[Federal Register Volume 72, Number 164 (Friday, August 24, 2007)]
[Rules and Regulations]
[Pages 48870-48888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-16606]



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Part VII





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 400 and 421



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

  Federal Register / Vol. 72 , No. 164 / Friday, August 24, 2007 / 
Rules and Regulations  

[[Page 48870]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare and Medicaid Services (CMS)

42 CFR Parts 400 and 421

[CMS-6030-F]
RIN 0938-AN72


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

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

ACTION: Final rule.

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SUMMARY: This final rule establishes the Medicare Integrity Program 
(MIP) and implements program integrity activities that are funded from 
the Federal Hospital Insurance Trust Fund. This final rule sets forth 
the definitions related to eligible entities; services to be procured; 
competitive requirements based on Federal acquisition regulations and 
exceptions (guidelines for automatic renewal); procedures for 
identification, evaluation, and resolution of conflicts of interest; 
and limitations on contractor liability.
    This final rule brings certain sections of the Medicare regulations 
concerning fiscal intermediaries (FIs) and carriers into conformity 
with the Social Security Act (the Act). The rule distinguishes between 
those functions that the statute requires to be included in agreements 
with FIs and those that may be included in the agreements. It also 
provides that some or all of the functions may be included in carrier 
contracts.

DATES: Effective Dates: These regulations are effective on October 23, 
2007.

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

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Medicare Contracting Environment

    Since the inception of the Medicare program, the Medicare 
contracting authorities have been in place and largely unchanged until 
the last few years. At the inception of the Medicare program, the 
health insurance and medical communities raised concerns that enacting 
Medicare could result in a large Federal presence in the provision of 
health care. In response, under sections 1816(a) and 1842(a) of the 
Social Security Act (the Act), as those sections existed prior to the 
October 1, 2005 effective date of amendments made by section 911(b) and 
(c) of the Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 (Pub. L. 108-173) (MMA), the Congress provided that public 
agencies or private organizations may participate administering the 
Medicare program under agreements or contracts entered into with CMS.
    These Medicare contractors (which are, for the purposes of this 
preamble, contractors that received awards under sections 1816 and 1842 
of the Act prior to October 1, 2005) are known as fiscal intermediaries 
(FIs) and carriers. With certain exceptions, FIs perform bill 
processing and benefit payment functions for Part A of the program 
(Hospital Insurance) and carriers perform claims processing and benefit 
payment functions for Part B of the program (Supplementary Medical 
Insurance).
    (For the following discussion, the terms ``provider'' and 
``supplier'' are used as those terms are defined in Sec.  400.202. 
``Provider'' means a hospital, a critical access hospital (CAH), a 
skilled nursing facility, a comprehensive outpatient rehabilitation 
facility, a home health agency, or a hospice that has in effect an 
agreement to participate in Medicare; or a clinic, a rehabilitation 
agency, or a public health agency that has in effect a similar 
agreement but only to furnish outpatient physical therapy or speech 
pathology services; or a community mental health center that has in 
effect a similar agreement but only to furnish partial hospitalization 
services. ``Supplier'' is defined as a physician or other practitioner, 
or an entity other than a provider that furnishes health care services 
under Medicare.)
    The former section 1842(a) of the Act authorized us to contract 
with private entities (carriers) for the purpose of administering the 
Medicare Part B program. Medicare carriers determine payment amounts 
and make payments for services (including items) furnished by 
physicians and other suppliers such as nonphysician practitioners 
(NPP), laboratories, and durable medical equipment (DME) suppliers. In 
addition, carriers perform other functions required for the efficient 
and effective administration of the Part B program. The former section 
1842(f) of the Act provided that a carrier must be a ``voluntary 
association, corporation, partnership, or other nongovernmental 
organization which is lawfully engaged in providing, paying for, or 
reimbursing the cost of, health services under group insurance policies 
or contracts, medical or hospital service agreements, membership or 
subscription contracts, or similar group arrangements, in consideration 
of premiums or other periodic charges payable to the carrier, including 
a health benefits plan duly sponsored or underwritten by an employee 
organization.'' No entity was eligible for consideration for a carrier 
contract unless it could demonstrate that it met this definition of 
carrier.
    Section 1842(b) of the Act provided us with the discretion to enter 
into carrier contracts without regard to any provision of the statute 
requiring competitive bidding. Many other provisions of generally 
applicable Federal contract law and regulations, as well as the 
Department of Health and Human Services (HHS) procurement regulations, 
remained in effect for carrier contracts.
    The former section 1816(a) of the Act authorized us to enter into 
agreements with public agencies or private organizations (that is, FIs) 
for the purpose of administering Part A of the Medicare program. These 
entities are responsible for determining the amount of payment due to 
providers in consideration of services provided to beneficiaries and 
for making these payments. Section 1816(a) gave us the authority to 
enter into an agreement with an entity to serve as a FI if the entity 
was first ``nominated'' by a group or association of providers to make 
Medicare payments to it. Effective October 1, 2005, section 911 of the 
MMA eliminated the requirement that FIs be nominated and establishes 
the requirement that Medicare contracts awarded to Medicare 
Administrative Contractors (MACs) be competitively bid.
    Section 421.100 requires that the agreement between CMS and a FI 
specify the functions the FI must perform. In addition to requiring any 
items specified by CMS in the agreement that are unique to that FI, our 
regulations require that all FIs perform activities relating to 
determining and making payments for covered Medicare services, fiscal 
management, provider audits, utilization patterns, resolution of cost 
report disputes, and reconsideration of determinations. Finally, our 
regulations require that all FIs furnish information and reports, 
perform certain functions for provider-based HHAs and provider-based 
hospices, and comply with all applicable laws and regulations and with 
any other terms and conditions included in their agreements.
    Similarly, Sec.  421.200 requires that the contract between CMS and 
a Part B carrier specify the functions the carrier must perform. In 
addition to requiring

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any items specified by CMS in the contract that are unique to that 
carrier, we require that all Part B carriers perform activities 
relating to determining and making payments (on a cost or charge basis) 
for covered Medicare services, fiscal management, utilization patterns, 
and Part B redeterminations. In addition, Sec.  421.200 requires that 
all carriers furnish information and reports, maintain and make 
available records, and comply with any other terms and conditions 
included in their contracts. It is within this context that Medicare FI 
and carrier contracts are significantly different from standard Federal 
government contracts.
    The Medicare FI and carrier contracts are normally renewed 
automatically from year to year, in contrast to the typical government 
contract that is recompeted at the conclusion of the contract term. The 
Congress, in providing for the nomination process under section 1816 of 
the Act, and authorizing the automatic renewal of the carrier contracts 
in then-existing section 1842(b)(5) of the Act, contemplated a 
contracting process that would permit us to noncompetitively renew the 
Medicare contracts from year to year.
    For both FIs and carriers, Sec.  421.5 states that we have the 
authority not to renew a Part A agreement or a Part B contract when it 
expires. Section 421.126 provides for terminating FI agreements in 
certain circumstances, and, similarly, Sec.  421.205 provides for 
terminating carrier contracts.
    Each year, the Congress appropriates funds to support Medicare 
contractor activities. In addition, the Medicare Integrity Program 
(MIP) authorized by the Health Insurance Portability and Accountability 
Act of 1996 (Pub. L. 104-191) (HIPAA) provides funding for program 
integrity efforts. These funds are distributed to the contractors based 
on annual budget and performance negotiations, where funds are provided 
by program activity to each of the current Medicare contractors. 
Historically, approximately 33 percent of these funds were for payment 
for the processing of claims; an additional 25 percent of the funds 
were for program integrity activities. These include conducting medical 
review of claims to determine whether services are medically necessary 
and constitute an appropriate level of care, deterring and detecting 
potential Medicare fraud, auditing or settling provider cost reports, 
and ensuring that Medicare acts as a secondary payer when a beneficiary 
has primary coverage through other insurance. The remainder of the 
funds was allocated for beneficiary and provider or supplier services 
and for operational functions.

B. Discussion About Medicare Administrative Contractors (MACs)

    Section 911 of the MMA added new section 1874A to the Act, 
establishing the Medicare Fee-for-Service (FFS) Contracting Reform 
(MCR) initiative that will be implemented over the next several years. 
Under this provision, effective October 1, 2005, we have the authority 
to replace the current Medicare FI and carrier contractors with new 
MACs using competitive procedures.
    In 2005, we began the process to conduct full and open competitions 
to replace the current contracts with MACs. (This process is required 
to be completed by 2011.) These MACs will handle many of the same basic 
functions that are now performed by FIs and carriers. Additionally, 
MACs may be charged with performing functions under the MIP under 
section 1893 of the Act. The statute does not preclude the current FIs 
and carriers from competing for the MAC contracts.
    Among other provisions, section 1874A of the Act establishes 
eligibility requirements for the MACs; describes the functions these 
new contractors may perform (which may include functions of section 
1893 of the Act so long as these responsibilities do not duplicate 
activities that are being carried out under a MIP contract); and 
specifies various requirements for the structure, terms, and conditions 
of these new MAC contracts. In particular, section 1874A(a)(6) of the 
Act specifies that the Federal Acquisition Regulation (FAR) (48 CFR 
Chapter 1) will apply to the MAC contracts, except to the extent 
inconsistent with a specific requirement of section 1874A of the Act.
    Unlike the contracting authority of section 1893 of the Act, the 
new authority of section 1874A of the Act does not mandate that the 
Secretary publish either a proposed or final regulation prior to 
entering into MAC contracts. Instead, the Congress, when enacting 
section 1874A of the Act, directed CMS in section 1874A(a)(6) of the 
Act to utilize the existing well-defined regulatory framework of the 
FAR.
    As one element of our implementation of section 1874A of the Act, 
we published the Medicare Hospital Outpatient Prospective Payment 
System and CY 2007 Payment Rates final rule (71 FR 68228 through 68230) 
which made certain changes to 42 CFR 421 Subparts A and B, and 
established a new Subpart E, to make clear how Medicare providers and 
suppliers will be assigned to FIs, carriers, and MACs during the 
implementation period for section 1874A.
    The first of the full and open MAC competitions was for the DME 
claims workloads. We decided to start the Medicare contractor reform 
initiative with the DME MAC contracts because the workload of the then-
existing four durable medical equipment regional carriers (DMERCs) was 
stable and the risk of any significant program disruption to the 
provider and beneficiary communities would have been minimal. We 
awarded the contracts for the four specialty MACs that will handle 
administration of Medicare claims for DME during 2006, and we 
anticipate that the last of these workloads will be fully implemented 
by the summer of 2007.
    During the initial implementation phase (2005 through 2011), we 
plan to compete and award contracts for 15 Part A and Part B MACs 
servicing the majority of all types of providers (both Part A and Part 
B). We designed the new MAC jurisdictions to balance the allocation of 
workloads, promote competition, account for the integration of claims 
processing activities, and mitigate the risk to the Medicare program 
during the transition to the new contractors. The new jurisdictions 
reasonably balance the number of FFS beneficiaries and providers. These 
jurisdictions will be substantially more alike in size than the 
existing FI and carrier jurisdictions, and they will promote much 
greater efficiency in processing Medicare's billion claims a year. On 
July 31, 2006, we announced that we had awarded the first of the Part 
A/B MAC contracts (Jurisdiction 3).
    More information about our plans to implement Medicare contracting 
reform, including our Report to the Congress on this subject, can be 
obtained by accessing the Internet at http://www.cms.hhs.gov/medicarereform/contractingreform/.

