[Federal Register: March 6, 2002 (Volume 67, Number 44)]
[Proposed Rules]               
[Page 10261-10293]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 403

Medicare Program; Medicare-Endorsed Prescription Drug Card and Drug 
Discount Card Assistance Initiative; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 403

[CMS-4027-P]
RIN 0938-AL25

 
Medicare Program; Medicare-Endorsed Prescription Drug Card 
Assistance Initiative

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would describe the Department of Health and 
Human Services' (HHS) Medicare-Endorsed Prescription Drug Card 
Assistance Initiative, and set forth the necessary requirements to 
participate in the initiative. This proposed rule also cross-references 
an advance notice of proposed rulemaking entitled ``Medicare Program; 
Medicare-Endorsed Prescription Drug Discount Card Assistance Initiative 
for State Sponsors'', published elsewhere in this Federal Register 
issue, outlining steps that we are considering proposing in support of 
State efforts to make more readily available affordable prescription 
drugs to Medicare beneficiaries.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on May 6, 2002.

ADDRESSES: In commenting, please refer to file code CMS-4027-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. Mail written comments (one original and 
three copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-4027-P, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses:
Department of Health and Human Services, Hubert H. Humphrey Building, 
200 Independence Avenue, Room 443-G, Washington DC 20201, or
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Room 
C5-16-03, Baltimore, MD 21244-1850.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Debbie Van Hoven, (410) 786-8070.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, telephone (410) 768-7197.

I. Background

A. History of the Initiative

    With limited exceptions, the Medicare benefit package currently 
does not include an outpatient prescription drug benefit. While 
approximately 73 percent of Medicare beneficiaries have drug coverage 
at any given time (under, for example, employer-sponsored retiree 
health plans or Medicaid), an estimated 10 million have no drug 
coverage. Without access to the discounts that come with most kinds of 
prescription drug coverage, many beneficiaries either pay list prices 
for drugs or have access only to drug discount programs that include 
modest discounts at the pharmacy. These beneficiaries often do not have 
access to the valuable services offered by some drug benefit and 
assistance programs, including services such as drug interaction, 
allergy monitoring, and advice on how medication needs might be met at 
a lower cost. Further, a substantial share of beneficiaries have little 
experience with choosing among prescription drug assistance plans as 
envisioned in almost all Medicare drug benefit proposals being 
considered by the Congress. This, along with the need for us to 
operationalize such a complex benefit, implies a substantial ``lead 
time'' for successful implementation of a prescription drug benefit. In 
his Fiscal Year 2002 and 2003 budgets, the President proposed adding a 
prescription drug benefit for all Medicare beneficiaries. In the 
interim before the Medicare drug benefit can be enacted and fully 
implemented, the President believes that beneficiaries should have 
access to rebates or discounts from pharmaceutical manufacturers on 
prescription drugs as well as to pharmaceutical management services 
that are commonly available in good private insurance plans.
    On July 12, 2001, the President announced an initiative that would 
create a Medicare-Endorsed Prescription Drug Discount Card program to 
assist Medicare beneficiaries in accessing lower cost prescription 
drugs and better advice on using them, and understanding the private 
sector methods that are used to reduce prescription drug costs and 
improve the quality of pharmaceutical services. We published a notice 
in the Federal Register on July 18, 2001 (66 FR 37564) that contained 
the application we planned to use to select the entities eligible for 
the Medicare endorsement. Based on comments received on that 
application, we issued a revised application on August 2, 2001 on our 
Web site at http://www.cms.gov.
    On September 11, 2001, the United States District Court for the 
District of Columbia issued a preliminary injunction against this 
Medicare-Endorsed Prescription Drug Discount Card program. National 
Ass'n of Chain Drug Stores v. Thompson, No. 01-1554 (D.D.C. 2001). In 
accordance with that order, we have ceased all work on implementing 
that program. Although we had received 28 proposals for the drug 
discount card endorsement in response to our August 2, 2001 
solicitation before the September 11, 2001 order, we will not make any 
Medicare endorsements on the basis of those proposals.
    On October 10, 2001, we filed a Motion for Stay with the United 
States District Court for the District of Columbia asking that the case 
giving rise to the preliminary injunction be stayed while we engage in 
notice and comment rulemaking on a modified prescription drug discount 
card program. On November 5, 2001, the court issued an order granting 
the Motion for Stay while we submit our proposed policy for comment by 
publishing this proposed rule in the Federal Register. By publishing 
this proposed rule, we are formally withdrawing the program described 
in the Federal Register on July 18, 2001. We are instead soliciting 
comments on all aspects of the proposed Medicare-Endorsed Prescription 
Drug Card Assistance Initiative described in this proposed rule.
    This proposed rule describes a program that differs in important 
respects from the Administration's initial proposal, for example, by 
requiring card sponsors to obtain substantial manufacturer rebates or 
discounts, requiring that manufacturer rebates or discounts be shared 
with

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beneficiaries directly or indirectly through pharmacies, and 
considering that the administrative consortium have an advisory body.
    Furthermore, in an advance notice of proposed rulemaking entitled, 
``Medicare Program; Medicare-Endorsed Prescription Drug Discount Card 
Assistance Initiative for State Sponsors,'' published elsewhere in this 
issue of the Federal Register, we outline additional steps that we are 
considering to propose in support of State efforts to make more readily 
available affordable prescription drugs to Medicare beneficiaries.
    The parameters of the initiative may change further based on the 
public comments we receive in response to this proposed rule.
    If the plaintiffs in the case mentioned above believe that the 
initiative published in the final rule is substantially similar to the 
program that was described in the July 18, 2001 Federal Register, we 
expect that before implementation of that initiative, the plaintiffs 
would seek further judicial review, which could result in a delay in 
implementation.

B. Statutory Basis for Initiative

    For several years we have considered ideas for obtaining 
significant discounts on prescription drug prices and higher quality 
drug services for Medicare beneficiaries. After exploring various means 
of enhancing the purchasing power of Medicare beneficiaries, we propose 
to use the authority granted to the Secretary under several statutes to 
achieve private purchasing power for Medicare beneficiaries by 
educating them about accessing certain qualified prescription drug 
discount programs.
    First, under section 4359(a) of the Omnibus Budget Reconciliation 
Act of 1990 (OBRA)(Pub. L. 101-508), the Secretary is authorized to 
``establish a health insurance advisory service program * * * to assist 
Medicare-eligible individuals with the receipt of services under the 
Medicare and Medicaid programs and other health insurance programs.'' 
Under section 4359(c)(1)(B) of OBRA, the Secretary is authorized to 
``provide for information, counseling, and assistance for Medicare-
eligible individuals'' with respect to benefits, whether or not covered 
by Medicare. The statute is broadly written, with section 4359(c) 
authorizing the Secretary to provide ``such other services as the 
Secretary deems appropriate to increase beneficiary understanding of, 
and confidence in, the Medicare program and to improve the relationship 
between beneficiaries and the program''. Section 4359(f) of OBRA 
expressly anticipates that there will be ``other health insurance 
informational and counseling services'' for Medicare-eligible 
individuals.
    We believe that this proposed initiative would meet the definition 
of a beneficiary assistance program because it would assist Medicare 
beneficiaries not just with their utilization of Medicare-covered 
services, but also with the receipt of services common under other 
health insurance programs. Access to more affordable prescription drugs 
would assist beneficiaries in receiving services under Medicare and 
other health insurance programs, since access could lead them to more 
effectively or efficiently use Medicare services, such as physician or 
hospital services. We also believe that this Medicare-Endorsed 
Prescription Drug Card Assistance Initiative would be a valuable 
educational tool for beneficiaries. It would improve their 
understanding of how to access prescription drug discounts, as well as 
increase their understanding of the private sector tools currently used 
to lower prescription drug costs and improve the quality of 
pharmaceutical services.
    Outpatient prescription drugs generally are not a covered benefit 
under Medicare. However, we believe that access to prescription drugs 
is so fundamental to the delivery of modern health care benefits that 
beneficiaries should receive information, counseling, and assistance 
regarding the prescription drug discount programs. Section 4359(b) of 
OBRA already instructs the Secretary to provide education and 
assistance not just about Medicare-covered benefits, but also about 
benefits not covered by the Medicare program. For a number of years we 
have offered Medicare beneficiaries education and assistance in 
accessing several non-covered benefits that are complimentary to 
Medicare, Medicaid, and other health insurance programs. Our ``Guide to 
Choosing a Nursing Home'' discusses long-term care options outside 
Medicare coverage, including assisted living, subsidized senior 
housing, and private long-term care insurance. We provide further 
education to beneficiaries regarding options for long-term care, such 
as adult day care and community-based services, many of which are not 
covered by Medicare. Finally, we provide educational assistance 
concerning prescription drugs. For example, the Medicare Web site 
(http://www.Medicare.gov) provides information on programs that offer 
discounts or free medication to individuals in need. Beneficiaries may 
access information on pharmaceutical companies or associations that 
offer assistance programs for those with low incomes, on available 
State assistance programs, or on community-based programs available in 
their area. This Web site also provides a link to an article on 
internet pharmacies.
    Moreover, by enhancing the buying power and knowledge of 
beneficiaries, we believe that we will further the Congressional goal 
in section 4359(c) of OBRA of ``increas[ing] beneficiary understanding 
of, and confidence in, the Medicare program and * * * improv[ing] the 
relationship between beneficiaries and the program.''
    Beneficiary confidence in the program would be enhanced by 
education about drugs that are a critical component of comprehensive 
health care, and by facilitation of the means by which beneficiaries 
can purchase drugs at a discounted price and obtain other valuable 
pharmacy services. This proposed initiative would allow beneficiaries 
to make more efficient and effective use of their Medicare services, as 
well as benefits that may be available to them under Medigap plans, 
employer-sponsored group health plans, retiree health insurance, or 
other health insurance programs. We believe that the broad provisions 
of section 4359 of OBRA permit us to pursue these important objectives. 
(See Texas Gray Panthers v. Thompson, 139 F. Supp. 2d 66, 76 (D.D.C. 
2001)), finding that section 4359 of OBRA is ambiguous in defining what 
types of ``information, counseling, and assistance'' are to be 
provided, and therefore deferring to the Secretary's reasonable 
interpretation of the statute).
    Finally, in the United States District Court case mentioned 
previously, the judge made a preliminary finding that section 4359 of 
OBRA did not provide the necessary legal authority for the program 
published in the Federal Register on July 18, 2001. We anticipate that, 
if the plaintiffs believe that the final rule is substantially similar 
to the program announced July 12, 2001, they will seek further judicial 
review. The comments submitted on this issue, and our responses to 
them, would assist the court in any future review of the policy. If 
there are commenters who wish to address whether the Secretary has 
sufficient authority under the statute, we also invite them to comment 
on how the initiative could be structured to reflect their views.
    We believe that sections 1102, 1140 and 1871 of the Social Security 
Act (the Act) also support the creation of this proposed initiative. 
Sections 1102 and 1871 of the Act provide the Secretary

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with general rulemaking authority. Section 1102 of the Act provides the 
Secretary with the authority to publish such rules and regulations as 
``may be necessary to the efficient administration of the functions 
with which'' he is charged. Facilitating beneficiary access to lower-
cost prescription drugs, and improving their access to other valuable 
pharmacy services, will lead to greater efficiency in the Medicare 
program. For example, with improved access to prescription drugs, 
beneficiaries would be more inclined to follow their drug regimens, 
which could affect their need for Medicare-covered services.
    Prescription drugs are an integral part of treatment of virtually 
all medical problems, and Medicare beneficiaries are more likely to 
have multiple and complex medical problems. Therefore, easier access to 
drug price comparisons, greater beneficiary access to affordable 
prescription drugs and expertise on how to use them will lead to more 
effective and efficient use of items and services covered by the 
Medicare program. Courts have acknowledged that the authority under 
section 1102 of the Act is ``broad,'' (National Welfare Rights 
Organization v. Mathews, 533 F.2d 637 (D.C. Cir. 1976)) and have even 
stated that a ``more plenary great (sic) of rule-making power would be 
difficult to devise.'' (Serritella v. Engleman, 339 F.Supp. 738, 752 
(D.N.J.), aff'd per curiam, 462 F.2d 601 (3d Cir. 1972)).
    Section 1140 of the Act also supports the Secretary's creation of 
this initiative. That section, among other things, prohibits misuse of 
the word, ``Medicare,'' in a manner that a person knows or should know 
would convey the false impression that an item is approved, endorsed, 
or authorized by the Health Care Financing Administration (the 
predecessor to the agency CMS) or the Department of Health and Human 
Services. By prohibiting the use of the term ``Medicare'' to convey the 
false impression that an item is approved or endorsed by us, the 
statute implicitly recognizes that the impression may be accurate and 
authorized in some circumstances. Thus, section 1140 of the Act, in 
combination with the educational and assistance authority of section 
4359 of OBRA, as well as the general rulemaking authority of sections 
1102 and 1871 of the Act, provides further support for the Secretary to 
endorse qualified entities as being approved by the Medicare program.

C. Objectives of Proposed Initiative

    The objectives of this proposed initiative would be to:
     Educate Medicare beneficiaries about private market 
methods available for securing substantial discounts from manufacturers 
and other competitive sources on the purchase of prescription drugs.
     Provide a mechanism for Medicare beneficiaries to gain 
access to the effective tools widely used by pharmacy benefit managers 
and pharmacies to get higher quality pharmaceutical care, for example 
monitoring for drug interactions and allergies.
     Publicize information (including drug-specific prices, 
formularies, and networks) to facilitate easy consumer comparisons that 
would allow Medicare beneficiaries to choose the best card for them.
     Enhance and stabilize participation of Medicare 
beneficiaries in effective prescription drug assistance programs, 
increasing the leverage and ability of these programs to negotiate 
manufacturer rebates or discounts for Medicare beneficiaries and to 
provide other valuable pharmacy services.
     Enhance the quality and use of Medicare-covered services 
by improving access to prescription drugs.
     Endorse qualified private sector prescription drug 
discount card programs (either for profit or nonprofit), based on 
structure and experience; customer service; pharmacy network adequacy; 
ability to offer manufacturer rebates or discounts (passing through a 
substantial portion to beneficiaries, either directly or indirectly 
through pharmacies), and available pharmacy discounts; and permit 
endorsed entities to market their programs as Medicare-endorsed.
     Provide Medicare beneficiaries a low (in Year One, $25 
maximum) or no-cost opportunity to enroll in a Medicare-endorsed 
prescription drug discount card program.
    We invite comments on all aspects of this proposed rule. We 
specifically solicit comments on whether additional objectives or 
requirements should be considered. We also welcome comments on whether 
beneficiaries currently have adequate information and understanding of 
the pharmaceutical management services that can help patients use 
prescription drugs more effectively--such as monitoring for drug 
interactions and allergies, services to help patients manage chronic 
illnesses, and education about drug side effects and how they can be 
managed or avoided. We welcome comments on whether the beneficiary 
population would benefit from easily being able to compare the 
formularies, discounts, drug prices, and pharmacy networks of 
prescription drug discount card programs.
    We also invite comments from beneficiaries and others regarding how 
access to lower cost prescription drugs and to better information on 
using prescription drugs effectively would improve beneficiary use of 
Medicare-covered services, and whether this access would result in more 
efficient use of these services. We welcome comments that include 
examples of how access to discounted prescription and related services 
may improve a medical condition.

