In 
other words, even if a beneficiary is paying 100 percent of his or her 
costs, the beneficiary must be charged the same negotiated prices at a 
network pharmacy that would otherwise be used for calculating cost 
sharing.
    Actual cost is defined in Sec.  423.100 as ``the negotiated price 
for a covered Part D drug when the drug is purchased at a network 
pharmacy, and the usual and customary price when a beneficiary 
purchases the drug at an out-of-network pharmacy consistent with Sec.  
423.124(a).'' (70 FR 4533.) In Sec.  423.100 ``negotiated prices'' 
means prices for covered Part D drugs that--
     Are available to beneficiaries at the point of sale at 
network pharmacies;
     Are reduced by those discounts, direct or indirect 
subsidies, rebates, other price concessions, and direct or indirect 
remunerations that the Part D sponsor has elected to pass through to 
Part D enrollees at the point of sale; and
     Includes any dispensing fees. (70 FR 4534.)
    On July 20, 2006, we issued guidance to Part D sponsors stating 
that, in order to minimize disruption to plan operations, for 2006 and 
2007, sponsors could, at their option, base beneficiary cost-sharing 
not on the price ultimately charged by the pharmacy for the drug, but 
on the price the sponsor paid a pharmacy benefit manager (PBM) or other 
intermediary for the drug. We also stated our intent to issue a 
proposed rule that would require a single approach for calculating 
beneficiary cost sharing, based upon the price ultimately received by 
the pharmacy.
    In order to resolve the confusion caused by the Prescription Drug 
Benefit final rule, we are now proposing to amend the definition of 
``negotiated prices'' to be effective for Part D contract year 2009 to 
require that beneficiary cost sharing must be based upon the price 
ultimately received by the pharmacy or other dispensing provider.
    Therefore, we are proposing to revise Sec.  423.100 so that the 
first part of the definition of ``negotiated prices'' would state that 
negotiated prices are prices that the Part D sponsor (or other 
intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount the network dispensing pharmacy or other network dispensing 
provider will receive, in total, for a particular drug. The term 
``intermediary contracting organization'' refers to organizations such 
as pharmacy benefit managers that contract with plan sponsors to 
negotiate pharmacy contracts on their behalf.
    We would also revise the definition of ``negotiated prices'' to 
include prices for covered Part D drugs negotiated between the Part D 
sponsor and other network dispensing providers. Part D sponsors can 
contract with providers other than a pharmacy to dispense covered Part 
D drugs, including them in their network. Therefore, we are amending 
the definition of negotiated prices to reflect the prices for covered 
Part D drugs that Part D sponsors negotiate with all of their network 
dispensing providers.
    In addition, although the definition of negotiated prices continues 
to state that these prices are reduced by discounts, rebates, and other 
direct and indirect remuneration that the Part D sponsor has elected to 
pass through to Part D enrollees at the point of sale, it is our 
understanding that in practice, Part D sponsors are unable to actually 
apply discounts, rebates, and other price concessions at the point of 
sale in order to reduce the price negotiated with the dispensing 
pharmacy or other dispensing provider. We recognize that negotiated 
prices would include only those price concessions actually passed 
through in order to result in a lower price to the beneficiary at the 
pharmacy (or other dispensing provider). To the extent no price 
concessions are passed through, of course, the negotiated prices would 
not be reduced.
2. Requirements Related to Qualified Prescription Drug Coverage (Sec.  
423.104)--Waiver of Reduction of Part D Cost-Sharing by Pharmacies
    In the January 28, 2005 final rule, we stated that we would allow 
waivers or reductions of cost-sharing by pharmacies to count as 
incurred costs. (70 FR 4240) Our statement, however, was limited only 
to pharmacies that are not also acting as other wrap-around coverage 
that generally would not count toward TrOOP. We did not intend to allow 
pharmacy waivers to count as incurred costs in cases where a pharmacy 
also met the definition of a group health plan, insurance or otherwise, 
or a third party payment arrangement, as those terms are defined in 
Sec.  423.100. As provided in the definition of incurred costs in Sec.  
423.100 (70 FR 4534), wraparound assistance with covered Part D drug 
costs by group health plans, insurance or otherwise, or a third party 
payment arrangement does not count as costs incurred toward a Part D 
enrollee's annual out-of-pocket threshold.
    In response to numerous requests for clarification of our policy 
with regard to waiver or reduction of Part D cost-sharing by network 
pharmacies, particularly by safety-net pharmacies, we have clarified, 
in question-and-answer guidance to Part D plans released on June 27, 
2005 (Q & A number 5115 http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi), that although we 
will generally allow waivers or reductions of Part D cost-sharing by 
pharmacies to count toward

[[Page 29408]]

as incurred costs, this will not be the case for pharmacies affiliated 
with entities whose wraparound coverage does not count as an incurred 
cost. This includes pharmacies operated by entities that are group 
health plans, insurance, government-funded health programs, or third 
party payment arrangements with an obligation to pay for covered Part D 
drugs. As a result, many safety-net providers (who, because they are 
fully or partially funded through government grants are considered 
government-funded health programs as defined in Sec.  423.100) will be 
unable to have any waiver or reduction of cost-sharing their pharmacies 
apply to Part D enrollees' Part D cost-sharing count as an incurred 
cost. This clarification does not represent a change or expansion to 
current policy given that, consistent with the section 1860D-2(b)(4)(C) 
of the Act, our regulations have made abundantly clear that cost-
sharing paid for or reimbursed by group health plans, insurance or 
otherwise, or other third party payment arrangements cannot be counted 
toward a Part D enrollee's incurred cost total.
3. Access to Covered Part D Drugs (Sec.  423.120)
a. Applicability of Some Nonretail Pharmacies to Standards for 
Convenient Access (Sec.  423.120(a)(2))
    In Sec.  423.120(a)(2), we made a technical error by inadvertently 
referring to ``rural health clinics'' as ``rural health centers.'' (70 
FR 4537) In fact, there is no such entity as a ``rural health center'' 
for purposes of the Medicare statute or regulations. Our intent was to 
reference facilities described in section 1861(aa)(2) of the Act, as 
demonstrated by our reference in Sec.  423.464(f)(1)(vii) to ``Rural 
health centers as defined under section 1861(aa)(2) of the Act.'' The 
correct terminology for those facilities is ``rural health clinics.'' 
Accordingly, we are revising the regulatory text to correctly reference 
these entities in Sec.  423.120(a)(2) by removing the phrase ``rural 
health centers'' and adding in its place ``rural health clinics.''
b. Adequate Access to Home Infusion Pharmacies (Sec.  423.120(a)(4))
    [If you choose to comment on issues in this section, please include 
the caption ``ADEQUATE ACCESS TO HOME INFUSION PHARMACIES'' at the 
beginning of your comments.]
    We are proposing to codify in regulation, at Sec.  423.120(a)(4) 
(70 FR 4537), guidance that we have already issued with regard to 
access to home infusion pharmacies by Part D sponsors. This 
codification would ensure that the regulations provide specificity to 
our requirement that Part D enrollees receive adequate access to Part 
D-covered home infusion therapy. In addition, we propose one change to 
the regulations, on which we invite comments. This modification would 
require that Part D sponsors provide covered home infusion drugs within 
24 hours of discharge from an acute setting.
    In the January 28, 2005 final rule, we used our authority under 
section 1860D-4(b)(1)(C) of the Act to require Part D plans to provide 
adequate access to home infusion pharmacies. Given coverage of home 
infusion drugs under Part D, we did not believe it was an option for 
Part D plans not to include at least some home infusion pharmacies in 
their networks in order to provide enrollees with meaningful access to 
those drugs. As we stated in the preamble to the final rule (70 FR 
4250), we were particularly concerned in regard to prescription drug 
plans which, unlike other Part D plans options, do not benefit from 
reduced medical costs associated with home infusion and may therefore 
have little incentive to contract with home infusion pharmacies. 
Therefore, we added a provision to our final regulations at Sec.  
423.120(a)(4) which requires Part D plans to demonstrate to us that 
they provide adequate access to home infusion pharmacies consistent 
with CMS operational guidance to Part D plans. In the preamble to our 
final rule, we also set forth our expectation that Part D plans would 
demonstrate adequate access based in part on the number of enrollees in 
their service areas and the geographic distribution and capacity of 
home infusion pharmacies in those service areas.
    As we have gained experience with the Part D program, the need to 
clarify our expectations with regard to the provision of Part D-covered 
home infusion drugs became necessary. To this end, we issued a 
clarification of our expectations regarding adequate access to home 
infusion pharmacies to Part D plans on March 10, 2006. (http://www.cms.hhs.gov/PrescriptionDrugCovContra/downloads/HomeInfusionReminder_03.10.06.pdf.) That policy memorandum clarified 
that, while we do not expect Part D plans to provide or pay for 
supplies, equipment, or the professional services needed for home 
infusion therapy, we do expect Part D sponsors' contracted pharmacy 
networks to deliver home infused drugs in a form that can be 
administered in a clinically appropriate fashion.
    In addition, we clarified that home infusion networks must have 
contracted pharmacies capable of providing infusible Part D drugs for 
both short term acute care (for example, IV antibiotics) and long term 
chronic care (for example, alpha1 protease inhibitor) 
therapies. While the same network pharmacy does not necessarily need to 
be capable of providing the full range of home infusion Part D drugs, 
the home infusion network, in the aggregate, must have a sufficient 
number of pharmacies capable of providing the full range of home 
infusion Part D drugs to ensure enrollees have adequate access to 
medically necessary home infusion therapies when needed.
    In addition, we clarified that Part D plans must require their 
contracted network pharmacies that deliver home infusion drugs to 
ensure that the necessary professional services and ancillary supplies 
required for home infusion therapy are in place before dispensing home 
infusion drugs. In addition, we believe that plans must require the 
delivery of home infusion drugs within a reasonable time period based 
on these assurances. We note that, generally, facility discharge 
planners, in collaboration with a patient's physician, are responsible 
for ensuring that the components needed to safely administer a drug at 
home are present upon a patient's discharge. However, we expect the 
Part D plan's in-network contracted pharmacy vendors--particularly 
those that do not supply the necessary ancillary services (which are 
not a Medicare Part D benefit)--to receive assurances that another 
entity, such as a home health entity, can arrange for the provision of 
these services. We further clarified that we consider the action of 
obtaining assurances a minimum quality assurance requirement on Part D 
plans under Sec.  423.153(c).
    With respect to the timely delivery of home infusion drugs under 
Part D, we invite comments on the specification of a reasonable 
timeframe for delivery. In our ongoing discussions with home infusion 
providers we have learned that best practices involve the availability 
of infusion services upon discharge from a hospital either by the next 
required dose or within twenty-four hours of the discharge. 
Consequently, we are proposing a requirement that Part D plan sponsors 
provide covered home infusion drugs within 24 hours of discharge from 
an acute setting. We note that home infusion therapy may serve as a 
vehicle to promote early hospital discharge. Given that the need for 
home infusion therapy is often of an urgent nature, we believe that 
delivery of home infusion drugs should occur within 24

[[Page 29409]]

hours, provided that all necessary assurances have been received by the 
Part D plan sponsor that all ancillary services and professional 
services have been arranged.
    Accordingly, in order to codify our previous guidance, we are 
proposing to revise Sec.  423.120(a)(4) to expressly require that a 
Part D plan's contracted pharmacy network provide adequate access to 
home infusion pharmacies through a contracted pharmacy network that, at 
a minimum: (1) Is capable of delivering home infused drugs in a form 
that can be administered in a clinically appropriate fashion; (2) is 
capable of providing infusible Part D drugs for both short-term acute 
care and long-term chronic care therapies; and (3) ensures that the 
professional services and ancillary supplies necessary for home 
infusion therapy are in place before dispensing home infusion drugs. In 
addition, we propose to add a new requirement that a Part D plan's 
contracted pharmacy network also provide delivery of home infusion 
drugs within 24 hours. These proposed changes would codify our existing 
operational policies and impose a new requirement that Part D plans 
provide adequate access to home infusion therapy through their 
contracted pharmacy networks within 24 hours.