C. The Medicare Integrity Program

    Section 202 of HIPAA added new section 1893 to the Act establishing 
the MIP. This program is funded from the Medicare Hospital Insurance 
Trust Fund to perform program integrity activities with respect to all 
parts of the Medicare program. Specifically, section 1893 of the Act 
expanded our contracting authority to allow us to contract with 
eligible entities to perform Medicare program integrity activities. 
These activities include: Medical, potential fraud, and utilization 
review; cost report audits; Medicare secondary payer determinations; 
overpayment recovery;

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

D. Experience With MIP Contractors

    The MIP authority, established by HIPAA, gave us specific 
contracting authority, consistent with the FAR, to enter into contracts 
with entities to promote the integrity of the Medicare program.
    In the March 20, 1998 Federal Register (63 FR 13590), we published 
a proposed rule that would implement provisions of section 1893 of the 
Act. We reviewed and considered all the timely comments received 
concerning the proposed MIP regulatory provisions. Comments received 
addressed a variety of issues, such as conflict of interest issues, 
coordination among Medicare contractors, contractor functions, and 
eligibility requirements. Overall, we found that few changes were 
needed to the regulatory text. However, a final rule was never 
published. Notwithstanding, section 1893 of the Act granted us the 
authority to contract with eligible entities to perform program 
integrity activities prior to publishing the final rule.
    Section 1871(a), added by section 902 of the MMA, mandated that 
final rules relating to the Medicare program based on a previous 
publication of a proposed regulation or an interim final regulation be 
published within 3 years except under exceptional circumstances. Given 
that it had been greater than 3 years since the publication of the 
initial proposed MIP regulations, we issued a second proposed rule in 
the Federal Register on June 17, 2005 (70 FR 35204 through 35220).
    In the March 20, 1998 proposed rule (63 FR 13590), we outlined our 
authority to contract with entities to perform Medicare program 
integrity functions to promote the integrity of the Medicare program 
prior to publishing a final rule. In accordance with this MIP 
authority, we currently maintain the following MIP contracts: 12 
Indefinite Delivery-Indefinite Quantity (IDIQ) contracts for the 
Program Safeguard Contractor (PSC) effort; 1 Coordination of Benefits 
(COB) contract, 8 IDIQ contracts for the Medicare Managed Care (MMC) 
Program Integrity Contractors effort, 8 IDIQ contracts for the Medicare 
Drug Integrity Contractor (MEDIC) effort, and other contracts. (IDIQ 
contracts are explained in detail in FAR 48 CFR subpart 16.5.) After 
being awarded an IDIQ contract, organizations are given a fair 
opportunity to be considered for award of task orders released by CMS 
to specifically address program integrity issues within the scope of 
the IDIQ contract. These MIP contractors, which are discussed in the 
following section, must comply with the CMS Business Partners Systems 
Security Manual (BPSSM) and its operational appendices (A, B, C, and 
D); the CMS Policy for IT Security; and the CMS Information Security 
``Virtual Handbook.'' CMS' Core Security Requirements, as defined in 
the CMS BPSSM, include, but are not limited to, security standards 
adopted under the Health Insurance Reform regulations published under 
the HIPAA and Title X, section 1002 of the Homeland Security Act of 
2002, the Federal Information Security Management Act of 2002 (FISMA) 
(Pub. L. 107-296). The CMS requirements are applicable to MIP contracts 
and to all subcontracts to MIP contractors. The BPSSM can be found at 
http://www.cms.hhs.gov/informationsecurity/. The security requirements 
include the following:
     Contractor appointment of a dedicated systems security 
officer.
     Contractor certification for compliance with CMS Systems 
Security Requirements.
     Contractor administration of a systems security program.
     Contractor correction of any security deficiencies, 
conditions, weaknesses, findings, or gaps identified by all audits, 
reviews, evaluations, tests, and assessments.

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     Contractor compliance with CMS' security certification and 
accreditation.
    CMS security requirements are fully defined at http://www.cms.hhs.gov/informationsecurity/ and will be described in detail in 
the MIP-related statement of work and task orders.
1. Program Safeguard Contractors (PSCs)
    Since 1999, we have awarded more than 65 individual task orders 
under the PSC IDIQ contract, including 17 Benefit Integrity (BI) Model 
PSCs. These BI PSCs are tasked with performing fraud and abuse 
detection and prevention activities for their respective jurisdictions. 
Specific activities include fraud case development, local and national 
data analysis to identify potentially fraudulent billing schemes or 
patterns, law enforcement support, medical review for a BI purpose, and 
identifying and developing appropriate administrative actions. Four of 
the 17 BI PSCs have additional medical review functions. The remaining 
task orders issued under the PSC IDIQ contract have focused on specific 
program vulnerabilities and problem areas (for example, Comprehensive 
Error Rate Testing (CERT), Correct Coding Initiative (CCI), and Data 
Assessment & Verification (DAVe)).
    Overall, we have been successful in implementing the PSC program. 
Since 2002, 12 of the 17 BI Model PSC contracts were awarded and 
transitioned. Typically, a 3 to 6 month period was allowed for the PSCs 
to transition the BI workload from the FI and Carrier that had 
previously been performing this workload.
2. Coordination of Benefits Contractor (COB)
    In November 1999, we awarded one COB contract to consolidate 
activities that support the collection, management, and reporting of 
other health insurance coverage for Medicare beneficiaries. The 
purposes of the COB program are to identify the health benefits 
available to a Medicare beneficiary and to coordinate the payment 
process to prevent the mistaken payment of Medicare benefits. In 
January 2001, the COB contractor assumed all Medicare Secondary Payer 
(MSP) claims investigations. Implementing this single-source 
development approach greatly reduced the amount of duplicate MSP 
investigations. It also offered a centralized, one-stop customer 
service approach for most MSP-related inquiries, including those 
seeking general MSP information.
    Another task that the COB contractor is responsible for is 
coordinating benefits with entities (including insurers and other 
benefit programs) that pay after Medicare. These entities sign a 
standard COB agreement for this purpose. Under a signed COB agreement, 
the COB contractor collects information about beneficiaries who have 
supplemental insurance. This information is used under Parts A and B of 
Medicare to cross Medicare processed claims data over to insurers or 
benefit programs for calculating their supplemental or tertiary 
payments, as applicable. This coordination of benefits is consolidated 
at the COB contractor. The COB contractor also has a role under Part D 
to collect supplemental payer information. This information is then 
shared and used by pharmacies to send secondary claims to supplemental 
payers.
3. Medicare Managed Care Program Integrity Contractors (MMC-PICs)
    MMC-PICs supplement our regional office integrity responsibilities 
related to Medicare Advantage (MA) (formerly known as Medicare+Choice 
(M+C)). Similar to the PSC, the MMC-PIC was designed specifically to 
identify, stop, and prevent fraud, waste, and abuse.
    Services performed by a MMC-PIC include--
     Complete monthly analysis of plan discrepancies and report 
to MA Organizations;
     Review and analyze State regulatory practices;
     Evaluate marketing operations;
     Audit financial and medical records, including claims, 
payments, and benefit packages;
     Evaluate enrollment and encounter data;
     Collect information and review matters that may contain 
evidence of fraud, waste, and abuse and make referrals to the 
appropriate government authority;
     Compliance testing of internal controls of Health Care 
Prepayment Plan (HCPP) contracting organizations;
     Complete all Retroactive Payment Adjustments and 
Retroactive Enrollments or Disenrollments submitted by MA 
Organizations;
     Complete final reconciliation of payment for non-renewals 
of MA contracts; and
     Make reconsideration determinations with plans that 
request decisions regarding payments.

II. Provisions of the Proposed Rule

    In the June 17, 2005 Federal Register (70 FR 35204), we published a 
proposed rule as part of our overall contracting strategy, which is 
designed to build on the strengths of the marketplace. We will continue 
to encourage new and innovative approaches in the marketplace to 
protect the Medicare Trust Funds.
    As discussed in the section I.B. of this preamble, implementing 
section 1874A of the Act is also a major element of our contracting 
strategy. We are not including extensive rules relating to that 
authority in this final rule, but interested parties can gain 
information about our plans for implementing section 1874A of the Act 
by accessing the Internet at http://www.cms.hhs.gov/medicarereform/contractingreform. In addition, the public can also send us informal 
questions about MAC implementation through this site.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability
    In accordance with section 1893 of the Act, we proposed to amend 
part 421 by adding a new subpart D entitled, ``Medicare Integrity 
Program Contractors.'' This subpart would--
     Define the types of entities eligible to become MIP 
contractors. We also clarify that, in accordance with section 1874A of 
the Act, a MAC may perform MIP functions under certain conditions;
     Identify program integrity functions a MIP contractor may 
perform;
     Describe procedures for awarding and renewing contracts;
     Establish procedures for identifying, evaluating, and 
resolving organizational conflicts of interest consistent with the FAR;
     Prescribe responsibilities; and
     Set forth limitations on MIP contractor liability.
    Subpart D would apply to entities that seek to compete for, or 
receive award of, a contract under section 1893 of the Act, including 
entities that perform functions under this subpart emanating from the 
processing of claims for individuals entitled to benefits as qualified 
railroad retirement beneficiaries. We would set forth the basis, scope, 
and applicability of subpart D in Sec.  421.300.
2. Definition of Eligible Entities (Sec.  421.302)
    In accordance with section 1893(c) of the Act, we proposed to add 
Sec.  421.302(a) to provide that an entity is eligible to enter into a 
MIP contract if it--
     Demonstrates the capability to perform MIP contractor 
functions;
     Agrees to cooperate with the Office of Inspector General 
(OIG), the Department of Justice (DOJ), and other law enforcement 
agencies in investigating and deterring potential