D. Overview of the Proposed Initiative and Requirements for Endorsement

1. General
    We propose to endorse prescription drug card programs that meet 
defined requirements, and to permit successful applicants to market and 
label their programs as ``Medicare-endorsed.''
    The proposed Medicare-Endorsed Prescription Drug Card Assistance 
Initiative would publicize information that would allow Medicare 
beneficiaries to compare endorsed prescription drug card programs, 
assist Medicare beneficiaries in understanding and accessing private 
market methods for securing discounts and other valuable services 
associated with the use of prescription drugs, and raise beneficiary 
awareness of certain qualified prescription drug card programs 
available in the commercial market.
    Aspects of the proposed initiative would include the ability of 
each Medicare-endorsed drug card program sponsor to:
     Obtain substantial manufacturer rebates or discounts on 
brand name drugs, and provide a substantial portion of the manufacturer 
rebates or discounts to beneficiaries, either directly or indirectly 
through pharmacies, in order to reduce the price beneficiaries pay for 
prescription drugs or enhance the pharmacy services they receive.
     Enroll all Medicare beneficiaries who wish to participate.
     Provide discounts on at least one brand name or generic 
prescription drug in each of the therapeutic drug classes, groups, and 
sub-groups representing prescription drugs commonly needed by Medicare 
beneficiaries.
     Offer a broad national or regional contracted retail 
pharmacy network, providing convenient retail access.
     Charge no fees to us, or any other Federal agency.
     Charge a small one-time enrollment fee (of no more than 
$25 per beneficiary in Year One) or no fee.
     Provide customer service to beneficiaries, including 
enrollment

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assistance, toll-free telephone customer service help, and education 
about the card program services, including any other prescription drug 
services offered by the program for no additional fee, such as drug 
interaction monitoring, and allergy alerts.
     Ensure that beneficiaries enroll in only one Medicare-
endorsed prescription drug discount card program at a time, so as to 
facilitate obtaining discounts from drug manufacturers on their behalf.
     Provide notice to beneficiaries of the expected uses of 
beneficiary information and obtain authorization from each enrollee for 
the sharing of beneficiary-specific information necessary for the 
operation of the drug discount card program. Also, obtain separate 
authorization from each enrollee for sharing information for any 
purpose other than the operation of the aspects of the discount card 
program that are part of the endorsement.
     Agree to jointly administer, and abide by the guidelines 
of, a private administrative consortium funded by Medicare-endorsed 
discount card program sponsors, to perform administrative functions, 
consisting of publishing information on drug prices, operating an 
enrollment exclusivity system, and, by the second year of the 
initiative, assuming review of marketing materials. The administrative 
consortium would be financed by the Medicare-endorsed card sponsors.
    We are proposing that drug discount card program sponsors in the 
proposed initiative would be required to limit enrollees in their 
Medicare-endorsed discount card programs to Medicare beneficiaries. 
Card sponsors could request the beneficiary's Medicare number or use 
other means to assess Medicare eligibility. We would not provide data 
or assistance to verify Medicare eligibility.
    Drug discount card program sponsors in this proposed initiative 
would be able to accept groups of enrollees from insurance groups, such 
as Medicare+Choice (M+C) plan members, Medigap enrollees, and 
beneficiaries with employer-sponsored retiree health insurance. If they 
accept group enrollments, we would require the discount card program 
sponsors to advise each member of the group of the enrollment 
exclusivity requirement and other enrollment rules, expected uses of 
their personal information under the discount card program, and obtain 
the consent of each member of the group to be enrolled in the discount 
card program. Members who do not consent to group enrollment would be 
allowed to enroll individually in the endorsed program of their choice.
    We propose to allow M+C organizations to subsidize the enrollment 
fee and to offer the drug discount card program as part of their 
Adjusted Community Rate filing, however they would not be allowed to 
require enrollment in a drug discount card program as a condition of 
enrollment in any of their M+C plans.
    In addition, we believe that this proposed initiative would improve 
upon the current drug card market. The market-based design of this 
proposed initiative, and its ability to mimic many of the important 
design features of an insured product, would give Medicare-endorsed 
drug discount card programs features that current market products 
generally do not have.
    This proposed initiative would improve upon the current market in 
several important respects by:
     Securing manufacturer rebates or discounts, and passing 
them through pharmacies or directly to beneficiaries, resulting in 
deeper discounts.
     Educating Medicare beneficiaries about formularies, 
generic substitution, drug utilization review, and other ways of 
lowering prices and improving the quality of pharmacy services.
     Ensuring that Medicare beneficiaries receive the lower of 
the negotiated drug discount card price or the pharmacy's lowest price 
to other cash paying customers.
     Providing the opportunity for Medicare beneficiaries to 
enroll in a low- or no-fee Medicare-endorsed prescription drug discount 
card program.
    In a recently released report from the General Accounting Office 
(GAO) entitled ``Prescription Drugs: Prices Available Through Discount 
Cards and From Other Sources'' (December 5, 2001), the GAO collected 
specific price data on 12 brand name and 5 generic commonly used 
prescription drugs from one regional and four large discount card 
programs, as well as pharmacies' prices for the same prescription drugs 
in four selected geographic areas. Some of the pharmacies' prices 
reported included pharmacy discounts, others did not. The GAO simply 
reported prices on the 17 drugs; they did not calculate average 
discount card savings. The average discounts that could be calculated 
from the GAO reported data are difficult to compare to our estimate of 
roughly 10 to 13 percent savings off total beneficiary drug spending 
for several reasons.
    First, while the impact analysis is built on an assumption of 
savings of 10 to 13 percent off total drug spending, we believe that 
more savings may be possible, depending on the ultimate design of card 
sponsors' programs. If Medicare-endorsed discount card programs rely 
heavily on the use of formularies, we expect that manufacturer rebates 
and discounts would be greater in response. We solicit comments and 
data on how to maximize manufacturer rebates and discounts.
    Second, savings for the proposed initiative are not estimated on a 
per-prescription basis. For certain drugs for which manufacturer 
rebates or discounts are secured, we expect to see, under this 
initiative, drug-specific discounts comparable to insured products, 
which are often 25 to 30 percent or sometimes more per prescription.
    Finally, the price data collected by the GAO do not include all 
drugs or indicate the relative market share that each drug represents; 
that is, they are not weighted. Savings estimates calculated by simply 
averaging selected drug prices do not account for the differences in 
utilization, and thus, market share.
2. Administrative Consortium Start-Up
    Medicare-endorsed drug discount card program sponsors would be 
expected to fund the cost of administering their own drug card program, 
in addition to the activities of the administrative consortium. We 
would not pay for enrollment, management, participation, or any other 
cost associated with any drug discount card program.
    However, we do anticipate providing some financial support toward 
the start-up of the consortium and its administrative activities, which 
in Year One would include operating and maintaining an enrollment 
exclusivity system and a web site for comparing drug prices among the 
Medicare-endorsed discount card programs. We would expect the 
administrative consortium to be operational no later than the first day 
that Year One enrollment may begin. That date would be announced in the 
final rule. We anticipate providing technical support and identifying 
options for the administrative consortium's structure, its financial 
arrangements, system to ensure enrollment exclusivity, and a web site 
to be used to compare drug prices. Further, we would develop a short-
term administrative operating plan for the administrative consortium, 
and assist the consortium in a short-term transition to full operation.
    We would expect the drug card sponsors to share in these start-up 
costs, as well as to be responsible for the

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assurance that the administrative consortium structure and its 
operation adhere to Federal and State laws, and for the execution of 
any legal arrangements for the consortium's formation and the 
implementation of the administrative tasks.
    Drug card program sponsors would be required to make a lump sum 
payment to a privately held escrow account as a term of endorsement to 
cover anticipated start-up costs to be incurred by the administrative 
consortium. We propose that the payment amount, which would be 
estimated by our contractor and may not represent payment in full for 
these start-up activities, would be prorated by the number of States 
included in each endorsed card program's network area, weighted by the 
number of Medicare beneficiaries residing in each State (and 
Washington, DC). This would not necessarily be the allocation 
methodology for any additional start-up costs or ongoing costs of the 
administrative consortium. One possible method for covering costs after 
the card program sponsors have gained experience would be to allocate 
costs based on a program's number of Medicare enrollees. We welcome 
comments on these allocation methods and alternative methods and 
rationale.
    We solicit information on existing systems with the capacity to 
assure exclusive enrollment and web-based technology that could be used 
to compare prices. We would like to understand what data or systems 
variations we could expect across card programs that would need to 
interface with an exclusivity system and the price comparison web site.
    In addition to supporting the administrative consortium start-up, 
it is our plan for us to be fully responsible in Year One for 
developing marketing guidelines and conducting review of marketing 
materials under a technical support contract. We propose that the 
consortium would assume this responsibility, beginning in Year Two, 
using guidelines we would develop. The administrative consortium would 
be free to use independent contractors to perform the review of 
marketing materials, as well as other consortium functions.
3. Education, Marketing and Other Services
    Medicare-endorsed drug discount card program sponsors would be 
expected to administer and market their discount card program and 
educate Medicare beneficiaries about the program. In order to secure 
rebates and deeper discounts for beneficiaries, Medicare-endorsed drug 
card program sponsors would have the discretion to use formularies, 
patient education, pharmacy networks, mail order, and other commonly 
used tools. However, beneficiaries would always have the option to 
purchase drugs outside of a Medicare-endorsed card program and pay the 
retail price or a discount price secured through existing non-endorsed 
cards or some other means, as they do now. Further, pharmacies 
sometimes offer special prices on drugs for promotional purposes to the 
general public. If these prices are lower than the price that could be 
obtained through the drug card program, the card sponsor would be 
expected to arrange with its network pharmacies that these lower prices 
must also be made available to Medicare beneficiaries to the extent the 
drugs are included in the card program's formulary.
    We propose that we also would educate beneficiaries about the 
Medicare-endorsed drug card assistance initiative, both at the time it 
is announced and as part of ongoing education efforts thereafter. We 
would create and authorize the use of a Medicare-endorsed prescription 
drug discount card assistance emblem. We would highlight the Medicare-
endorsed drug card assistance initiative in Medicare publications, such 
as brochures, and in the pre-enrollment package that is sent to all 
beneficiaries when they become eligible for Medicare. We propose to 
provide general information about the initiative on the Medicare web 
site (http://www.medicare.gov). We propose to include on our web site 
information for each discount card program of the following types: 
Contact information, including toll free telephone numbers for 
individual programs; identification of the program's web site; 
enrollment fee; and customer service hours.
    Since other prescription drug related services, such as drug 
interaction notification, drug allergy notification and pharmacy 
counseling, could improve the overall quality of the card program, we 
propose to identify these services on our web site as well, provided 
they are not associated with a separate fee. Additionally, we would 
consider reporting on our web site the card program sponsor's 
performance on reliable quality and satisfaction standards pertaining 
to the card program operation, customer service, and its network's 
pharmacy services (including the adequacy of the network for 
underserved populations and populations at risk for health 
disparities). We request comments on, and information about, available 
quality measurements, including whether they are standardized and 
reliable, how they are or could be reported, and whether they would be 
meaningful to beneficiaries in their selection of a drug discount card 
program.
    We propose that the information made available on our web site also 
be available to Medicare beneficiaries through the toll-free Medicare 
information line (1-800-MEDICARE), which is available 24 hours per day, 
7 days a week.
    Although not required to do so, drug card sponsors could provide 
other services to beneficiaries who enroll in their card programs. 
These services could include both drug-related services or items for a 
fee, such as disease management, and additional non-drug-related 
services or items, whether for a fee or not, such as discounts on 
dental services and prescription eyeglasses. These services would not 
be covered, however, by the Medicare endorsement. Therefore, although 
program sponsors would be allowed to market these other services to 
Medicare beneficiaries who are enrolled in their drug discount card 
programs, they would not be allowed to describe the services as being 
Medicare-endorsed, or associate them directly with the Medicare 
endorsement. Sponsors also would be allowed to send marketing materials 
for these items and services only to those beneficiaries enrolled in 
their drug discount card programs that elect to receive these 
materials.
    Card program sponsors would be required to follow our marketing 
guidelines, including the standards we develop for use of the Medicare 
endorsement emblem. Guidelines would also cover the presentation of the 
emblem and other information on each program sponsor's discount card.
    We recognize that the prescription drug and pharmacy industries are 
moving toward electronic transmission systems for prescription 
transactions, due to their inherent efficiencies, and that various 
systems are being tested. We also recognize that some in the industry 
are interested in standardization of certain identification information 
cards.
    We would like to better understand the state of development, 
testing, and market readiness for electronic transmittal of 
prescription transactions and the standardization of identification 
information. We solicit comments on how these advances could be 
implemented to improve the efficiency and effectiveness of individual 
card programs, and how they could interact with the Medicare-endorsed 
prescription drug card assistance

[[Page 10267]]

initiative to better prepare us, the marketplace, and beneficiaries for 
a future Medicare drug benefit.
    We would like to better understand the present limitations of these 
electronic transmittal systems, such as electronic signatures, and the 
efforts to standardize identification information for the card. We also 
solicit comments on any barriers that might be imposed by the use of 
these advances in the Medicare-endorsed drug card initiative. For 
example, we would like to understand if there are competitive 
advantages and disadvantages to us or the card program sponsors of 
requiring the pharmacy networks to use electronic transmittal systems 
of accepting only standardized identification information on the cards.
4. Manufacturers Rebates or Discounts
    The name ``Medicare'' is extremely valuable and highly regarded by 
the nearly 40 million Medicare beneficiaries. Medicare focus groups 
have indicated that virtually all seniors recognize the name 
``Medicare''. We believe its name recognition is so strong that it is 
unlikely to be duplicated in the commercial market.
    As a result of the Medicare endorsement, Medicare name recognition, 
and education of Medicare beneficiaries, we anticipate that Medicare-
endorsed drug discount card program sponsors would have increased 
visibility for their discount drug programs, which would lead to 
significant enrollment by Medicare beneficiaries. We expect that the 
attributes of this proposed initiative, coupled with exclusive 
enrollment, would provide card sponsors with the ability to negotiate 
significant drug manufacturer rebates or discounts. We expect that 
competition among card sponsors and, in turn, drug manufacturers to 
attract beneficiaries through lower prices and other valuable 
prescription related services would assure that manufacturer rebates or 
discounts are shared with Medicare beneficiaries either directly or 
indirectly through pharmacies.
    We would require that Medicare-endorsed drug discount card program 
sponsors obtain substantial manufacturer rebates or discounts on brand 
name drugs and pass a share of those rebates or discounts through to 
beneficiaries either directly or indirectly through pharmacies. These 
requirements would be structured to promote better drug prices for 
beneficiaries or to enhance pharmacy participation in a card sponsor's 
network. In particular, card sponsors would be required to have 
contractual arrangements with drug manufacturers for rebates or 
discounts and a contractual mechanism for passing on the bulk of 
rebates or discounts that are not required to fund operating costs to 
beneficiaries or pharmacies. Card sponsors would be required to have 
contractual agreements with pharmacies ensuring that the rebates or 
discounts would be passed through to the Medicare beneficiaries in 
lower prices or enhanced pharmacy services. Further, we would like to 
structure these requirements so they do not discourage use of generic 
drugs.
    We request comments concerning other purchasers' experiences with 
rebates or discounts, such as the level of rebate or discount for brand 
name drugs (the average amount over a specified unit or a rebate or 
discount percentage off a stated price), the portion of brand name 
drugs on a formulary for which rebates or discounts are provided, and 
efforts to sustain the use of generic drugs in spite of manufacturers' 
rebates or discounts on brand name drugs. We would also be interested 
in receiving reliable data on the experience under insurance products 
and estimates on what could be achieved under a drug discount card 
program given the proposed design. We would also like to better 
understand the effects of various levels of rebates or discounts and 
negotiating strategies on market competition and their impact on the 
use of generic drugs.
    Further, we solicit comments on information and data or experiences 
of other purchasers regarding the level of rebates or discounts that 
are shared with purchasers as clients of pharmacy benefit managers, 
enrollees, and pharmacies. We invite comments on factors to be 
considered to achieve the objective of ensuring that rebates or 
discounts are passed through to beneficiaries. Specifically, we are 
interested in comments that provide information and data on how to 
account for factors addressed in contracts with employers such as 
operational expenses and profitability of card sponsors in determining 
what portion of the rebate or discount must be passed through. We are 
particularly interested in reliable data to demonstrate a reasonable 
level of pass through to beneficiaries, taking into account the factors 
noted above, or other factors that should be considered. We are also 
interested in the experience in the insurance market with sharing 
rebates or discounts with pharmacies to support discounts or as 
incentives for participation in networks, or the funding of other 
services, such as pharmacy counseling, and any reliable data to support 
this experience. We also are interested in information and data on the 
impact of rebates or discounts on the price paid for drugs.
    We also solicit comments regarding existing or new operations 
models to provide rebates or discounts to beneficiaries (such as an 
estimate of additional manufacturer discount at the point of sale or a 
periodic rebate check or credit toward further prescription purchases) 
and to pharmacies (such as quarterly payments based on volume of drugs 
sold). This includes comments regarding whether the Medicare drug card 
program could provide easier access for eligible beneficiaries to 
several recently announced drug manufacturer discount programs. We 
would like to consider the strengths and limitations of any model, how 
it could be implemented, and whether to require a particular model.
    We also request comments on, and examples of, the necessary 
processes, as well as time and other constraints associated with 
negotiating manufacturer rebates or discounts and assuring they are 
reliably shared with beneficiaries either directly or indirectly 
through pharmacies. We solicit comments on how to incorporate these 
considerations into our proposed requirement for substantial 
manufacturer rebates or discounts on brand name drugs, which would 
largely be given directly to beneficiaries, but could also be shared 
with pharmacies to enable them to offer larger discounts or other 
services, such as pharmacy counseling.
    Finally, we solicit comments on proposed approaches for 
communicating information on the effect of rebates or discounts on 
prices that beneficiaries would pay at the retail pharmacy.
5. Partnering Opportunity for State Sponsored Drug Card Assistance 
Programs
    The Medicare-Endorsed Prescription Drug Card Assistance Initiative 
is targeted to the private sector marketplace. To receive a Medicare 
endorsement, private drug card program sponsors would be required to 
apply for endorsement, demonstrate that they meet all of the 
requirements concerning: (1) Applicant structure; experience and 
participation in the administrative consortium; (2) customer service; 
and (3) rebates, discounts and access. These requirements would be 
tailored to reflect the strengths of the private marketplace, as well 
as to protect the integrity of the initiative, beneficiaries, and the 
Medicare name from firms with questionable business practices.

[[Page 10268]]

    While we believe that all of these requirements are important to 
assure best practices in the private sector, we do not believe they are 
all well suited for States that are already sponsoring privately 
administered drug card programs. For example, the definition of a 
regional sponsor includes providing service in at least 2 contiguous 
States. Program sponsors also would have to agree to abide by the 
guidelines of, jointly administer, and fund a privately run 
administrative consortium intended, among other administrative roles, 
to review and approve sponsors' marketing materials. Also, some 
customer service standards and the strict beneficiary confidentiality 
requirements may not be appropriate for States.
    Nonetheless, under this initiative, we propose that States could 
partner with private drug card program sponsors by selecting a 
Medicare-endorsed program and offering its own endorsement, and having 
a distinct card. One restriction would be that the endorsed card 
program would continue to operate in the State as it is defined in the 
sponsor's agreement with us. Specifically, we would allow drug 
formularies and prices to vary geographically, but they would not be 
able to vary for different populations in the same area. Also, under 
this initiative, the endorsed discount card program would have to be 
made available to all Medicare beneficiaries in a State, and we would 
not allow it to be restricted to only certain Medicare beneficiaries, 
such as those age 65 and over, or those with certain levels of income. 
However, different populations could be segmented for marketing 
purposes, provided the marketing activities would not mislead or 
intentionally misrepresent to the public the nature of the endorsed 
program, and marketing activities would include marketing to 
beneficiaries with disabilities, beneficiaries with End-Stage Renal 
Disease (ESRD), and beneficiaries age 65 and over.
    In the advance notice of proposed rulemaking entitled, ``Medicare 
Program; Medicare-Endorsed Prescription Drug Discount Card Assistance 
Initiative for State Sponsors'', published elsewhere in this issue of 
the Federal Register, we outline additional steps that we are 
considering proposing to support State efforts to make more readily 
available affordable prescription drugs to Medicare beneficiaries, 
including efforts to help low income Medicare beneficiaries access 
lower prices for prescription drugs.

