[Federal Register Volume 73, Number 145 (Monday, July 28, 2008)]
[Rules and Regulations]
[Pages 43628-43632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17056]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 422

[CMS-4121-F]
RIN 0938-AO54


Medicare Program; Prohibition of Midyear Benefit Enhancements for 
Medicare Advantage Organizations

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

ACTION: Final rule.

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SUMMARY: This final rule prohibits Medicare Advantage (MA) 
organizations, including organizations offering MA plans to employer 
and union group health plan sponsors, from making midyear changes to 
non-prescription drug benefits, premiums, and cost-sharing submitted in 
their approved bids for a given contract year. This final rule also 
clarifies that MA organizations offering certain kinds of plans 
restricted to employer and union group health plan sponsors and not 
open to general enrollment may continue to offer benefit enhancements 
as they do currently, through means other than midyear benefit 
enhancements (MYBEs). Programs of all-inclusive care for elderly (PACE) 
are not subject to the provisions of this final rule and may continue 
to offer enhanced benefits as specified in our guidance for PACE plans.

DATES: Effective Date: These regulations are effective on August 27, 
2008.

FOR FURTHER INFORMATION CONTACT: Christopher McClintick, (410) 786-
4682.

SUPPLEMENTARY INFORMATION:

I. Background

    Title II of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) made important 
changes to the Medicare+Choice (M+C) program under Part C of Medicare 
and renamed the program Medicare Advantage (MA). On August 3, 2004, we 
published in the Federal Register a proposed rule (69 FR 46866) that 
set forth the provisions that would implement Title II of the MMA. On 
January 28, 2005, we published in the Federal Register a final rule (70 
FR 4588) to implement our proposals. A major revision to the MA program 
was to implement a new bidding process for determining benefits.
    In the August 3, 2004 proposed rule, we proposed to prohibit MA

[[Page 43629]]

organizations from offering MYBEs (that is, enhanced benefits or 
reductions in premiums or cost-sharing amounts not specified in the 
approved bid for the calendar year (CY) in question). We believed MYBEs 
undermined the statutory requirement for a competitive bidding process. 
In response to the August 3, 2004 proposed rule, several commenters 
objected to our proposal to eliminate MYBEs. These commenters believed 
that we could allow MYBEs without affecting the integrity of the 
bidding process.
    In the January 28, 2005 final rule (70 FR 4639), we noted that 
under the previous M+C program, we permitted M+C organizations to offer 
new plans midyear and to offer MYBEs to existing benefit packages, but 
were concerned that this was no longer appropriate under the new 
bidding process. Also, in the January 28, 2005 final rule (70 FR 4640), 
we noted that MYBEs ``* * * would be a de facto adjustment to the 
benefit packages from which bids were submitted earlier in the year.'' 
In a related final rule (published January 28, 2005 (70 FR 4301)) 
implementing the Medicare prescription drug benefit (Part D 
regulations), we similarly stated that MYBEs ``* * * would be de facto 
acknowledgement that the revenue requirements submitted by the plan 
were overstated.'' Although we acknowledged that MYBEs could undermine 
the integrity of the bidding process, in response to comments on the 
August 3, 2004 proposed rule, we decided to permit them on an interim 
basis under limited circumstances. Therefore, in the January 28, 2005 
final rule, we stated that we would permit MYBEs to non-drug benefits 
only as a transitional policy and under the following circumstances 
only:
     An MYBE could be effective no earlier than July 1 of the 
contract year, and no later than September 1 of the contract year (in 
subsequent instructions issued in a April 10, 2007 CMS memorandum, we 
further limited the effective date to September 1);
     MA organizations could not submit MYBE applications later 
than July 31 of the contract year (in subsequent instructions issued in 
an April 10, 2007 CMS memorandum, we further limited the application 
date to June 30); and
     Twenty-five percent of the value of the MYBE would be 
retained by the government.
    If the MYBE met the circumstances described above, the requesting 
MA organization--
     Was required to submit for each plan or segment, a revised 
bid and any supporting documentation related to the enhancement, 
including information on where the revenue requirements were overstated 
in the annual June bid submission; and
     Would be subject to CMS consideration of whether there is 
a current year MYBE request when analyzing a plan's bid for the 
following year.
    On September 1, 2006, we published in the Federal Register a 
proposed rule (71 FR 52014-52017) that proposed prohibiting MYBEs for 
all MA organizations. For more information concerning the basis of our 
proposal to prohibit MYBEs, see the proposed rule and our discussion of 
the proposed rule in Section II of this document.