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fraud and abuse in the Medicare program, including making referrals;
     Complies with the conflict of interest standards in 48 CFR 
Chapters 1 and 3, and is not excluded under the conflict of interest 
provisions established by this rule;
     Maintains an appropriate written code of conduct and 
compliance policies that include, without limitation, an enforced 
policy on employee conflicts of interest;
     Meets financial and business integrity requirements to 
reflect adequate solvency and satisfactory legal history; and
     Meets other requirements that we may impose.
    Also, in accordance with the undesignated paragraph following 
section 1893(c)(4) of the Act, we proposed to specify that Medicare 
carriers are deemed to be eligible to perform the activity of 
developing and periodically updating a list of DME items that are 
subject to prior authorization.
    In the June 17, 2005 proposed rule (70 FR 35204), we stated that it 
is not possible to identify each and every possible contractor 
eligibility requirement that may appear in a future solicitation. 
Therefore, we proposed that in order to permit us maximum flexibility 
to tailor our contractor eligibility requirements to specific 
solicitations while satisfying the intent of section 1893 of the Act, 
any contractor eligibility requirements in addition to those specified 
in Sec.  421.302(a)(1) through (a)(4) would be contained in the 
applicable solicitation.
    At Sec.  421.302(a)(1), we proposed to clarify that a MAC under 
section 1874A of the Act may perform any or all of the MIP functions 
listed and described in Sec.  421.304. However, in performing these 
functions, the MAC may not duplicate work being performed under a MIP 
contract. We believe the proposed provision is consistent with sections 
1874A(a)(4)(G) and 1874A(a)(5) of the Act, as added by the MMA.
    At proposed Sec.  421.302(b), we also clarified our discretion to 
require a MAC performing any of the MIP functions under Sec.  421.304 
to abide by the eligibility requirements applicable to MIP contracts, 
that is, the four elements listed at Sec.  421.302(a). The first 
requirement at Sec.  421.302(a) related to demonstrated capability and 
the third requirement related to addressing conflicts of interest were 
consistent with provisions in the authorizing statute for MAC contracts 
(section 1874A(a)(2)of the Act). While the second requirement, which 
pertained to cooperation with the OIG and other forms of law 
enforcement, was not stated in section 1874A of the Act, we believed 
that this requirement is not inconsistent with section 1874A of the Act 
or the FAR. This requirement is, in fact, compatible with our general 
practices, multiple statutes, and regulations governing HHS operations 
and contracts, and finally with provisions within Title XI of the Act. 
The fourth requirement clarified our authority to impose additional 
reasonable requirements through contract, and therefore, it made sense 
to apply this element to MAC contractors. Our specific approach to all 
these issues would be clarified in any solicitation for MAC contracts.
    In accordance with section 1893(d) of the Act, we may continue to 
contract, for the performance of MIP activities, with FIs and carriers 
that had a contract with us on August 21, 1996 (the effective date of 
enactment of HIPAA). However, in accordance with sections 1816(l) or 
1842(c)(6) of the Act (both added by HIPAA and both now repealed by the 
MMA), and section 1874A(a)(5)(A) of the Act (added by the MMA), these 
contractors and MACs (which may also perform MIP activities) may not 
duplicate activities under a FI agreement or carrier contract and a MIP 
contract, with one excepted activity. The exception permits a carrier 
or a MAC to develop and update a list of items of DME that are subject 
to prior authorization both under the MIP contract and its contract 
under section 1842 of the Act. This discretion to continue the 
performance of MIP activities through the FI and carrier contracts 
until they are phased out in accordance to section 911(d) of the MMA 
was provided for in proposed changes to Sec.  421.100 and Sec.  
421.200.
3. Definition of MIP Contractor (Sec.  400.202)
    We proposed to define ``Medicare integrity program contractor,'' at 
Sec.  400.202 (Definitions specific to Medicare), as an entity that has 
a contract with us under section 1893 of the Act to perform exclusively 
one or more of the program integrity activities specified in that 
section. The inclusion of the word ``exclusively'' in this definition 
is intended to conform with section 1874A(a)(5)(B) of the Act as added 
by the MMA.
4. Services To Be Procured (Sec.  421.304)
    A MIP contractor may perform some or all of the MIP activities 
listed in Sec.  421.304. Section 421.304 would state that the contract 
between CMS and a MIP contractor specifies the functions the contractor 
performs. In accordance with section 1893(b) of the Act, proposed Sec.  
421.304 identified the following as MIP activities:
    (a) Medical, Utilization, and Potential Fraud Review. Medical and 
utilization review includes the processes necessary to ensure both the 
appropriate utilization of services and that services meet the 
professionally recognized standards of care. These processes include 
review of claims, medical records, and medical necessity documentation 
and analysis of patterns of utilization to identify inappropriate 
utilization of services. This would include reviewing the activities of 
providers or suppliers and other individuals and entities (including 
health maintenance organizations, competitive medical plans, health 
care prepayment plans, and MA plans). This function results in 
identifying overpayments, prepayment denials, recommendations for 
changes in national coverage policy, changes in local coverage 
determinations (LCD) policies and payment screens, referrals for 
potential fraud and abuse, and identifying the education needs of 
beneficiaries, providers, and suppliers.
    Potential fraud review includes fraud prevention initiatives, 
responding to external customer complaints of alleged fraud, developing 
strategies to detect potentially fraudulent activities that may result 
in improper Medicare payment, and identifying and developing potential 
fraud cases to refer to law enforcement.
    (b) Cost Report Audits. Providers and managed care plans receiving 
Medicare payments are subject to audits for all payments. The audits 
help ensure that proper payments are made in accordance with Medicare 
payment policy, verify financial information for making a final 
determination of allowable costs, identify potential instances of fraud 
and abuse, and ensure the completion of special projects. This 
functional area includes the receipt, processing, and settlement of 
cost reports based on reasonable costs, prospective payment, or any 
other basis; and the establishment or adjustment of the interim payment 
rate using cost report or other information.
    (c) Medicare Secondary Payer Activities. The Medicare secondary 
payer function is a process developed as a payment safeguard to protect 
the Medicare program against making mistaken primary payments. The 
focus of this process is to ensure that the Medicare program pays only 
to the extent required by statute. Contractors performing Medicare 
secondary payer functions would be responsible for identifying Medicare 
secondary payer situations and pursuing the recovery of

[[Page 48875]]

mistaken payments from the appropriate entity or individual, depending 
on the specifics of the contract. This functional area includes the 
processes performed to identify beneficiaries for whom there is 
coverage which is primary to Medicare. Through these processes, 
information may be acquired for subsequent use in beneficiary claims 
adjudication, recovery, and litigation.
    (d) Education. This functional area includes educating 
beneficiaries, providers, suppliers, and other individuals regarding 
payment integrity and benefit quality assurance issues.
    (e) Developing Prior Authorization Lists. This functional area 
includes developing and periodically updating a list of DME items that, 
in accordance with section 1834(a)(15) of the Act, are subject to prior 
authorization. Prior authorization is a determination that an item of 
DME is covered prior to when the equipment is delivered to the Medicare 
beneficiary. Section 1834(a)(15) of the Act requires prior 
authorization to be performed on the following items of DME:
     Items identified as subject to unnecessary utilization;
     Items supplied by suppliers that have had a substantial 
number of claims denied under section 1862(a)(1) of the Act as not 
reasonable or necessary or for whom a pattern of overutilization has 
been identified; or
     A customized item if the beneficiary or supplier has 
requested an advance determination.
    We note that the MIP functions were not limited to services 
furnished under FFS payment methodologies. MIP functions apply to all 
types of claims. They also apply to all types of payment systems 
including, but not limited to, managed care and demonstration projects. 
MIP functions also apply to payments made under the Medicare Part D 
prescription drug benefit that was implemented on January 1, 2006.
5. Competitive Requirements (Sec.  421.306)
    We specified, in Sec.  421.306(a), that MIP contracts would be 
awarded in accordance with 48 CFR chapters 1 and 3, 42 CFR part 421 
subpart D, and all other applicable laws and regulations. Furthermore, 
in accordance with section 1893(d)(2) of the Act, we specified that the 
procedures set forth in these authorities would be used: (1) When 
entering into new contracts; (2) when entering into contracts that may 
result in the elimination of responsibilities of an individual FI or 
carrier; and (3) at any other time we consider appropriate.
    In Sec.  421.306(b), we proposed to establish an exception to 
competition that allows a successor in interest to a FI agreement or 
carrier contract to be awarded a contract for MIP functions without 
competition if its predecessor performed program integrity functions 
under the transferred agreement or contract and the resources, 
including personnel, which were involved in performing those functions, 
were transferred to the successor. This provision would remain in 
effect until all FI agreements and carrier contracts were transitioned 
to MACs in accordance with section 1874A of the Act.
    The proposal was made in anticipation that some FIs and carriers, 
prior to the competition of their contracts in accordance with the MMA, 
may engage in transactions under which the recognition of a successor 
in interest by means of a novation agreement may be appropriate, and 
the resources involved in the FI's or carrier's MIP activities were 
transferred along with its other Medicare-related resources to the 
successor in interest. For example, the FI or carrier may undergo a 
corporate reorganization under which the corporation's Medicare 
business is transferred entirely to a new subsidiary corporation. When 
all of a contractor's resources or the entire portion of the resources 
involved in performing a contract are transferred to a third party, we 
may recognize the third party as the successor in interest to the 
contract through approval of a novation agreement as specified in the 
FAR at 48 CFR 42.1200.
    If the FI or carrier was performing program integrity activities 
under its contract on August 21, 1996, the date of the enactment of the 
MIP legislation, section 1893(d) of the Act permits us to continue to 
contract with the FI or carrier for the performance of those activities 
without using competitive procedures (but only through and, no later 
than, September 30, 2011). In the context of a corporate reorganization 
under which all of the resources involved in performing the contract, 
including those involved in performing MIP activities, are transferred 
to a successor in interest, we may determine that breaking out the MIP 
activities and competing them separately (prior to the MAC contract 
competitions) would not be in the best interest of the government.
    Inherent in the requirement of section 1893(d) of the Act that the 
Secretary establish competitive procedures to be used when entering 
into contracts for MIP functions was the authority to establish 
exceptions to those procedures. (See 48 CFR 6.3) Moreover, the statute 
stated that FI agreements and carrier contracts would be 
noncompetitively awarded under sections 1816(a) and 1842(b)(1) of the 
Act. Furthermore, those agreements and contracts have, in recent years 
prior and subsequent to the enactment of the MIP legislation, included 
program integrity activities, a fact that the Congress acknowledged in 
section 1893(d)(2) of the Act. Creating an exception to the use of 
competition for cases in which the same resources, including the same 
personnel, continue to be used by a third party as successor in 
interest to a FI agreement or carrier contract is consistent with the 
Congress' authorization to forego competition when the contracting 
entity was carrying out the MIP functions on the date of enactment of 
the MIP legislation. Section 421.306(b) permits continuity in the 
performance of the MIP functions until the time we determine a need to 
procure MIP functions on the basis of full and open competition.
    The exception to competition will operate only where a FI or 
carrier that performed program integrity functions under an agreement 
or a contract in place on August 21, 1996, transfers its functions by 
means of a valid novation agreement in accordance with the requirements 
of the FAR. This exception is intended to be applied only until we are 
prepared to award MIP contracts on the basis of FAR competitive 
procedures, or until we compete the full FI and carrier workloads (both 
MIP and non-MIP functions) in accordance with section 1874A(b) of the 
Act. The exception is not intended, and will not be used, to circumvent 
the competitive process when we make competitive awards of MIP and MAC 
contracts. This provision is intended to provide us with flexibility in 
handling Medicare functions in the face of bona fide changes in 
corporate structure that often have little, if anything, to do with the 
Medicare program.
    In Sec.  421.306(c), we further specified that an entity must meet 
the eligibility requirements established in proposed Sec.  421.302 to 
be eligible to be awarded a MIP contract.
6. Renewal of MIP Contracts (Sec.  421.308)
    Proposed Sec.  421.308(a) specified that an initial contract term 
will be defined in the MIP contract and that contracts may contain 
renewal clauses. Contract renewal provides a mutual benefit to both 
parties. Renewing a contract, when appropriate, results in continuity 
both for us and the contractor and can be in the best interest of the 
Medicare program. The benefits are realized through early communication 
of our intention whether to renew a contract, which permits both 
parties to plan for