C. Subpart F--Submission of Bids and Monthly Beneficiary Premiums: Plan 
Approval--Timing of Payments (Sec.  423.293(a))

    We are making a technical correction to Sec.  423.293(a) (70 FR 
4546) to reflect the statutory requirement that all the provisions of 
section 1854(d) of the Act apply in the same manner as they apply under 
Part C of Title XVIII of the Act. Section 1860D-13(c)(1) of the Act 
states that, with two exceptions not particularly relevant to this 
discussion, the provisions of ``section 1854(d) shall apply to PDP 
sponsors and premiums (and any late enrollment penalty) under this part 
in the same manner as they apply to MA organizations and beneficiary 
premiums under part C, except that any reference to a Trust Fund is 
deemed for this purpose a reference to the Medicare Prescription Drug 
Account.'' Section 1854(d)(1) of the Act requires an organization to 
permit the payment of both basic and supplemental premiums on a monthly 
basis. This concept is reflected in the Part C regulations at Sec.  
422.262(e). In accordance with the statutory mandate, we have already 
required plans to permit beneficiaries to pay their premiums on a 
monthly basis. We are now making a technical correction to Sec.  
423.293(a) to cite both Sec.  422.262(f) and Sec.  422.262(e). This 
change reflects both our current policy as well as the statutory 
requirement.

D. Subpart G--Payments to Part D Plan Sponsors for Qualified 
Prescription Drug Coverage

1. Definitions and Terminology (Sec.  423.308)
a. Administrative Costs (Sec.  423.308)
    [If you choose to comment on issues in this section, please include 
the caption ``ADMINISTRATIVE COSTS'' at the beginning of your 
comments.]
    The statute requires CMS to exclude administrative costs from the 
calculation of gross covered prescription drug costs and allowable risk 
corridor costs. However, administrative costs are not defined in either 
the statute or the January 28, 2005 final rule. Therefore, to explain 
this term and clarify which costs are included in administrative costs, 
we are adding a definition for the term ``administrative costs''. In 
the definition, we define ``administrative costs'' as the Part D 
sponsor's costs other than those incurred to purchase or reimburse the 
purchase of Part D drugs under the Part D plan. Included in the 
definition of administrative costs are costs incurred by Part D plans 
that exceed the price charged by a dispensing entity for covered Part D 
drugs. For example, the profit retained by a PBM that negotiates prices 
with pharmacies on behalf of a Part D sponsor is considered an 
administrative cost and not a drug cost.
    The policy refines our interpretation of the statutory and 
regulatory definitions of ``allowable reinsurance costs'' and 
``allowable risk corridor costs,'' which in both cases exclude any 
administrative costs of the sponsor. By statute, ``allowable 
reinsurance costs'' are a subset of ``gross covered prescription drug 
costs,'' and Congress specifically defined these gross costs as ``not 
including administrative costs.'' (See sections 1860D-15(b)(2) and 
1860D-15(b)(3) of the Act.) Similarly, Congress defined ``allowable 
risk corridor costs'' as ``not including administrative costs.'' (See 
section 1860D-15(e)(1)(B) of the Act.) In the January 28, 2005 final 
rule, we adopted these definitions. (70 FR 4547.) We interpret 
administrative costs to include any profit or loss incurred by an 
intermediary contracting organization (for example, a pharmacy benefit 
manager (PBM)) as a result of lock-in pricing. Therefore, this profit 
or loss must not be included in the reinsurance and risk corridor 
payments made by the government, as these payments exclude 
administrative fees. Thus, the Ingredient Cost, Dispensing Fee, Sales 
Tax, Gross Drug Cost below the Out of Pocket Threshold, and Gross Drug 
Cost above the Out of Pocket Threshold fields would need to reflect the 
final amount ultimately received by the pharmacy at the point of sale.
b. Gross Covered Prescription Drug Costs (Sec.  423.308)
    [If you choose to comment on issues in this section, please include 
the caption ``GROSS COVERED PRESCRIPTION DRUG COSTS'' at the beginning 
of your comments.]
    Part D sponsors are required to report drug costs to CMS for the 
purposes of reconciliation and risk sharing. We are required by statute 
to calculate reinsurance payments using ``allowable reinsurance 
costs,'' a subset of ``gross covered prescription drug costs,'' which 
Congress specifically defined as ``not including administrative 
costs.'' (See sections 1860D-15(b)(2) and 1860D-15(b)(3) of the Act). 
Risk sharing payments are calculated using ``allowable risk corridor 
costs,'' which are also defined as ``not including administrative 
costs.'' (See section 1860D-15(e)(1)(B)of the Act.)
    There have been several questions regarding the appropriate drug 
costs to report, particularly when a Part D sponsor has contracted with 
a PBM. The January 28, 2005 final rule defines ``gross covered 
prescription drug costs'' as ``those actually paid costs incurred under 
a Part D plan, excluding administrative costs * * * [equal to:] (1) All 
reimbursement paid by a Part D sponsor to a pharmacy (or other 
intermediary) * * * plus (2) All amounts paid under the Part D plan by 
or on behalf of an enrollee (such as the deductible, coinsurance, cost 
sharing, or amounts between the initial coverage limit and the out-of-
pocket threshold) in order to obtain drugs covered under the Part D 
plan.'' (70 FR 4547)
    The January 28, 2005 final rule definition of ``gross covered 
prescription drug costs'' specifically recognizes that reimbursement 
may be paid by a Part D sponsor ``to a pharmacy (or other 
intermediary).'' (70 FR 4547) Many interpreted the term 
``intermediary'' to mean PBM (rather than agent). Using this 
definition, many plan sponsors reported the prices they negotiated with 
their PBMs, rather than the prices that were agreed upon as the amount 
to be received by the pharmacies.
    We propose rectifying these conflicting definitions to require the 
plan sponsor to include the profit or loss retained or incurred by a 
PBM as part of lock-in pricing to be part of the administrative costs 
of the plan sponsor.

[[Page 29410]]

This would require the amount ultimately received by the pharmacy 
(minus any point-of-sale price concessions) to be used in calculating 
cost-sharing for plan years 2009 and beyond. Specifically, we propose 
amending the definition of ``gross covered prescription drug costs'' to 
eliminate the parenthetical ``or other intermediary'' to require that 
all plan sponsors report the amount ultimately received by the 
pharmacy, other dispensing provider, or agent (as opposed to the amount 
paid to an intermediary contracting organization that does not serve as 
an agent, such as a PBM). We propose that the amount ultimately 
received by the pharmacy or other dispensing provider (whether directly 
or indirectly) for the particular drug will be the basis for-- (1) 
calculating beneficiary cost sharing; (2) accumulating gross covered 
drug costs; (3) reporting drug costs on the Prescription Drug Event 
(PDE) records, and (4) developing bids submitted to CMS.
    Similarly, we propose clarifying our definition of ``allowable risk 
corridor costs'' so that it is clear that these costs are only based 
upon the amounts received directly by the pharmacy or other dispensing 
provider. This is because we would consider any profit (or loss) earned 
by a PBM or other entity negotiating contracts with pharmacies to 
constitute an administrative cost, and therefore would be exempt from 
the definition of allowable risk corridor costs, as well as gross 
covered prescription drug costs. Thus, for example, if a Part D sponsor 
pays a PBM a certain amount for a particular drug, and then the PBM 
negotiates a different price with the pharmacy, any differential 
retained or lost by the PBM would be considered administrative, and 
could not be reported as part of drug costs.
    We propose revising the definitions of ``gross covered prescription 
drug costs'' and ``allowable risk corridor costs'' to establish that 
the amount received by the dispensing pharmacy or other dispensing 
provider (whether directly or through an intermediary contracting 
organization) rather than just the amount paid by the Part D sponsor is 
the basis for drug cost that must be reported to CMS and used as the 
basis to calculate beneficiary cost sharing. Accordingly, we are 
revising Sec.  423.308 to incorporate these changes.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' and ``allowable risk corridor costs'' to 
ensure that when entities other than pharmacies dispense Part D drugs 
and receive payment for Part D drugs, these expenditures are also 
reflected in gross drug costs and allowable reinsurance costs, as well 
as allowable risk corridor costs. For instance, reimbursement for a 
vaccine that must be administered in a physician's office, payments 
made to other Part D plans due to reconciliation, and reimbursement 
made to a third party payer for COB error are all legitimate drug costs 
that have been incurred through the payments indicated. In some cases, 
a Part D plan, other than the plan in which the beneficiary is 
correctly enrolled, may pay for a prescription drug on the 
beneficiary's behalf (because of an erroneous belief that the 
beneficiary was actually enrolled in its plan). In these cases, when 
the enrollment error is corrected, the beneficiary's true plan 
generally will reconcile payments with the original payer. The drug 
costs paid by Part D plans (as well as by the beneficiary) under these 
reconciliation processes reflect drug costs incurred by the plan's 
enrollees that a payer other than the correct Part D plan of record 
paid as primary. As drug costs paid for Part D covered drugs under Part 
D plans, these costs are included in the calculations of reinsurance 
costs and risk corridor costs. Therefore, we have amended the 
definition of ``gross covered prescription drug costs'' and ``allowable 
risk corridor costs'' in Sec.  423.308 to include all these drug costs.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' to ensure that when a beneficiary is paying 
100 percent cost sharing (for example, in any applicable deductible or 
coverage gap) and the beneficiary obtains a covered Part D drug at a 
network pharmacy for a lower price than the plan's negotiated price, 
the beneficiary's out-of-pocket costs are counted toward both incurred 
costs (TrOOP) and total drug spending. This is consistent with guidance 
released via Q&A 7944 (issued May 9, 2006 http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi.) For 
example, if an enrollee in any applicable coverage gap or deductible 
phase of the Part D benefit is able to obtain a better cash price for a 
covered Part D drug at a network pharmacy than the plan offers via its 
negotiated price, and the enrollee takes advantage of the special cash 
price or discount being offered to all pharmacy customers or, 
alternatively, by using a discount card, the enrollee may purchase that 
covered Part D drug without using the Part D benefit or a supplemental 
card. If that purchase price is lower than the Part D plan's negotiated 
price, it will count toward TrOOP and total drug spend balances, 
provided the Part D plan finds out about the purchase. This means that 
the enrollee must take responsibility for submitting the appropriate 
documentation to the enrollee's Part D plan, consistent with plan-
established processes and instructions for submitting that information, 
in order to have that amount aggregated to the beneficiary's TrOOP and 
total drug spend balances.
    The applicability of beneficiary out-of-pocket expenditures made 
outside the Part D benefit to TrOOP and total drug spend also extends 
to any nominal copayments assessed by patient assistance programs 
(PAPs) that provide assistance with covered Part D drug costs to Part D 
enrollees outside the Part D benefit. Consistent with guidance provided 
via Q&A 7942 (http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi), operating outside the Part D 
benefit does not preclude a PAP sponsor from requiring its enrollees 
(including those enrolled in a Part D plan) from paying a nominal 
copayment when they fill a prescription for a covered Part D drug for 
which they provide assistance. We note that any copayments assessed by 
PAPs operating outside the Part D benefit should be nominal, since only 
nominal beneficiary cost-sharing is consistent with the concept of 
operating outside Part D. Moreover, given that copayments are typically 
assessed for purposes of minimizing drug overutilization, the 
assessment of anything but nominal cost-sharing by PAPs is seemingly 
inconsistent with the mission of a charitable organization structured 
to provide assistance with prescription drug costs to low-income 
patients.
    Although PAP payments made for covered Part D drugs outside the 
Part D benefit do not count toward enrollees' TrOOP or total drug spend 
balances, nominal PAP copayment amounts paid by affected Part D 
enrollees can be aggregated to their TrOOP and total drug spend 
balances, provided the enrollees submit the appropriate documentation 
to their plan consistent with plan-established processes and 
instructions for submitting the information. The definition of ``gross 
covered prescription drug costs'' has been revised to include these 
drug costs and to reflect this sub-regulatory guidance.
2. Payment Appeals (Sec.  423.350(b))
    In the January 28, 2005 final rule, we made a technical error in 
Sec.  423.350(b). (70 FR 4550) In this paragraph, we inadvertently used 
the phrase ``notice of

[[Page 29411]]

the adverse determination'' when we said that the request for 
reconsideration for a payment determination must be filed within 15 
days from the date of the notice of the adverse determination. The term 
``notice of the adverse determination'' is a term that was 
inadvertently copied here from a fee-for-service policy, and is not 
relevant here. We are revising the regulation text to instead cite to 
the notice of final payment for risk adjustment, reinsurance, low-
income cost sharing subsidies, or risk-sharing payments under 
Sec. Sec.  423.343(b), 423.343(c), 423.343(d) or 423.336, respectively.