E. Other Proposed Requirements

    In addition to the requirements listed in section I.D of this 
preamble, we propose that other requirements to participate in the 
initiative and receive the Medicare endorsement under this proposed 
rule would be divided into three categories: (1) Requirements related 
to the applicant's experience, structure and agreement to jointly 
administer the administrative consortium; (2) requirements related to 
customer service; and (3) requirements related to discounts, rebates, 
and access. We would also require applicants to sign an agreement with 
us certifying that they would comply with all requirements in the 
agreement, including funding and operating an administrative consortium 
to perform certain administrative functions, implementing the program 
as described in the application, and operating consistently within the 
endorsement requirements.
    We propose that all applicants offering a prescription drug card 
program that apply for Medicare endorsement and meet or exceed these 
requirements (in addition to any of the requirements listed in section 
I.D of this preamble), and sign the agreement would be Medicare-
endorsed.
    The requirements discussed in this section reflect our 
interpretations of the standards included in the proposed regulation. 
We would include these interpretations in an application we would 
append to the final rule. In addition to receiving comments as a result 
of this proposed rule, we expect to entertain questions from potential 
applicants on the application during a 14-day period after approval of 
the application by the Office of Management and Budget (OMB). We will 
provide additional details concerning this 14-day comment period in the 
final rule.
1. Applicant Structure, Experience, and Participation in the 
Administrative Consortium
    The requirements relating to the organization of the drug card 
program sponsor would include significant private sector experience in 
the United States in pharmacy benefit management, or the administration 
of drug discount cards or low income drug assistance programs that 
provide prescription drugs at low or no cost. We propose to require 5 
years experience because the Medicare name is so well known and so 
important to beneficiaries that we would not want the name to be 
associated with any but the most stable and reputable organizations. 
The sponsors whose drug discount cards would be endorsed by Medicare 
should be those that have the experience and capacity to offer Medicare 
beneficiaries discounts and good customer service and would be likely 
to continue in the marketplace. The drug card industry is relatively 
new and has seen organizations entering and leaving the market in short 
periods of time. The 5 years of experience provides a sufficient amount 
of time to adequately demonstrate a reasonable track record of good 
performance and stability, taking into account the history of the 
pharmaceutical benefit management and discount card industries. Due to 
the evidence of market turn over in the discount card industry, we 
think that requiring anything less than 5 years experience would create 
the risk of having the Medicare name associated with other than stable 
and reputable organizations.
    The same organization with the five years experience would also 
have to currently operate a regional or national drug benefit or 
discount drug card, or low income drug assistance program that provides 
prescription drugs at low or no cost that serves a certain number of 
covered lives. We would interpret covered lives to mean discrete 
individuals who have signed enrollment agreements or paid an enrollment 
fee or insurance premiums, or some comparable documentation, that we 
could use for verification purposes. We are proposing that in order to 
qualify for Medicare endorsement, national program sponsors would have 
to operate in 50 States and Washington, DC and currently serve at least 
2 million covered lives, and regional program sponsors would have to 
operate in at least 2 contiguous States currently serving at least 1 
million covered lives. In selecting a geographic definition for 
regional (at least 2 contiguous States) we attempted to balance the 
opportunity for smaller programs to qualify with the interest in 
assuring beneficiary access to network pharmacies when beneficiaries 
are traveling across a State line.
    Since the Medicare endorsement would likely create a very large 
pool of beneficiaries who wish to obtain the endorsed discount cards, 
organizational capacity to handle large numbers of people would be an 
important factor for qualification. Our data show that over 10 million 
Medicare beneficiaries are without drug coverage for an entire year. 
Also, beneficiaries with drug coverage through Medigap and other 
sources face benefit limitations, and many beneficiaries have coverage 
for only part of the year. Beneficiaries from all of these groups may 
likely be interested in

[[Page 10269]]

the Medicare-endorsed discount cards. Endorsed card program sponsors 
would need to be capable of handling a large influx of enrollees over a 
relatively short period of time, to negotiate rebates or discounts with 
pharmaceutical manufacturers and discounts with retail pharmacies, and 
to handle the customer service needs of the enrollees.
    As discussed in the impact analysis, we estimate that during the 
first 6 months of operation, as many as 10 million beneficiaries may 
wish to enroll in a Medicare-endorsed discount card program. The 
capacity of a Medicare-endorsed discount card program sponsor to accept 
from 1 to 10 percent of this volume is critical to implementing the 
discount card initiative. Current levels of covered lives provide 
evidence of organizational capacity to handle a large enrollment and 
provide customer service. As a percentage increase in enrollment for 
organizations with as many as 1 or 2 million covered lives, a potential 
enrollment of 100,000 to several hundred thousand individuals 
represents a sizable expansion over current operations.
    In examining our data on the number of covered lives served by a 
variety of organizations, we found that a standard of 1 and 2 million 
lives, for regional and national programs, respectively, would strike a 
balance between ensuring a competitive marketplace with a number of 
different options for Medicare beneficiaries and ensuring that 
organizations would have the capacity to handle a large increase in 
covered lives.
    We propose that entities would be able to combine their 
capabilities to meet the various requirements for Medicare endorsement. 
If multiple organizations combine to meet these requirements, however, 
one of those organizations would be required to have the requisite 5 
years of experience in pharmacy benefit management, or the 
administration of a drug discount card or low income assistance program 
that provides prescription drugs at low or no cost, as well as have 
served the requisite number of covered lives. For example, if a 
regional pharmacy chain partners with a pharmacy benefit administrator 
that has the requisite experience and covered lives (and meets all 
other requirements for endorsement, either individually or through 
contracts with other organizations), that regional pharmacy chain's 
program could receive the Medicare endorsement, even though the 
regional chain by itself does not currently serve the necessary 1 or 2 
million individuals and does not have 5 years experience in pharmacy 
benefit management or the administration of a drug discount card or low 
income assistance program that provides prescription drugs at low or no 
cost. Or, for example, a drug manufacturer that wishes to offer 
discounts on its prescription drugs to Medicare beneficiaries under the 
Medicare-endorsed card initiative could make arrangements to have those 
discounts offered to beneficiaries through a pharmacy chain that has 
operated a drug discount card program for 5 years and is serving the 
requisite number of covered lives (and together, or through 
arrangements with other organizations, meet all other requirements for 
endorsement).
    Further, multiple organizations would be allowed to combine under 
contract or other legal arrangements to assure that any other 
requirements would be met without regard to the entity with the 5 years 
experience and responsibility for covered lives.
    In assuring that the Medicare endorsement would only be provided to 
reputable organizations that would be prepared to administer a discount 
card program in accordance with all of the requirements of this 
initiative, we propose that if multiple organizations combine to meet 
the requirements, including establishing a pharmacy network, 
negotiating manufacturer discounts and rebates, conducting enrollment, 
and operating the customer service call center, we would require 
evidence of legal arrangements between or among the entities combining 
for this purpose. We would require either contracts or signed letters 
of agreement to be submitted with the application. For the pharmacy 
network, we would require one copy of each unique contract or signed 
letter of agreement used across the entire network. We would require 
evidence in these documents that manufacturer rebates or discounts 
shared with the pharmacies would be passed through to the beneficiaries 
in lower prices or enhanced pharmacy services. We propose that at least 
the following additional requirements must be satisfied in each of the 
contracts or signed letters of agreement:
     Clearly identifies the parties to the contract.
     Describes the functions to be performed by the 
subcontractor.
     Contains language that indicates that the subcontractor 
has agreed to participate in the discount card program.
     Describes the payment the subcontractor will receive for 
performance under the contract, if applicable.
     Be for a term of at least 15 months.
     Be signed by a representative of each party with legal 
authority to bind the entity.
     Contains language obligating the subcontractor to abide by 
the same State and Federal confidentiality requirements, including 
those required under the Medicare endorsement, that apply to the 
applicant in offering its discount card program.
    Where legal documentation is provided but does not constitute the 
actual contract for the purpose of operating the Medicare-endorsed 
discount card, we would allow the contract to be submitted following 
receipt of the Medicare endorsement, but we would not allow marketing 
and enrollment activities to begin until we determine that our 
requirements for legal agreements are satisfied.
    A separate proposal for each drug card program would be required. 
An organization or entity would be allowed to have operational 
responsibilities in more than one drug discount card program. However, 
a sponsoring organization or entity would be allowed to be the primary 
sponsoring organization or entity in only one card program at any time.
    Additional requirements to assure that the Medicare endorsement 
would be provided to reliable and stable organizations would include a 
demonstration of financial integrity and business ethics. We would 
interpret this to mean that the following requirements be met for the 
applicant, as well as for each of any subcontractors or organizations 
under other legal arrangements with the applicant to develop the 
pharmacy network, to handle the negotiation of rebates and discounts on 
behalf of the card sponsor, or to operate enrollment, and including the 
entity that meets the 5 years of experience and covered lives 
requirements:
     Provide a summary of the history, structure and ownership, 
including a chart showing the structure of ownership, subsidiaries and 
business affiliations.
     Provide the most recent audited financial statements 
(balance sheet, income statement, statement of cash flow along with 
auditor's opinions and related footnotes). Each of these entities must 
demonstrate that total assets are greater than total unsubordinated 
liabilities and that sufficient cash flow exists to meet obligations as 
they come due.
     Report financial ratings, if any, for the past 5 years.
     List past or pending investigations and legal actions 
brought against any of

[[Page 10270]]

these entities (and parent firms if applicable) by any financial 
institution, government agency (local, State, or Federal) or private 
organization over the past 5 years on matters relating to health care 
and prescription drug services and/or allegations of fraud.
    Each applicant would be required to provide a brief explanation of 
each action, including the following:
    (a) Circumstances; (b) status (pending or closed); and (c) details 
as to resolution and any monetary damages, if closed. Additionally, we 
would conduct an independent investigation to include at least a review 
of Federal databases for issues related to any of these entities.
    Drug discount card program sponsors would also be required to 
jointly administer, abide by the guidelines of, and fund a private 
administrative consortium with all other sponsors of Medicare-endorsed 
discount card programs. The funded administrative tasks would include 
the following 3 functions: (1) Assuring enrollment exclusivity; (2) 
reviewing marketing materials; and (3) publishing comparative 
prescription drug price information for beneficiaries.
    This proposed rule would require enrollment exclusivity for 
beneficiaries because a low-or no-fee card program could otherwise lead 
beneficiaries to enroll in more than one Medicare-endorsed drug card. 
Multiple enrollments would dilute the negotiating leverage of each 
organization offering an endorsed discount card, thereby lowering the 
discounts from drug manufacturers available to beneficiaries. In order 
to maximize these discounts, we propose that each beneficiary who 
enrolled in an endorsed drug discount card program would be required to 
enroll exclusively in one Medicare-endorsed card program, as is 
generally the case with programs that provide both discounts on, and 
insurance coverage of, prescription drug costs. A beneficiary enrolling 
for the first time in a Medicare-endorsed drug discount card program 
could enroll at any time of the year. Beneficiaries would be allowed to 
disenroll at any time and could elect another Medicare-endorsed drug 
discount card program; however the new enrollment would not become 
effective until the first day of the following January or July 
following the date of disenrollment, which ever came first, unless the 
program in which the beneficiary was enrolled was no longer operating 
under Medicare's endorsement; in this case the beneficiary could join 
another card program any time during the year.
    The administrative consortium would also be responsible for 
reviewing marketing materials prepared by the Medicare-endorsed drug 
discount card program sponsors. In the first year of the initiative, we 
propose that we would be responsible for developing marketing 
guidelines and reviewing the marketing materials. Beginning in the 
second year of the initiative, we propose that the consortium would 
assume review of marketing materials using guidelines drafted by us. It 
is essential that marketing materials be reviewed to ensure that the 
Medicare name is not misused, for example, to market services unrelated 
to prescription drugs.
    Finally, we would require Medicare-endorsed drug discount card 
program sponsors to publish, through the administrative consortium, 
comparative information on the prices offered to Medicare beneficiaries 
for drugs covered by the discount card. To provide time for the 
administrative consortium to develop a price comparison methodology for 
the web site that would reflect the actual price a beneficiary would 
encounter at the point of sale, in the first year, we propose that 
discounts on the web site be expressed as a percentage off the Average 
Wholesale Price (AWP) for a standard set of the most commonly used 
drugs and dosages. By the second year of the initiative, we propose 
that the administrative consortium would be expected to publish the 
actual price that Medicare beneficiaries would pay for drugs offered by 
each Medicare-endorsed discount card sponsor. This comparative 
information would assist beneficiaries in deciding which Medicare-
endorsed discount card would offer them the greatest financial 
advantage. Since we are proposing that we would allow the discount card 
program sponsors' formularies and prices to vary geographically and 
over the period of the Medicare endorsement, we would require that the 
card sponsors report any price and formulary changes to the 
administrative consortium, for posting on the consortium's web site, at 
least 48 hours before the changes would become effective. We solicit 
comments on whether the consortium web site should also provide other 
information on card programs, such as prescription drug-related 
services for no additional fee that are considered part of the 
Medicare-endorsed card sponsors' programs.
    We propose as a qualification requirement that the applicant 
provide notice to beneficiaries of the expected uses of beneficiary 
information within the Medicare-endorsed drug discount card program and 
obtain written authorization from each enrollee for the sharing of 
beneficiary-specific information necessary for the operation of the 
discount card program. Also, the applicant would be required to obtain 
separate authorization from each enrollee for sharing information for 
any other purpose. This activity would be coordinated with the 
enrollment process to assure that beneficiaries understand their 
confidentiality rights as provided under this initiative. Further, 
enrollment, marketing and any other activities of Medicare-endorsed 
card programs could not be combined with the functions for non-
Medicare-endorsed card services, in order to assure the full protection 
of a beneficiary's personal information as required under the Medicare 
endorsement agreement.
2. Customer Service
    We are proposing that the one-time enrollment fee for any Medicare-
endorsed drug discount card be limited (a maximum of $25 in Year One), 
and we would encourage Medicare-endorsed card program sponsors to keep 
their fees as close to zero as possible. We believe this limit would 
allow some discount card program sponsors to recoup some of their 
administrative costs through the enrollment fee, so more of the 
manufacturer rebates could be passed on to beneficiaries, but would not 
be so prohibitive so as to dissuade beneficiaries from enrolling in the 
drug card assistance programs.
    We further propose that if a beneficiary changed drug card 
programs, the beneficiary could be charged a separate one-time 
enrollment fee by the second drug card program. We recognize that the 
use of a one-time enrollment fee by a card program differs from the 
current market practice of charging annual fees; we solicit comments on 
the benefits and disadvantages of also permitting, for example, an 
annual nominal renewal fee of a maximum of $15.
    We would require that the card sponsor provide to Medicare 
beneficiaries information and outreach regarding the discount card. We 
would interpret this to mean that the endorsed card programs must 
disclose, in customer appropriate printed material, to Medicare 
beneficiaries (prior to enrollment and after enrollment upon request) a 
detailed description of the program that included contracted 
pharmacies, enrollment fees (if any), drugs included, and their prices 
to reflect discounts that are provided to the consumer. We would 
anticipate that this information would also be made available on the 
drug card sponsors' web sites and through their enrollment and customer 
service phone lines. In

[[Page 10271]]

addition, card sponsors that provide additional prescription drug 
quality services for no additional fee, such as drug interaction, 
allergy alerts, and pharmacy counseling would be expected to educate 
beneficiaries about the role of and availability of these services, and 
provide information to us for use on our web site.
    We also propose that endorsed card programs would be required to 
accept all Medicare beneficiaries who wish to participate in the card 
program. We would expect the endorsed drug discount card programs to 
maintain methods for enrollment similar to usual business practice--
such as accepting enrollees through paper, telephone, fax or Internet. 
However, the beneficiary confidentiality requirements would also 
require that the card program sponsor collect and maintain a signed 
agreement to use a beneficiary's personal information as specified in 
the statement of expected uses of such data.
    In order to be consistent with the beneficiary confidentiality 
requirements, the requirements also would include a restriction on drug 
card program sponsors that have received Medicare endorsement that 
would prohibit them from marketing or sending unsolicited marketing 
materials concerning other services they offer (including both 
prescription drug related services that are provided for a separate 
fee, such as disease management, and nonprescription drug related 
services whether or not for a fee, such as discounts on dental services 
and prescription eyeglasses) to beneficiaries who have not actively 
elected to receive these marketing materials.
    We would require each endorsed card program sponsor to maintain a 
toll-free customer call center to assist beneficiaries in understanding 
the drug card program offered. We propose that the call center must be 
open during usual business hours and provide customer telephone service 
in accordance with standard business practices. We propose to interpret 
this to mean that the call center would be available at least Monday 
through Friday from 8 a.m. to 4:30 p.m. Eastern to Pacific Standard 
times for those zones in which the discount card program would operate. 
We would also interpret the requirement that the call center be 
operated in accordance with standard business practices to mean that 70 
percent of customer service representatives' time would be spent 
answering telephones and responding to enrollee inquiries; 80 percent 
of all incoming customer calls would be answered within 30 seconds; the 
abandonment rate for all incoming customer calls would not exceed 5 
percent; and that there would be an explicit process for handling 
customer complaints. These standards are required or exceeded by the 1-
800 Medicare call center contractors.
3. Discounts, Rebates, and Access
    Each drug discount card program would be required to provide a 
discount for at least one drug identified in the therapeutic classes, 
groups, and subgroups of drugs commonly needed by Medicare 
beneficiaries as listed in the application. This requirement would be 
to assure that beneficiaries enrolling in Medicare-endorsed discount 
card programs would be offered discounts on many of the types of drugs 
most commonly needed. The classes, groups and subgroups were developed 
from self-reported drug utilization data collected under the 1998 
Medicare Current Beneficiary Survey (MCBS), and in consultation with 
Federal experts in pharmacology and using nationally recognized 
pharmacology classifications. We would anticipate modifying these 
classes, groups, and subgroups over time in future solicitations to 
remain current with beneficiary use of drugs and changes in the market, 
including the emergence of new drug types and drugs removed from the 
market. These drug groupings are listed on Table 1. Endorsed drug 
discount card programs would be allowed to vary their formularies by 
geographic location and over the course of the endorsement period.
    We would also require that each drug card program sponsor obtain 
substantial manufacturer rebates or discounts on brand name drugs and 
share a substantial portion with beneficiaries, either directly or 
indirectly through pharmacies.
    The table below shows the drug therapeutic classes and groups (and 
in a few cases, subgroups) that contain the drugs most commonly needed 
by Medicare beneficiaries.