II. Provisions of the Proposed Regulations

    In the September 1, 2006 proposed rule, we proposed to prohibit all 
MA organizations from offering midyear benefit enhancements. We are 
referring the reader to 71 FR 52014-52017, for more information 
concerning the basis of our proposal to prohibit MYBEs.

III. Analysis of and Responses to Public Comments

    We received 4 items of timely correspondence on the proposed rule, 
raising 5 specific issues. The comments, which we discuss below, were 
from an individual, a health plan, and two insurance trade 
organizations. We reviewed each commenter's letter and for ease of 
reference, we are organizing the comments and our responses to them in 
the sections relating to MA plans, and employer and union group health 
plans, in general.

A. Medicare Advantage Plans

    We proposed to prohibit MYBEs as being inconsistent with the new, 
MMA-authorized, competitive bidding process. We proposed that the new 
prohibition would be effective beginning contract year 2007. We 
received comments concerning the timeline for implementation of MYBEs, 
and our contentions that MYBEs encourage overbidding; that MYBEs are 
inconsistent with the Part D benefit, which does not permit MYBEs; and 
that MYBEs can lead to an unfair advantage for plans offering them. 
Some commenters also stated that if we were to prohibit MYBEs, we would 
be affecting primarily beneficiaries who would not have the opportunity 
to receive additional benefits. See the proposed rule for more 
information on these issues.
    Comment: A commenter stated that current MYBE policy achieves a 
balance between preserving the integrity of the bidding process and 
providing enrollees with additional benefits at no extra costs.
    Response: We believe that beneficiaries and the MA program in 
general are best served by having a fair, competitive, and transparent 
bidding process. By prohibiting MYBEs we believe that plans will have 
more incentive to submit bids that reflect actual revenue needs. 
Establishing a level playing field and preserving the integrity of the 
competitive bidding process will be fair to plans and provide 
beneficiaries with quality benefit packages with reasonable costs.
    Comment: Three commenters recommended that CMS defer for a year 
consideration of the policy to prohibit MYBEs. The commenters' 
recommendation for this request ranged from the need to have more 
experience with the bidding process, to the need to take into account 
the fact that plans would have little experience with the bidding 
process and, therefore, would need more time to make the transition to 
the new process. One of the commenters requested that if CMS concludes 
a new policy is needed, it should publish a new proposed rule.
    Response: Based on these comments, we delayed publication of the 
final rule, which we had proposed to implement beginning with the 2007 
calendar year (CY). While the additional year of experience has been 
helpful for us in assessing MYBEs, we believe that it confirms a longer 
transition period will not be necessary (only one MA organization, for 
example, applied for a MYBE in 2007). With respect to our other primary 
concerns, we continue to estimate that MYBEs would likely lead to bids 
as much as 2 to 3 percent higher than would be submitted if MYBEs were 
prohibited, and that the competitive nature of the bidding process 
would be undermined to both the detriment of beneficiaries and the MA 
program if MYBEs were permitted even under the current limitations. We 
also do not believe that there is any benefit to publishing another 
proposed rule. Although this final rule updates some of our original 
contentions, and clarifies our discussion of employer and union 
sponsored group health plans and MYBEs, our concerns as well as our 
means of addressing them remain unchanged as does the larger context 
surrounding MYBEs and the MA program. We believe, therefore, that it is 
important to proceed as indicated in the proposed rule so that we may 
ensure that the bidding process is competitive, fair to all, and that 
it continues to comply with the statute.
    Comment: A commenter disagreed with our statement that there was 
value