E. Subpart I--Organization Compliance With State Law and Preemption by 
Federal Law--Waiver of Certain Requirements To Expand Choice (Sec.  
423.410)

    In accordance with section 1860D-12(c)(2)(B) of the Act, which 
describes the special waivers available for the 2006 and 2007 plan 
years, we are revising section 423.410(d) of the January 28, 2005 final 
rule (70 FR 4551). We believe that the statute requires only a 
substantially complete (rather than a fully complete) application to 
have been submitted to the applicable state in order for an applicant 
to be granted the special waiver for 2006 and 2007. Therefore, we are 
correcting the regulatory language to require that an applicant submit 
a substantially completed application to the state, in order for the 
applicant to be eligible for the Sec.  423.410(d) waiver.

F. Subpart J--Coordination of Part D Plans With Other Prescription Drug 
Coverage

1. Application of Part D Rules to Certain Part D Plans On and After 
January 1, 2006 (Sec.  423.458).
    Application of Part D Rules to Certain Part D Plans On and After 
January 1, 2006 (Sec.  423.458).
    We are revising the regulation text of Sec.  423.458(d)(2)(ii), 
because we inadvertently omitted a reference to section 1894 of the Act 
in describing the statutory authorization for the benefits offered by a 
Program for All Inclusive Care For the Elderly (PACE) organization (70 
FR 4552). Under Sec.  423.458(d)(2)(ii), a PACE organization may 
request a waiver of a Part D requirement if the waiver would improve 
the coordination of benefits between Part D and the benefits offered by 
the PACE organization. As provided in section 1860D-21(f)(1) of the 
Act, Part D provisions will apply to PACE organizations electing to 
offer qualified prescription drug coverage in a manner that is similar 
to the manner in which those provisions apply to an MA-PD local plan. 
In addition, section 1860D-21(f) provides that a PACE organization may 
be deemed to be an MA-PD local plan. Section 1860D-21(f) of the Act 
specifically refers to ``a PACE program under section 1894.'' As 
published in Sec.  423.458(d)(2)(ii), we reference only section 1934 of 
the Act when describing benefits provided by PACE organizations. In 
fact, PACE operates under both the Medicare and Medicaid statutes, and 
all descriptions of PACE benefits should refer to both sections 1894 
and 1934 of the Act. We are therefore revising Sec.  423.458(d)(2)(ii) 
so that it refers to benefits offered by a PACE organization under both 
sections 1894 and 1934 of the Act.
2. Coordination of Benefits With Rural Health Clinics (Sec.  423.464)
a. Coordination of Benefits With Rural Health Clinics
    In Sec.  423.464(f)(1)(vii), we made a technical error by 
inadvertently referring to rural health clinics as rural health centers 
(70 FR 4553). In fact, our intent was to reference facilities described 
in section 1861(aa)(2) of the Act, and the correct terminology for 
those facilities is rural health clinics. Accordingly, we are 
correcting the reference to these entities in Sec.  423.464(f)(1)(vii) 
by removing the phrase rural health centers and adding in its place 
rural health clinics.
b. Coordination of Benefits With Part D Plans and Other Payers
    [If you choose to comment on issues in this section, please include 
the caption ``COORDINATION OF BENEFITS WITH PART D PLANS AND OTHER 
PAYERS'' at the beginning of your comments.]
    We are codifying in Sec.  423.464(f) guidance we have already 
issued to Part D sponsors addressing coordination of benefits 
requirements in cases that involve another Part D plan that is not the 
correct Part D plan of record or another payer that has incorrectly 
paid as primary for a covered Part D drug for an enrolled beneficiary. 
These revisions to Sec.  423.464(f) reflect our historic policy that 
Part D plans must effectively coordinate benefits with other entities 
providing prescription drug coverage.
    In accordance with sections 1860D-24(a)(1) and (b) of the Act, 
Sec.  423.464(a) of the regulations extends the coordination of 
benefits requirements in section 1860D-23 of the Act applicable to Part 
D plans vis-[agrave]-vis State Pharmaceutical Assistance Programs 
(SPAPs) to other entities providing prescription drug coverage. As 
provided in Sec.  423.464(f)(1), these entities include Medicaid 
(including a plan operating under a waiver under section 1115 of the 
Act), group health plans, the Federal Employees Health Benefits Program 
(FEHBP), military coverage (including TRICARE), the Indian Health 
Service, Federally qualified health centers, rural health clinics, and 
other health benefit plans or programs that provide coverage or 
financial assistance for the purchase or provision of Part D drugs on 
behalf of Part D eligible individuals as CMS specifies. Consistent with 
section 1860D-23(a)(2) of the Act, Sec.  423.464(a) specifies that the 
elements to be coordinated with entities providing prescription drug 
coverage include enrollment file sharing, the processing of claims 
(including electronic processing), claims payment, claims 
reconciliation reports, application of incurred costs, and other 
administrative processes and requirements we specify.
    A number of issues associated with the implementation of Part D 
(including the presence of multiple payers, payer order, and 
retroactive eligibility) have created challenges for Part D plans in 
coordinating benefits with other entities providing prescription drug 
coverage. Since the publication of the January 28, 2005 Medicare 
Prescription Drug benefit final rule, we have developed, in cooperation 
with industry stakeholders, additional processes and requirements to 
address these challenges to Part D plan coordination of benefits.
    Because of program start-up issues in 2006, lags in the information 
available to pharmacies at the point-of-sale regarding which Part D 
plan to bill may have resulted in the pharmacies' having access to 
outdated or incomplete information. Because pharmacies generally relied 
in good faith on this information, in some cases the wrong payer paid 
for a prescription. Given the volume of drug claims that pharmacies 
would need to re-adjudicate as a result of incorrect Part D enrollment 
information available at the point-of-sale, re-adjudication would have 
imposed a significant administrative and financial burden on 
pharmacies. Therefore, payer-to-payer reconciliation procedures were 
developed by CMS and a workgroup of industry representatives, including 
industry trade groups, Part D plans, and pharmacies to mitigate the 
administrative and financial burden involved with re-adjudication of 
claims.
    This payer-to-payer process was designed initially to be a 
temporary measure during Part D's start-up phase. However, because many 
beneficiaries have the opportunity (through special election periods) 
to change their Part D

[[Page 29412]]

plan enrollment during the coverage year, there continues to be lag 
time associated with enrollment and information systems updates. 
Therefore, the Part D plan from which a beneficiary has transferred may 
make payment for covered prescription drug costs incurred after the 
effective date of the beneficiary's enrollment in the new Part D plan 
of record. As a result, while CMS continues to explore the plan-to-plan 
reconciliation and reimbursement procedures, we are requiring that 
plans continue to use the special prescription drug event submission 
and reimbursement processes established in 2006 as part of the plan-to-
plan reconciliation process. In this proposed rule, we are merely 
codifying the already-existing procedures. (It is important to note 
that an essential element of the plan-to-plan reconciliation process as 
designed precludes plan use of claim denials or edits in the transition 
period. That is, the process's design reflects the consensus of Part D 
plans that it is necessary to prevent disclosure of proprietary pricing 
information by masking the NDC coding.)
    In addition, unforeseeable future events may create further need 
for processes to reconcile payments when a payer other than the correct 
Part D plan of record pays as primary for a covered Part D drug for an 
enrolled beneficiary. These other reconciliation processes may be 
developed by CMS to accomplish payment reconciliation without involving 
pharmacy reversal and re-adjudication of claims or the public release 
of a payer's proprietary information, such as negotiated rates.
    Therefore we are proposing to clarify Sec.  423.464(f)(1) to state 
that included among the entities providing other prescription drug 
coverage with which Part D plans must coordinate are other Part D 
plans. Although Part D plans are already obligated to coordinate with 
group health plans, as provided in Sec.  423.464(f)(1)(ii), we believe 
this revision formalizes our implicit recognition of other Part D plans 
as other entities providing prescription drug coverage with which a 
beneficiary's correct Part D plan of record must coordinate.
    We also are clarifying Sec.  423.464(f) to clearly specify 
additional elements of Part D plans' coordination of benefits 
requirements in order to address the reconciliation issues detailed in 
the preceding discussion. Section 1860D-23(a)(2)(F) of the Act gives 
the Secretary the discretion to identify other administrative processes 
that may be included in the required elements for coordination of 
benefits by Part D plans. Consistent with this authority, we propose 
revising Sec.  423.464(f) to add a fifth paragraph that clarifies that 
Part D plans coordinate benefits with other Part D plans through the 
reconciliation process we have developed for 2006, which involves 
making payments to other Part D plans on the basis of the covered plan-
paid and low-income cost-sharing subsidy amounts reported to them by 
CMS with respect to transferred enrollees. Payments made by the Part D 
plans as part of this reconciliation process would be made without 
regard to the plan's formulary or drug utilization review edits.
    In addition, we propose modifying Sec.  423.464(f) by adding a 
sixth paragraph that would require Part D sponsors to coordinate 
benefits on a timely basis with other third parties and use CMS-
developed reconciliation processes, when established, in situations in 
which a payer other than the correct Part D plan of record pays for 
covered Part D drug costs as a primary payer. This was the case in 2006 
with respect to the State-to-Plan Reconciliation Project in which some 
States made drug payments for dual eligible beneficiaries and low-
income subsidy entitled beneficiaries enrolled in Part D and were 
subsequently reimbursed by CMS through a special demonstration 
authority. Processes similar to those employed in 2006 may need to be 
developed by CMS in lieu of requesting pharmacy claims reversals and 
re-adjudications or the public release of a payer's proprietary 
information (such as negotiated prices).
    The proposed changes described in this portion of this proposed 
rule would not change current coordination benefits policy. Rather, 
they would codify existing operational processes and reflect our 
historic policy that Part D plans must effectively coordinate benefits 
with entities providing other prescription drug coverage. We seek 
comment on our proposals regarding the plan-to-plan coordination 
process and CMS-developed reconciliation process.

G. Subpart K--Application Procedures and Contracts With Part D Plan 
Sponsors

1. General Provisions (Sec.  423.504)
a. Submission of Bids
    In Sec.  423.504, we inadvertently made reference to Sec.  
423.265(a)(1) rather than Sec.  423.265 (70 FR 4555). Section 
423.265(a) gives only the most narrow and rudimentary of information 
concerning the bidding process; that is, that an applicant may submit a 
bid to become a Part D plan sponsor. In fact, our intent was to cite in 
its entirety the much broader list found under Sec.  423.265 
(Submission of bids and related information) that provides 
comprehensive and essential information for a Part D Plan sponsor to 
successfully contract with CMS (70 FR 4544). Accordingly, we are 
correcting the reference found under Sec.  423.504(a) to cite all of 
Sec.  423.265.
2. Contract Provisions (Sec.  423.505)
    In Sec.  423.505(h)(1), we are correcting the citation for the 
False Claims Act, from 32 U.S.C. 3729 et seq., to 31 U.S.C. 3729 et seq 
(70 FR 4556).
3. Failure To Comply With the Dissemination of Information Requirements 
Grounds for Contract Termination (Sec.  423.509(a)(9))
    In Sec.  423.509(a)(9), we indicate that CMS may terminate a plan's 
contract if the plan substantially fails to comply with the Part D 
marketing requirements (70 FR 4559). This provision cites the marketing 
requirements at Sec.  423.128, which is an incorrect citation. Section 
423.128 deals with the dissemination of Part D plan information, not 
with plans' marketing requirements, per se. Therefore, we are revising 
the regulation text, consistent with our original intent, to reflect 
that a plan contract may be terminated if a plan sponsor substantially 
fails to comply with the marketing requirements in Sec.  423.50 or the 
dissemination of Part D plan information requirements in Sec.  423.128.