[[Page 48876]]

any necessary changes in the event of nonrenewal. Furthermore, as a 
prudent administrator of the Medicare program, we must ensure that we 
have sufficient time and resources to transfer the MIP functions if a 
reassignment of the functions becomes necessary (either because the 
contractor has given notice of its intent to nonrenew or because we 
have determined that reassignment is in the best interest of the 
Medicare program). Therefore, in Sec.  421.308(a), we proposed to 
specify that we may renew a MIP contract, as we determine appropriate, 
by giving the contractor notice, within timeframes specified in the 
contract, of our intention to do so. (The solicitation document that 
results in the contract would contain further details regarding this 
provision.)
    The renewal clause referred to in this section is not an ``option'' 
as defined in the FAR at 48 CFR subpart 2.101. Section 1893 of the Act 
allows for the renewal of MIP contracts without regard to any provision 
of the law requiring competition if the contractor has met or exceeded 
performance requirements. As stated in the FAR at 48 CFR 2.101, `` 
`Option' means a unilateral right in a contract by which, for a 
specified time, the government may elect to purchase additional 
supplies or services called for by the contract, or may elect to extend 
the term of the contract.''
    As described in the FAR, 48 CFR subpart 17.2, an option is 
different than a renewal clause in several respects. The length of time 
of an option is established in a contract. In contrast, the length of a 
renewal period in a MIP contract may not be defined. Furthermore, an 
option must be exercised during the life of the contract. A MIP renewal 
clause can go into effect only after exhausting the initial contract 
period of performance, including any option provisions. Finally, an 
option allows us to extend the term of a contract only up to 60 months, 
the maximum term allowed by the FAR (excluding GSA awards). A MIP 
contract renewal clause allows the term of a MIP contract to surpass 
that limit, as long as the contractor meets the conditions in the 
regulation and the contract (including performance standards 
established in its contract) and we have a continuing need for the 
supplies or services under contract.
    Based on section 1893(d)(3) of the Act, we specified, in Sec.  
421.308(b), that we may renew a MIP contract without competition if the 
contractor continues to meet all the requirements of proposed subpart D 
of part 421, the contractor meets or exceeds the performance standards 
and requirements in the contract, and it is in the best interest of the 
government.
    At Sec.  421.308(c), we provided that, if we do not renew the 
contract, the contract will end in accordance with its terms, and the 
contractor does not have a right to a hearing or judicial review 
regarding the nonrenewal. This is consistent with our longstanding 
policy for FI and carrier contracts.
7. Conflict of Interest Rules
    The proposed rule established the process for identifying, 
evaluating, and resolving conflicts of interest as required by section 
1893(d)(1) of the Act. The process was designed to ensure that the more 
diversified business arrangements of potential contractors do not 
inhibit competition between providers, suppliers, or other types of 
businesses related to the insurance industry, or have the potential for 
harming government interests.
    Given the sensitive nature of the work to be performed under the 
MIP contract(s), the need to preserve the public trust, and the history 
of fraud and abuse in the Medicare program, our contracting officers 
may include an organizational conflict of interest provision in the 
solicitation and subsequent contract award document, which may be 
tailored to each procurement. The contract provision will be consistent 
with the guidelines found at FAR 9.5, Organizational and consultant 
conflicts of interest, as well as address specific concerns for 
identifying, mitigating and resolving actual, apparent or perceived 
conflict(s) of interest. In general, the contracting officer will not 
enter into a MIP contract with an offeror that has been determined to 
have, or has the potential for, an unresolved organizational conflict 
of interest.
    In Sec.  421.310(a), we specified that an offeror for MIP contracts 
is, and MIP contractors are, subject to the organizational conflict of 
interest standards and requirements of the FAR organizational conflict 
of interest guidance, found at 48 CFR subpart 9.5, and the requirements 
and standards as are contained in each individual contract awarded to 
perform functions found at section 1893 of the Act.
    In Sec.  421.310(b), we stated that we consider that a conflict of 
interest has occurred if, during the term of the contract, the 
contractor or its employee, agent or subcontractor has received, 
solicited, or arranged to receive any fee, compensation, gift, payment 
of expenses, offer of employment, or any other thing of value from any 
entity that is reviewed, audited, investigated, or contacted during the 
normal course of performing activities under the MIP contract. We 
incorporated the definition of ``gift'' from 5 CFR 2635.203(b) of the 
Standards of Ethical Conduct for Employees of the Executive Branch, 
which excludes from the definition items such as greeting cards, soft 
drinks, and coffee.
    We also specified in Sec.  421.310(b) that if we determine that the 
contractor's activities are creating a conflict, then a conflict of 
interest has occurred during the term of the contract. In addition, we 
specified that, if we determine that a conflict of interest exists, we 
may, as we deem appropriate--
     Not renew the contract for an additional term;
     Modify the contract; or
     Terminate the contract for default.
    We also specified that the solicitation may require more detailed 
information than identified above. Our proposed provisions did not 
describe all of the information that may be required, or the level of 
detail that would be required, because we wish to have the flexibility 
to tailor the disclosure requirements to each specific procurement.
    We intended to minimize the reporting and recordkeeping 
requirements as much as is feasible, while taking into consideration 
our need to have assurance that MIP contractors do not have, and will 
not develop during the time of performance, a conflict of interest.
    Because potential offerors may have questions about whether 
information submitted in response to a solicitation, including 
information regarding potential conflicts of interest, may be disclosed 
under a request submitted under the Freedom of Information Act (FOIA), 
we provided the following information.
    To the extent that a proposal containing information is submitted 
to us as a requirement of a competitive solicitation under 41 U.S.C. 
Chapter 4, Subchapter IV, and a FOIA request is made for a copy of that 
proposal, we will withhold the proposal to the extent authorized by 
law. This withholding is based upon 41 U.S.C. 253b(m). However, there 
is one exception to this requirement that involves any proposal that is 
set forth or incorporated by reference in the contract awarded to an 
offeror or bidder. In such cases, the FOIA does not offer presumptive 
categorical protection. Rather, we would withhold, under 5 U.S.C. 
552(b)(4), information within the proposal that constitutes trade 
secrets or commercial or financial information that is privileged or 
confidential, provided the criteria established by National Parks & 
Conservation Association v. Morton, 498

[[Page 48877]]

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

[[Page 48878]]

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

B. Intermediary and Carrier Functions

    The former section 1816(a) of the Act, which provided that 
providers could nominate a FI, required only that nominated FIs perform 
the functions of determining payment amounts and making payment, and 
the former section 1842(a) of the Act required only that carriers 
perform some or all of the functions cited in that section. Section 911 
of the MMA eliminated the requirement that FIs be nominated, and 
effective October 1, 2005, established the requirement that Medicare 
contracts awarded to MACs be competitively bid by September 30, 2011.
    Our existing requirements at Sec.  421.100 and Sec.  421.200 
concerning functions to be included in FI agreements and carrier 
contracts far exceeded those of the statute. Therefore, in the February 
22, 1994 Federal Register (59 FR 8446), we published a proposed rule 
that would distinguish between those functions that the statute 
previously required to be included in agreements with FIs and those 
functions that, while not required to be performed by FIs, could have 
been included in FI agreements at our discretion. We also proposed that 
any functions included in carrier contracts may be included at our 
discretion. In addition, we proposed to add payment on a fee schedule 
basis as a new function that may be performed by carriers.
    The February 22, 1994 proposed rule was never finalized, but its 
content was reproposed in our initial March 20, 1998 proposed rule for 
the MIP program (63 FR 13590). The second proposed rule, published on 
June 17, 2005, set forth a new proposal to bring those sections of the 
regulations that concern the functions Medicare FIs and carriers 
perform into conformity with the provisions of sections 1816(a), 
1842(a), and 1893(b) of the Act, for so long as the FI and carrier 
contracts exist until they are all replaced by MAC contracts.
    As noted in section I.A. of this preamble, our current regulations 
at Sec.  421.100 specify a list of functions that must, at a minimum, 
be included in all FI agreements. Similarly, Sec.  421.200 specifies a 
list of functions that must, at a minimum, be included in all carrier 
contracts. These requirements far exceed those of the statute.
    Until October 1, 2005, section 1816(a) of the Act required only 
that a FI agreement provide for determination of the amount of payments 
to be made to providers and for the making of the payments. Pending the 
effective date of changes made by the MMA, section 1816(a) permitted, 
but did not require, a FI agreement to include provisions for the FI to 
provide consultative services to providers to enable them to establish 
and maintain fiscal records or to otherwise qualify as providers. It 
also provided that, for those providers to which the FI makes payments, 
the FI may serve as a channel of communications between us and the 
providers, may audit the records of the providers, and may perform 
other functions as were necessary.
    Until October 1, 2005, section 1816(a) of the Act mandated only 
that a FI make payment determinations and make payments and, because of 
the nomination provision of section 1816(a) of the Act, these functions 
must remain with FIs. We believed that, pending the effective date of 
changes made by the MMA, section 1816(a) of the Act would not require 
that the other functions set forth at Sec.  421.100(c) through (i) be 
included in all FI agreements. Furthermore, section 1893 of the Act 
permits the performance of functions related to Medicare program 
integrity by other entities. Thus, we proposed to revise Sec.  421.100 
to be consistent with section 1893 of the Act and the implementing 
regulations. The mandatory inclusion of all functions in all agreements 
limits our ability to efficiently and effectively administer the 
Medicare program. For example, if an otherwise competent FI performs a 
single function poorly, it would be efficient and effective to have 
that function transferred to another contractor that could carry it out 
in a satisfactory manner. The alternative is to not renew or to 
terminate the agreement of that FI and to transfer all functions to a 
new contractor, which may not have had an ongoing relationship with the 
local provider community.
    Therefore, we proposed to revise Sec.  421.100 to state that an 
agreement between CMS and a FI specifies the functions to be performed 
by the FI and that these must include determining the amount of 
payments to be made to providers for covered services furnished to 
Medicare beneficiaries and making the payments and may include any or 
all of the following functions:
     Any or all of the MIP functions identified in proposed 
Sec.  421.304, provided that they are continuing to be performed under 
an agreement entered into under section 1816 of the Act that was in 
effect on August 21, 1996, and they do not duplicate work being 
performed under a MIP contract.
     Undertaking to adjust overpayments and underpayments and 
to recover overpayments when an overpayment determination has been 
made.
     Furnishing to us timely information and reports that we 
request in order to carry out our responsibilities in administering the 
Medicare program.
     Establishing and maintaining procedures that we approve 
for the redetermination of payment determinations.
     Maintaining records and making available to us the records 
necessary for verification of payments and with other related purposes.
     Upon inquiry, assisting individuals with matters 
pertaining to a FI contract.
     Serving as a channel of communication to and from us of 
information, instructions, and other material as necessary for the 
effective and efficient performance of a FI contract.
     Undertaking other functions as mutually agreed to by us 
and the FI.
    In Sec.  421.100(c), we specified that, for the responsibility for 
services to a provider-based HHA or a provider-based hospice, when 
different FIs serve the HHA or hospice and its parent provider, the 
designated regional FI determines the amount of payment and makes 
payments to the HHA or hospice. The FI or MIP contractor serving the 
parent provider performs fiscal functions, including audits and 
settlement of the

[[Page 48879]]

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

C. Technical and Editorial Changes

    A new subpart D was added and reserved to part 421 by the Revisions 
to Hospital Outpatient Prospective Payment System and Calendar Year 
2007 Payment Rates final rule published in the November 24, 2006 
Federal Register (71 FR 67960). The new subpart D will apply to MIP 
contractors. In addition, because we have published regulations that 
pertain to MAC contracts in the November 24, 2006 final rule, the title 
of part 421 was revised from ``Intermediaries and Carriers'' to read 
``Medicare Contracting.''
    Furthermore, in the June 17, 2005 proposed rule, we proposed to 
revise Sec.  421.1, which sets forth the basis, scope, and 
applicability of part 421. We proposed to revise this section to add 
section 1893 of the Act to the list of provisions upon which the part 
is based. We also proposed to make editorial and other changes (such as 
reorganizing the contents of the section and providing headings) that 
improve the readability of the section without affecting its substance.
    In addition, numerous sections of our regulations specifically 
refer to an action being taken by a FI or a carrier. (As previously 
noted in this preamble, FIs and carriers refer to contractors that 
received awards under sections 1816 and 1842 of the Act prior to 
October 1, 2005.) If the action being described may now be performed by 
a MIP contractor that is not a FI or a carrier, we proposed to revise 
those sections to indicate that this is the case. For example, Sec.  
424.11, which sets forth the responsibilities of a provider, specifies, 
in paragraph (a)(2), that the provider must keep certification and 
recertification statements on file for verification by the FI. A MIP 
contractor now may also perform the verification. Therefore, we 
proposed to revise Sec.  424.11(a)(2) to specify that the provider must 
keep certification and recertification statements on file for 
verification by the FI or MIP contractor. Because our regulations are 
continuously being revised and sections redesignated, we did not 
identify all sections that would have technical changes in the June 17, 
2005 proposed rule. If we determine that substantive changes to our 
regulations are necessary, we will make those changes through separate 
rulemaking.