  Table 1.--Therapeutic Classes and Groups/Subgroups of Drugs Commonly
                    Needed by Medicare Beneficiaries
------------------------------------------------------------------------
                                              Drug groups/subgroups
        Therapeutic drug classes            (subgroups where shown are
                                                    indented)
------------------------------------------------------------------------
Nutrients and Nutritional Agents
Hematological Agents
                                         Hematopoietic Agents
                                         Antiplatelet Agents
                                         Coumarin and Indandione
                                          Derivatives
                                         Hemorrheologic Agents
Endocrine/metabolic Agents
                                         Sex Hormones
                                         Bisphosphonates
                                         Antidiabetic Agents
                                           Insulin
                                           Sulfonylureas
                                           Biguanides
                                           Thiazolidinediones
                                           Others
                                         Adrenocortical Steroids
                                         Thyroid Drugs
                                         Calcitonin-Salmon
                                         Agents for Gout
Cardiovascular Agents
                                         Inotropic Agents
                                         Antiarrhythmic Agents
                                         Calcium Channel Blocking Agents
                                           Dihydropyridine

[[Page 10272]]

                                           Others
                                         Vasodilators 3
                                         Antiadrenergics/Sympatholytics
                                           Alpha/Beta Andrenergic
                                            Blocking Agent
                                           Antiadrenergic Agents-
                                            Centrally Acting
                                           Antiadrenergic Agents-
                                            Peripherally Acting
                                         Renin Angiotensin System
                                          Antagonists
                                           Angiotensin--Converting
                                            Enzyme Inhibitors
                                           Angiotensin II Receptor
                                            Antagonists
                                         Antihypertensive Combinations
                                         Antihyperlipidemic Agents
                                           Bile Acid Sequestrants
                                           HMG--CoA Reductase Inhibitors
                                           Others
Renal and Genitourinary Agents
                                         Anticholinergics
                                         Diuretics
                                           Thiazides and Related
                                            Diuretics
                                           Loop Diuretics
                                           Others
Respiratory Agents
                                         Bronchodilators
                                         Leukotriene Modulators
                                         Respiratory Inhalant Products
                                           Corticosteroids
                                           Intranasal Steroids
                                           Mast Cell Stabilizers
                                           Others
                                         Antihistamines
                                         Cough Preparations
Central Nervous System Agents
                                         Analgesics
                                           Narcotic
                                           Agents for Migraine
                                           Others
                                         Antiemetic/Antivertigo Agents
                                         Antianxiety Agents
                                         Antidepressants
                                           Selective Serotonin Reuptake
                                            Inhibitors
                                           Others
                                         Antipsychotic Agents
                                           Phenothiazines/Thioxanthenes
                                           Butytophenones
                                           Indoles
                                           Other Antipsychotic Agents
                                         Cholinesterase Inhibitors
                                         Sedatives and Hypnotics,
                                          Nonbarbiturate
                                         Anticonvulsants
                                           Iminostilbene
                                           Hydantoins
                                           Barbiturates
                                           Deoxybarbiturates
                                           Succinimides
                                           Valproic Acid
                                           Oxazolidinedione
                                           Benzodiazepines
                                           GABA Mediating Medications
                                           Other Anticonvulsants
                                         Antiparkinson Agents
Gastrointestinal Agents
                                         Histamine H2 Antagonists
                                         Proton Pump Inhibitors
                                         GI Stimulants
Systemic Anti-Infectives
                                         Penicillins
                                         Cephalosporins and Related
                                          Antibiotics
                                         Fluoroquinolones
                                         Macrolides
                                         Sulfonamides
                                         Antivirals

[[Page 10273]]

                                         Antiretroviral Agents
Biological and Immunologic Agents
                                         Immunologic Agents
Dermatological Agents
                                         Anti-Inflammatory Agents
Ophthalmic/Otic Agents
                                         Agents for Glaucoma
                                           Cholinergic
                                           Sympathomimetic
                                           Adrenergic Antagonists
                                           Prostaglandins
                                           Carbonic Anhydrase Inhibitors
                                         NonSteroidal Anti-Inflammatory
                                          Agents (NSAIDS)
                                         Anticholinergic
                                         Muscarinic Antagonists
                                         Glucocorticoids
                                         Anti-Infectives
                                         Mast-cell Stabilizers/
                                          Antihistamines
                                         Other Outpatient
                                          Ophthalmologics
Antineoplastic Agents
                                         Antimetabolites
                                         Hormones
                                           Antiestrogens
                                           Aromatase inhibitors
                                           Antiandrogen
Rheumatologicals
                                         Nonsteroidal Anti-Inflammatory
                                          Agents
                                         Immunomodulators
                                         Cox-2 Inhibitors
                                         Other Rheumatologicals
                                         Gout Agents (already listed in
                                          endocrine/metabolic class
                                          above)
------------------------------------------------------------------------
Sources: Drug Facts and Comparisons, A Wolters Kluwer Company, 2001
  edition; Pharmacological Basis of Therapeutics, Goodman and Gilman,
  9th edition (1996); Clinical Pharmacology, Melman and Morelli, 4th
  edition, 2000

    We propose as a requirement that the card sponsors guarantee that 
participating Medicare beneficiaries would receive, on all prescription 
drugs included under the card program at the point of sale, the lower 
of the discounted price available through the program or the price the 
pharmacy would charge a ``cash'' paying customer at that time.
    The discount and access requirements would also require any 
national or regional prescription drug card program to offer Medicare 
beneficiaries convenient access to retail pharmacies. We propose to 
interpret convenient retail access to mean demonstrated contracts with 
retail pharmacies so that upon the start of marketing and enrollment in 
the discount card program, at least 90 percent of Medicare 
beneficiaries in the area served by the program would live within 10 
miles of a contracted pharmacy (90/10). We would require that this be 
demonstrated using mapping software, computed by using one hundred 
percent of beneficiary counts by zip code (provided by us). We would 
require the applicant's complete list of contracted pharmacies to be 
available to beneficiaries for the area included under the Medicare 
endorsement. While we propose that the 90/10 access requirement would 
pertain to the largest area covered under the Medicare endorsement 
(either national or regional), tables generated by the mapping software 
would have to be submitted at both the State and either regional or 
national levels, depending on which designation the applicant is 
seeking. Also, a complete listing of the contracted pharmacies, along 
with an address, phone number and contact person for each, would have 
to be submitted.
    We solicit comments not only on the overall pharmacy access 
requirements, but also on whether the requirements should differ by 
population density across different geographic areas and whether 
additional consideration should be given to independent pharmacies. For 
example, while we believe the 90/10 access requirement would generally 
ensure that Medicare beneficiaries would be close enough to a pharmacy 
for the discount card to be useful, we recognize that this access 
standard would allow certain rural areas with limited pharmacy access 
to be below the 90/10 ratio while having a higher ratio in urban areas 
in order to meet the overall 90/10 access requirement. We solicit 
comments on feasible options for raising the ratio in these areas and 
on current private sector criteria related to access requirements for 
different types of geographic areas, including adjustments based on 
population density or pharmacy availability. We also solicit 
suggestions for performance improvement steps in low-access areas to 
build up the ratio over time.
    In addition, we are concerned about access for certain populations 
in urban areas. We recognize the value and role of certain small, urban 
pharmacies that provide linguistically appropriate or culturally 
sensitive services to Medicare beneficiaries. We solicit comments 
concerning the role and importance of these pharmacies to underserved 
populations and other populations that may have special needs. We also 
solicit comments on how to maintain access to these pharmacies under a 
Medicare-endorsed drug discount card initiative

[[Page 10274]]

for Medicare beneficiaries who depend on them.
    Although we would not require the drug discount card program 
sponsors to include institution-based pharmacies in their pharmacy 
networks, neither would we preclude their inclusion. Institutionalized 
beneficiaries whose prescription drugs are covered under Medicare Part 
A or Medicaid would not be able to use the drug discount cards. 
Further, we intend for this proposed policy to comport with the 
requirements of participation for long term care facilities. We solicit 
comments on whether and how institutionalized beneficiaries who have 
access to institution-based pharmacies would be affected if they choose 
to participate in the drug card program initiative, since institution 
networks are explicitly not required in this program. We would also be 
interested in better understanding whether and how institution-based 
pharmacies could participate in the drug card programs.
    Drug card program sponsors would not be permitted to offer a home 
delivery-only (mail order) option to Medicare beneficiaries, since 
Medicare beneficiaries are accustomed to purchasing prescription drugs 
from a local pharmacy. However, to provide a choice to beneficiaries 
who prefer home delivery, endorsed drug card programs would be allowed 
to include an option to use home delivery via a mail order pharmacy, in 
addition to the required contracted retail pharmacy network.
4. Time Table and Mechanics of the Endorsement
    We would publish in the Federal Register the final rule and a 
solicitation for applications for Medicare endorsement at the same 
time. We propose that in order to qualify for Medicare endorsement, 
applicants would be required to submit complete applications by the 
effective date of the final rule, which would be 60 days after the date 
it is published. For a 14-day period following publication of the 
approved solicitation, we would entertain questions from potential 
applicants to clarify the final application requirements. All 
applicants who qualify for Medicare endorsement would be announced by 
the Administrator by a date set in the final rule.
    We propose that the endorsement in Year One would be for a period 
of 15 months. Card program sponsors would be given a period of time 
following our announcement of the programs we have endorsed to 
implement their card programs, including finalizing their pharmacy 
network contracts and negotiating manufacturer rebates or discounts. 
Sponsors would also use this time to organize and activate the 
administrative consortium. October 1, 2002 would be the first day that 
programs would begin marketing and enrollment, and additionally, at 
their option, begin providing discounts, provided they have a signed 
agreement with us, approved marketing materials, an operational call 
center, and completed contracts for all aspects of the program as 
specified under the requirements. Endorsed programs, however, would be 
required to begin enrollment and discounts no later than January 1, 
2003 in order to participate as an endorsed card program.
5. Oversight
    In addition to an application and qualification process to assure 
that the Medicare endorsement would be provided to reputable, stable 
entities with the capacity to fulfill our customer service and access, 
and rebates and discount requirements, we propose requiring that card 
sponsors have a customer grievance process, and that enrollment and 
disenrollment reports be submitted to us once every six months in Year 
One, and thereafter on a schedule to be determined by us. During the 
endorsement period, drug card program sponsors would be required to 
notify us of any material modifications to their programs if the 
modifications could put them at risk of no longer meeting any of the 
terms of endorsement.
    Further, we would educate beneficiaries about the Medicare-endorsed 
drug card programs and provide information about each endorsed program 
as described in this proposed rule. We would monitor in Year One, and, 
beginning in Year Two, the administrative consortium would monitor, to 
assure that marketing guidelines are being followed. We would develop 
and operate a complaint tracking system and also refer complaints to 
Federal and State authorities where violations of laws under the 
jurisdictions of these agencies are in question. We would reserve the 
right to terminate any endorsement at any time for violations of the 
terms of the endorsement. We would consider drug card program sponsor 
performance under an existing Medicare endorsement as one factor in 
determining eligibility for endorsement in future annual cycles.
    We are considering requiring the administrative consortium to have 
an advisory board, composed of representatives from beneficiary 
advocacy groups and pharmacies, as well as from interested public 
organizations. We invite comments on what groups should be represented, 
ideas about how the advisory board could provide guidance and oversight 
and on what issues, and what the advisory board's reporting 
relationship should be with the consortium. Also, we are interested in 
comments on practical options concerning standards, conduct, and 
intermediate corrective action strategies that could be developed to 
promote public confidence in the administrative consortium and drug 
card program sponsors' performance.

II. Provisions of This Proposed Rule

    In section 403 of Title 42 of the Code of Federal Regulations we 
would add a new subpart H-Medicare-Endorsed Prescription Drug Card 
Assistance Initiative, the provisions of which would be as follows:
     We would add a new Sec. 403.800 to describe the basis and 
scope of the initiative and set forth the requirements for the 
initiative.
     We would add a new Sec. 403.802 to define the initiative 
as a mechanism whereby we solicit applications for Medicare endorsement 
of prescription drug card programs, review them, offer agreements to 
program sponsors who meet all of the requirements for endorsement, and 
award Medicare endorsements to program sponsors who sign the agreement. 
We would define a Medicare-endorsed prescription drug card program as a 
program developed by an organization or groups of organizations 
endorsed by us under the Medicare-endorsed prescription drug card 
assistance initiative to educate Medicare beneficiaries about 
prescription drug programs available in the private marketplace and to 
provide prescription drug assistance cards to Medicare beneficiaries. 
We would define the administrative consortium as a private entity 
financed by the Medicare-endorsed prescription drug discount card 
program sponsors to carry out a set of specific administrative tasks 
required under this initiative.
     We would add a new Sec. 403.804 to set forth the general 
rules for obtaining Medicare endorsement of prescription drug card 
programs, including meeting the requirements, submitting an 
application, and agreeing to the terms and conditions of the agreement 
with us.
     We would add a new Sec. 403.806 to set forth the 
requirements for eligibility for obtaining Medicare endorsement under 
the initiative.
     We would add a new Sec. 403.807 to set forth the 
application process for organizations wishing to obtain

[[Page 10275]]

Medicare endorsement under the initiative.
     We would add a new Sec. 403.808 to set forth that each 
prescription drug card program sponsor eligible for Medicare 
endorsement must enter into an agreement with us agreeing to meet the 
terms and conditions in the agreement.
     We would add a new Sec. 403.810 to set forth the 
responsibilities of the administrative consortium.
     We would add a new Sec. 403.811 to set forth the 
requirement that a beneficiary would only be allowed to be enrolled in 
one drug card program at a time.
     We would add a new Sec. 403.812 to set forth the 
conditions under which the Medicare endorsement would be withdrawn from 
an endorsed drug card program sponsor.
     We would add a new Sec. 403.820 to set forth our oversight 
and beneficiary education responsibilities.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide notice in the Federal Register and solicit public comment 
before a collection of information requirement is submitted to the 
Office of Management and Budget (OMB) for review and approval. In order 
to fairly evaluate whether an information collection should be approved 
by OMB, section 3506(c)(2)(A) of the PRA requires that we solicit 
comments on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are seeking comments on these issues for the provisions 
summarized below:

Section 403.804  General Rules for Medicare Endorsement

    The burden associated with the application for endorsement is 
addressed in the discussion on Sec. 403.806.
    Under paragraphs (g) and (h) of Sec. 403.804, a Medicare-endorsed 
drug card program sponsor may choose not to continue participation in 
the Medicare-endorsed drug card assistance initiative and would have to 
notify us of its decision. It would also have to notify its Medicare 
beneficiaries that they may enroll in an alternative Medicare-endorsed 
drug discount card program. This notice must be provided within 10 days 
of the effective date of termination.
    We do not believe that 10 or more card program sponsors will 
terminate their agreement. Because this burden would apply to less than 
10 program sponsors, this requirement is not subject to the PRA in 
accordance with 5 CFR 1320.3(c).

Section 403.806  Requirements for Eligibility for Endorsement

    Under paragraph (a) of this section, an applicant must submit an 
application demonstrating that it meets and will comply with the 
requirements described in this section.
    The requirements described in this section include various 
disclosure, recordkeeping, and privacy policies. We anticipate that it 
will take each applicant approximately 120 hours to complete each 
application. We anticipate that we will receive approximately 30 
applications, for a total burden of 3,600 hours.
    We solicit comments on the information collection, recordkeeping, 
and third party disclosure burdens imposed by the various requirements 
that must be met in order to be endorsed as a drug discount card 
program sponsor.

Section 403.808  Agreement Terms and Conditions

    Under this section, in order to receive a Medicare endorsement, an 
applicant that complies with all of the application procedures and 
meets all of the requirements described in this subpart must enter into 
a written agreement with us. The agreement would include a statement by 
the applicant that it has met the requirements of this subpart and will 
continue to meet all requirements for so long as the agreement is in 
effect.
    The burden associated with this requirement is the time and effort 
for the applicant to review and sign the agreement and the time and 
effort required to comply with the information collection requirements. 
It is anticipated that it will take each applicant approximately 8 
hours to complete the agreement. We consider all of the information 
collection requirements associated with complying with the requirements 
of this section to be usual and customary business practice, except for 
the requirement that card sponsors provide drug and price information 
from their formularies to the administrative consortium. For this 
information collection requirement, we estimate the burden of 
complying, which involves recordkeeping, information reporting, and 
disclosure to third parties, to be 24 hours per card sponsor.
    We estimate that we would send agreements to approximately 15 
applicants, for a total burden of 480 hours.

Section 403.810  Administrative Consortium Responsibilities

    Under this section, the administrative consortium would be 
responsible for publishing, or facilitating the publication of, 
information, particularly comparative pricing information, that would 
assist beneficiaries in determining which Medicare-endorsed 
prescription drug discount card program is the most appropriate for 
their needs.
    There would only be one administrative consortium under this 
initiative. Since that is fewer than 10, this requirement is not 
subject to the PRA in accordance with 5 CFR 1320.3(c).