H. Subpart M--Grievances, Coverage Determinations, and Appeals

1. Definitions (Sec.  423.560)
a. Appointed Representative
    We are revising the regulation text of Sec.  423.560 by making a 
technical change to the definition of ``appointed representative.'' (70 
FR 4562) In the Medicare Prescription Drug Benefit final rule, we 
inadvertently omitted language indicating that an enrollee's appointed 
representative may request a grievance on the enrollee's behalf. 
Current policy as reflected in Chapter 18 of the Prescription Drug Plan 
Manual permits an enrollee's appointed representative to request a 
grievance, obtain a coverage determination, or deal with any of the 
levels of the appeals process on the enrollee's behalf. We are 
codifying this already existing policy by amending the regulation text. 
The definition for appointed representative will state: ``Appointed 
representative means an individual either appointed by an enrollee or 
authorized under State or other applicable law to act on behalf of the 
enrollee in filing a grievance, obtaining a coverage determination, or

[[Page 29413]]

in dealing with any of the levels of the appeals process. Unless 
otherwise stated in this subpart, the appointed representative has all 
of the rights and responsibilities of an enrollee in filing a 
grievance, obtaining a coverage determination, or in dealing with any 
of the levels of the appeals process, subject to the rules described in 
part 422, subpart M of this chapter.''
b. Projected Value
    In addition, we are making a technical change to the definition of 
``projected value'' in Sec.  423.560 because it is not consistent with 
the definition of projected value provided on page 4360 of the preamble 
and in the regulation text at Sec.  423.610(b). (70 FR 4568) The 
definition of ``projected value'' in Sec.  423.560 includes ``future 
charges that will be incurred within 12 months from the date the 
request for coverage determination or exception is received by the 
plan'' as part of the projected value formula. However, the projected 
value formulas on page 4360 of the preamble to the final rule and Sec.  
423.610(b) of the regulations include ``any costs the enrollee could 
incur based on the number of refills prescribed for the drug(s) in 
dispute during the plan year.'' Our policy regarding how to calculate 
projected value is consistent with the definition of projected value 
provided on page 4360 of the preamble to the final rule and in the 
regulation text at Sec.  423.610(b). Therefore, we are revising the 
definition of projected value in Sec.  423.560 to state: ``Projected 
value of a Part D drug or drugs includes any costs the enrollee could 
incur based on the number of refills prescribed for the drug(s) in 
dispute during the plan year. Projected value includes enrollee co-
payments, all expenditures incurred after an enrollee's expenditures 
exceed the initial coverage limit, and expenditures paid by other 
entities.''
2. Expediting Certain Coverage Determinations (Sec.  423.570)
    We are amending the regulation text of Sec.  423.570(d)(3) because 
we inadvertently omitted language indicating who is entitled to receive 
written notice of a plan sponsor's denial of a request to expedite a 
coverage determination. (70 FR 4564) Our policy requires a plan sponsor 
to send written notice to the enrollee when it denies a request to 
expedite a coverage determination. We believe the regulation text of 
Sec.  423.570(d)(3) must be revised to accurately reflect our policy. 
Accordingly, we propose to codify in the regulation text of Sec.  
423.570(d)(3) the requirement that when a Part D sponsor denies a 
request to expedite a coverage determination, it must ``subsequently 
deliver to the enrollee, within 3 calendar days, equivalent written 
notice.''
3. Expediting Certain Redeterminations (Sec.  423.584)
    We are revising the regulation text of Sec.  423.584(b) because we 
inadvertently omitted regulatory language regarding the procedures for 
filing and withdrawing a request for an expedited redetermination. (70 
FR 4566) Sections 423.582(b), (c), and (d) explain the process for 
filing and withdrawing a request for a standard redetermination. These 
procedures also apply to requests for expedited redeterminations. We 
are revising the regulation text of Sec.  423.584(b) to accurately 
reflect our policy that the provisions in Sec.  423.582(b), (c), and 
(d) would also apply to Sec.  423.584(b). We are revising Sec.  
423.584(b) by adding ``(3) The provisions set forth in Sec.  
423.582(b), (c), and (d) also apply to expedited redeterminations.''
4. Right to an ALJ Hearing (Sec.  423.610)
    We are revising the regulation text of Sec.  423.610(c)(2) due to 
typographical errors. (70 FR 4568) The three requirements listed under 
Sec.  423.610(c)(2) should have been numbered with (i), (ii), and 
(iii). We are revising Sec.  423.610(c)(2) to reflect appropriate 
numeration. It will now read as follows: ``Multiple enrollees. Two or 
more appeals may be aggregated by multiple enrollees to meet the amount 
in controversy for an ALJ hearing if--(1) the appeals have previously 
been reconsidered by an IRE; (2) the request for ALJ hearing lists all 
of the appeals to be aggregated and each aggregated appeal meets the 
filing requirement specified in Sec.  423.612(b); and (3) the ALJ 
determines that the appeals the enrollees seek to aggregate involve the 
same prescription drug.''

I. Subpart P--Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals

1. Premium Subsidy Amount (Sec.  423.780)
a. Low-Income Benchmark Premium Amount
    Section 1860D-14 of the Act requires CMS to subsidize the monthly 
beneficiary premium and cost-sharing amounts incurred under Part D by 
Part D eligible individuals with income and resources below certain 
thresholds. Our rules mirror the statute's structure, which divides 
low-income subsidy eligible individuals into two different groups, 
based on income and resources: (1) Full subsidy eligible individuals; 
and (2) other low-income subsidy eligible individuals. The different 
groups are entitled to different amounts of premium assistance and 
reductions in cost sharing.
    Since the Part D benefit has become operational, we have become 
aware that certain sections of part 423 subpart P need to be corrected 
to accurately reflect the statutory language. Specifically, there is an 
error in Sec.  423.780(b). (70 FR 4574) As written, this section states 
that the premium subsidy amount is based upon the lesser of the plan's 
premium or the low-income benchmark premium amount. The low-income 
benchmark premium amount, as defined in the statute at section 1860D-14 
of the Act, specifically describes how to calculate the low-income 
subsidy for regions with only one PDP sponsor. At section 1860D-
14(b)(2)(A)(i) of the Act, the statute indicates that ``* * * the term 
* * * `low-income benchmark premium amount' means, with respect to a 
PDP region in which all prescription drug plans are offered by the same 
PDP sponsor, the weighted average of the amounts described in 
subparagraph (B)(i) for such plans.'' However, while the final 
regulation described the low-income benchmark premium amount 
calculation for regions with multiple drug plan sponsors, it did not 
describe the methodology for determining the low-income benchmark 
premium amount in a region with any number of MA-PD plans, but with 
only one PDP sponsor (although the preamble to the final rule did). We 
are correcting this error to comport with the statute and our intent as 
outlined in the preamble by adding a new subparagraph (A) to Sec.  
423.780(b)(2)(i). The new text will make clear that when there is only 
one PDP sponsor in the region, the low income benchmark weighted 
average includes only the premiums of basic PDPs in the area. The 
weighted average does not count the premium amounts of PDP plans 
offering supplemental coverage or MA-PD plans. This is in contrast to 
the weighted average calculated when there are multiple PDP sponsors. 
In that situation, the benchmark calculation includes not just the 
premiums of basic PDPs; it also includes the portion of a premium 
attributable to basic coverage, when a PDP offers both basic and 
supplemental coverage. In addition, for multiple-PDP regions, the 
benchmark would also include the amount charged for Part D coverage by 
MA-PD plans. We note that in 2006, all PDP regions included multiple 
PDP sponsors.
    We also are revising Sec.  423.780(b)(2)(ii). We want to make

[[Page 29414]]

clear that in multiple-PDP sponsor regions, the MA-PDs included in the 
weighted average are coordinated care plans.
b. Premiums Subsidy for Late Enrollment Penalty
    We need to correct an omission related to the subsidy of the late 
enrollment penalty for other low-income subsidy individuals in the 
regulation text at Sec.  423.780(e). In this paragraph, we 
inadvertently omitted a provision from the statute at section 1860D-
14(a)(2)(A) of the Act, which requires a late enrollment penalty 
subsidy for other low-income subsidy eligible individuals. This subsidy 
is based on a linear sliding scale, with a higher subsidy available to 
individuals with incomes at or below 135 percent of the FPL (but who do 
not meet the asset requirements of a full subsidy eligible individual), 
and the lowest level subsidy available to individuals with incomes 
below 150 percent of the FPL. Specifically, section 1860D-14(a)(2)(A) 
of the Act reads, ``(2) OTHER INDIVIDUALS WITH INCOME BELOW 150 PERCENT 
OF POVERTY LINE.--In the case of a subsidy eligible individual who is 
not described in paragraph (1), the individual is entitled under this 
section to the following: (A) SLIDING SCALE PREMIUM SUBSIDY.--An 
income-related premium subsidy determined on a linear sliding scale 
ranging from 100 percent of the amount described in paragraph (1)(A) 
for individuals with incomes at or below 135 percent of such level to 0 
percent of such amount for individuals with incomes at 150 percent of 
such level.'' (emphasis added). The ``amount described in paragraph 
(1)(A)'' encompasses the subsidy for the late enrollment penalty.
    The current regulation does not include this sliding scale 
calculation. The regulation only cites the subsidy for the late 
enrollment penalty as something which is available only to full subsidy 
eligible individuals. Accordingly, we are proposing to revise Sec.  
423.780(e) to accurately reflect the statute. The sliding scale for the 
late enrollment penalty subsidy will be calculated based on the linear 
sliding scale for the premium subsidy, which is described in paragraph 
(d) of the regulation. Beneficiaries with incomes on the sliding scale 
will receive a late enrollment penalty subsidy that will be equal to a 
percentage of the late enrollment penalty subsidy for full subsidy 
individuals, based on the same 5 percent increment scale that applies 
for the premium subsidy in paragraph (d) (that is, 135, 140, 145 and 
150 percent of FPL).
    For the first 60 months the penalty is imposed, full subsidy 
individuals receive a late enrollment penalty subsidy equal to only 80 
percent of the penalty amount. Therefore, the sliding scale premium 
subsidy percentages for each income level in paragraph (d) must be 
multiplied by 80 percent to arrive at the percentage of the late 
enrollment penalty that is subsidized for each income level for the 
first 60 months. For example, for individuals with incomes greater than 
135 percent, but at or below 140 percent of the FPL applicable to the 
family size, the late enrollment penalty subsidy will be equal to 60 
percent of the late enrollment penalty for the first 60 months during 
which the penalty is imposed. Sixty percent is equal to 75 percent (the 
percentage of the premium subsidized for individuals with incomes 
greater than 135 percent, but at or below 140 percent of the FPL 
applicable to the family size in accordance with paragraph (d)(2)) 
multiplied by 80 percent (which, as stated, will be the amount of the 
late enrollment penalty that will be subsidized for full subsidy 
eligible individuals for the first 60 months during which the penalty 
is imposed on them, as described in paragraph (e)).
    After the first 60 months the penalty is imposed, the sliding scale 
premium subsidy percentages for each income level in paragraph (d) will 
be multiplied by 100 percent, as 100 percent of the late enrollment 
penalty will be subsidized for full subsidy eligible individuals after 
the first 60 months. As stated, the resulting percentages will be the 
percent of the late enrollment penalty that will be subsidized and can 
therefore be multiplied by the individual's late enrollment penalty to 
give the subsidy. The below table illustrates the penalty subsidy 
available to other low income subsidy individuals.