III. Analysis and Responses to Public Comments

    We received three timely public comments on the June 17, 2005 
proposed rule (70 FR 35204 through 35220). The following is a summary 
of the issues raised by those comments and our responses.
    Comment: Several commenters stated that due care is not the 
appropriate standard for MIP functions and recommended that we hold MIP 
contractors to a higher standard of care because the potential for 
abuse by MIP contractors is significant. One commenter maintained that 
contractors will conduct their activities in strict compliance with MIP 
principles if immunity is not readily available. Another commenter 
specifically advocated adopting a gross negligence or reckless 
disregard standard, stating that section 1893 of the Act gives CMS the 
authority to deviate from the due care standard ``to the extent the 
Secretary finds appropriate.'' This commenter asserted that MIP 
contractors should receive the same protection that intermediaries and 
carriers receive through their agreements and contracts (that is, 
immunity as long as they are not grossly negligent). The commenter 
explained that the nature of the functions that MIP contractors perform 
(for example, fraud investigations, cost report audits, and recovering 
overpayments) expose them to substantially greater risk of liability 
than Quality Improvement Organizations (QIOs), and QIOs enjoy immunity 
from criminal or civil liability in performance of their duties if they 
act with due care.
    Response: As we explained in the June 17, 2005 proposed rule, we 
believe that the due care standard specified in Sec.  421.316(a) is the 
only standard consistent with the statutory mandate of the Act. Section 
1893(e) of the Act requires us to limit a contractor's liability by 
employing the same or comparable standards that are set forth in 
section 1157 of the Act. Section 1157 of the Act limits a contractor's 
liability under a due care standard. We believe that applying this 
standard to MIP contractors strikes a reasonable balance between the 
concerns of the contractors and those subject to the contractors' 
review. We believe MIP contractors operate with due care to avoid 
liability, and those being reviewed have the assurance that they have 
legal recourse if a contractor acts negligently.
    Comment: One commenter stated that, to the extent that a MAC, 
carrier, or fiscal intermediary enters into a contract to perform MIP 
functions, they should

[[Page 48880]]

be afforded the same immunity and indemnification that exists under 
their MAC, carrier, or fiscal intermediary contract. In addition, the 
commenter urged us to add language to Sec.  421.316(b) to clarify the 
continued applicability of the immunity/indemnification standards in FI 
and carrier contracts, as well as any standards ultimately included in 
MAC contracts to MIP functions.
    Response: Generally, FIs and carriers are indemnified for any 
liability arising from the performance of contract functions provided 
that the FI's and the carrier's conduct was not grossly negligent, 
fraudulent, or criminal. However, we do not believe we have statutory 
authority under section 1893(e) of the Act to indemnify MIP contractors 
based on this same standard. As we explained in the June 17, 2005 
proposed rule, section 1893(e) of the Act requires us to limit a 
contractor's liability by employing the same or comparable standards 
that are set forth in section 1157 of the Act. Section 1157 of the Act 
limits a contractor's liability under a due care standard. In addition, 
Sec.  421.316(a) provides MIP contractors immunity from liability in 
connection with the performance of a MIP contract as long as the 
contractors exercise due care. Therefore, indemnification is not 
necessary since the MIP contractors will have immunity from liability 
as specified in Sec.  421.316(a). Note, however, that section 
1874A(d)(4) of the Act, as added by the MMA, provides that we have some 
discretion to indemnify MAC contractors that perform MIP functions 
under section 1874A(a)(4)(G) of the Act and other functions, as long as 
their conduct was not grossly negligent, fraudulent, or criminal in 
nature. Indemnification may include payment of judgments, settlements, 
awards, and costs (including reasonable legal expenses) as specified in 
section 1874A(d)(4) of the Act.
    Comment: Section Sec.  421.316(b) limits payment of expenses 
incurred by MIP contractors and others in defense of a legal action 
related to the performance of a MIP to reasonable expenses, as 
determined by CMS. In addition, section 421.316(b)(2) limits 
reimbursement to ``funds available'' in order to comply with the Anti-
Deficiency Act, which applies to all government expenditures. A 
commenter objected to what it describes as a ``discretionary 
reasonableness standard'' and the ``funds available'' condition. The 
commenter stated that both provisions have the potential to 
substantially undermine the intent of the Social Security Act, which 
seeks to reimburse MIP contractors for their legal expenses. The 
commenter also called the ``funds available'' provision unprecedented, 
noting that neither current FI or carrier contracts nor the MMA 
provisions that pertain to MAC contractors impose this condition.
    Response: Under Sec.  421.316(b), we proposed to pay expenses 
incurred by MIP contractors and others in defense of a legal action 
related to the performance of a MIP as long as certain conditions are 
satisfied. However, we believe that this payment should be limited to 
reasonable expenses, as determined by us. For clarity, in making the 
determination of what is a ``reasonable'' cost, Sec.  421.316(b), we 
adopt the description contained in the FAR at 48 CFR 31.201-3. In terms 
of reimbursement for legal expenses, we note that Sec.  421.316 is more 
generous than FAR 31.205-47, which addresses costs related to legal and 
other proceedings. Under the FAR, at 48 CFR 31.205-47, for example, 
reimbursement is limited to 80 percent of the costs allowed. This 
limitation does not apply under the final rule.
    As previously noted, section 421.316(b)(2) limits reimbursement to 
``funds available'' in order to comply with the Anti-Deficiency Act. 
The Anti-Deficiency Act applies to all government expenditures and 
provides, among other things, that a government agency ``may not 
authorize an expenditure or obligation exceeding an amount available in 
an appropriation or fund'' as specified in 31 U.S.C. 1341. A contractor 
that incurs legal fees that may be reimbursable under Sec.  421.316(b) 
would be expected to notify its contracting officer, under general FAR 
requirements, if it anticipates a cost overrun due to legal fees and 
expenses. Then, if the resources are available, the funding for the 
contract could be adjusted. We do not believe it is appropriate or 
necessary for CMS, in this final rule, to obligate itself to seek 
additional funds or to limit its actions if funds are not available for 
reimbursement.
    Comment: A commenter noted that the preamble to the proposed rule 
stated that a transfer of resources, including personnel, must occur to 
qualify for the successor-in-interest exception. The commenter asked 
that we clarify whether a potential successor-in-interest may, assuming 
all other requirements of Sec.  421.306(b) are met, qualify for the 
exception if the predecessor does not technically transfer personnel to 
the successor-in-interest but instead provides such personnel through 
an administrative services agreement.
    Response: We would determine whether a particular contractor 
qualifies for the exception on a case-by-case basis.
    Comment: A commenter asserted that medical and utilization reviews 
should be conducted only by physicians with the same State licensure, 
from the same geographic area, and within the same specialty as the 
physician who provided the service under review.
    Response: Statements of Work for MIP contractors contain guidelines 
that address activities such as medical review and utilization. 
However, we decline to require by regulation medical or utilization 
review to be performed by physicians with the same State licensure, 
from the same geographic area, and within the same specialty as the 
physician who provided the service under review because we have found 
that nurse clinicians have the appropriate clinical experience to make 
objective clinical decisions. However, we recognize the value that a 
provider meeting these requirements may offer, and our contractors 
utilize (as they deem appropriate) physician consultants on a case-by-
case basis to provide this specialized knowledge.
    Comment: One commenter recommended that we revise Sec.  
421.312(b)(5) to state that it is in the best interest of the 
government to contract with the offeror or contractor even though the 
conflict exists (and the conflict has been mitigated to the extent 
possible).
    Response: We appreciate the commenter's recommendation. We believe 
that our contracting officer must have the flexibility to enter into a 
contract with an offeror or contractor even if a conflict of interest 
exists without the additional requirement of mitigating the conflict to 
the extent possible. This flexibility ensures that the officer has the 
ability to enter into these types of contracts when doing so is in the 
best interest of the government. We are committed to minimizing and, 
where possible, eliminating all potential conflict of interests as 
outlined in Sec.  421.312.
    Comment: A commenter urged that, if CMS convenes a Conflicts of 
Interest Review Board as specified in Sec.  421.321(a), the board's 
membership should include practicing physicians who regularly treat 
Medicare beneficiaries. According to the commenter, the board should 
also include representatives from the type of entity that is 
experiencing the conflict, CMS representatives, and other provider 
representatives as appropriate.
    Response: The Conflicts of Interest Review Board is an internal 
process for CMS, which is convened only when CMS deems necessary. To 
maintain the

[[Page 48881]]

integrity of the procurement process and the confidentiality of 
proprietary information submitted in proposals, opening the procurement 
process to the public is not a viable option.
    Comment: One commenter expressed concerned about a MIP contractor 
auditing a hospital's cost reports and a FI, a different contractor, 
processing the hospital's claims. Specifically, the commenter 
questioned whether the two contractors could effectively communicate 
with each other. The commenter expressed concern about access to 
updated claims information in cases where one contractor audited cost 
reports and another contractor processed claims, and urged CMS to 
discuss this issue with specific providers to ensure that existing 
roadblocks are cleared before any potential expansion of separate 
contractors across the country.
    Response: We understand the comments related to the coordination of 
activities between PSCs and the claims processing contractors, 
especially as they relate to audit activities. We are concerned about 
the interaction between PSCs and other CMS contractors. We continually 
promote positive interaction and effective communication between all 
our various contractors. If significant issues arise, we will intervene 
to address these issues.

IV. Provisions of the Final Rule

    This final rule accomplishes two primary goals. First, it 
implements, with certain exceptions indicated below, the provisions of 
the June 17, 2005 proposed rule as issued. Second, it describes two new 
MIP contracts that were awarded between the publication of the March 
20, 1998 proposed rule and before the publication of this final rule.