Section 403.811  Beneficiary Enrollment

    Under this section, in paragraph (b), Group enrollment, card 
sponsors may accept group enrollment from health insurers. Card 
sponsors would be required to assure disclosure to Medicare 
beneficiaries of the intent to enroll them as a group. They must also 
assure disclosure to the beneficiaries of the enrollment exclusivity 
restrictions and other rules of enrollment of the initiative. The card 
sponsors would be further required to assure that written consent of 
the beneficiaries to be enrolled in the drug card program as a group is 
obtained and maintained.
    The burden associated with these requirements is the time and 
effort required to disclose the information to beneficiaries and obtain 
their consent before enrolling them in the drug card program.
    We estimate that there will be 178 health insurers accepted for 
group enrollment and 1.218 million beneficiaries to whom information 
must be disclosed and whose consent must be obtained. We estimate that 
it will take approximately 15 minutes per beneficiary to complete the 
enrollment process. Within that process, the third party disclosure 
requirement burden would be 2 minutes per enrollee, for a total burden 
of 40,628 hours.

Section 403.820  Oversight and Beneficiary Education

    Under this section, a Medicare-endorsed prescription drug discount 
card program sponsor must report to us the number of Medicare 
beneficiaries

[[Page 10276]]

enrolled in, and disenrolled from, the drug discount card program, on a 
form and at times specified by us.
    The burden associated with this requirement is the time it would 
take to report to us. We believe that it would take approximately 15 
minutes per report. We anticipate requiring 4 reports per year, per 
card sponsor, for 15 sponsors, for a total annual burden of 15 hours.
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements in Secs. 403.804, 
403.806, 403.808, 403.810, 403.811, and 403.820. These requirements are 
not effective until they have been approved by OMB.
    If you have any comments on any of these information collection and 
recordkeeping requirements, please mail one original and three copies 
directly to the following:

Centers for Medicare & Medicaid Services, Office of Information 
Services, Standards and Security Group, Division of CMS Enterprise 
Standards, 7500 Security Boulevard, Room N2-14-26, Baltimore, MD 21244-
1850, Attn: John Burke, CMS-4027-P, and,
Office of Information and Regulatory Affairs, Office of Management and 
Budget, New Executive Office Building, Room 10235, Washington, DC 20503 
Attn: Allison Herron Eydt, CMS Desk Officer.

IV. Response to Comments

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

V. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review) 
and the Regulatory Flexibility Act (RFA) (September 19, 1980, Public 
Law 96-354). 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 annually). While a final 
estimate depends on the final design of the drug card program, our 
preliminary estimate (based on our assumptions about manufacturer 
discounts) is that the savings to beneficiaries under the Medicare-
Endorsed Prescription Drug Card Assistance Initiative would represent a 
total economic impact ranging from $927 million to $1.235 billion in 
2003, the first full year of operation. In the second year of the 
initiative (2004), once enrollment has phased-in completely, the total 
savings to beneficiaries under the initiative would represent an impact 
estimated to range from $1.391 billion to $1.855 billion. In 2007, the 
total savings to beneficiaries would represent an impact estimated to 
range from $1.967 billion to $2.622 billion. This represents less than 
1 percent of projected total retail prescription drug spending for 2003 
($175.8 billion), 2004 ($197.1 billion), and 2007 ($272.4 billion) 
based on published projections released in March 2001 by our Office of 
the Actuary. Depending on the final design features and the magnitude 
of additional manufacturer discounts realized, actual savings to 
beneficiaries could be larger.
    This proposed rule is a major rule as defined in Title 5, United 
States Code, section 804(2). Accordingly, we have prepared an impact 
analysis for this proposed rule.

B. Impact on Small Entities

1. General
    The RFA requires agencies to determine whether a rule will have a 
significant economic impact on a substantial number of small entities. 
For purposes of the RFA, small entities include small businesses, 
nonprofit organizations, and small governmental jurisdictions. Most 
hospitals and most other health care providers and suppliers are small 
entities, either by nonprofit status, or by having revenues of $5 
million to $25 million or less annually. Individuals and States are not 
included in the definition of a small entity. The Small Business 
Administration (SBA), on its web site (http://www.sba.gov/naics/
dsp_naicslist2.cfm), provides a size standard for pharmacies and drug 
stores (NAICS code 446110 or SIC code 5912) of revenues of $5 million 
or less annually for the purpose of determining whether entities are 
small businesses.
    Whether measured from a firm or an establishment perspective (as 
reflected in Census Bureau data), the proposed Medicare-endorsed drug 
discount card initiative may involve some impact on a substantial 
number of small businesses. The current market for delivery of 
pharmaceutical products, by its nature involves small businesses, 
similar to other professional health care services such as physician 
services. The current health insurance market demonstrates that 
insurance companies, pharmaceutical benefit managers, and others such 
as HMOs have been able to enter into arrangements similar to those 
envisioned in this proposed Medicare initiative involving the 
participation of large and small pharmacy and drug store firms. These 
arrangements have resulted in lower prescription drug prices being made 
available to consumers who have insurance coverage for prescription 
drugs. There is evidence that both large and small pharmacies and drug 
stores participate in these arrangements with pharmaceutical benefit 
managers, and that pharmaceutical benefit managers are able to offer 
(employer) clients pharmacy networks containing the majority of retail 
pharmacy outlets.
    The role of individual pharmacies, including small pharmacies, in 
this proposed Medicare initiative is a critical one: they would be an 
integral part of the pharmacy networks of Medicare-endorsed programs, 
serving Medicare beneficiaries at the point of retail sale. The 
objectives of the proposed initiative and the related design 
requirements would preclude individual pharmacies or drug stores from 
operating the full scale of the contemplated drug card assistance 
initiative that would be necessary to obtain an endorsement. Individual 
pharmacies could participate in the initiative by voluntarily entering 
into a drug card program's network with other pharmacies. Individual 
pharmacies are not in a market position to meet the requirements for 
endorsement, including the ability to serve a large number of enrollees 
and to garner manufacturer rebates. Retail pharmacy chains could 
possibly be organized to meet the requirements of Medicare endorsement 
explained elsewhere in this proposed rule because of their size, type 
of experience and infrastructure.
    Convenient access to retail pharmacies, regardless of size or 
ownership, by Medicare beneficiaries would be an important feature of 
the proposed initiative. As discussed elsewhere in this proposed rule, 
we propose to interpret this to mean that a discount card sponsor would 
have to have a contracted pharmacy network of sufficient size to 
demonstrate that at

[[Page 10277]]

least 90 percent of Medicare beneficiaries in the area served by the 
program live within 10 miles of a contracted pharmacy (90/10). This 
access ratio is consistent with the access standard of most insured 
products, and we believe it would require card sponsors to support an 
extremely broad network of retail pharmacies. However, we recognize 
that our proposed standard would be measured at the national level (or, 
in the case of a regional network, at the regional level), and that 
some rural areas may not meet this standard. We want to encourage 
retail pharmacy participation in the networks; elsewhere in this 
proposed rule we request comments on how to ensure convenient access in 
rural areas and for pharmacies that serve special market needs.
    Given the 90/10 access ratio requirement and the provision that 
Medicare-endorsed programs would not be allowed to offer a mail order-
only option, we believe that most pharmacies and drug stores (both 
chain and independent) would be invited and encouraged to participate 
in card programs' networks, particularly small pharmacies in rural 
areas. This is generally the case in the current insured market, and we 
do not anticipate significantly narrower networks in the Medicare-
endorsed card programs. There are over 55,000 retail pharmacies in the 
United States. According to a report prepared for us by 
PricewaterhouseCoopers (PWC) (``Study of the Pharmaceutical Benefit 
Management Industry'', June 2001), pharmacy benefit managers (PBMs) 
offer, as a general practice, standard national pharmacy networks, with 
42,000 pharmacies in the typical network. The PWC study also reports 
that one leading PBM has 50,000 pharmacies in its more restricted 
network. Also, according to PWC, two large national PBMs have 98 
percent of all pharmacies in the United States in their standard 
networks.
    The inclusive access standard required for Medicare endorsement, 
coupled with the industry norm for pharmacy networks under insured 
products as reported by PWC, lead us to believe that a very large 
number of small pharmacies and drug stores would be included in the 
networks of Medicare-endorsed drug discount card programs. Further, we 
believe that small entities in rural areas especially would be included 
in order to meet the standard for endorsement. We welcome comments 
regarding the inclusion of small pharmacies and drug stores in the 
networks of Medicare-endorsed card programs.
    To assess the number of small entities affected by this initiative, 
and the amount of revenue involved for these entities, we analyzed data 
from several sources. The U.S. Census Bureau's 1997 Economic Census 
data (Table 4 on Retail Trade--Subject Series) indicate that there were 
a total of 20,815 business firms that were pharmacies and drug stores 
that operated for the entire year. The Census Bureau data also indicate 
that the 20,815 firms operated 41,228 establishments (some entities 
selling prescription drug products are not included in this count, 
including supermarkets and mass merchants). Of the total firms, 20,126 
(or 96.7 percent) were firms that had sales of less than $5 million, 
and these same firms operated 21,226 establishments or 51.5 percent of 
the pharmacies and drug store class of trade in the Census Bureau data.
    In addition to traditional pharmacies and drug stores, prescription 
drugs are sold through supermarkets and mass merchants. The National 
Association of Chain Drug Stores (NACDS) offers data that include these 
outlets, so we examined this data source as well. The NACDS analyzes 
industry data from a variety of sources, including IMS Health, the 
National Council of Prescription Drug Programs, and American Business 
Information, and reports industry statistics on their web site (http://
www.nacds.org). For 1997, NACDS reports a total of 51,170 community 
retail pharmacy outlets, of which 20,844 were independent and 19,119 
were chain drug stores (for a total of 39,963)--a number very similar 
to the Census Bureau's 1997 count of 41,228 pharmacy and drug store 
establishments. We assume that there is a great deal of overlap between 
the 21,226 establishments that the Census Bureau identifies as those 
with sales of less than $5 million and the NACDS report of 20,844 
independent pharmacies in 1997. For 2000, NACDS reports 55,011 
community retail pharmacy outlets, of which 20,896 are identified as 
independent drug stores.
    In addition to the number of outlets, we examined revenues. The 
Census Bureau data indicate that, in 1997, total pharmacy and drug 
store sales for firms operating the entire year were $97.47 billion, of 
which firms with $5 million or less in sales accounted for 25.5 percent 
($24.82 billion). However, these sales include more than just 
prescription drugs, as most pharmacies and drug stores sell other 
products. Since firms may differ in the proportion of revenues obtained 
from prescription drugs, we think that the analysis should focus, to 
the extent possible, on revenues from prescription drugs, rather than 
the broader set of sales occurring through pharmacies and drug stores, 
so we also examined information prepared by our Office of the Actuary 
(OACT). It is important to note that focusing only on prescription drug 
sales, rather than all sales through this class of trade, yields an 
estimated impact that is larger than the actual impact on total sales.
    The Office of the Actuary is responsible for preparing the official 
Federal estimates of national health spending, that are used for 
research and policy analysis. As part of preparing the estimates, OACT 
obtains data on prescription drug sales from a variety of sources, 
including the data on prescription drug sales from the National 
Prescription Audit conducted by IMS Health. OACT has data on retail 
prescription drug spending through 2000, and prepares 10-year 
projections. For 1997, OACT, in its published projections (released in 
March 2001), estimated that total retail prescription drug spending was 
$75.1 billion. OACT adjusts the data from the National Prescription 
Audit to take into account a number of factors. The major factors 
involved in these adjustments include: benchmarking to the Economic 
Census, subtracting prescription drug sales to nursing homes (which are 
accounted for in nursing home spending), and adjusting the data to 
subtract an estimate of manufacturer rebates provided to health 
insurers related to insurance coverage for prescription drugs. Thus, in 
some respects, the National Health Accounts' estimate of prescription 
drug spending reflects a sales level that is somewhat lower than what 
is actually received by pharmacies, drug stores, and other retail 
business outlets selling prescription drugs. Consequently, when 
National Health Accounts figures are used as the denominator in 
calculating the percentage impact on revenues (as we do later in this 
impact analysis), the result is somewhat larger than is actually the 
case. Nevertheless, we believe that OACT's estimates for prescription 
drug spending are the most appropriate to use for analysis of 
prescription drug revenues. OACT's estimates are specific to the 
prescription drug market, and the National Health Accounts are 
recognized as a public source of data on health care spending.
    From the National Prescription Audit data obtained by OACT, it is 
possible to estimate the portion of sales occurring through independent 
and chain pharmacies. The data obtained by OACT do not permit analysis 
by firm size. However, these data are specific to prescription drug 
sales for a more recent time period. Furthermore, we believe

[[Page 10278]]

that there is a great deal of overlap between the firms identified as 
independent pharmacies and the small pharmacy and drug store firms 
identified in the Census data. Consequently, we think that the data 
from the Prescription Drug Audit are an appropriate source for 
analysis.
    For 1997, that data indicate that 29.2 percent of sales were 
through independent drug stores--a figure slightly higher than the 
share (25.5 percent) indicated by the Census data. For 2000, the data 
obtained by OACT indicate that 25.3 percent of sales were through 
independent pharmacies. For purposes of calculating the share of 
revenues from prescription drug sales through small firms, we think it 
is reasonable to use the more recent estimate of prescription drug 
sales through independent pharmacies obtained from our analysis of the 
Prescription Drug Audit for 2000. The numerical value from the 2000 
National Prescription Drug Audit is essentially the same as what would 
be used if we selected the 1997 Census data proportion.
    The Census Bureau data contain information on supermarkets (NAICS 
code 445110) and mass merchants (discount or mass merchandising 
department stores--NAICS code 4521102, and warehouse clubs and 
superstores--NAICS code 45291). We assume that for both supermarkets 
and the mass merchants, prescription drug sales comprise a small share 
of sales, and consequently have not included them in this small 
business analysis. This assumption is supported by data from the Census 
Bureau, Prescription Drug Audit, and NACDS web site. The 1997 Census 
data indicate that total supermarket product sales were $351.4 billion. 
OACT's analysis of 1997 data from the Prescription Drug Audit indicates 
that $8.8 billion in prescription drug sales occurred through food 
stores, or 2.5 percent of total product sales. Similarly, the 1997 
Census data indicate that total product sales for the two categories of 
mass merchandisers identified above was $208 billion. Since data from 
the Prescription Drug Audit obtained by OACT include mass merchants 
with other chain stores, we used prescription drug sales data from the 
NACDS web site. The NACDS web site indicates that prescription drug 
sales through the mass merchant category were $8.9 billion in 1997, or 
4.3 percent of total product sales. Furthermore, the fact that 
businesses are identified as supermarkets and mass merchandisers would 
seem to indicate that prescription drugs is not their major line of 
trade.
    The Department of Health and Human Services (HHS) uses as its 
measure of significant economic impact on a substantial number of small 
entities a change in revenues of more than 3 to 5 percent. For purposes 
of the analysis related to small business, it is necessary to develop 
an estimate of the share of national drug sales associated with small 
pharmacies and drug stores. OACT projects that total national retail 
prescription drug spending for 2003 will be $175.8 billion, $197.1 
billion by 2004, and will reach $272.4 billion by 2007. Given that 25.3 
percent of sales were through independent pharmacies in 2000, we 
calculated that the share of total national prescription drug sales 
through pharmacies and drug stores with $5 million or less in revenues 
would be $44.5 billion in 2003, $49.9 billion in 2004, and $68.9 
billion in 2007.
    For purposes of both the impact analysis and to examine the impact 
on small pharmacies and drug stores, it is also necessary to understand 
the share of prescription drug spending for the population that is 
expected to enroll in the Medicare-endorsed discount card programs as a 
portion of total national prescription drug spending. Total drug 
expenditures involved in the Medicare-endorsed discount card programs 
are projected to be $13.3 billion in 2003 (not adjusted for enrollment 
phase-in), $14.9 billion in 2004, and $21.1 billion by 2007, before the 
savings achieved through the card initiative. The data used to develop 
these estimates come from the Medicare Current Beneficiary Survey 
(MCBS). This data base and the methodology for preparing these 
estimates are described later in the impact analysis. Thus, total 
prescription drug spending involved in the Medicare-endorsed cards is 
estimated to account for approximately 7.6 percent of total national 
prescription drug sales in 2003 (not adjusted for enrollment phase-in), 
7.6 percent in 2004, and 7.7 percent by 2007. In terms of the total 
market of retail prescription drug revenues, spending for the Medicare 
population to be assisted by the Medicare-endorsed discount card 
initiative is estimated to account for less than 8 percent of revenues 
on prescription drugs.
    If we assume that the population most likely to enroll in the 
proposed Medicare-endorsed drug discount card programs splits its 
purchases between large and small pharmacies in the same proportion as 
the total population, then the estimated sales involved in the discount 
card initiative through small pharmacies and drug stores would be $3.4 
billion out of the $44.5 billion in sales for 2003 (not adjusted for 
enrollment phase-in), $3.8 billion out of the $49.9 billion in sales in 
2004, and $5.3 billion out of the sales of $68.9 billion in 2007 (again 
accounting for less than 8 percent of prescription drug sales).
    The total estimated savings to beneficiaries under this proposed 
initiative would represent a total economic impact ranging from $927 
million to $1.235 billion in 2003, from $1.391 billion to $1.855 
billion in 2004, and $1.967 billion to $2.622 billion in 2007. Thus, 
again assuming 25.3 percent of sales were through independent 
pharmacies, the portion of the estimated beneficiary savings (described 
later in this analysis as the upper and lower bound) related to retail 
prescription drug sales occurring through small pharmacies and drug 
stores ranges from: $234 to $313 million in 2003, $352 to $469 million 
in 2004, and from $498 million to $663 million in 2007. These amounts, 
as a share of the national retail prescription drug sales occurring 
through small pharmacies and drug stores, would represent a range of 
from 0.53 percent to 0.70 percent in 2003, from 0.71 to 0.94 percent in 
2004, and from 0.72 to 0.96 in 2007.
    This is likely to be an overestimate of the economic impact on 
small pharmacies and drug stores, as this economic impact would not be 
borne entirely by pharmacies. Card sponsors would be required to obtain 
substantial manufacturer rebates or discounts that would defray the 
cost to pharmacies of providing discounts on retail drug prices. In 
addition, to the extent that the discount card programs achieve larger 
savings from drug manufacturers than are included in our estimate, the 
additional beneficiary savings would come from drug manufacturers and 
not local pharmacies.
    Other plausible caveats to consider are the following: Our spending 
estimates assume no effects of the drug card program on beneficiary 
drug use. It is possible that lower drug prices would lead to greater 
use, resulting in a smaller impact on pharmacy revenues. It is also 
possible that pharmacy services associated with the card would lead to 
some drug substitution, simplification of drug regimens, or avoidance 
of complications that require further drug therapy, leading to a 
somewhat greater impact on pharmacy revenues.
    We welcome any comments and information on whether there is 
evidence that Medicare beneficiaries without drug coverage use small 
pharmacies and drug stores more or less than the share of revenues that 
these firms represent in terms of the overall market. We have assumed 
the share to