------------------------------------------------------------------------
                                        Percent of         Percent of
                                         penalty            penalty
                                    subsidized during   subsidized after
           Income level                the first 60       the first 60
                                    months individual  months individual
                                      is  subject to     is  subject to
                                         penalty            penalty
------------------------------------------------------------------------
<=135% FPL........................                 80                100
>135% and <=140% FPL..............                 60                 75
>140% and <=145% FPL..............                 40                 50
>145% and <150% FPL...............                 20                 25
>=150% FPL........................                  0                  0
------------------------------------------------------------------------

J. Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans

1. Requirements for Qualified Retiree Prescription Drug Plans (Sec.  
423.884)
a. Application Timing
    [If you choose to comment on issues in this section, please include 
the caption ``APPLICATION TIMING'' at the beginning of your comments.]
    The enactment of Title I of the MMA provides sponsors of retiree 
prescription drug plans with multiple options for providing drug 
coverage to their retirees who are Medicare beneficiaries. One of these 
is section 1860D-22(a) of the Act, which permits the sponsor of a 
qualified retiree prescription drug plan to receive a subsidy with 
respect to certain allowable prescription drug costs incurred by 
qualifying covered retirees, who must be eligible for, but not enrolled 
in, Part D. This is referred to in the regulations as the Retiree Drug 
Subsidy (RDS).
    In implementing the statute, the regulations at Sec.  423.884(c) 
outline the application requirements for the Retiree Drug Subsidy. (70 
FR 4577) Section 423.884(c)(5)(i) requires a plan sponsor to file an 
application for the subsidy by no later than 90 days before the 
beginning of its plan year, unless an extension is requested and 
granted (for example, the deadline for 2007 calendar year plans under 
the regulation would be October 2, 2006). Upon further review of this 
requirement, we believe that an end-of-month deadline would be 
administratively simpler for both plan sponsors and CMS to track. For 
example, for the 2006 calendar year, the initial deadline for the RDS 
applications, as established in the regulation, was September 30, 2005, 
which is actually 92 days before the

[[Page 29415]]

start of the plan year. In order to establish an appropriate 
application date for each contract year, we can announce the date in 
published guidance in advance to allow stakeholders sufficient time to 
do the necessary preparation and filing. Accordingly, we are proposing 
to replace the 90 day requirement with the phrase ``by a date specified 
by CMS in published guidance'' in this provision of the final rule to 
allow us the discretion to specify an end-of-month deadline in the 
future through guidance. This will also give CMS the flexibility to 
take into account operational systems changes in determining the 
Retiree Drug Subsidy application deadline, while providing adequate 
advance notice to plan sponsors and their advisers.
b. Data Match
    [If you choose to comment on issues in this section, please include 
the caption ``DATA MATCH'' at the beginning of your comments.]
    In order to properly administer the Retiree Drug Subsidy program, 
we must compare the retiree data that a plan sponsor submits to CMS 
records to ensure that sponsors are not claiming the subsidy for 
individuals that are enrolled in a Part D plan and are therefore not 
qualifying covered retirees. In Sec.  423.884(c)(7)(i), we specifically 
referenced the Medicare Beneficiary Database (MBD) as the system of 
record for the data match. (70 FR 4578) While the MBD is currently the 
system by which the retirees' status is verified, we also may use other 
systems of record for purposes of the data match. Accordingly, we 
propose to modify our language to be more suitable by substituting a 
general reference to ``CMS database(s)'' for the ``Medicare Beneficiary 
Database (MBD)'' in the regulation text at Sec.  423.884(c)(7)(i).
c. Actuarial Equivalence (Sec.  423.884)
(1) Medicare Supplemental Adjustment
    Section 1860D-22(a)(2)(A) of the Act requires that a plan sponsor 
provide an attestation that its plan is actuarially equivalent to 
Medicare standard prescription drug coverage in order to claim RDS. 
Section 423.884(d)(5) sets forth a two-prong test for determining the 
actuarial value of the defined standard prescription drug coverage 
under Part D against which the actuarial value of the retiree coverage 
is measured. (70 FR 4578) The actuarial equivalence test includes a 
``gross test'' and a ``net test.'' Section 423.884(d)(5)(iii)(B)(2) 
states that the net test includes a ``Medicare supplemental 
adjustment'' which allows a plan sponsor that provides supplemental 
coverage for its retirees that elect Part D coverage to reflect the 
impact of the supplemental coverage on the net value of Part D 
coverage. Supplemental coverage for this purpose means drug coverage 
over and above Part D coverage for those retirees that enroll in Part D 
coverage. Our intent, which we clarified in operational guidance to 
plan sponsors, was that a sponsor must actually provide supplemental 
employer-provided retiree drug coverage in order to qualify for the 
Medicare supplemental adjustment. (See CMS Guidance on the Actuarial 
Equivalence Standard for the Retiree Drug Subsidy (April 7, 2005) 
available at http://www.cms.hhs.gov/employerretireedrugsubsid.) In 
accordance with our existing guidance, we are therefore revising Sec.  
423.884(d)(5)(iii)(B)(2) to indicate that plan sponsors must actually 
provide supplemental drug coverage for their retirees that elect Part D 
in order to do the adjustment to the net value of Part D in the 
actuarial equivalence test. We view this revision as merely 
incorporating previously issued guidance, and not as a new policy 
proposal.
(2) Non-Calendar Year Plans
    [If you choose to comment on issues in this section, please include 
the caption ``NON-CALENDAR YEAR PLANS'' at the beginning of your 
comments.]
    Sec. 1860D-22(a)(2)(A) of the Act requires a plan sponsor to 
provide an attestation that its plan is actuarially equivalent to the 
Medicare defined standard prescription drug coverage in order to claim 
RDS. As explained above, our regulation at Sec.  423.884(d)(5) sets 
forth a two-prong test for actuarial equivalence. The actuarial 
equivalence test requires that the value of the plan sponsor's retiree 
drug coverage be compared to the hypothetical value of the Medicare 
defined standard prescription drug coverage had the sponsor's Part D 
eligible individuals taken that coverage.
    Sections 423.884(d)(5)(iii)(C) and (D) state that the valuation of 
the Medicare defined standard prescription drug coverage for this 
purpose is based on the initial coverage limit, cost sharing amounts, 
and out-of-pocket threshold in effect at the start of the plan year. 
However, the attestation must be submitted to CMS no later than 60 days 
after the publication of the Part D coverage limits for the upcoming 
calendar year; otherwise, the valuation must be based on the initial 
coverage limit, cost sharing amounts, and out-of-pocket threshold for 
the upcoming plan year. The intent of this 60 day provision is to 
prevent actuaries from having to redo calculations for non-calendar 
year plans that were based on the current calendar year initial 
coverage limit, cost sharing amounts, and out-of-pocket threshold when, 
after doing their calculations, but before the RDS application is 
submitted, we publish the Part D coverage limits for the upcoming 
calendar year.
    Actuaries of plan sponsors have indicated to us that they believe 
they should have the flexibility for non-calendar year plans to use the 
Part D initial coverage limit, cost-sharing amounts, and out-of pocket-
threshold for the upcoming plan year, provided it does not impact their 
ability to meet the application deadline. We agree that actuaries 
should have this flexibility, and so we are proposing to amend the 
Sec.  423.884(d)(5)(iii)(C) to permit a non-calendar year plan's 
actuary to use either the current or subsequent year's Part D cost 
limits when the attestation is submitted within 60 days of the 
publication of the following year's cost limits. We also propose to 
make corresponding changes to Sec.  423.884(d)(5)(iii)(C).
(3) Benefit Options
    Employment-based retiree health coverage often has different plan 
design features or benefit options that apply to specific groups of 
retirees. Section 423.882 defines a benefit option as a particular 
benefit design, category of benefits, or cost sharing arrangement 
offered within a group health plan. Section 423.884(d)(5)(iv) states 
that a plan with more than one benefit option must pass the gross test 
separately on a disaggregated basis for each option, but that it may 
pass the net test on an aggregated or disaggregated basis. As we have 
indicated in subsequent guidance, our intent was that a plan sponsor 
should also have the option of aggregating a subset of the benefit 
options in a plan for the actuarial equivalence net test in addition to 
aggregating all of the options or evaluating each option individually. 
(See CMS Guidance on the Actuarial Equivalence Standard for the Retiree 
Drug Subsidy (April 7, 2005); available at www.cms.hhs.gov/employerretireedrugsubsid.) If the sponsor combines two or more benefit 
options, the sponsor may not claim the subsidy for those benefit 
options excluded from the net value calculation, even if those options 
meet the gross test. We are amending the final rule to reflect this 
clarification of our intent, which reflects policy that has been 
applied

[[Page 29416]]

consistently since the rule was published.
(4) Submission of Actuarial Attestation Upon Material Change
    Section 1860D-22(a)(2)(A) of the Act requires that a plan sponsor 
submit an actuarial attestation annually or at another time as the 
Secretary may require. Section 423.884(d)(6)(ii) requires submission of 
an attestation no later than 90 days before the implementation of a 
material change to the coverage. While the term ``material change'' can 
be construed broadly to include any change to the value of a sponsor's 
plan, we have issued guidance indicating that a resubmission is not 
necessary when a plan remains actuarially equivalent and no benefit 
options are being added. In this preamble we are also reiterating this 
interpretation: We would not require submission of an attestation under 
Sec.  423.884(d)(6)(ii) where a plan sponsor still meets the actuarial 
equivalence test after the change, and there are no benefit options 
being added.

K. Subpart S--Special Rules for States--Eligibility

1. General Payment Provisions--Coordination With Medicare Prescription 
Drug Benefits (Sec.  423.906)
    Section 1935(d) of the Act contains specific provisions regarding 
Medicaid coordination with Medicare prescription drug benefits. In the 
case of a full benefit dual eligible individual, Federal Financial 
Participation in State Medicaid expenditures is not available for 
Medicaid covered drugs that could be covered under Part D or for cost 
sharing related to these drugs. We are correcting Sec.  423.906(b) and 
(c) to make clear that, in accordance with the statutory requirement in 
section 1935(d)(2) of the Act, only drugs specifically excluded from 
the definition of Part D drugs may be covered by medical assistance.
    Currently, Sec. Sec.  423.906(b) and (c) includes the word 
``covered.'' (70 FR 4583) Since our regulatory definition of ``Covered 
Part D drugs'' excludes drugs that are not on a plan's formulary, 
States may have interpreted the regulation to allow States to provide 
additional medical assistance for coverage of drugs not on a Part D 
plan's formulary. The effect of these changes is to make clear that 
Federal financial participation is not available to States for coverage 
of drugs that would be Part D covered drugs except that they are not on 
a plan's formulary. We are also adding a definition of ``non-covered 
drugs'' to the Sec.  423.902.
2. States' Contribution to Drug Benefit Costs Assumed by Medicare 
(Sec.  423.910)
    Section 1935(b) of the Act, as amended by the MMA, requires States 
and the District of Columbia to be responsible for making monthly 
payments to the Federal government beginning in January 2006 to defray 
a portion of the Medicare drug expenditures for full benefit dual 
eligible individuals. The statute further defines full benefit dual 
eligible individuals to mean ``for a State for a month an individual 
who has coverage for the month for covered part D drugs under a 
prescription drug plan under part D of title XVIII, or under an MA-PD 
plan under part C of such title. * * *''. In the January 28, 2005 final 
rule, we explained the calculation of the monthly State phased-down 
contributions. The calculation of the monthly state contribution is 
dependent upon the state's reporting of the total number of full-
benefit dual eligible individuals for the State in the applicable 
month. States are required, in accordance with the Sec.  423.910(d), to 
submit an electronic file, in a manner specified by CMS, identifying 
each full benefit dual eligible individual enrolled in the State 
Medicaid program for each month. For States that do not submit an 
acceptable file by the end of the month, the phased down State 
contribution for that month is based on data deemed appropriate by CMS.
    In Sec.  423.910(b)(1) of the Medicare Prescription Drug Benefit 
final rule, we made a typographical error. (70 FR 4584) Section 
423.910(b)(1) specified that ``[f]or States that do not meet the 
quarterly reporting requirement for the monthly enrollment reporting, * 
* *''. The text should have read ``For States that do not meet the 
monthly reporting requirement for the monthly enrollment reporting, * * 
*'', since there is no State quarterly reporting requirement referred 
to in either the statute or regulation when calculating the phased-down 
State contribution. Accordingly, we are revising the text consistent 
with the statute.