A. Implementation, With Certain Exceptions, of the Provisions of the 
June 17, 2005 Proposed Rule

    With the exception of the following, we are implementing the 
provisions of the June 17, 2005 proposed rule as issued.
    In Sec.  421.1, Basis, Applicability, and Scope, we are revising 
this section to omit the language in proposed paragraph (b) that states 
that ``Sec.  421.118 is also based on 42 U.S.C. 1395(b)-1(a)(1)(F), 
which authorizes demonstration projects involving FI agreements and 
carrier contracts.'' This language was omitted because Sec.  421.118 
was removed from the CFR by the Medicare Hospital Outpatient 
Prospective Payment System and CY 2007 Payment Rates final rule (71 FR 
67960).
    In Sec.  421.1(a), we are revising the description of sections 1816 
and 1842 of the Act. The previous description (``Use of organizations 
and agencies in making Medicare payments to providers and suppliers of 
services'') was replaced with the following description: ``Provisions 
relating to the administration of Parts A and B.''
    In Sec.  421.1(b), we are revising this section to clarify that FIs 
and carriers refer to contractors that received awards under sections 
1816 and 1842 of the Act prior to October 1, 2005 to distinguish these 
contractors from MACs. Therefore, Sec.  421.1(b) is revised to read, 
``The provisions of this part apply to agreements with Part A (Hospital 
Insurance) FIs that received awards under sections 1816 and 1842 of the 
Act prior to October 1, 2005, contracts with Part B (Supplementary 
Medical Insurance) carriers that received awards under sections 1816 
and 1842 of the Act prior to October 1, 2005, and contracts with 
Medicare integrity program contractors that perform program integrity 
functions.''
    In Sec.  421.1(c)(2), we are revising this paragraph to omit 
language indicating that CMS specifies criteria and standards to select 
FIs and designate regional or national FIs for certain classes of 
providers. We no longer perform these functions. In addition, language 
was added to clarify that CMS specifies criteria and standards to 
evaluate the performance of successor-in-interest entities to FIs. 
Therefore, Sec.  421.1(c)(2) is revised to read, ``Specifies criteria 
and standards CMS uses in evaluating the performance of fiscal 
intermediaries' successor entities and in assigning or reassigning a 
provider or providers to particular fiscal intermediaries.''
    In Sec.  421.302(a)(4), Definition of Eligible Entities, we are 
revising this section to replace the phrase ``without limitation'' with 
``but are not limited to.'' This change was made to clarify that an 
appropriate written code of conduct and compliance policies consist of 
more than an enforced policy on employee conflicts of interest. 
Therefore, Sec.  421.304(a)(4) is revised to read, ``Maintains an 
appropriate written code of conduct and compliance policies that 
include, but are not limited to, an enforced policy on employee 
conflicts of interest.''
    In Sec.  421.302, Definition of Eligible Entities, we are revising 
this section to omit the requirement in proposed paragraph (a)(5) that 
states that an entity is eligible to enter into a MIP contract if it 
``meets financial and business integrity requirements to reflect 
adequate solvency and satisfactory legal history'' because we believe 
that this requirement may create an ambiguity with the 48 FAR at 9.103.
    In Sec.  421.304, Medicare integrity program contractor functions, 
we list the activities that a MIP contractor may perform. Section 
421.304 states that the contract between CMS and a MIP contractor 
specifies the functions the contractor performs. Specifically in the 
area of medical and utilization review, we include the processes 
necessary to ensure both the appropriate utilization of services and 
that services meet the professionally recognized standards of care. We 
state that these processes include review of claims, medical records, 
and medical necessity documentation and analysis of patterns of 
utilization to identify inappropriate utilization of services. We 
proposed that this would include reviewing the activities of providers 
or suppliers and other individuals and entities (including health 
maintenance organizations, competitive medical plans, health care 
prepayment plans, and MA plans). We are adding Part D Prescription Drug 
Plans to the list of entities.
    We are revising Sec.  421.304(b) to include reconciling and issuing 
cost report payments for providers and suppliers. Therefore, Sec.  
421.304(b) is revised to read, ``Auditing, settling, and determining 
cost report payments for providers of services, or other individuals or 
entities (including entities contracting with CMS under parts 417 and 
422 of this chapter), as necessary to help ensure proper Medicare 
payment.''
    In Sec.  421.304(c), we are revising this paragraph to specify that 
we will recover mistaken and conditional payments. Therefore, Sec.  
421.304(c) is revised to read, ``Determining whether a payment is 
authorized under title XVIII, as specified in section 1862(b) of the 
Act, and recovering mistaken and conditional payments under section 
1862(b) of the Act.''
    In Sec.  421.306(b), we are revising this paragraph to clarify that 
CMS may award an entity a Medicare integrity program contract by 
transfer--as opposed to ``without competition''--if certain conditions 
apply. The phrase ``without competition'' implies there is new work not 
contemplated in the original contact award. However, work transferred 
by novation was competed at some prior date, and a successor-in-
interest would take on that work. Therefore, Sec.  421.306(b) is 
revised to read, ``CMS may award an entity a Medicare integrity program 
contract by transfer if all of the following conditions apply * * *.''

[[Page 48882]]

    In Sec.  421.308(b), we are revising this paragraph to omit the 
phrase ``without competition'' because that term implies there is new 
work not contemplated in the original contact award. Therefore, Sec.  
421.308(b) is revised to read, ``CMS may renew a Medicare integrity 
program contract if all of the following conditions apply are met * * 
*.''
    In Sec.  421.310, we are revising the section to omit Sec.  
421.310(b)(1) in its entirety because, in Sec.  421.310, we state that 
conflict of interest standards and requirements are contained in each 
contract awarded to perform section 1893 of the Act functions. To 
eliminate redundancy and possible ambiguities when read with the 
contract, we believe it is necessary to remove this section of the 
regulation as similar language is contained in the contract. In 
addition, we eliminated Sec.  421.310(b)(1) because conflict of 
interest standards and requirements could vary among MIP contracts (for 
example, PSC and COB) and differ from those that are stated in this 
regulation. Finally, we removed Sec.  421.310(b)(2)addressing the 
resolution of conflicts of interest in its entirety. For clarity, the 
language in this provision was slightly revised and moved to Sec.  
421.312(b)(2) for organizational purposes.
    In Sec.  421.312(a), we are revising the paragraph to clarify that 
CMS determines when to convene a Conflicts of Interest Review Board. 
Therefore, Sec.  421.312(a)is revised to read, ``CMS may establish and 
convene a Conflicts of Interest Review Board to assist the contracting 
officer in resolving organizational conflicts of interest.''
    In Sec.  421.312(b), we are revising the section to separately 
identify resolution of pre-award and post-award conflicts to increase 
clarity and for organizational purposes. For resolution of post-award 
conflicts, we added language that clarifies that we could continue a 
contract even though a conflict of interest exists. Note that we did 
not state in Sec.  421.312(b)(2)(iv) that the waiver of a conflict of 
interest must be in accordance with 48 CFR subpart 9.503 in the 
resolution of post-award conflicts of interest because that subpart 
applies only to pre-award conflicts.
    In Sec.  421.312(b)(2)(iii), which was proposed as Sec.  
421.312(b)(4) in the June 17, 2005 proposed rule before Sec.  
421.312(b) was reorganized in this final rule, we are revising this 
section to clarify that a contracting officer may resolve an 
organizational conflict of interest by not renewing an existing 
contract. In addition, this section is revised to omit the phrase ``for 
default.'' Under the FAR, a contract may be terminated for default, and 
it may be terminated for the convenience of the government. Therefore, 
Sec.  421.312(b)(2)(iii) is revised to read, ``The conflict requires 
that CMS terminate or not renew an existing contract * * *.''

B. Description of Two New MIP Contractors

    As explained in the preamble to this final rule, since the March 
20, 1998 proposed rule was published, we had the authority to contract 
with entities to perform Medicare program integrity functions to 
promote the integrity of the Medicare program before publishing a final 
rule. We also noted in the preamble to this final rule that, in 
accordance with this MIP authority, we maintain various MIP contracts, 
which include, but are not limited to, the following: 12 IDIQ contracts 
for the PSC effort; 1 COB contract, 8 IDIQ contracts for the MMC 
Program Integrity Contractors effort, 8 IDIQ contracts for the MEDIC 
effort, and other contracts.
    Between publishing the March 20, 1998 proposed rule and before 
publishing this final rule, we awarded two other types of MIP 
contracts: Workers' Compensation Review Contractors (WCRC) and Medicare 
Secondary Payer Recovery Contractors (MSPRC). Although these MIP 
contracts were not specifically identified in the March 20, 1998 
proposed rule or the June 17, 2005 proposed rule, the preamble to both 
respective proposed rules did not provide an exhaustive list of MIP 
contracts; instead, it provided examples of MIP contracts and indicated 
that there were ``other [MIP] contracts.''
    As MIP contractors, the WCRC and the MSPRC must satisfy the same 
requirements (for example, eligibility requirements under section 
421.302) that other MIP contractors must satisfy. Their duties are 
briefly described as follows:
     Workers' Compensation Review Contractor. In September 
2003, we awarded a contract to the WCRC to review and evaluate proposed 
Workers' Compensation Medicare Set-aside Arrangements (WCMSAs) in 
workers' compensation (WC) cases to help ensure that Medicare's 
interests are properly considered when determining the future case-
related medical needs of the claimant. The purpose of the contract is 
to procure an independent entity with qualified medical staff to 
determine WCMSA amounts for future medical expenses related to the WC 
injury to protect Medicare's interest. This function confirms the 
adequacy of WCMSAs and, as a result, prevents the Medicare program from 
incurring costs that should be paid by a WC carrier. This initiative 
creates a streamlined process for review of WCMSAs and reduces the time 
associated with such reviews and evaluations, ultimately enhancing the 
level of customer service to the WC industry. More information about 
the WCRC can be obtained by accessing the Internet at http://www.cms.hhs.gov/WorkersCompAgencyServices/06_wcmsasreviewprocess.asp.
     Medicare Secondary Payer Recovery Contractor. In August 
2006, we consolidated all of the functions related to recovering MSP 
Group Health Plan (GHP) and ``non-GHP'' (Workers' Compensation (WC), 
no-fault, and liability) debts from the Medicare claims processing 
contractors into one MSP Recovery Contractor (MSPRC). The MSPRC was 
implemented in October 2006. The MSPRC only took over cases where the 
debtors are employers, insurers/Third Party Administrators, WC 
carriers, no-fault insurers, liability insurers, or beneficiaries. 
Cases where debtors are providers, physicians, or suppliers remained at 
the FFS contractors. Furthermore, those contractors using the 
Healthcare Integrated General Ledger Accounting System (HIGLAS) kept 
cases already on that system to see through to completion. Using one 
contractor to perform MSP recoveries is achieving administrative and 
operational efficiencies, standardizing the recovery process, 
maximizing recoveries, and enhancing customer service. The MSPRC is 
already introducing innovations into the process, including 
establishing a virtual case system to replace paper files and using a 
dedicated call center with a toll-free number for more expedient 
customer service. More information about the MSPRC can be obtained by 
accessing the Internet at http://www.cms.hhs.gov/MSPRGenInfo/.