[[Page 10279]]

be the same, but it would be helpful to have data on where Medicare 
beneficiaries, particularly those without drug coverage (who make up 
the largest group expected to use the Medicare-endorsed discount 
cards), purchase their prescription drugs. Knowing where these 
beneficiaries purchase their drugs would help us better understand 
whether there are any distributional issues. However, we currently do 
not have this type of data available.
    We are particularly concerned about ensuring beneficiary access to 
pharmacies in rural areas. We do have some evidence to believe there 
could be a disproportionate number of beneficiaries in rural areas who 
would use the Medicare-endorsed discount cards. Data from the 1998 MCBS 
indicate that 37 percent of Medicare beneficiaries in rural areas do 
not have drug coverage compared to the national average of 27 percent. 
We also assume that pharmacies and drug stores in rural areas are more 
likely to be small businesses.
    We recognize that the 90/10 access ratio may be difficult to obtain 
in rural areas, and we solicit suggestions on feasible options for 
raising the ratio in these areas.
    According to the PWC study mentioned above, because there is less 
competition among pharmacies in rural areas, pharmacy benefit managers 
have had to make special arrangements in order to obtain the 
participation of rural pharmacies in the networks. We expect the 
current market practice of making special arrangements (for example, 
special pricing for ingredient costs and additional dispensing fees) 
with rural pharmacies would carry over in the Medicare-endorsed 
discount card programs.
2. Sensitivity Analysis
    In order to assess the potential for differing distributional 
impacts among pharmacies, we conducted a sensitivity analysis. We 
estimate that the total prescription drug spending involved in the 
proposed Medicare-endorsed drug discount card initiative would 
comprise, on average, less than 8 percent of revenues, with the 
economic impact of the proposed discount card initiative on total 
revenues related to prescription drugs estimated at less than one 
percent. For purposes of a sensitivity analysis, we estimate that in 
order to reach the Department of Health and Human Services (HHS) 
measure of significant economic impact of 3 to 5 percent of revenues, 
it would be necessary to have prescription drug revenues involved in 
the proposed Medicare-endorsed discount card initiative account for at 
least 24 percent of a business' revenues. In the sensitivity analysis, 
we developed a hypothetical geographic locality skewed to contain a 
very large share of Medicare beneficiaries who enroll in the proposed 
Medicare-endorsed discount card initiative. Under this highly skewed 
assumption, we estimated a maximum share of 19.6 percent of a business' 
total prescription drug revenues would be associated with the Medicare-
endorsed discount card, with an economic impact of the Medicare-
endorsed discount card initiative of 2.4 percent of prescription drug 
sales.
    As noted previously, this economic impact would not be borne 
entirely by pharmacies, because card sponsors would be required to 
obtain substantial manufacturer rebates or discounts that would defray 
the cost of pharmacies providing discounts on retail drug prices. Thus, 
the sensitivity analysis still yielded an impact level below the 3 to 5 
percent of revenues used by HHS to measure significant economic impact. 
The following discussion describes the assumptions and supporting data 
used in the sensitivity analysis.
    In order to prepare the sensitivity analysis, we identified key 
variables that could change the market share of revenues and consequent 
impact resulting from the proposed Medicare-endorsed discount card 
initiative. One key variable is the Medicare population as a portion of 
a pharmacy's geographic locality customer base. We assume that a 
pharmacy's customer base is derived in large part from the population 
in close geographic proximity to its business location. Therefore, we 
examined the variation in the geographic distribution of the Medicare 
population. On average nationally, Medicare beneficiaries were 13.6 
percent of the total population as of July 2000. Using several States 
with the highest Medicare population rates, we examined, at the county 
level, the percent of the population over age 65 based on Census Bureau 
data. For counties with high elderly population compositions, we 
obtained the actual counts of Medicare enrollment (aged and disabled) 
and calculated Medicare enrollment as a percentage of the counties' 
populations. Based on this analysis at the county level, we estimate in 
a high-end scenario that Medicare beneficiaries could potentially 
comprise up to approximately 36 percent of a geographic area's 
population.
    A second key variable that we assume could alter the revenues being 
impacted is the percent of the Medicare population in an area that may 
enroll in the Medicare-endorsed discount card programs. As discussed 
later in this impact analysis, we think that the beneficiaries most 
likely to enroll in the Medicare-endorsed discount card programs would 
be those without insurance coverage for prescription drugs (including 
those with supplemental insurance coverage that does not include 
prescription drugs) and those with Medigap drug coverage. In terms of 
demographic variables, the highest rates of Medicare beneficiaries 
without drug coverage occur among Medicare beneficiaries in non-
metropolitan areas (37 percent). Our analysis of the MCBS data also 
indicates that 15 percent of beneficiaries in non-metropolitan areas 
have drug coverage through Medigap insurance, compared to the national 
average of 10 percent.
    For purposes of a sensitivity analysis, we developed a hypothetical 
geographic location with a large share of Medicare beneficiaries that 
also had a high portion without drug coverage. We used the 36 percent 
figure from our analysis discussed above on geographic areas with 
larger Medicare population composition, and the 37 percent as the high 
rate for no drug coverage, to adjust the national averages underlying 
the overall impact analysis. We also assumed that the hypothetical 
Medicare population would have a slightly higher portion (15 percent) 
of beneficiaries who obtained drug coverage through Medigap.
    We estimate that nationally approximately 10 million Medicare 
beneficiaries would enroll in the proposed Medicare-endorsed discount 
card programs by the end of 2003, accounting for an estimated 3.5 
percent of the total U.S. population. Adjusting the data, using the 
population and drug coverage weighting factors for the sensitivity 
analysis and using the overall uptake assumptions described later in 
this impact analysis (75 percent overall uptake in the Medicare 
population without drug coverage and 95 percent in the Medigap 
population with drug coverage), results in the hypothetical area having 
approximately 15 percent of its total population participating in the 
Medicare-endorsed drug discount card initiative. Therefore, about 85 
percent of the total hypothetical area's population would not 
participate in the Medicare-endorsed discount card initiative, 
including both Medicare beneficiaries and non-Medicare beneficiaries.
    To estimate the impact of the drug discount card initiative on 
prescription drug revenues in the hypothetical locality, we estimated 
the per capita drug spending for participants in the proposed 
initiative and non-participants

[[Page 10280]]

in the initiative in the hypothetical area. We estimated per capita 
drug spending to be $1,351 for participants and $990 for non-
participants in the hypothetical locality in 2004. These figures differ 
from per capita estimates for participants and non-participants at the 
national level due to the skewed demographic composition of the 
hypothetical area (which would have a large Medicare population and 
have beneficiaries with Medigap drug coverage comprising a slightly 
greater share of drug discount card program participants than at the 
national level). The per capita spending estimates for both 
participants and non-participants include individuals without drug 
expenditures. The per capita spending estimates were done for 2004 
since that would be the year we assume full phase-in of enrollment in 
the drug discount card program initiative.
    The per capita drug spending data for the Medicare population 
participating in the discount card initiative come from the MCBS, and 
the methodology for calculating drug spending from that data is 
described later in the impact analysis. For participants in the 
Medicare-endorsed discount card programs, the per capita value consists 
of the estimated total spending for enrolled beneficiaries without drug 
coverage plus the share of spending for the Medigap enrollees that is 
purchased through the discount program, divided by the total number of 
participants.
    For purposes of calculating the per capita spending for non-
participants in the Medicare-endorsed discount card programs, we used 
prescription drug spending data from the National Health Accounts and 
estimates from the MCBS to develop per capita drug spending estimates 
for the non-Medicare population and for the Medicare population not 
participating in the discount card program. These two per capita values 
for non-participants in the drug card initiative were then weighted 
relative to the population distribution they represented in the 
hypothetical area's non-participant population to create a per capita 
drug spending for non-card participants.
    We then adjusted per capita drug spending for non-participants to 
include participants' drug spending that was not purchased through the 
discount card program (the portion of drug spending covered by Medigap 
plans) to yield an estimate of total drug spending outside of the 
proposed drug discount card initiative. Consequently, this inclusion of 
the Medigap covered drug spending means that the per capita drug 
spending figure for non-participants is this adjusted per capita 
(including the Medigap related spending) for the hypothetical area 
rather than the actual per capita for the non-participant population in 
the hypothetical area. For purposes of the sensitivity analysis 
calculation of the impact of the proposed discount card programs, we 
used the upper bound figure of all drug spending as a high-end 
assumption. This corresponds to the upper bound estimates discussed in 
subsequent sections of this impact analysis.
    The results of the sensitivity analysis are shown in Table 2. For 
the hypothetical area that is skewed to have a very high Medicare 
beneficiary population composition and a high enrollment in the 
discount card initiative, the negative impact on revenues from 
prescription drugs reached 2.4 percent, still below the HHS measure for 
significant economic impact of 3 to 5 percent of revenues. Furthermore, 
as noted above, not all of the 2.4 percent would be borne by the 
pharmacy, since discount card sponsors would be required to obtain 
manufacturer rebates or discounts and pass those through to 
beneficiaries and pharmacies in order to receive Medicare endorsement.
    We recognize that reliance on nationally calculated per capita 
averages weighted for different demographic compositions has 
limitations, and pharmacies may have customer populations with per 
capita drug spending levels that differ from the population specific 
averages calculated at a national level. Nevertheless, we think that 
the sensitivity analysis is comprised of differentiating factors that 
can influence market shares and we skewed these to be at the highest 
values identified in the available data. Consequently, we think that 
the sensitivity analysis reflects a reasonable test of potential 
distributional effects. We welcome comments, and particularly data, 
that could help to inform further analysis of distributional effects.

  Table 2.--National Average Versus Sensitivity Analysis--Hypothetical
                                 Example
                              [In percent]
------------------------------------------------------------------------
                                   Discount      Discount
              2004                   card        card non-      Total
                                 participants  participants   population
------------------------------------------------------------------------
National average for comparison
 purposes:
    Percent of total population          3.52         96.48       100.00
    Percent of total                     7.60         92.40       100.00
     prescription drug sales...
    Estimated beneficiary               12.40          0.00         0.94
     savings as a percent of
     drug sales................
Hypothetical Example:
    Percent of total population         15.12         84.88       100.00
    Percent of total                    19.60         80.4        100.00
     prescription drug sales...
    Estimated beneficiary               12.40          0.00         2.40
     savings as a percent of
     drug sales................
------------------------------------------------------------------------

3. Policy Considerations
    Several policy decisions were made to mitigate the impact on 
pharmacies, including small pharmacies and drug stores. We would 
require manufacturer rebates or discounts that could be passed through 
to pharmacies to defray the costs of pharmacies providing discounts on 
retail prices. In addition, the funding from manufacturer rebates could 
be used to provide other incentives for pharmacies, such as rural 
pharmacies, to participate in the proposed Medicare-endorsed card 
sponsors' networks.
    Also to mitigate the impact on pharmacies, we would require very 
broad retail pharmacy networks and would not endorse mail order-only 
discount card programs. We believe that strong access to retail 
pharmacies is important for the Medicare population.
    One group of pharmacies about which we would like more information 
is small, independent, urban pharmacies. These pharmacies frequently 
serve an important role for underserved populations and populations at 
risk for health disparities. We solicit comments on data sources and 
information concerning these pharmacies, including

[[Page 10281]]

whether or not they are usually included in the networks of insured 
products and the extent to which Medicare beneficiaries rely on them.
    We realize that there is some risk to revenues of a pharmacy not 
participating in the networks of proposed Medicare-endorsed programs, 
particularly for small or rural pharmacies. At the same time, we 
believe that the proposed access standard of 90 percent of the 
beneficiaries being within 10 miles of a retail pharmacy would create 
the need for card sponsors to develop inclusive networks. Consequently 
we believe that, as the market does today for insured products, card 
sponsors would use special arrangements to encourage the participation 
of rural pharmacies and other pharmacies that serve segments of the 
Medicare population with special needs.
    Also, participation of Medicare beneficiaries in this proposed 
initiative is voluntary, and beneficiaries with drug cards always would 
remain free to make prescription drug purchases at the pharmacy of 
their choice (although they may pay more at a non-network pharmacy) or 
to use existing voluntary discount cards; and they could purchase a 
drug not on a formulary (at the price offered by the pharmacy).
    Based on the data we have available, the impact of the proposed 
Medicare endorsement initiative, on average, is estimated to be well 
below the 3 to 5 percent of revenues that HHS uses as the measure of 
significant economic impact. Furthermore, our sensitivity analysis 
indicates that even taking into account significantly different market 
characteristics, and even if all of the impact were assumed to be 
coming from pharmacies rather than our proposed program design that 
requires manufacturer rebates or discounts, we did not generate a 
scenario that reaches the HHS test for significant economic impact. We 
welcome comments, and particularly data, that could help to inform 
further analysis of distributional effects.
4. Small Rural Hospitals
    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. This proposed rule would 
not affect small rural hospitals since the initiative would be directed 
at outpatient prescription drugs, not drugs provided during a hospital 
stay. Prescription drugs provided during hospital stays are covered 
under Medicare as part of Medicare payments to hospitals. Therefore, we 
are not providing an analysis.

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1998 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any one year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. We have determined that this proposed 
rule is not an unfunded mandate as defined by the UMRA. In particular, 
section 101 of the UMRA only requires estimation of direct costs to 
comply with the definition of a private sector unfunded mandate. In 
addition, this proposed rule does not mandate any requirements for 
State, local, or tribal governments.

D. Federalism

    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. This proposed rule would impose no direct costs on State 
and local governments, would not preempt State law, or have any 
Federalism implications. However, as noted in section I.A of this 
preamble, States may choose, on a voluntary basis, to partner with 
private drug card sponsors by selecting a Medicare-endorsed drug card 
program and offering State endorsement of it as well. In addition, as 
noted in the advance notice of proposed rulemaking entitled, ``Medicare 
Program; Medicare-Endorsed Prescription Drug Discount Card Assistance 
Initiative for State Sponsors'', published elsewhere in this issue of 
the Federal Register, we outline steps we are considering proposing in 
support of State efforts to make prescription drugs more readily 
available to Medicare beneficiaries. These are voluntary opportunities 
for States, and have no Federalism implications.

E. Limitations of Our Analyses

    The following analyses present projected effects of this proposed 
rule on Medicare beneficiaries, the Medicare program, total national 
retail prescription drug spending, and drug card sponsors.
    Because this would be the first year of the Medicare-Endorsed 
Prescription Drug Discount Card Assistance Initiative, we do not have 
the benefit of the experience of prior years. Therefore, we present a 
range rather than a single estimate for the impact of the prescription 
drug rebate and discount requirements of the proposal. Another 
limitation of this particular analysis is that our most recent 
available data on beneficiary use of prescription drugs come from self-
reported survey data from the 1998 Medicare Current Beneficiary Survey 
(MCBS). (The MCBS is a continuous multipurpose survey of a 
representative sample of the Medicare population.) We have adjusted the 
data for trends in drug spending and for under reporting.
    In the cost and benefit analysis, we do not estimate the costs and 
benefits of sharing manufacturer rebates and discounts with 
beneficiaries indirectly through pharmacies. We require that these 
rebates and discounts would have to be shared with beneficiaries either 
directly or indirectly through pharmacies. We anticipate that this 
requirement would promote better drug prices for beneficiaries or 
enhance pharmacy participation in a card program's network. Further, we 
anticipate that sharing indirectly with pharmacies could promote 
enhanced pharmacy services. We request public comment on the costs and 
benefits to pharmacies, beneficiaries and card program sponsors of 
various possible arrangements to achieve enhanced pharmacy 
participation in a card program's network, as well as to promote the 
enhancement of pharmacy services for beneficiaries.
    The cost analysis of the effects of the proposed requirement that 
applicants jointly administer, abide by the guidelines of, and fund a 
private administrative consortium is limited by the following 
condition. While subject to the oversight described in section I.E.5 of 
this preamble, the consortium would be a private operation independent 
of the government. Its actual organization and ongoing operation, 
including specifications of the final details of its three major 
administrative tasks, would be determined largely by the 
representatives of the drug card sponsors; and, if included in the 
final design, its advisory board; and in the case of reviewing 
marketing materials, subject to guidelines provided by us. Further, 
both the number of drug card sponsors that receive Medicare endorsement 
and how the card sponsors choose to operate the consortium may

[[Page 10282]]

effect the costs borne by any one card program sponsor.