III. Collection of Information Requirements

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

IV. Regulatory Impact Analysis

 A. Overall Impact

    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 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132. With 
exception of the statutory change addressing the payment of vaccine 
administration under Part D beginning in 2008 for covered Part D 
vaccines, the impact of the policy supporting the clarifications in 
this proposed rule were addressed as part of a prior final rule and do 
not require further analysis. Specifically, a full regulatory impact 
analysis was performed for the January 28, 2005 final rule (70 FR 4454) 
implementing the Part D provisions of the MMA. As we explain below, 
many of the provisions in this proposed rule are simply clarifications 
of that final rule.
    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). 
Because of the addition of vaccine administration under Part D 
beginning in FY 2008, this rule meets the threshold to be economically 
significant; and is consequently a major rule. The RFA requires 
agencies to analyze options for regulatory relief of small businesses. 
For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and small governmental jurisdictions. Most 
hospitals and most other providers and suppliers are small entities, 
either by nonprofit status or by having revenues of $6 million or less 
to $29 million in any 1 year. Individuals and States are not included 
in the definition of a small entity.
    As stated previously the addition of vaccine administration under 
Part D is estimated to have a net impact to the fiscal year (FY) 2008 
budget in the amount of $100 million. Since the relevant monetary 
threshold has been exceeded, the RFA requires us to conduct a 
regulatory flexibility analysis

[[Page 29417]]

in regard to the implementation of vaccine administration under Part D. 
Given the nature of immunization in the U.S. market and its relation to 
the Part D benefit, we believe only two small business areas merit 
discussion, retail pharmacy and physicians in private practice.
    The Small Business Administration (SBA) considers pharmacies with 
firm revenues of less than $6 million to be small businesses. The 2002 
Business Census (the latest available detailed data) indicates that 
there were about 19,488 firms operating about 40,152 retail pharmacies 
and drug store establishments (NAICS code 44611). Of these firms, 
17,332 had revenues under $5 million and operated a total of 19,488 
establishments. Because more than 89 percent of retail pharmacy firms 
are small businesses (as defined by the SBA size standards), we expect 
that the inclusion of vaccine administration within the statutory 
definition of a covered Part D drug will have some effect on a 
substantial number of small retail pharmacies. However, we estimate 
that overall the revenue effect on the retail pharmacy industry, 
including small pharmacies, will be positive. In those states that 
permit pharmacists to administer vaccinations (currently 44 of 50 
states), we anticipate Medicare beneficiaries will consider receiving 
immunization of Part D vaccines in a pharmacy setting, given the real-
time nature of the Part D benefit and the pharmacy's ability to bill 
the Part D Sponsor without the beneficiary having to pay upfront for 
the vaccine and its administration, as he or she might in the 
physician's office. Over the past few years the number of beneficiaries 
seeking to obtain immunizations from pharmacies has continued to 
increase. We expect this trend to continue, when, beginning in 2008, 
in-network pharmacies will be able to seek compensation for the 
administration of Part D vaccines under the Part D program. While there 
may be some additional cost for pharmacist time in administrating 
vaccines, these should be more than offset by the reimbursement of 
administration fees. Finally, a pharmacy could negotiate not to 
administer vaccine administration services and continue to participate 
in the Part D program, if it believed that the costs of providing 
vaccinations outweighed any potential benefits.
    Almost all physicians in private practice (or the practices of 
which they are members) are small businesses, and, therefore, small 
entities because their annual revenues do not meet the Small Business 
Administration's threshold for ``small'' physician practices. We 
expect, since a substantial number of vaccinations continue in the 
physician office setting, that physicians will benefit from the 
inclusion of vaccine administration in the statutory definition of a 
covered Part D drug because the administering physician will have a new 
source of reimbursement of Part D vaccine administration fees. We do 
not expect there will be any additional costs to the physicians 
practice.
    With the respect to the other changes in the proposed rule, the 
definitions of negotiated prices, gross covered drug costs, and 
allowable risk corridor costs will not have a significant impact on 
small businesses, such as small pharmacies. Instead, they will 
primarily impact which drug costs are reported to CMS and how plans 
calculate beneficiary cost sharing. Moreover, they will require minimal 
if any changes in health plan, PBM and pharmacy operational systems. 
Even with these proposed changes in beneficiary cost sharing, health 
plans will still be required to ensure that pharmacies receive their 
contracted rate. If there were any additional costs due to the change 
in beneficiary costs, health plans would account for them in their 
bids.
    The other technical corrections and substantive clarifications are 
not expected to affect small businesses in a significant manner, if at 
all. For example, although the substantive clarification relating to 
the delivery of home infusion medications may slightly increase the 
cost of delivering these medications for some plan sponsors because it 
may cost more for plan sponsors that do not currently have timeframe 
delivery provisions in their contracts with home infusion pharmacies, 
any increase will be accounted for in plan sponsors' bids. However, 
this increase is expected to be minimal, and is not expected to affect 
all plan sponsors. As for home infusion pharmacies themselves, the 
requirement to meet performance timeframes should also have no cost 
impact. Our ongoing communications with the home infusion industry 
revealed that these timeframes were already an industry standard. Thus, 
incorporation of these new requirements does not place any new burdens 
on the pharmacy cost structure, as home infusion pharmacies have 
already been meeting these performance standards in advance of our 
rulemaking.
    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 standards of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. Because prescription 
drugs including Part D vaccines, are dispensed in hospitals to Medicare 
outpatients, this final rule could have an effect on small rural 
hospitals who decide to offer Part D vaccines. Since a number of rural 
hospitals offer vaccine administration on an outpatient basis, they too 
will benefit by being able to collect a Part D vaccine administration 
fee. Rural hospitals should already have the systems in place to 
handle, store and administer vaccines and consequently small rural 
hospitals should only benefit from the availability of this new 
administration fee and should not incur new costs as a result of this 
proposed rule.
    The additional clarification and proposed revisions related to the 
Medicare Part D drug benefit, which is the voluntary outpatient 
prescription drug benefit, not regulations relating to any drug benefit 
under Part A. Therefore these additional proposals do not affect small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. That threshold 
level is currently approximately $120 million. Many of the proposed 
changes are either corrections in the regulations to make the 
regulations comply with the statute, or the proposed changes are merely 
the formal proclamation of existing policies that are in line with the 
statute and do not cross the $120 million dollar threshold. For 
example, one clarification, which brings the regulation in line with 
the statute, that will prohibit States from covering Part D drugs for 
recipients of Medicaid may save States the money they would have 
otherwise spent on these drugs, if they had chosen to cover the drugs 
at issue. Because the statute only allows States to cover excluded 
drugs, as opposed to noncovered drugs, and we expect that most States 
complied with the statute, as opposed to the Part D regulation, we do 
not believe that this clarification will significantly affect States. 
Therefore we do not expect that it will affect State, local, or tribal 
governments.
    As stated previously, many of the proposed changes are either 
corrections in the regulations to make the regulations comply with the 
statute, or the proposed changes are merely the

[[Page 29418]]

formal proclamation of existing policies that are in line with the 
statute. Although there may be added costs to plan sponsors with the 
broadening of the definition of Part D drug to include ``[s]upplies 
required to deliver insulin by inhalation[,]'' plan sponsors are aware 
that new drugs and supplies become available on the market constantly 
and they account for these changes in their bids. Furthermore, only 
plan sponsors that choose to cover inhaled insulin will be affected. 
The expected costs to the private sector will be less than the $120 
million threshold.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues a proposed rule (and subsequent final 
rule) that imposes substantial direct requirement costs on State and 
local governments, preempts State law, or otherwise has Federalism 
implications. The proposed changes and technical clarifications will 
not have a substantial effect on State or local governments. For 
example, a clarification concerning timing of state reporting for the 
purposes of calculating State phase-down contributions is not expected 
to affect State governments, because monthly reporting is consistent 
with the statute. Although there is a provision in this proposal that 
relates to waivers of State plan licensure, there are no anticipated 
Federalism implications because the clarification to the applicable 
regulation makes the regulation comply with the existing statute.

B. Anticipated Effects

1. Effects on Health Plans, and Pharmacy Benefit Managers (PBM)
    Part D plans will incur costs in implementing the reimbursement of 
Part D vaccine administration fees, this is a new benefit passed by 
Congress in the Tax Relief and Health Care Act of 2006. However, since 
Congress defined the Part D vaccine administration fee as a Part D drug 
cost, the impact will be no different than any other new drug entering 
the market. Part D Plans will consider Part D vaccine administration as 
part of their overall benefit and resulting bid. We estimate a net cost 
for FY 2008 which considers the offset associated with beneficiary cost 
sharing and the direct Federal subsidy and risking sharing, to be $100 
million.

                    Accounting Statement.--Classification of Estimated Expenditures, FY 2008
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                     Category                                                 Transfers
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers....................  $100.
From Whom To Whom?................................  Federal Government To Part D Plans.
----------------------------------------------------------------------------------------------------------------

    Our other revisions to the regulation, such as the proposed plan-
to-plan reconciliation, we believe, merely reflect already existing 
policy. Nevertheless, even if this requirement were a new standard, we 
believe that all parties involved in the reconciliation would benefit, 
because the reconciliation process will involve fewer tasks than if 
pharmacies were required to reverse and re-adjudicate claims.
    With respect to the proposed changes that will impact which drug 
costs are reported to CMS and how Part D plans calculate beneficiary 
cost sharing, we believe that the impact on pharmacies will be minimal, 
as the total compensation received by pharmacies should remain 
unaffected. The proposed changes may, however, require a small number 
of Part D sponsors to renegotiate their contracts with their PBMs to 
account for system changes to reflect the appropriate beneficiary cost 
sharing. We believe that most PBMs will be unaffected by the proposed 
changes in the drug costs reported and beneficiary cost sharing. Thus, 
the expected financial impact of these proposed changes on PBMs is 
minimal.
    We do not believe the inclusion of inhaled insulin supplies or the 
substantive clarification relating to the delivery of home infusion 
medications will place any additional costs onto Part D plans. We 
estimate the gross costs of inhaled insulin for FY 2008 will be $10 
million. The approval of inhaled insulin onto the U.S. market has been 
anticipated for years and should have been considered into the Part D 
Sponsor's bid. As discussed earlier, the proposed home infusion 
delivery standard appears to be an existing standard that plans should 
be accustomed and consequently would not increase their costs in 
providing the benefit.

C. Alternatives Considered

    We considered not proposing the regulation to address our policy 
clarifications and technical changes. However, we believed in order to 
ensure public awareness of our policies, as well as to avoid potential 
confusion regarding them, that we should codify our clarifications as 
well as make certain technical corrections to the January 28, 2005 
final rule. In addition, we believe it is important to propose a few 
new clarifications for Part D plans as a result of our experience in 
implementing Part D. Finally, we believe it is important to acknowledge 
in this proposed rule changes made by the Congress to the statutory 
definition of a covered Part D drug.

D. Conclusion

    Given that the cost of implementing vaccine administration under 
Part D is expected to exceed the $100 million threshold in FY 2008, we 
have performed an economic impact analysis on those entities 
potentially involved in providing Part D vaccine administration. Our 
analysis showed that entities such as physicians and pharmacies are 
situated to benefit from this change in 2008, whereas other entities 
such as Part D Sponsors will experience no or little difference in 
costs as a result of implementation.
    As for other technical corrections and substantive clarifications 
contained in this proposed rule, as stated earlier, a full analysis was 
performed for the final regulations implementing the Part D provisions 
of Medicare Prescription Drug Improvement and Modernization Act of 
2003, and for the reasons cited, we believe these additional proposals 
either do not require further analysis or are in practice today and, as 
such, are not economically significant.

V. Response to Comments

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

[[Page 29419]]

List of Subjects

42 CFR Part 423

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Medicare, 
Penalties, Privacy, Reporting and recordkeeping.

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

PART 423--MEDICARE PROGRAM; MEDICARE PRESCRIPTION DRUG PROGRAM

    1. The authority citation for part 423 continues to read as 
follows:

    Authority: Secs. 1102, 1860D-1 through 1860D-42, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, 
and 1395hh).

Subpart B--Eligibility and Enrollment

    2. Section 423.50 is amended by revising paragraph (f)(1)(v) to 
read as follows:


Sec.  423.50  Approval of marketing materials and enrollment forms.

* * * * *
    (f) * * *
    (1) * * *
    (v) Use providers, provider groups, or pharmacies to distribute 
printed information comparing the benefits of different Part D plans 
unless providers, provider groups or pharmacies accept and display 
materials from all Part D plan sponsors with which the providers, 
provider groups or pharmacies contract.
* * * * *
    3. Section Sec.  423.56 is amended by revising paragraph (b)(6) to 
read as follows:


Sec.  423.56  Procedures to determine and document creditable status of 
prescription drug coverage.