V. Collection of Information Requirements

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

VI. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the

[[Page 48883]]

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 (UMRA) (Pub. L. 104-4), and Executive Order 13132.
    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). 
Although Table 1 shows a significant decline in improper Medicare FFS 
payments based on the implementation of MIP contractors and other 
initiatives, such as FI and carrier education efforts, the decline is a 
function of our efforts to prevent and recoup improper payments, which 
represent savings to the Medicare program. As a result, we have 
determined that this final rule is not a major rule, and that it would 
not have economically significant effects.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. 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 
$6.5 million to $31.5 million in any 1 year. By the North American 
Industrial Classification (NAIC) Codes which are set by the Department 
of Commerce and the Business Size Standard of each of the NAIC codes 
which are set by the Small Business Administration, FIs and carriers 
(which are for the purposes of this final rule contractors that 
received awards under sections 1816 and 1842 of the Act prior to 
October 1, 2005) are not small businesses based on the NAIC code used 
for this type of work.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside a Metropolitan 
Statistical Area and has fewer than 100 beds. We have determined, and 
certify, that this final rule would not have a significant economic 
impact on a substantial number of small entities. We also have 
determined, and certify, that this final rule would not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the UMRA 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. We have determined that this final rule would not cause 
the private sector or State, local, or tribal governments in the 
aggregate to expend $120 million or more in any given year.
    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. Under section I of Executive Order 13132, `` `[p]olicies 
that have federalism implications' refers to regulations, legislative 
comments or proposed legislation, and other policy statements or 
actions that have substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.'' We have determined, and certify, that this final rule 
would not impose substantial direct requirement costs on State and 
local governments, preempt State law, or otherwise have Federalism 
implications.

B. Discussion of Impact

    Our MIP experience since 1999 suggests that this rule will continue 
to have a positive impact on the Medicare program, Medicare 
beneficiaries, providers, suppliers, and entities that have not 
previously contracted with us. Existing MIP contractors that seek 
renewal of MIP contracts should not expect any additional costs in 
complying with the requirements set forth in the rule, as these 
requirements are similar yet more streamlined than those set forth in 
the 1998 proposed rule and are currently applied by MIP contractors. To 
the extent that small entities could be affected by the rule, and 
because the rule raises certain policy issues for conflict of interest 
standards, we provide an impact analysis for those entities that we 
believe will be most heavily affected by the rule.
    We believe that this rule will have an impact, although not a 
significant one, in five general areas: (1) The Medicare program and 
Health Insurance Trust Fund; (2) Medicare beneficiaries and taxpayers; 
(3) current FIs and carriers; (4) entities that have not previously 
contracted with us; and (5) Medicare providers and suppliers. These 
five general areas are examined below.
1. The Medicare Program and Health Insurance Trust Fund
    HIPAA provides for a direct apportionment from the Health Insurance 
Trust Fund for program integrity activities to thwart improper billing 
practices. Appropriations totaled $700 million for 2002 and $720 
million for fiscal year (FY) 2003 and all subsequent years. The Deficit 
Reduction Act of 2005 (DRA) increased unrestricted general MIP funding 
by $100 million for FY 2006 only and provided another $12 million in 
MIP funds in FY 2006 for the Medicare-Medicaid (Medi-Medi) Data Match 
Project, bringing total MIP funding in FY 2006 to $832 million. For FY 
2007, general MIP funding returns to $720 million, while the DRA 
provides $24 million in MIP funds for the Medi-Medi Data Match Project, 
for a MIP total of $744 million.
    A separate and dependable long-term funding source for MIP allows 
us the flexibility to invest in innovative strategies to combat the 
fraud and abuse drain of the Medicare Trust Funds. By shifting emphasis 
from post-payment recoveries on incorrectly paid claims to pre-payment 
strategies, most claims will be paid correctly the first time.
    Improper billing and health care fraud are difficult to quantify 
because of their hidden nature. However, estimates suggest that the 
percentage of improper Medicare FFS payments as compared to total FFS 
payments has declined since the implementation of MIP contractors as 
shown in Table 1.

[[Page 48884]]



                                                   Table 1\*\
----------------------------------------------------------------------------------------------------------------
                                               Improper payment  Percentage of FFS      Total FFS payment (in
                    Year                        (in billions)          total                  billions)
----------------------------------------------------------------------------------------------------------------
1998........................................      $14.9 billion                8.4                $177.0 billion
1999........................................               14.5                8.6                        168.9.
2000........................................               16.4                9.4                        174.6.
2001........................................               16.8                8.8                        191.3.
2002........................................               17.1                8.0                        212.8.
2003\**\....................................               12.7                6.4                        199.1.
2004........................................               21.7               10.1                        213.5.
2005........................................               12.1                5.2                        234.1.
2006........................................               10.8                4.4                       246.8.
----------------------------------------------------------------------------------------------------------------
\*\The Improper Payments Information Act of 2002 (Pub. L. 107-300) mandates that federal agencies use gross
  figures when reporting improper payment amounts and rates. A gross figure is calculated by adding
  underpayments to overpayments. All amounts and rates in this table have been converted to gross figures.
\**\Since 1996, HHS has annually determined the rate of improper payments for FFS claims paid by Medicare
  contractors. The survey measures claims found to be medically unnecessary, inadequately documented, or
  improperly coded. From 1996 until 2002, the survey was conducted by the OIG based on a survey of some 6,000
  claims. In 2003, CMS launched an expanded effort, reviewing approximately 128,000 Medicare claims to learn
  more precisely where errors are being made. Because this was a new initiative, there was a high non-response
  rate. The 2003 figures used in the above table reflect the adjusted error rate figures, which account for this
  high non-response rate. If this adjustment had not been made, the improper payment would have been $21.5
  billion and the national error rate would have been 10.8 percent. The numbers reported for 2004 are unadjusted
  and reflect CMS' findings since employing its expanded effort.

    As we referred to previously, the positive error rate trend also 
relates to other initiatives, including FI and carrier education 
efforts, partnering with the provider community, and our anti-fraud and 
abuse efforts.
    In 2004, we announced new steps to measure error rates in Medicare 
payments more accurately and comprehensively at the contractor level 
and to further reduce improper payments through targeted error 
improvement initiatives. Under the new measurement process for the 
Medicare error rate, the gross national rate for FY 2004 was 10.1 
percent and decreased to 5.2 percent in 2005.
    In addition to economic advantages, MIP funding and contracting 
improvements will allow us to better serve Medicare beneficiaries in a 
qualitative way. MIP gives us a tool to better administer the Medicare 
program and accomplish our mission of providing access to quality 
health care for Medicare beneficiaries. We will continue to use 
competitive procedures under the FAR to contract separately for the 
performance of integrity functions. In general, economic theory 
postulates that competition results in a better price for the consumer 
which, in this instance, is CMS on behalf of Medicare beneficiaries and 
taxpayers. Competition should also encourage the use of innovative 
techniques to perform integrity functions that will, in turn, result in 
more efficient and effective safeguards for the Trust Funds.
2. Medicare Beneficiaries and Taxpayers
    MIP contracts have had, and we expect will continue to have, an 
overall positive effect on Medicare beneficiaries and taxpayers. 
Beneficiaries pay deductibles and Part B Medicare premiums. Taxpayers, 
including those who are not yet eligible for Medicare, contribute part 
of their earnings to the Part A Trust Fund. Taxpayers and beneficiaries 
contribute indirectly to the Part B Trust Fund because it is funded, in 
part, from general tax revenues. Consistent performance of program 
integrity activities will ensure that less money is wasted on 
inappropriate treatment or unnecessary services. As evidence, MIP funds 
have contributed to reducing the total percentage of improper payments 
made for FFS claims paid in 2006 to 4.4 percent of all FFS claims, down 
from 8.4 percent of FFS claims in 1998. As a result, current and future 
beneficiaries will obtain more value for every Medicare dollar spent. 
In addition, under the Medicare Secondary Payer program in FY 2005, CMS 
achieved $5.8 billion dollars in pre-payment and post payment savings.
3. Current Fiscal Intermediaries and Carriers
    Although FIs and carriers are not considered small entities for 
purposes of the RFA, and effective October 1, 2005, we have the 
authority to replace the current Medicare FI and carrier contracts with 
new MAC contracts, we are providing the following analysis.
    There are currently 18 Medicare FIs, 15 Medicare carriers, 1 DME 
regional contractor (which is also a carrier), and 1 Medicare A/B MAC. 
Presently, these contractors perform general program integrity 
activities addressed in this final rule apart from, but not duplicative 
of, MIP contractors. In FY 2004, approximately 29 percent of the total 
contractor budget was dedicated to program integrity. Current FIs, 
carriers, and MACs are not prohibited from entering into MIP contracts 
when we compete contracts for (MIP) activities under section 1893 of 
the Act. (However, these contractors would have to meet conflict of 
interests requirements in the MIP contracts and the FAR.)
    We believe that this rule will have a minimum impact in several 
areas. Medical directors continue to play an important role in medical 
review activities, and locally-based medical directors improve our 
relationship with local physicians by using groups like Carrier 
Advisory Committees. Locally-based fraud investigators and auditors are 
being used as necessary. Upon publishing this final regulation, we 
anticipate that review policies will continue to be coordinated across 
contractors to ensure consistency, while local practice will continue 
to be incorporated where appropriate.
    This rule may have had a negative impact on current FIs and 
carriers in some respects. Many current FIs and carriers may have lost 
a portion of their Medicare business since 1998 as fraud review and 
other functions were transferred to MIP contractors.
    However, current contractors have benefited from the MIP program 
and will benefit from this final rule. Under the provisions of this 
rule, they are eligible to compete for MIP contracts as long as they 
comply with all conflict of interest and other requirements. (Current 
contractors may not receive payment for performing the same program 
integrity activities under both a MIP contract and their existing 
contract.) We considered proposing rules that identified specific 
conflict of interest situations that would prohibit

[[Page 48885]]

the award of a MIP contract. We also considered prohibiting a MIP 
contractor whose contract was completed but not renewed or terminated 
from competing for another MIP contract for a certain period. Instead, 
the final rule would establish a process for evaluating, on a case-by-
case basis at the time of contracting, situations that may constitute 
conflicts of interest in accordance with the FAR, subpart 9.5. It 
permits current contractors to position themselves to be eligible for a 
MIP contract by mitigating any conflicts of interest they may have in 
order to compete. The economic impact on FIs and carriers is lessened 
by this approach when compared to the alternatives we considered.
    The current contractors that are awarded MIP contracts, or that 
continue to perform MIP functions under their FI or carrier contracts, 
will also benefit from more consistent funding provided by the law for 
program integrity activities. This more stable, long-term funding 
mechanism enables Medicare contractors to attract, train, and retain 
qualified professional staff to help them fulfill their program 
integrity functions.
    There will be an economic impact on current contractors that 
propose to perform MIP contracts using subcontractors. A MIP contractor 
would apply to its subcontractors the same conflict of interest 
standard to which it must adhere. It is impossible to assess the 
precise economic impact of this portion of the final rule because a MIP 
contractor is generally free to contract with any subcontractor. A MIP 
contractor may seek out subcontractors that are conflict free, which 
would reduce or eliminate the time expended monitoring conflict of 
interest situations. However, our requirements rely heavily on FAR 
subpart 9.5, which normally apply to both prime contractors and 
subcontractors. Thus, we do not believe this provision imposes any 
additional negative burden on current FIs or carriers.
4. New Contracting Entities
    Entities that have not previously performed Medicare program 
integrity activities will experience a positive effect from this rule. 
Integrity functions such as audit, medical review, and potential fraud 
investigation may be consolidated in a MIP contract to allow suspect 
claims to be identified and investigated from all angles. This final 
rule may create new markets and opportunities for small, small 
disadvantaged, and woman-owned businesses.
    Since publishing the 1998 proposed rule and in accordance to this 
MIP authority, we have awarded 12 Indefinite Delivery-Indefinite 
Quantity (IDIQ) contracts for the Program Safeguard Contractor (PSC) 
effort, one Coordination of Benefits (COB) contract, 8 IDIQ contracts 
for the Medicare Managed Care Program Integrity Contractors (MMC-PICs) 
effort, 8 IDIQ contracts for the MEDIC effort, and other miscellaneous 
contracts. With the addition of the Medicare Part D prescription drug 
benefit included in the MMA, there will be further opportunities for 
entities to compete for MIP contracts to perform additional program 
oversight activities.
    Use of full and open competition to award MIP contracts may 
encourage innovation and the creation of new technology. Historically, 
cutting edge technologies and analytical methodologies created for the 
Medicare program have benefited the private insurance arena.
5. Providers and Suppliers
    Because MIP contractors have been in place since 1998, we 
anticipate no additional burden imposed on providers and suppliers that 
are small businesses or not-for-profit organizations by the need to 
deal with a new set of contractors. There are approximately 1.1 million 
health care providers and suppliers (depending on how group practices 
and multiple locations are counted) that bill independently. The final 
rule does not necessarily impose any action on the part of these 
providers and suppliers.
    Overall, we expect that providers and suppliers will benefit 
qualitatively from this final rule. Many providers and suppliers 
perceive that their reputations are tarnished by the few dishonest 
providers and suppliers that take advantage of the Medicare program. 
The media often focus on the most egregious cases of Medicare fraud and 
abuse, leaving the public with the perception that physicians and other 
health care practitioners routinely make improper claims. This rule 
would allow us to take a more effective and wider ranging approach to 
identifying, stopping, and recovering from unscrupulous providers and 
suppliers. As the number of dishonest providers and suppliers and 
improper claims diminishes, ethical providers and suppliers will 
benefit.