F. Impact of the Rebate and Discount Requirements

1. Medicare Beneficiary Estimated Enrollment
    Although the Medicare-endorsed prescription drug card programs 
would be available to all Medicare beneficiaries, we believe that those 
most likely to benefit from the initiative and those most likely to 
enroll in a drug card program would be the approximately 10 million 
Medicare beneficiaries without prescription drug coverage at any point 
in a year (1998 MCBS).
    Another group of beneficiaries likely to benefit from and enroll in 
Medicare-endorsed discount card programs would be beneficiaries with 
Medigap insurance. The Medigap plans that offer prescription drug 
coverage (including standardized plans H, I, and J) generally are 
designed with a cap on the amount of drug spending covered by the plan. 
Plans H and I have a drug benefit cap of $1250 and Plan J has a drug 
benefit cap of $3000. In addition, these plans each have a $250 
deductible and 50 percent copayments. Many Medigap plans do not 
actively negotiate discounts for enrollees. Thus, we believe that 
Medicare beneficiaries with standardized and non-standardized Medigap 
drug coverage would benefit from a discount card program, particularly 
for spending above the benefit cap. According to the 1998 National 
Association of Insurance Commissioner's (NAIC) Medigap experience 
files, covered lives in standardized and non-standardized Medigap plans 
totaled 10.7 million. Using the 1998 MCBS, we estimate that 
approximately 2 million of these covered lives had drug coverage from a 
Medigap policy, recognizing that a large share of this estimated 
population was enrolled in non-standardized plans. According to the 
NAIC, of the beneficiaries enrolled in the standardized Medigap plans 
offering drug coverage in 1998, 56 percent were enrolled in plans H and 
I and 44 percent of the beneficiaries were enrolled in plan J.
    We anticipate that beneficiaries without prescription drug coverage 
and with relatively higher spending would be more likely to enroll than 
those with generally very low or no spending. We assumed that 
beneficiaries without prescription drug coverage who spend over $250 
per year, the point at which a $25 maximum enrollment fee could be 
recouped (assuming 10 percent savings on $250 in drug spending) would 
be the most likely to enroll. To the extent that card sponsors would 
offer lower or no-cost enrollment, we would expect more beneficiaries 
to take advantage of the savings opportunity. We expect some 
beneficiaries would realize that the $25 maximum fee is a one time only 
fee, and to the extent they stay in the same card program over time, 
the more value the card represents in terms of annual savings.
    In Table 3 we show the assumptions regarding the percentage of 
beneficiaries without drug coverage enrolling in a Medicare-endorsed 
drug card program. Based on these assumptions and the distribution of 
drug spending in the Medicare population without drug coverage, we 
estimate that 75 percent of these beneficiaries would enroll in the 
Medicare-endorsed drug card programs.

  Table 3.--Estimated Enrollment Rate of Medicare Beneficiaries With No
                         Drug Coverage 2003-2007
------------------------------------------------------------------------
                                                               Percent
                    Annual drug spending                      enrolling
------------------------------------------------------------------------
$0-200.00..................................................           55
$200.01-300.00.............................................           80
$300.01-400.00.............................................           85
$400.01-500.00.............................................           90
$500.01+...................................................           95
------------------------------------------------------------------------

    In addition, we believe that 95 percent of beneficiaries with 
Medigap coverage for prescription drug costs, regardless of expenditure 
level, would also enroll in a Medicare-endorsed card program. We 
believe that beneficiaries with Medigap coverage for prescription drugs 
would be more risk averse than the average beneficiary and would 
therefore be more likely to enroll in a drug discount card program.
    While we expect there would be a phase-in of beneficiary 
enrollment, we believe that because of the recognition and acceptance 
of the Medicare name and the educational efforts to be undertaken, 
beneficiaries wishing to enroll would do so within the first 6 months 
of the initiative. Thus, we assume that the percentage of beneficiaries 
enrolling in 2003 would be about equal to the percentage enrolling in 
2004 and beyond. In 2003, we expect approximately 10 million 
beneficiaries would enroll. We use 2003 as the beginning point for the 
estimates because it would be the first full year of operation.
2. Estimated Portion of Drug Spending Included
    For purposes of estimating the impact of the Medicare-Endorsed 
Prescription Drug Discount Card Assistance Initiative, it is necessary 
to make some assumptions concerning the portion of spending that would 
be affected by the discounts under the drug card programs. The 
requirements for endorsement would include provision of a discount on 
one brand name or generic drug in each therapeutic grouping commonly 
used by Medicare beneficiaries. However, we expect that the card 
programs probably would provide discounts on more than one drug per 
grouping and would be highly likely to provide discounts on commonly 
used drugs. In addition, we anticipate that many card sponsors would 
choose to provide a discount on all drugs, with large manufacturer 
rebates and deeper discounts on a subset of drugs on a formulary. 
Analysis of 1998 MCBS spending for the drugs most commonly used by 
Medicare beneficiaries, identified in Attachment B of the August 2, 
2001 application for the Medicare-endorsed drug discount card program, 
found that those drugs accounted for approximately 66 percent of total 
drug spending for beneficiaries without drug coverage. However, the 
drug classification listing included in Attachment C of the August 2, 
2001 application, for which card sponsors were required to include a 
drug, is more extensive than the top specific drug list shown in 
Attachment B, which was used to estimate 66 percent.
    We assume that many card sponsors would choose to include more than 
one drug for the required drug grouping. Consequently, we increased our 
estimate to 75 percent of total drug spending for beneficiaries 
enrolled that would be affected by the drug card initiative. We assume 
that this is the lower bound of drug spending that would be affected by 
the drug card initiative.
    We also assume that it is possible that programs would include a 
discount on all drugs. To calculate this upper bound, we assume that 
all beneficiary drug expenditures would be affected by the drug card 
initiative. We note, however, that we have made no adjustment to take 
into account that some beneficiaries currently receive discounts and 
that a large portion of the savings to beneficiaries would come from 
generic substitution, and not as a result of price reductions on brand 
name drugs.
3. Estimated Beneficiary Savings
    An April 2000 study prepared by the Department of Health and Human 
Services (HHS) entitled, ``A Report to the President: Prescription Drug 
Coverage, Spending, Utilization and

[[Page 10283]]

Prices'', indicated a significant price differential between 
individuals paying cash for prescriptions at a retail pharmacy versus 
those with insurance. This was true for both the Medicare and non-
Medicare populations. According to the study, in 1999 the price paid by 
cash customers was nearly 15 percent more than the total price paid 
under prescription drug insurance, including the enrollee cost sharing. 
For 25 percent of the most commonly prescribed drugs, this price 
difference was higher--over 20 percent. Thus, in today's market, 
individual Medicare beneficiaries without drug coverage and the related 
market purchasing leverage, not only face having to pay the full cost 
for medications from their own pockets, but ironically are also charged 
the highest prices. Furthermore, the HHS study did not include the 
effect of rebates on total prices paid. It did, however, note industry 
experts as indicating that insurers and employers typically receive 70 
to 90 percent of the rebates negotiated for their enrollees. While 
currently, rebates in insured products may not necessarily reduce 
prices paid at the retail point of sale, the rebates do lower the per-
prescription cost for plan sponsors, and thus tend to lower premiums or 
program costs for insured beneficiaries.
    We anticipate that the estimated savings for Medicare beneficiaries 
in a Medicare-endorsed drug card program would be a first step toward 
the savings that could be achieved under an insurance product. Based on 
information on savings from insurance products and information on the 
current discount card market, we assumed that beneficiaries enrolling 
in the Medicare-endorsed prescription drug discount card programs would 
save, on average, between 10 and 13 percent of their total drug costs 
compared to their spending in the absence of this initiative. The 
percentage savings on particular prescription drugs would vary and may 
be substantially higher for certain products, particularly generics, 
due to their lower prices. While the impact analysis uses an assumption 
of savings of 10 to 13 percent off total drug spending, we believe that 
savings of 15 percent may be possible, depending on the ultimate design 
of card sponsors' programs. If Medicare-endorsed discount card programs 
rely heavily on the use of formularies, we expect that manufacturer 
rebates and discounts would be greater in response. Earlier in this 
proposed rule we solicited comments and data on how to maximize 
manufacturer rebates and discounts.
    The savings to beneficiaries would be attributable to the 
combination of lower prices paid at the point of sale as a result of 
manufacturer and pharmacy discounts, as well as the effects of 
beneficiary education leading to greater use of generic drugs and more 
effective management of prescription drug expenses by beneficiaries. 
Because pharmacy discounts are increasingly available to beneficiaries 
through existing voluntary card programs, we expect that manufacturer 
rebates and discounts and savings from a better understanding of 
generic alternatives and managing prescription drug expenses would be 
important sources of savings in this initiative. For purposes of 
calculating the estimates of beneficiary savings, we assumed an average 
overall drug spending savings to beneficiaries of 12.4 percent. These 
estimates do not take into account possible increased use of 
prescription drugs by Medicare beneficiaries resulting from paying 
reduced out-of-pocket amounts for drugs.
    Because the Medicare-endorsed drug card programs would be modeled 
after insured products in terms of enrollment and the use of 
formularies, combined with its competitive model and the requirement of 
manufacturer rebates or discounts, we expect that the Medicare-endorsed 
drug card programs would achieve new beneficiary savings from 
manufacturer rebates or discounts. The share of savings would vary 
depending on the drug, but savings from manufacturers are expected to 
be substantially greater than those available through existing 
voluntary cards. According to the HHS study, industry experts report 
that private insurance plans garner rebates on individual brand name 
drugs ranging from 2 to 35 percent. We assume that the portion of 
beneficiary savings attributable to manufacturers may increase over 
time as competition forces card sponsors to secure manufacturer rebates 
or discounts in order to remain competitive. To the extent that card 
program sponsors design formularies to mimic those of insured products, 
the ability to garner manufacturer rebates or discounts would increase.
4. Projection Assumptions
    Since our data on Medicare beneficiary prescription drug spending 
are based on 1998 MCBS data, it is necessary to make several 
adjustments in order to prepare 2003 estimates. In order to trend 1998 
spending to 2003 dollars, we use prescription drug spending projections 
based on per capita drug expenditure growth from the National Health 
Expenditure (NHE) Projections 1980 to 2010. These projections can be 
found on our Web site at: http://www.hcfa.gov/stats/NHE-Proj/proj2000/
tables/t11.htm.
    MCBS data on prescription drug utilization are self-reported by 
beneficiaries, and consequently are subject to under reporting. We are 
studying this under reporting in order to develop adjustment factors to 
be used for estimating purposes. For purposes of the estimates in this 
proposed rule, the spending data from the MCBS are adjusted to account 
for the estimated 16.4 percent in under reporting that has been 
identified through our research thus far.
    It is also necessary to adjust for growth in the Medicare 
beneficiary population. The adjustments were made based on the 
assumptions used for the Medicare Trustees Reports, March 19, 2001.
    These assumptions are detailed in Table 4, which shows the 
estimated impact, using 1998 as the base year for projections. The 
estimated increase in total Medicare enrollment for 2003 and the 
estimated increase in per capita drug expenditures (97.4 percent) are 
shown as increases from 1998 to 2003. These estimates are based on the 
1980 to 2010 NHE projections.
    For the estimated 10 million beneficiaries who would enroll in the 
proposed Medicare-endorsed drug card programs, the base for total drug 
expenditures involved in the discount card initiative is projected to 
be $13.3 billion in 2003 (not adjusted for enrollment phase-in), $14.9 
billion in 2004, and $21.1 billion in 2007 before the savings achieved 
through the card initiative.
    As indicated above, these projections are estimated using 1998 MCBS 
data, projected forward to 2003 to 2007 based on expected growth in per 
capita health care spending and the Medicare population. For 
beneficiaries with Medigap coverage, estimated prescription drug 
spending involved in the discount card initiative may be understated 
because our projection method implicitly assumes that the Medigap drug 
benefit structure (deductible and coverage limits) grows as per capita 
spending grows. However, we believe that this does not significantly 
alter the overall findings in the impact analysis because it is likely 
counterbalanced by other assumptions that tend to overstate the 
discount card programs' impact on retail prescription drug sales 
through pharmacies. For example, in the impact analysis, we use NHE 
estimates of prescription drug spending net of manufacturer rebates 
provided to health insurers. Because removing the rebates understates 
total prescription drug sales realized by

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pharmacies, the impact of the Medicare-endorsed drug cards as a percent 
of total pharmacy revenues is overstated.

                                           Table 4.--Estimated Impact
----------------------------------------------------------------------------------------------------------------
                                                   1998       2003       2004       2005       2006       2007
----------------------------------------------------------------------------------------------------------------
                  Total Medicare Enrollment ($       38.9       40.9       41.4       42.0       42.6       43.4
                   millions)..................
                  Increase in Total Medicare    .........       5.2%       1.3%       1.3%       1.5%       1.8%
                   Enrollment.................
                  Increase in per Capita Drug   .........      97.4%      11.2%      10.7%      10.7%      10.2%
                   Expenditures...............
                  Total National Aggregate          $85.2     $175.8     $197.1     $219.9     $245.3     $272.4
                   Drug Expenditures ($
                   billions)..................
                  Projected Prescription Drug        $6.4      $13.3      $14.9      $16.8      $18.8      $21.1
                   Spending Under the Drug
                   Discount Card Programs ($
                   billions)..................
                  Projected Beneficiary              $793     $1,647     $1,855     $2,081     $2,338     $2,622
                   Savings ($ millions).......
                  Implementation Phase-in.....  .........       0.75       1.00       1.00       1.00       1.00
                  Upper Bound Impact of         .........     $1,235     $1,855     $2,081     $2,338     $2,622
                   Estimated Beneficiary
                   Savings ($ millions).......
                  Upper Bound Impact as a       .........      0.70%      0.94%      0.95%      0.95%      0.96%
                   Percent of Total National
                   Retail Prescription Drug
                   Expenditures...............
                  Lower Bound Impact of         .........       $927     $1,391     $1,561     $1,753     $1,967
                   Estimated Beneficiary
                   Savings ($ millions).......
                  Lower Bound Impact as a       .........      0.53%      0.71%      0.71%      0.71%      0.72%
                   Percent of Total National
                   Retail Prescription Drug
                   Expenditures...............
----------------------------------------------------------------------------------------------------------------

5. Anticipated Effects
a. Effects on Medicare Beneficiaries
    Among the primary purposes of the proposed Medicare-Endorsed 
Prescription Drug Card Assistance Initiative would be to:
     Educate beneficiaries about the private market methods for 
securing discounts on the purchase of prescription drugs.
     Encourage beneficiary experience with the competitive 
discount approaches that are a key element of all Medicare prescription 
drug benefit legislative proposals.
     Assist beneficiaries in accessing lower cost prescription 
drugs through new competitive manufacturer rebates or discounts and 
better understanding of how to manage their prescription drug needs.
    We estimate that at least 10 million Medicare beneficiaries would 
enroll in Medicare-endorsed drug card programs. We anticipate that 
Medicare beneficiaries with no drug insurance who enroll in a Medicare-
endorsed prescription drug card program would save between 10 and 13 
percent of their total drug costs. However, this would vary by the mix 
of drugs beneficiaries use, and as noted previously, may be even higher 
depending on the ultimate program design used by card sponsors.
    Also, beneficiaries may be required to pay a one-time enrollment 
fee of up to $25 to join a Medicare-endorsed drug card program. If all 
10 million Medicare beneficiaries estimated to enroll by the end of 
Year One would pay the maximum $25 enrollment fee (a scenario we do not 
expect because of competition among endorsed card programs), the total 
beneficiary savings would be reduced by a maximum of $250 million in 
2003. However, as noted earlier, to the extent a beneficiary stays in 
the same drug card program, beyond the first year, the more value the 
card represents in savings to the beneficiary. In Year Two, based on 
our estimates of growth in the Medicare population and the 
disenrollment rate (discussed later in this analysis), we estimate that 
if beneficiaries paid the maximum $25 enrollment fee, total beneficiary 
savings would be reduced by a maximum of $32 million in 2004.
    Beneficiaries with Medigap insurance that includes drug coverage 
who enroll in a Medicare-endorsed drug discount card program would also 
experience savings, particularly before the Medigap drug deductible is 
reached, and after the spending cap is exceeded. We also believe that 
the education beneficiaries would receive concerning drug prices, 
formularies, drug-to-drug interactions and other pharmacy counseling, 
generic substitution, and pharmacy networks, would provide an 
opportunity for beneficiaries to maximize their savings.
    A beneficiary enrolled in a Medicare-endorsed card program would be 
free to purchase prescription drugs outside the drug discount card 
program, either at a non-network pharmacy or a non-formulary drug. 
Thus, beneficiaries without prescription drug coverage would not be any 
worse off than they would be in the absence of the proposed Medicare-
endorsed initiative.
b. Effects on the Medicare Program
    We would be responsible for reviewing applications and awarding 
endorsements so that these proposed card programs could begin operating 
to provide lower prices to cash paying beneficiaries. The cost 
associated with this process, as well as all other activities we would 
undertake associated with implementing this proposed initiative, would 
be subsumed in the agency's existing administrative budget. No new 
agency resources are budgeted for implementation of this initiative.
    While not quantifiable, a positive impact of the rebate and 
discount requirements of the proposed initiative would be to provide us 
with experience in understanding issues in the pharmaceutical industry 
prior to enactment of a Medicare drug benefit. We would increase our 
knowledge concerning pricing and payment issues, information technology 
requirements, and increasing the effectiveness of pharmacy quality 
improvement programs. The pharmaceutical industry (including pharmacy 
benefit managers) would also gain more experience in working with the 
Medicare population prior to implementation of a drug benefit. We 
expect that this experience would make the transition to a Medicare 
prescription drug benefit faster and more efficient.
    Because this proposed initiative is not a Medicare benefit, we do 
not anticipate any significant change in the Medicare baseline as a 
result of its implementation.
c. Effects on National Retail Prescription Drug Spending
    Total national retail spending (spending for total population, not 
just Medicare beneficiaries) on prescription drugs is projected to be 
$175.8 billion in 2003, $197.1 billion in 2004, and $272.4