[[Page 43630]]

in making the MA MYBE policy consistent with the prescription drug 
benefit program (which does not permit MYBEs). The commenter also 
stated that the offering of basic or supplemental benefits in MA 
programs often have separate requirements, and asked why this should 
not be the case with respect to MYBEs and Part C and D benefits. In 
other words, the commenter asked why would CMS prohibit MYBEs for MA 
benefits simply because this is the case for Part D benefits.
    Response: As we stated in the proposed rule, we do not believe that 
non-prescription drug benefits should be treated differently than 
prescription drug benefits. In many MA plans (known as MA-PDs), 
beneficiaries also receive the Part D prescription drug benefit. (Under 
our current guidance, in such cases beneficiaries could receive benefit 
enhancements for health benefits midyear but no enhancements for the 
Part D portion of the benefit.) By prohibiting MYBEs we will create 
consistency in treatment of the Part C and D benefit components and 
ensure that estimates of the revenue necessary for both is accurate. In 
response to the comment that the sometimes different requirements 
surrounding Part C basic and supplemental benefits would permit 
different treatment of MA and Part D benefits, (that is, allow MYBEs 
for MA plans but not for Part D plans), we believe that the different 
requirements cited by the commenter would have little to do with the 
question of MYBEs and their relation to bidding. Instead, the 
prohibition on MYBEs is primarily due to our desire to ensure that bids 
accurately represent the revenue needed whether for MA basic or 
supplemental benefits.