C. Conclusion

    Since publishing the March 20, 1998 proposed rule, we have awarded 
MIP contracts to contractors in order to perform program integrity 
activities, and there has been a decrease in the percentage of improper 
claims paid. In anticipation of our continued authority to award 
contracts to entities to continue these activities, we have announced 
initiatives to measure error rates in Medicare payments more accurately 
and comprehensively and to further reduce improper payments.
    We conclude that our continued authority would save the Medicare 
program additional money and would extend the solvency of the Trust 
Funds as a result of this final rule. The dynamic nature of fraud and 
abuse is illustrated by the fact that wrongdoers continue to find ways 
to evade safeguards. This supports the need for constant vigilance and 
increasingly sophisticated ways to protect against ``gaming'' the 
system. We solicited public comments as well as data on the extent to 
which any of the affected entities would be significantly economically 
affected by this final rule.
    In accordance with the provisions of Executive Order 12866, this 
proposed notice was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 400

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

42 CFR Part 421

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

0
For reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as follows:

PART 400--INTRODUCTION; DEFINITIONS

0
1. The authority citation for part 400 continues to read as follows:

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


0
2. Section 400.202 is amended by adding the following definition in 
alphabetical order to read as follows:


Sec.  400.202  Definitions specific to Medicare.

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

[[Page 48886]]

PART 421--MEDICARE CONTRACTING

0
3. The authority citation for part 421 continues to read as follows:

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


0
4. Section 421.1 is revised to read as follows:


Sec.  421.1  Basis, applicability, and scope.

    (a) Basis. This part is based on the provisions of the following 
sections of the Act:
    Section 1124--Requirements for disclosure of certain information.
    Sections 1816 and 1842--Provisions relating to the administration 
of Parts A and B.
    Section 1893--Requirements for protecting the integrity of the 
Medicare program.
    (b) Applicability. The provisions of this part apply to agreements 
with Part A (Hospital Insurance) fiscal intermediaries that received 
awards under sections 1816 or 1842 of the Act prior to October 1, 2005, 
contracts with Part B (Supplementary Medical Insurance) carriers that 
received awards under sections 1816 or 1842 of the Act prior to October 
1, 2005, and contracts with Medicare integrity program contractors that 
perform program integrity functions.
    (c) Scope. The scope of this part--
    (1) Specifies that CMS may perform certain functions directly or by 
contract.
    (2) Specifies criteria and standards CMS uses in evaluating the 
performance of fiscal intermediaries' successor entities and in 
assigning or reassigning a provider or providers to particular fiscal 
intermediaries.
    (3) Provides the opportunity for a hearing for fiscal 
intermediaries and carriers affected by certain adverse actions.
    (4) Provides adversely affected fiscal intermediaries an 
opportunity for judicial review of certain hearing decisions.
    (5) Sets forth requirements related to contracts with Medicare 
integrity program contractors.


0
5. Section 421.100 is revised to read as follows:


Sec.  421.100  Intermediary functions.

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

0
6. Section 421.200 is revised to read as follows:


Sec.  421.200  Carrier functions.

    A contract between CMS and a carrier specifies the functions to be 
performed by the carrier. The contract may include any or all of the 
following functions:
    (a) Any or all of the program integrity functions described in 
Sec.  421.304 provided the following conditions are met:
    (1) The carrier is continuing those functions under a contract 
entered into under section 1842 of the Act that was in effect on August 
21, 1996.
    (2) The functions do not duplicate work being performed under a 
Medicare integrity program contract, except that the function related 
to developing and maintaining a list of DME may be performed under both 
a carrier contract and a Medicare integrity program contract.
    (b) Receiving, disbursing, and accounting for funds in making 
payments for services furnished to eligible individuals within the 
jurisdiction of the carrier.
    (c) Determining the amount of payment for services furnished to an 
eligible individual.
    (d) Undertaking to adjust incorrect payments and recover 
overpayments when it is determined that an overpayment was made.
    (e) Furnishing to CMS timely information and reports that CMS 
requests in order to carry out its responsibilities in the 
administration of the Medicare program.
    (f) Maintaining records and making available to CMS the records 
necessary for verification of payments and for other related purposes.
    (g) Establishing and maintaining procedures under which an 
individual enrolled under Part B is granted an opportunity for a 
redetermination.
    (h) Upon inquiry, assisting individuals with matters pertaining to 
a carrier contract.
    (i) Serving as a channel of communication to and from CMS of 
information, instructions, and other material as necessary for the 
effective and efficient performance of a carrier contract.
    (j) Undertaking other functions as mutually agreed to by CMS and 
the carrier.

0
7. A new subpart D is added to part 421 to read as follows:
Subpart D--Medicare Integrity Program Contractors
Sec.
421.300 Basis, applicability, and scope.
421.302 Eligibility requirements for Medicare integrity program 
contractors.
421.304 Medicare integrity program contractor functions.
421.306 Awarding of a contract.
421.308 Renewal of a contract.
421.310 Conflict of interest requirements.
421.312 Conflict of interest resolution.
421.316 Limitation on Medicare integrity program contractor 
liability.

[[Page 48887]]

Subpart D--Medicare Integrity Program Contractors


Sec.  421.300  Basis, applicability, and scope.

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


Sec.  421.302  Eligibility requirements for Medicare integrity program 
contractors.

    (a) CMS may enter into a contract with an entity to perform the 
functions described in Sec.  421.304 if the entity meets the following 
conditions:
    (1) Demonstrates the ability to perform the Medicare integrity 
program contractor functions described in Sec.  421.304. For purposes 
of developing and periodically updating a list of DME under Sec.  
421.304(e), an entity is deemed to be eligible to enter into a contract 
under the Medicare integrity program to perform the function if the 
entity is a carrier with a contract in effect under section 1842 of the 
Act.
    (2) Agrees to cooperate with the OIG, the DOJ, and other law 
enforcement agencies, as appropriate, including making referrals, in 
the investigation and deterrence of potential fraud and abuse of the 
Medicare program.
    (3) Complies with conflict of interest provisions in 48 CFR 
Chapters 1 and 3, and is not excluded under the conflict of interest 
provision at Sec.  421.310.
    (4) Maintains an appropriate written code of conduct and compliance 
policies that include, but are not limited to, an enforced policy on 
employee conflicts of interest.
    (5) Meets other requirements that CMS establishes.
    (b) A MAC as described in section 1874A of the Act may perform any 
or all of the functions described in Sec.  421.304, except that the 
functions may not duplicate work being performed under a Medicare 
integrity program contract.
    (c) If a MAC performs any or all functions described in Sec.  
421.304, CMS may require the MAC to comply with any or all of the 
requirements of paragraph (a) of this section as a condition of its 
contract.


Sec.  421.304  Medicare integrity program contractor functions.

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


Sec.  421.306  Awarding of a contract.

    (a) CMS awards and administers Medicare integrity program contracts 
in accordance with acquisition regulations set forth at 48 CFR chapters 
1 and 3, this subpart, all other applicable laws, and all applicable 
regulations. These requirements for awarding Medicare integrity program 
contracts are used as follows:
    (1) When entering into new contracts.
    (2) When entering into contracts that may result in the elimination 
of responsibilities of an individual fiscal intermediary or carrier 
under section 1816(l) or section 1842(c) of the Act, respectively.
    (3) At any other time CMS considers appropriate.
    (b) CMS may award an entity a Medicare integrity program contract 
by transfer if all of the following conditions apply:
    (1) Through approval of a novation agreement in accordance with the 
requirements of the Federal Acquisition Regulation (FAR), CMS 
recognizes the entity as the successor in interest to a fiscal 
intermediary agreement or carrier contract under which the fiscal 
intermediary or carrier was performing activities described in section 
1893(b) of the Act on August 21, 1996.
    (2) The fiscal intermediary or carrier continued to perform 
Medicare integrity program activities until transferring the resources 
to the entity.
    (c) An entity is eligible to be awarded a Medicare integrity 
program contract only if it meets the eligibility requirements 
specified in Sec.  421.302; 48 CFR Chapters 1 and 3; and other 
applicable laws and regulations.


Sec.  421.308  Renewal of a contract.

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

[[Page 48888]]

Sec.  421.310  Conflict of interest requirements.

    Offerors for MIP contracts and MIP contractors are subject to the 
following:
    (a) The conflict of interest standards and requirements of the 
Federal Acquisition Regulation (FAR) organizational conflict of 
interest guidance specified under 48 CFR subpart 9.5.
    (b) The standards and requirements as are contained in each 
individual contract awarded to perform section 1893 of the Act 
functions.


Sec.  421.312  Conflict of interest resolution.

    (a) Review Board. CMS may establish and convene a Conflicts of 
Interest Review Board to assist the contracting officer in resolving 
organizational conflicts of interest.
    (b) Resolution--(1) Pre-award conflicts. Resolution of an 
organizational conflict of interest is a determination by the 
contracting officer that one of the following has occurred:
    (i) The conflict is mitigated.
    (ii) The conflict precludes award of a contract to the offeror.
    (iii) It is in the best interest of the government to award a 
contract to the offeror (in accordance with 48 CFR subpart 9.503) even 
though a conflict of interest exists.
    (2) Post-award conflicts. Resolution of an organizational conflict 
of interest is a determination by the contracting officer that one of 
the following has occurred:
    (i) The conflict is mitigated.
    (ii) The conflict requires that CMS modify an existing contract.
    (iii) The conflict requires that CMS terminate or not renew an 
existing contract.
    (iv) It is in the best interest of the government to continue the 
contract even though a conflict of interest exists.


Sec.  421.316  Limitation on Medicare integrity program contractor 
liability.

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

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

    Dated: January 29, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: May, 11 2007.
Michael O. Leavitt,
 Secretary.

    Editorial Note: This document was received at the Office of the 
Federal Register on August 17, 2007.

[FR Doc. E7-16606 Filed 8-23-07; 8:45 am]
BILLING CODE 4120-01-P