* * * * *
    (b) * * *
    (6) Coverage under a Medicare supplemental policy (Medigap policy) 
as defined at 42 CFR 403.205.
* * * * *

Subpart C--Benefits and Beneficiary Protections

    4. Section 423.100 is amended by--
    A. Revising the definition of ``contracted pharmacy network.''
    B. Revising the definition of ``negotiated prices.''
    C. Revising the definition of ``part D drug.''
    The revisions read as follows:


Sec.  423.100  Definitions.

* * * * *
    Contracted pharmacy network means licensed pharmacies, including 
retail, mail-order, and institutional pharmacies, under contract with a 
Part D sponsor to provide covered Part D drugs at negotiated prices to 
Part D enrollees.
* * * * *
    Negotiated prices means prices for covered Part D drugs that--
    (1) The Part D sponsor (or other intermediary contracting 
organization) and the network dispensing pharmacy or other network 
dispensing provider have negotiated as the amount such network entity 
will receive, in total, for a particular drug;
    (2) Are reduced by those discounts, direct or indirect subsidies, 
rebates, other price concessions, and direct or indirect remuneration 
that the Part D sponsor has elected to pass through to Part D enrollees 
at the point of sale; and
    (3) Includes any dispensing fees.
* * * * *
    Part D drug means--
    (1) Unless excluded under paragraph (2) of this definition, any of 
the following if used for a medically accepted indication (as defined 
in section 1927(k)(6) of the Act):
    (i) A drug that may be dispensed only upon a prescription and that 
is described in sections 1927(k)(2)(A)(i) through (iii) of the Act.
    (ii) A biological product described in sections 1927(k)(2)(B)(i) 
through (iii) of the Act.
    (iii) Insulin described in section 1927(k)(2)(C) of the Act.
    (iv) Medical supplies associated with the injection of insulin, 
including syringes, needles, alcohol swabs, and gauze.
    (v) A vaccine licensed under section 351 of the Public Health 
Service Act.
    (vi) Supplies that are directly associated with delivering insulin 
into the body through inhalation, such as the inhalation chamber used 
to deliver the insulin.
    (2) Does not include--
    (i) Drugs for which payment as so prescribed and dispensed or 
administered to an individual is available for that individual under 
Part A or Part B (even though a deductible may apply, or even though 
the individual is eligible for coverage under Part A or Part B but has 
declined to enroll in Part A or Part B); and
    (ii) Drugs or classes of drugs, or their medical uses, which may be 
excluded from coverage or otherwise restricted under Medicaid under 
sections 1927(d)(2) or (d)(3) of the Act, except for smoking cessation 
agents.
* * * * *
    5. Section 423.120 is amended by revising paragraphs (a)(2) and 
(a)(4) to read as follows:


Sec.  423.120  Access to covered Part D drugs.

    (a) * * *
    (2) Applicability of some non-retail pharmacies to standards for 
convenient access. Part D plans may count I/T/U pharmacies and 
pharmacies operated by Federally Qualified Health Centers and Rural 
Health Clinics toward the standards for convenient access to network 
pharmacies in paragraph (a)(1) of this section.
* * * * *
    (4) Access to home infusion pharmacies. A Part D plan's contracted 
pharmacy network must provide adequate access to home infusion 
pharmacies consistent with CMS guidelines and instructions. A Part D 
plan must ensure that such network pharmacies, at a minimum--
    (i) Are capable of delivering home infused drugs in a form that can 
be administered in a clinically appropriate fashion;
    (ii) Are capable of providing infusible Part D drugs for both 
short-term acute care and long-term chronic care therapies;
    (iii) Ensure that the professional services and ancillary supplies 
necessary for home infusion therapy are in place before dispensing Part 
D home infusion drugs; and
    (iv) Provide delivery of home infusion drugs within at least 24 
hours of discharge from an acute setting.
* * * * *

Subpart F--Submission of Bids and Monthly Beneficiary Premiums: 
Plan Approval

    6. Section 423.293 is amended by revising paragraph (a) to read as 
follows:


Sec.  423.293  Collection of monthly beneficiary premium.

    (a) General rule. Part D sponsors must charge enrollees a 
consolidated monthly Part D premium equal to the sum of the Part D 
monthly premium for basic prescription drug coverage (if any) and the 
premium for supplemental coverage (if any and if the beneficiary has 
enrolled in such supplemental coverage). Part D sponsors must permit 
payment of monthly Part D premiums (if any) under the timing of 
payments established in 422.262(e) of this chapter. Part D sponsors 
must also permit each enrollee, at the enrollee's option, to make 
payment of premiums (if any)

[[Page 29420]]

under this part to the sponsor using any of the methods listed in Sec.  
422.262(f) of this chapter.
* * * * *

Subpart G--Payments to Part D Plan Sponsors for Qualified 
Prescription Drug Coverage

    7. Section 423.308 is amended by--
    A. Adding the definition of ``administrative costs.''
    B. Revising the definition of ``allowable risk corridor costs.''
    C. Revising the definition of ``gross covered prescription drug 
costs.''
    The addition and revisions read as follows:


Sec.  423.308  Definitions and terminology.

* * * * *
    Administrative costs means costs incurred by a Part D sponsor in 
complying with the requirements of this Part for a coverage year and 
that are not drug costs incurred to purchase or reimburse the purchase 
of Part D drugs. Administrative costs include sponsor costs that exceed 
the amount paid by or on behalf of the Part D sponsor to a pharmacy or 
other entity that is the final dispenser of the drug for the provision 
of a covered Part D drug under the plan. When an intermediary acts on 
behalf of a Part D sponsor to negotiate prices with dispensing entities 
such as pharmacies, any profit retained by the intermediary contracting 
organization as a result of such negotiation (through discounts, 
manufacturer rebates, or other direct or indirect price concessions) is 
considered an administrative cost to the Part D sponsor and not a drug 
cost.
* * * * *
    Allowable risk corridor costs means the subset of actually paid 
costs for Part D drugs (not including administrative costs, but 
including dispensing fees) that are attributable to basic prescription 
drug coverage only and that are incurred and actually paid by the Part 
D sponsor to--
    (1) A dispensing pharmacy or other dispensing provider (whether 
directly or through an intermediary contracting organization) under the 
Part D plan;
    (2) The parties listed in Sec.  423.464(f)(1) with whom the Part D 
sponsor must coordinate benefits, including other Part D plans, as the 
result of any reconciliation process developed by CMS under Sec.  
423.464; or
    (3) An enrollee (or third party paying on behalf of the enrollee) 
to indemnify the enrollee when the reimbursement is associated with 
obtaining drugs under the Part D plan.


Costs must be based upon imposition of the maximum amount of copayments 
permitted under Sec.  423.782. The costs for any Part D plan offering 
enhanced alternative coverage must be adjusted not only to exclude any 
costs attributable to benefits beyond basic prescription drug coverage, 
but also to exclude any prescription drug coverage costs determined to 
be attributable to increased utilization over standard prescription 
drug coverage as the result of the insurance effect of enhanced 
alternative coverage in accordance with CMS guidelines on actuarial 
valuation.
* * * * *
    Gross covered prescription drug costs mean those actually paid 
costs incurred under a Part D plan to purchase or reimburse the 
purchase of Part D drugs, excluding administrative costs, but including 
dispensing fees, during the coverage year. They equal--
    (1) The share of negotiated prices (as defined by Sec.  423.100 of 
this chapter) actually paid by the Part D plan that is received as 
reimbursement by the pharmacy or other dispensing entity, reimbursement 
paid to indemnify an enrollee when the reimbursement is associated with 
an enrollee obtaining covered Part D drugs under the Part D plan, or 
payments made by the Part D sponsor to other parties listed in Sec.  
423.464(f)(1) with whom the Part D sponsor must coordinate benefits, 
including other Part D plans, as the result of any reconciliation 
process developed by CMS under Sec.  423.464 of this chapter; plus
    (2) All amounts paid under the Part D plan by or on behalf of an 
enrollee (such as the deductible, coinsurance, cost sharing, or amounts 
between the initial coverage limit and the out-of-pocket threshold) in 
order to obtain covered Part D drugs that are covered under the Part D 
plan. If an enrollee who is paying 100 percent cost sharing (as a 
result of paying a deductible or because the enrollee is between the 
initial coverage limit and the out-of-pocket threshold) obtains a 
covered Part D drug at a lower cost than is available under the Part D 
plan, such cost-sharing will be considered an amount paid under the 
plan by or on behalf of an enrollee under the previous sentence of this 
definition, if the enrollee's costs are incurred costs as defined under 
Sec.  423.100 of this chapter and documentation of the incurred costs 
has been submitted to the Part D plan consistent with plan processes 
and instructions for the submission of such information. These costs 
are determined regardless of whether the coverage under the plan 
exceeds basic prescription drug coverage.
* * * * *
    8. In Sec.  423.350 paragraph (b)(1) is revised to read as follows:


Sec.  423.350  Payment appeals

    (b) * * *
    (1) Time for filing a request. The request for reconsideration must 
be filed within 15 days from the date of the final payment. For 
purposes of this paragraph, the date of final payment is: for risk 
adjustment, the date of the final reconciled payment under Sec.  
423.343(b); for reinsurance, the date of the final reconciled payment 
under Sec.  423.343(c); for low-income cost sharing subsidies, the date 
of the final reconciled payment under Sec.  423.343(d); or for risk-
sharing payments, the date of the final payments under Sec.  423.336.

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

    9. Section 423.410 is amended by revising paragraph (d) to read as 
follows:


Sec.  423.410  Waiver of certain requirements to expand choice.

* * * * *
    (d) Special waiver for plan years beginning before January 1, 2008. 
For plan years beginning before January 1, 2008, if the State has a 
prescription drug plan or PDP sponsor licensing process in effect, CMS 
grants a waiver upon a demonstration that an applicant to become a PDP 
sponsor has submitted a substantially completed application for 
licensure to the State.
* * * * *

Subpart J--Coordination of Part D Plans With Other Prescription 
Drug Coverage

    10. Section 423.458 is amended by revising paragraph (d)(2)(ii) to 
read as follows--


Sec.  423.458  Application of Part D rules to certain Part D plans on 
and after January 1, 2006.

* * * * *
    (d) * * *
    (2) * * *
    (ii) A waiver of a requirement under this part otherwise applicable 
to cost plans or PACE organizations, if such waiver improves 
coordination of benefits provided by the cost plan under section 1876 
of the Act, or by the PACE organization under section 1894 and 1934 of 
the Act, with the benefits under Part D.
    11. Section 423.464 is amended by--
    (A) Revising paragraph (f)(1)(vii), and (f)(1)(viii).
    (B) Adding new paragraphs (f)(1)(ix) and (f)(5).

[[Page 29421]]

    The revision and additions read as follows:


Sec.  423.464  Coordination of benefits with other providers of 
prescription drug coverage.

* * * * *
    (f) * * *
    (1) * * *
    (vii) Rural health clinics. Rural health clinics as defined under 
section 1861(aa)(2) of the Act.
    (viii) Other Part D plans.
    (ix) Other prescription drug coverage. Other health benefit plans 
or programs that provide coverage or financial assistance for the 
purchase or provision of Part D drugs on behalf of Part D eligible 
individuals as CMS may specify.
* * * * *
    (5) Plan-to-plan liability. In the process of coordinating benefits 
between Part D plans when a Part D plan from which a beneficiary has 
transferred has incorrectly made payment for covered prescription drug 
costs incurred after the effective date of the Part D enrollee's 
enrollment in the new Part D plan of record, the new Part D plan of 
record must make the reconciling payments based on amounts reported to 
it by CMS without regard to the Part D plan's own formulary or drug 
utilization review edits.
    (6) Use of other reconciliation processes. In the process of 
coordinating benefits between the correct Part D plan of record and 
another entity providing prescription drug coverage when that entity 
has incorrectly paid as primary payer for a covered Part D drug on 
behalf of a Part D enrollee, the correct Part D plan of record must 
achieve timely reconciliation through working directly with the other 
entity that incorrectly paid as primary payer, unless CMS has 
established reconciliation processes for payment reconciliation, rather 
than requesting pharmacy claims reversal and re-adjudication.

Subpart K--Application Procedures and Contracts With Part D 
Sponsors

    12. Section 423.504 is amended by revising paragraph (a) to read as 
follows:


Sec.  423.504  General provisions.