B. Employer and Union Group Health Plans

    In the January 28, 2005 final rule (70 FR 4639), we noted that 
under the previous M+C program, we permitted M+C organizations to offer 
MYBEs to existing benefit packages (that is, enhanced benefits, or 
reductions in premiums or cost-sharing amounts). We also noted that 
because employers and unions offering group health plans through an MA 
organization may operate on different bidding and negotiation 
timelines, MA organizations offering certain kinds of restricted 
enrollment plans to employer and union group health plan sponsors would 
be allowed to offer MYBEs on a flow basis and would not be subject to 
the new restrictions on MYBEs. This exemption from the proposed MYBE 
restriction included both the ``800-series'' employer and union-only 
group health plans and the new type of employer and union group health 
plan, where we directly contract with the employer or union sponsor 
offering an MA product (both of these restricted enrollment employer-
only plans have since become known as employer and union-only group 
waiver plans or ``EGWPs''). We noted that we did not believe the 
competitive nature of the bidding process was affected if benefit 
packages for these plans were adjusted midyear in accordance with our 
guidance.
    However, we noted that an MA organization would be subject to the 
policy of restricted MYBEs if it is offering an employer or union group 
health plan sponsor a plan that enrolls both individual beneficiaries 
and employer or union group health plan members, (that is, a plan open 
to general enrollment). For these latter plans, we also noted that 
employers and unions would still be free to enhance benefits midyear 
for the part of the group health plan benefit that is a ``wrap-around'' 
to the MA plan and that is only available to that employer or union 
group health plan sponsor's members. Additionally, we noted that these 
``wrap-around'' benefits are not technically part of the MA plan.
    In the September 1, 2006 proposed rule (71 FR 52016), we noted that 
there was no longer a need for an interim MYBE policy and applied the 
same rule to ``800-series'' EGWPs that was proposed for all other MA 
plans (with the exception of PACE plans). That is, we proposed that 
beginning with CY 2007, all MA organizations, including organizations 
offering MA plans to employer and union group health plan sponsors, 
would not be permitted to make any midyear changes in benefits, 
premiums or cost-sharing even under the circumstances in which these 
types of changes were permitted in CY 2006. We proposed that this 
policy apply to MA organizations that offer plans open to general 
enrollment to employer and union group health plan sponsors and MA 
organizations that offer restricted enrollment plans to employer and 
union group health plan sponsors (that is, ``800 series'' EGWPs).
    Comment: Two insurance trade associations commented that the 
proposed rule should not apply to restricted enrollment MA plans. The 
commenters stated that the proposed rule would severely limit the 
longstanding flexibility for MA organizations and employers or unions 
to negotiate benefits throughout the year that are responsive to the 
needs and interests of these employer and union group health plan 
sponsors and their members and thereby discourage employer and union 
health plan sponsors from enrolling their members in MA plans. The 
commenters also indicated that it is crucial for MA plans to be able to 
accommodate the timing of arrangements with employers and unions that 
offer ``800-series'' non-calendar year plans, and those ``800-series'' 
plans and/or contracts that begin midyear. For example, the commenters 
stated that it would be extremely difficult for MA organizations that 
must submit a bid by June of each year to anticipate the needs of 
employers who have plan years that start in July of the following year 
(for example, State and local governments).
    Response: We agree that MA organizations should retain the 
longstanding flexibility to customize benefits, including enhancing 
benefits and reducing premiums and cost-sharing, for all ``800-series'' 
EGWPs in order to be able to accommodate the various needs of employer 
and union group health plan sponsors throughout the year. The proposed 
prohibition on MYBEs was not intended in any way to limit the current 
flexibility that MA organizations have to negotiate customized benefit 
designs for these ``800-series'' employer and union-only types of 
plans. The proposed rule was merely intended to clarify that these 
kinds of plans do not need to be exempted from the policy restricting 
MYBEs because, due to their unique nature, they may continue to enhance 
benefits for employer and union group health plan sponsors at any point 
during the contract year without submitting MYBEs to CMS. Accordingly, 
we are clarifying that MA organizations will retain the flexibility to 
enhance benefits when offering these kinds of ``800-series'' employer 
and union-only plans to employer and union group health plan sponsors 
throughout the year despite being restricted from filing a formal MYBE 
with CMS. Filing an MYBE is not necessary to exercise this flexibility.
    Also, we are further clarifying that MA organizations will continue 
to be able to accommodate different timing arrangements for different 
employer or union group health plan sponsors by either contracting with 
employers and unions on a non-calendar year basis or by entering into 
new employer and union contracts midyear. MA organizations do not need 
to file MYBEs to continue to negotiate with employers or unions to 
provide enhanced benefits on a non-calendar year basis or to enter into 
midyear contracts with employer and union group health plan sponsors.
    Comment: One commenter expressed concern that the MYBE prohibition 
may

[[Page 43631]]

cause employer and union group health plan sponsors to lose the ability 
to incorporate Medicare in their benefits and thereby negatively affect 
the ability to reduce health care costs and employers' access to 
affordable health care.
    Response: CMS' longstanding policy allowing enhancement of ``800 
series'' EGWP plans for employer and union group health plan sponsors 
throughout the year, as explained in response to the previous comment, 
is not being modified by the proposed rule. We are clarifying that the 
proposed rule does not limit the current flexibility for employer and 
union group health plan sponsors to continue to contract with MA plans 
to offer employment-based health coverage that incorporates Medicare 
benefits (that is, ``800-series'' EGWPs) and thereby enhances the cost 
effectiveness for employer and union health plan sponsors and the 
retention of employment-based coverage.

IV. Provisions of the Final Regulations

    We are finalizing, with the clarifications described in section 
III, Analysis of and Responses to Public Comments, the policy specified 
in the September 1, 2006 proposed rule (71 FR 52014-52017) and section 
II, Provisions of the Proposed Rule. Beginning in contract year 2008, 
MA organizations will no longer be permitted to offer midyear benefit 
enhancements. As discussed in section III of this rule, employer and 
union group health plans sponsors offering ``800 series'' MA plans will 
continue to be able to offer benefit enhancements as they do currently, 
through means other than MYBEs under existing CMS employer group waiver 
policies. PACE plans are not affected by the prohibition.
    We have had the opportunity to reevaluate our MYBE policy over the 
course of the first 2 contract years of the new bidding process, and we 
remain convinced that MYBEs are an obstacle to the statutory 
requirement of a competitive bidding process and that there is no 
longer a need for this interim policy. As stated in the proposed rule 
on September 1, 2006, this policy was intended to assist MA 
organizations during the initial phase of the new bidding process, 
while ensuring that beneficiaries have a choice of plans. The lack of 
MYBE applications support this conclusion as we had only one 
application for a MYBE in CY 2007, and approximately six in CY 2006. 
Under the new bidding process, the focus is, as it should be in a 
competitive environment, on establishing a level playing field by 
ensuring that the initial bidding process is not skewed by the 
opportunity later in the year to adjust benefits and bids through 
benefit enhancements. Prohibiting MYBEs will ensure that the focus is 
squarely on the integrity of the bidding process established by 
statute.
    As indicated in the proposed rule, the rationales for our proposal 
to prohibit MYBEs remain valid after another year of experience with 
MYBEs and the bidding process. To summarize those concerns--
     MA organizations, knowing that they could alter their 
benefit packages after the bidding process was complete, could 
misrepresent their actual costs (revenue requirements) to provide 
benefits (overbid) and noncompetitively revise their benefit packages 
later in the year, once competitors' benefits are known.
     MYBEs offered in July or September of the contract year 
could be offered primarily to attract individuals in their initial 
coverage election period (ICEP). We believe that individuals are very 
attractive to MA organizations because of their relatively low 
utilization (they are new to the program and tend to be healthier) and 
because of their numbers (nationally, over 200,000 individuals per 
month ``age-in'' to Medicare).
     We estimate that organizations planning on revising their 
bids through MYBEs could overbid by as much as 2 to 3 percent in order 
to distinguish themselves from other plans later in the year and 
attract ICEP beneficiaries.
     MYBEs encourage overbidding, and second, penalize MA 
organizations that do not attempt to ``game the system'' and which 
instead offer a bid that more accurately represents their costs to 
offer benefits over the full course of a contract year.
     MYBEs are not consistent with the Part D program (the Part 
D program does not allow MYBEs).
    Finally, based on our experience since permitting MYBEs under even 
the current limited circumstances, we have found it difficult to 
determine the credibility of ``excess'' profits an MA organization has 
for a specific plan (on which MYBEs are based), since the assessment is 
based only on a few months of incomplete utilization data that occur 
between the beginning of the calendar year and the MYBE application 
deadline. Therefore, based on comments received, we are accepting all 
of the provisions as proposed.

V. Collection of Information Requirements

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

VI. Regulatory Impact Statement

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year). This rule 
does not reach the economic threshold and thus is not considered a 
major rule.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. Individuals and States are not 
included in the definition of a small entity. The MA program, by having 
both regional and local plans, provides an opportunity for health 
insurance entities of all types and most sizes (but probably not below 
the ``small'' insurance entity cutoff level defined by the SBA ($6 
million), which is lower than appears viable for a comprehensive, risk-
bearing insurance plan) to participate. Therefore, we are not preparing 
an analysis for the RFA because we have determined that this rule will 
not have a significant economic impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. We are not preparing an 
analysis for section 1102(b)

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of the Act because we have determined that this rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule 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. This rule will have no 
consequential effect on State, local, or tribal governments or on the 
private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. Since this regulation does not impose any costs on State 
or local governments, the requirements of E.O. 13132 are not 
applicable.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

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

    Dated: January 10, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: March 12, 2008.
Michael O. Leavitt,
Secretary.
[FR Doc. E8-17056 Filed 7-25-08; 8:45 am]
BILLING CODE 4120-01-P