    (a) General rule. Subject to the provisions at Sec.  423.265 
concerning submission of bids, to enroll beneficiaries in any Part D 
drug plan it offers and be paid on behalf of Part D eligible 
individuals enrolled in those plans, a Part D plan sponsor must enter 
into a contract with CMS. The contract may cover more than one Part D 
plan.
* * * * *
    13. Section 423.505 is amended by revising paragraph (h)(1) to read 
as follows:


Sec.  423.505  Contract provisions.

* * * * *
    (h) * * *
    (1) Federal laws and regulations designed to prevent fraud, waste, 
and abuse, including, but not limited to applicable provisions of 
Federal criminal law, the False Claims Act (31 U.S.C. Sec. Sec.  3729 
et seq.), and the anti-kickback statute (section 1128B(b) of the Act).
* * * * *
    14. Section 423.509 is amended by revising paragraph (a)(9) to read 
as follows:


Sec.  423.509  Termination of contract by CMS.

    (a) * * *
    (9) Substantially fails to comply with the marketing requirements 
in Sec.  423.50, or the information dissemination requirements of Sec.  
423.128.
* * * * *

Subpart M--Grievances, Coverage Determinations, and Appeals

    15. Section 423.560 is amended by
    A. Revising the definition for ``Appointed representative.''
    B. Revising the definition of ``Projected Value.''


Sec.  423.560  Definitions.

* * * * *
    Appointed representative means an individual either appointed by an 
enrollee or authorized under State or other applicable law to act on 
behalf of the enrollee in filing a grievance, obtaining a coverage 
determination, or in dealing with any of the levels of the appeals 
process. Unless otherwise stated in this subpart, the appointed 
representative has all of the rights and responsibilities of an 
enrollee in filing a grievance, obtaining a coverage determination, or 
in dealing with any of the levels of the appeals process, subject to 
the rules described in part 422, subpart M of this chapter.
* * * * *
    Projected value of a Part D drug or drugs includes any costs the 
enrollee could incur based on the number of refills prescribed for the 
drug(s) in dispute during the plan year. Projected value includes 
enrollee co-payments, all expenditures incurred after an enrollee's 
expenditures exceed the initial coverage limit, and expenditures paid 
by other entities.
* * * * *
    16. Section 423.570 is amended by revising paragraph (d)(3) to read 
as follows:


Sec.  423.570  Expediting certain coverage determinations.

* * * * *
    (d) * * *
    (3) Subsequently deliver to the enrollee, within 3 calendar days, 
equivalent written notice.
* * * * *
    17. Section Sec.  423.584 is amended by adding a new paragraph 
(b)(3) as to read as follows:


Sec.  423.584  Expediting certain redeterminations.

* * * * *
    (b) * * *
    (3) The provisions set forth in Sec.  423.582(b), (c), and (d) also 
apply to expedited redeterminations.
* * * * *
    18. Section Sec.  423.610 is amended by revising paragraph (c)(2) 
to read as follows:


Sec.  423.610  Right to an ALJ hearing.

* * * * *
    (c) * * *
    (2) Multiple enrollees. Two or more appeals may be aggregated by 
multiple enrollees to meet the amount in controversy for an ALJ hearing 
if--
    (i) The appeals have previously been reconsidered by an IRE;
    (ii) The request for ALJ hearing lists all of the appeals to be 
aggregated and each aggregated appeal meets the filing requirement 
specified in Sec.  423.612(b); and
    (iii) The ALJ determines that the appeals the enrollees seek to 
aggregate involve the same prescription drug.

Subpart P--Premiums and Cost Sharing Subsidies for Low-Income 
Individuals

    19. Section 423.780 is amended by--
    A. Revising paragraph
    (b)(1) introductory text, (b)(1)(i), (b)(1)(ii), and (b)(2)(i).
    B. Revising paragraph (e).
    The revisions read as follows:


Sec.  423.780  Premium subsidy.

* * * * *
    (b) * * *
    (1) The premium subsidy amount is equal to the lesser of--
    (i) Under the Part D plan selected by the beneficiary, the portion 
of the monthly beneficiary premium attributable to basic coverage (for 
enrollees in PDPs) or the portion of the MA monthly prescription drug 
beneficiary premium attributable to basic prescription drug coverage 
(for enrollees in MA-PD plans) or
    (ii) The greater of the low-income benchmark premium amount 
(determined under paragraph (b)(2) of

[[Page 29422]]

this section) for the region in which the subsidy eligible individual 
resides or the lowest monthly beneficiary premium for a PDP that offers 
basic prescription drug coverage in the region.
    (2) * * *
    (i) The low-income benchmark premium amount for a PDP region equals 
either--
    (A) The weighted average of the monthly beneficiary premiums for 
all basic prescription drug plans (if all PDPs in the region are 
offered by the same PDP sponsor), with the weight for each basic PDP 
equal to a percentage, the numerator being equal to the number of Part 
D eligible individuals enrolled in the plan in the reference month (as 
defined in Sec.  422.258(c)(1) of this chapter) and the denominator 
equal to the total number of Part D eligible individuals enrolled in 
all basic PDPs in the PDP region in the reference month.
    (B) The weighted average of the premiums described in paragraph 
(b)(2)(ii) of this section (if the PDPs in the region are offered by 
more than one PDP sponsor). The average is weighted using a percentage 
for each PDP, as well as for each MA-PD that is described in Sec.  
422.4(a)(1) of this chapter. Such percentage is calculated using a 
numerator equal to the number of Part D eligible individuals enrolled 
in each such plan in the reference month (as defined in Sec.  
422.258(c)(1) of this chapter) and the denominator equal to the total 
number of Part D eligible individuals enrolled in all such PDPs and MA-
PD plans in the reference month.
* * * * *
    (e) Premium subsidy for late enrollment penalty. (1) Amount of 
premium subsidy for late enrollment penalty. Full subsidy eligible 
individuals who are subject to late enrollment penalties under Sec.  
423.46 are entitled to an additional premium subsidy equal to 80 
percent of the late enrollment penalty for the first 60 months during 
which the penalty is imposed and 100 percent of their late enrollment 
penalty thereafter.
    (2) Other low-income subsidy eligible individuals-- sliding scale 
premium subsidy for late enrollment penalty. Other low-income subsidy 
eligible individuals are entitled to a premium subsidy based on a 
linear sliding scale as follows:
    (i) For individuals with income at or below 135 percent of the FPL 
applicable to the family size, a premium subsidy equal to 80 percent of 
the late enrollment for the first 60 months during which the penalty is 
imposed and 100 percent of their late enrollment penalty thereafter.
    (ii) For individuals with income greater than 135 percent but at or 
below 140 percent of the FPL applicable to the family size, a premium 
subsidy equal to 60 percent of the late enrollment penalty for the 
first 60 months during which the penalty is imposed and 75 percent of 
their late enrollment penalty thereafter.
    (iii) For individuals with income greater than 140 percent but at 
or below 145 percent of the FPL applicable to the family size, a 
premium subsidy equal to 40 percent of the late enrollment penalty for 
the first 60 months during which the penalty is imposed and 50 percent 
of their late enrollment penalty thereafter.
    (iv) For individuals with income greater than 145 percent but below 
150 percent of the FPL applicable to the family size, a premium subsidy 
equal to 20 percent of the late enrollment penalty for the first 60 
months during which the penalty is imposed and 25 percent of their late 
enrollment penalty thereafter.

Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans

    20. Section Sec.  423.884 is amended by--
    A. Revising paragraph (c)(5)(i).
    B. Revising paragraph (c)(7)(i).
    C. Revising paragraph (d)(5)(iii)(B)(2).
    D. Revising paragraphs (d)(5)(iii)(C) and (D).
    E. Revising the last sentence of paragraph (d)(5)(iv).
    The affected paragraphs are revised to read as follows:


Sec.  423.884  Requirements for qualified retiree prescription drug 
plans.

* * * * *
    (c) * * *
    (5) Timing. (i) General rule. An application for a given plan year 
must be submitted prior to the beginning of the plan year by a date 
specified by CMS in published guidance, unless a request for an 
extension has been filed and approved under procedures set forth in 
such guidance.
* * * * *
    (7) * * *
    (i) Matches the names and identifying information for the 
individuals submitted as qualifying covered retirees with a CMS 
database(s) to determine which retirees are Part D eligible individuals 
who are not enrolled in a Part D plan.
* * * * *
    (d) * * *
    (5) * * *
    (iii) * * *
    (B) * * *
    (2) An amount calculated to reflect the impact on the value of 
defined standard prescription drug coverage of supplemental coverage 
actually provided by the sponsor. Sponsors may use other actuarial 
approaches specified by CMS as an alternative to the actuarial 
valuation specified in this paragraph (d)(5)(iii)(B)(2).
    (C) The valuation of defined standard prescription drug coverage 
for a given plan year is based on the initial coverage limit, cost-
sharing amounts, and out-of pocket threshold for defined standard 
prescription drug coverage under Part D in effect either at the start 
of the plan year or that is announced for the upcoming calendar year. 
In order to use the coverage limits in effect at the beginning of the 
plan year, the attestation must be submitted to CMS no later than 60 
days after the publication of the Part D coverage limits for the 
upcoming calendar year; otherwise, the valuation is based on the 
upcoming year's initial coverage limit, cost-sharing amounts, and out-
of-pocket threshold for defined standard prescription drug coverage 
under Part D.
    (D) Example: If a sponsor's retiree prescription drug plan operates 
under a plan year that ends March 30, the sponsor has a choice of 
basing the attestation for the year April 1, 2007-March 30, 2008 on 
either: the initial coverage limit, cost-sharing amounts, and out-of-
pocket threshold amounts that apply to defined standard prescription 
drug coverage under Part D in calendar year 2007, or the amounts 
announced for calendar year 2008. However, in order to use the amounts 
applicable in calendar year 2007, the sponsor must submit the 
attestation within 60 days after the publication of the Part D coverage 
limits for 2008. If the attestation is submitted more than 60 days 
after the 2008 coverage limits have been published, the 2008 coverage 
limits would apply.
    (iv) * * *For the assurance required under paragraph (d)(1)(ii) of 
this section, the assurance may be provided either separately for each 
benefit option for which the sponsor provided assurances under 
paragraph (d)(1)(i)of this section, or in the aggregate for all benefit 
options (or for a subset of the benefit options).
* * * * *

Subpart S--Special Rules for States-Eligibility Determinations for 
Subsidies and General Payment Provisions

    21. Section 423.902 is amended by adding the definition of ``non-
covered drugs'' in alphabetical order to read as follows:

[[Page 29423]]

Sec.  423.902  Definitions.

* * * * *
    Non-covered drugs are those drugs specifically excluded from the 
definition of Part D drug, which may be excluded from coverage or 
otherwise restricted under Medicaid under sections 1927(d)(2) or (d)(3) 
of the Act, except for smoking cessation agents.
* * * * *
    22. Section 423.906 is amended by--
    A. Revising paragraphs (b)(1) and (2).
    B. Revising paragraph (c).
    The revisions read as follows:


Sec.  423.906  General payment provisions.

* * * * *
    (b) * * *
    (1) Part D drugs; or
    (2) Any cost-sharing obligations under Part D relating to Part D 
drugs.
* * * * *
    (c) Non-covered drugs. States may elect to provide coverage for 
outpatient drugs other than Part D drugs in the same manner as provided 
for non-full benefit dual eligible individuals or through an 
arrangement with a prescription drug plan or a MA-PD plan.
    23. Section 423.910 is amended by revising paragraph (b)(1) 
introductory text to read as follows:


Sec.  423.910  Requirements.

    (b) * * *
    (1) Calculation of payment. The State contribution payment is 
calculated by CMS on a monthly basis, as indicated in the following 
chart. For States that do not meet the monthly reporting requirement 
for the monthly enrollment reporting, the State contribution payment is 
calculated using a methodology determined by CMS.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: September 27, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: November 14, 2006.
Michael O. Leavitt,
Secretary.

    Editorial Note: This document was received by the Federal 
Register on May 21, 2007.
[FR Doc. 07-2577 Filed 5-21-07; 4:20 pm]
BILLING CODE 4120-01-P