[[Page 10285]]

billion in 2007 (http://www.hcfa.gov/stats/NHE-Proj/Proj2000/tables/
t11.htm).
    The total estimated economic impact of the Medicare-Endorsed 
Prescription Drug Card Assistance Initiative of $927 million to $1.235 
billion in 2003 would range from 0.53 percent (the lower bound) to 0.70 
percent (the upper bound) as a share of total national retail 
prescription drug expenditures in 2003. In the second year of the 
initiative (2004), once enrollment has phased-in completely, the total 
impact is estimated to range from $1.391 billion to $1.855 billion, or 
0.71 percent to 0.94 percent of total national retail expenditures for 
prescription drugs. In 2007, we estimate the total impact to range from 
$1.967 billion to $2.622 billion, or 0.72 percent to 0.96 percent of 
total national retail drug expenditures. Thus, the economic impact is 
estimated to be less than 1 percent of total retail prescription drug 
spending.
    We expect that the various sectors involved in the prescription 
drug industry would adjust to the impact without significant 
disruption, just as the industry adjusted to discounts being extended 
to the Medicaid population and the privately insured population during 
the 1990s. The 1990s saw a significant increase in reliance on pharmacy 
benefit managers and the tools they use to manage pharmaceutical 
benefit costs.
    For example, evidence of market adjustment can be seen in the 
changes in pharmacies' acquisition costs during the 1990s. In the 
August 2001 HHS Office of Inspector General (OIG) Report entitled 
``Medicaid Pharmacy-Actual Acquisition Cost of Brand Name Prescription 
Drug Products'', the OIG reports on changes in pharmacy acquisition 
costs for both single source and multi-source brand name drugs. The OIG 
uses the common industry pricing metric of average wholesale price 
(AWP). The findings from the OIG study indicate that the acquisition 
prices pharmacies face for a broad spectrum of brand name drugs have 
been declining as the percentage of AWP during the period 1994 to 1999. 
Based on 1994 pricing data, OIG estimates that pharmacies acquired 
brand name drugs (both single source and multi-source) at a discount of 
18.30 percent below AWP. For 1999 pricing data, OIG estimates a 
discount of 21.84 below AWP. The OIG reports that this represents an 
increase of 19.3 percent in the average discount below AWP for which 
pharmacies were able to purchase a mixture of single source and multi-
source brand name drugs. The OIG is preparing a similar analysis on the 
pharmacy acquisition costs related to generic drugs. Thus, during the 
1990s, as more customers secured discounts on the purchase of 
prescription drugs, pharmacies' acquired drugs at larger discounts from 
AWP.
    The pharmacy acquisition costs reported by the OIG are similar to 
those reported in the PricewaterhouseCoopers (PWC) study conducted for 
us entitled ``A Study of Pharmaceutical Benefit Management'', June 
2001. That study reported that pharmacies generally now acquire drugs 
at AWP minus 20 to 25 percent. According to the PWC report, absent a 
discount arrangement (such as a pharmacy-sponsored senior discount), 
pharmacies, on average, sell to the uninsured population at full retail 
price, roughly AWP plus a dispensing fee (generally $2 to $3).
    We also believe that the proposed Medicare-endorsed prescription 
drug card programs would accelerate the use of generic drugs. The HHS 
study reports that, generally, pharmacies earn higher margins on 
generic drugs. In addition, PWC found that generic manufacturers 
sometimes provide pricing incentives to pharmacies based on generic 
volume or market share. These are other examples of adjustments that 
take place related to the market place in pharmaceuticals.
    Our expectation is that the discounts offered by retail pharmacies 
and drug manufacturers would be no greater than the discounts already 
offered to insured individuals, including insured Medicare 
beneficiaries, unless there is a legitimate business reason for the 
pharmacies and the drug manufacturers to offer a greater discount. It 
is possible that the requirements of final price publication and the 
establishment of a large number of competing discount cards would lead 
to greater manufacturer discounts. We expect that access to modern 
competitive tools would assist in controlling prescription drug costs 
and improving the quality and efficiency of prescription drug services. 
We also expect that this initiative would somewhat level the playing 
field between the insured and uninsured, and the current differential 
in pricing between populations with drug coverage and Medicare 
beneficiaries without drug coverage would be ameliorated.
    Further, since this proposed initiative is not a Medicare benefit, 
we do not expect that this effort would have any impact on the number 
of Medicare beneficiaries with drug coverage through employer-sponsored 
health insurance. We do not anticipate that employers would alter their 
drug coverage in response to this initiative.

G. Estimated Costs and Anticipated Benefits of Other Proposed 
Requirements and Medicare's Beneficiary Education and Outreach Plans

    The following cost and benefit analysis is prepared in 2002 dollars 
and reflects costs and benefits we anticipate in the first and second 
year of this proposed initiative. We estimate significantly different 
costs in Year One and Year Two of implementation because the start up 
of the administrative consortium and a very large enrollment is assumed 
in the first year only. Also, in the second year, the administrative 
consortium would be responsible for review of card sponsors' marketing 
materials; we propose that marketing review would be our responsibility 
in the first year.
    Table 5 reports the per card program sponsor costs and the per new 
enrollee costs for national and regional card programs for each 
administrative function associated with a significant cost. While any 
entity that meets all of the requirements in the regulations would be 
eligible to enter into an agreement with us to receive a Medicare 
endorsement, for purposes of estimating these costs, we assumed that 15 
drug card programs would be endorsed. Of those 15, we assume that 10 
would be national programs (including 50 States and Washington, DC) and 
5 would be regional programs (including 4 States). We do not make 
adjustments for differences in Medicare population per State, which 
would cause the actual impact on regional programs to vary.
1. Organizational Size, Experience, and Structure Requirements
    We believe that the organizational size and experience requirements 
would be necessary to assure beneficiary confidence in the initiative 
so they would enroll and stay enrolled, protect the Medicare name, and 
assure the necessary administrative capacity to handle a large volume 
of new enrollment. Large enrollment volume, along with the exclusivity 
provisions of this proposed rule, would be necessary for a drug card 
sponsor to garner significant market share and negotiate manufacturer 
rebates and discounts to successfully compete with other card programs 
on price and customer and pharmacy service.
    We do not think it would be practical and therefore possible for 
independent pharmacies to obtain an endorsement. We nonetheless expect 
most pharmacies would be able to participate in an endorsed card 
program sponsor's pharmacy network. To improve the

[[Page 10286]]

opportunity for a variety of organizations, such as chain pharmacies, 
nonprofit groups, and other private entities to qualify for Medicare 
endorsement of their card program, the proposed initiative provides 
flexibility in the way that entities may organize to meet these size, 
experience and structure requirements.
    We seek comments concerning the anticipated costs and limitations 
that would be faced by entities interested in organizing with other 
entities to meet any of the requirements necessary to obtain Medicare 
endorsement that one entity could not meet by itself.
2. Private Sector Administrative Consortium and Its Tasks
    We propose that drug card sponsors would agree to, and demonstrate 
the ability to, jointly administer, abide by the guidelines of, and 
fund a private administrative consortium with other Medicare-endorsed 
prescription drug program sponsors.
    Following are the systems specifications we used to estimate the 
costs of hardware to run an enrollment exclusivity system and a price 
comparison web site. One administrative responsibility of the 
consortium would be to ensure that beneficiaries are not enrolled in 
more than one Medicare-endorsed prescription drug card program at the 
same time. We assume that this would require the administrative 
consortium to develop and maintain a secure electronic enrollment 
exclusivity system that would be populated by and accessible only by 
the administrative consortium and endorsed sponsors; as stated 
previously, we assume 15 card sponsors would be endorsed.
    For the purpose of defining the capacity needed for this system, we 
also assume that the system would maintain a unique record for each 
beneficiary enrolled by a card sponsor. The record would contain such 
information as name, address, telephone number, a unique number 
identifier, date of enrollment, date of disenrollment, card program 
identifier, provision for enrollment changes, and whether the 
beneficiary was group enrolled through the sponsor. We estimate the 
number of system transactions, most occurring in any year in a two 
month period, based on the estimated 10 million beneficiaries who would 
likely join, adjusted using the 2000 Medicare+Choice voluntary 
disenrollment rate of 11.5 percent.
    We do not know what the actual rate of voluntary disenrollment 
would be for this proposed initiative; it could be lower or higher 
depending on how much a beneficiary's card program changes its 
formulary and drug prices and whether these changes affect the drugs 
the beneficiary takes. Also, the voluntary disenrollment rate would 
depend on the diligence of beneficiaries in tracking any changes to the 
formularies and drug prices of the card programs they join and the 
perceived value of these changes relative to comparable information 
available to them on other cards.
    We assume that of the 10 million beneficiaries who would enroll in 
the first year, 11.5 percent would disenroll and reenroll in another 
Medicare-endorsed drug card program. We also assume that sponsors would 
access the system to check enrollment records for an additional 10 
percent of beneficiaries for reasons such as a lost discount card. We 
assume the system would be updated in real time and be of web based 
technology. We assume this system would be maintained by a webmaster 
hired by the administrative consortium. We also assume reports, such as 
enrollment rates in a particular time frame by a particular card and 
percent of beneficiaries enrolled as a group, could be generated off 
this system by the consortium's webmaster.
    Another administrative responsibility of the consortium would be to 
facilitate the publication of, or to publish, information, including 
comparative price information on discount drugs, that would assist 
beneficiaries in determining which Medicare-endorsed prescription drug 
card program is the most appropriate for their needs. This would 
require the administrative consortium to develop and maintain a web-
based, searchable database accessible to the public so that interested 
Medicare beneficiaries or their advocates could access comparable price 
data on the drugs they take for the drug discount card programs 
available in their zip code area. We assume that each of 15 card 
sponsors would update its formulary and price lists four times a year. 
Because we propose that formularies could vary geographically, we 
assume that 10 of the estimated 15 sponsors endorsed by Medicare would 
be national programs (having a network in all 50 States and Washington, 
DC), and the remaining 5 programs would be regional programs, comprised 
of 4 States each. We assume that each card program would have a unique 
formulary and price list for each State, differentiated by urban and 
rural areas. Based on these numbers, we estimate that the price 
comparison web site would house as many as 1060 unique formularies and 
pricing listings. We assume that only the administrative consortium 
would have direct interface with the system; card sponsors would submit 
files in a uniform format to the consortium's webmaster to be uploaded. 
We assume reports, such as price comparisons for a list of drugs within 
a geographic area, could be generated off this system by the 
consortium's webmaster.
    To fulfill these specifications for both of the enrollment 
exclusivity and price comparison systems, our Office of Information 
Services (OIS) developed a cost estimate for the first year in 2002 
dollars in the amount of $400,000 for lowest common denominator 
technology which would permit the system to be hosted virtually 
anywhere by a professional internet technology organization. The 
estimate includes the costs of a database server, redundant database 
server, application server, redundant application server and the cost 
for an internet service provider. Second year costs would be 
significantly less, $80,000, reflecting maintenance rather than 
purchase of hardware.
    A third responsibility of the administrative consortium would not 
begin until the second year. We propose that the consortium would be 
responsible for ensuring the integrity of the information distributed 
by the Medicare-endorsed prescription drug discount card programs. We 
propose that we would conduct the marketing material review for the 
first year of endorsements. We propose that the administrative 
consortium's reviews in future years would be based on guidelines 
prepared by us. Based on a cost estimate, prepared in 2002 dollars, 
developed by our Center for Beneficiary Choices (CBC), we assume that 
the cost of developing the guidelines would be $237,500. We assume the 
cost of conducting the review from the estimated 15 endorsed sponsors 
and tracking the status of the review and approval process, including 
the cost of a database for this activity would be $282,000. We assume 
that the cost of transitioning the review to the administrative 
consortium would be $44,000. We assume reporting on the status of the 
marketing review and findings under the review would cost $29,000. This 
first year cost, totaling $592,500, would be borne by us in the context 
of our existing budget. We use the same estimates to reflect the second 
year costs to be borne by the administrative consortium, however the 
consortium would not develop guidelines, for a total of $355,000 
($592,500 minus $237,500). This estimate does not include guideline 
development because this activity would be conducted by us.

[[Page 10287]]

    A cost estimate in 2002 dollars was produced by CBC for key 
activities associated with the start-up of the administrative 
consortium, and the development of the specifications and software to 
run the enrollment exclusivity system as well as the price comparison 
web site. These activities and their estimated costs include:
     Analysis and development of recommendations for an 
appropriate organizational structure and governance, including review 
of legal considerations, $405,000.
     Specification of requirements for the enrollment 
exclusivity system and software development, $301,500.
     Options development for financial management for the 
administrative consortium, $345,600.
     Development of a transition plan from consortium formation 
through full operation, $104,850.
     Specification of requirements for the price comparison web 
site and software development, $261,000.
     Contract support to the consortium during transition for 
management functions, $184,500.
     Contract support for the consortium webmaster to implement 
the enrollment exclusivity system and the price comparison web site, 
$45,900.
    These activities and their estimated costs equal $1.65 million for 
the start-up of the administrative consortium.
    As an additional cost in the first year of operation, we assume 
that the administrative consortium would hire or retain the services of 
several professionals. We use national mean hourly wage data produced 
by the U.S. Department of Labor, Bureau of Labor Statistics, and 
reported in ``Occupational Employment Statistics, 2000 National 
Occupational Employment and Wage Estimates''. Administrative consortium 
staff and their estimated 2000 national mean hourly wage rates are as 
follows:
     Public Relations Manager--$29.54.
     Lawyer--$43.90.
     Computer Programmer--$29.31.
     Pharmacist--$33.39.
     Executive Secretary or Administrative Assistant--$15.63.
    We age these wages to 2002 dollars using a 2001 adjustment of 3.8 
percent, and a 2002 adjustment of 4.0 percent, found in Table II.F1 of 
the 2001 Annual Report of the Board of Trustees of the Federal Hospital 
Insurance Trust Fund (http://www.hcfa.gov/pubforms/tr/hi2001/
tabiifl.htm). We adjust these wages upward to include compensation 
using an adjustment factor of 1.355 based on Table 6 of a U.S. 
Department of Labor, Bureau of Labor Statistics report entitled 
``Employer Costs for Employee Compensation--March 2001'', which reports 
that national wages and salaries for white collar occupations represent 
73.8 percent of total wages and compensation. We assume that the 
administrative consortium would hire or retain the services of each 
type of employee on a full-time basis of 2080 hours per year, except 
the lawyer and the pharmacist, whom we assume would work one-half of 
that time. The estimated 2002 annual wages and compensation would be as 
follows:
     Public Relations Manager--$89,876.
     Lawyer--$66,783.
     Computer Programmer--$89,177.
     Pharmacist--$50,795.
     Executive Secretary--$47,555.
    The total of these yearly costs would be $344,188. We estimated 
overhead costs for these employees using a factor of 1 applied to the 
total wage and compensation rates for an additional amount of $344,188.
    We estimate the cost of leasing space for the administrative 
consortium staff of 5 using an estimate provided by a commercial real 
estate broker of $25 per square foot for full service leasing in a 
metropolitan area. We apply this rate to an estimated 150 square foot 
office per worker, an estimate provided by the staff of the Government 
Services Administration (GSA), for a total amount of $18,750.
    We anticipate providing some financial support for the start-up of 
the administrative consortium. As this support would be provided in the 
context of our existing budget and other program priorities, a 
determination of the actual amount is pending the outcome of this 
public notice and rule making process. We recommend at this time that 
interested parties assume no support aside from the costs of developing 
marketing guidelines and conducting the marketing review in the first 
year of the proposed initiative.
    The total estimated cost to be borne across all Medicare-endorsed 
card program sponsors for the administrative consortium start-up and 
administrative activities in the first year would be $2.75 million 
($1.64 million for start-up activities plus $400,000 for hardware plus 
$344,188 for staff wages and compensation plus $344,188 in overhead 
plus $18,750 for leased space).
    We expect that drug card program sponsors would share the start-up 
costs. We propose that a lump sum payment be made into a privately held 
escrow account by each endorsed card program. The payment would be 
prorated by the number of States included in each endorsed card 
program's network area, weighted by the number of Medicare 
beneficiaries residing in each State (and Washington, DC). As reported 
in Table 5, we estimate the per card program sponsor costs for a 
national program would be $265,149, and for a regional program to be 
$20,796, with a per new enrollee cost of $0.25.
    We estimate that second year administrative consortium costs to be 
borne by all sponsors of the consortium would be significantly lower 
than first year costs. Specifically, the relevant estimates for second 
year costs include: maintenance of the enrollment exclusivity and price 
comparison systems, $80,000; marketing review, $355,000; consortium 
staff, $344,188; overhead costs, $344,188; and leased space, $18,750; 
for a total of $1.14 million. As reported in Table 5, we estimate the 
per card program sponsor costs for a national program would be 
$109,902, and for a regional program to be $8,619, with a per new 
enrollee cost of $0.88.
    In these estimates for the administrative consortium and its 
activities, we have captured the activities required in the proposed 
regulation and have attempted to reflect the significant costs 
associated with them. We seek public comment on the adequacy of this 
estimate.
    We presume that sponsors would recover these costs in enrollment 
fees and from the portion of pharmaceutical manufacturing rebates that 
are not shared either directly or indirectly with beneficiaries through 
pharmacies. These costs would have the effect of lowering the amount of 
negotiated rebate that could be passed through to beneficiaries, or of 
increasing the enrollment fee.
    We believe that card program sponsors would benefit in preparation 
for a future Medicare drug benefit by developing the infrastructure 
implied by the activities detailed above.
    We believe that the administrative consortium's enrollment 
exclusivity responsibility, as well as its marketing review 
responsibility, would significantly benefit beneficiaries as they seek 
information about selecting a drug discount card program. These 
activities would help beneficiaries make informed decisions and protect 
them from misleading information. Further, the role of the exclusivity 
system in assuring that beneficiaries only belong to one drug discount 
card program at a time, as well as the price comparison information, 
would help optimize card sponsor negotiations for manufacturer rebates 
and discounts as sponsors compete for Medicare market share. Also, the 
secure exclusivity system

[[Page 10288]]

would assist in protecting beneficiary confidential information.
    We would benefit by learning from the implementation of the 
requirements involving information technology, marketing material 
review, beneficiary enrollment, and education using the price 
comparison web site and through the card programs' enrollment.
3. Customer Service Requirements
    Given the types of potential sponsors who would likely meet the 
size and experience requirements that we propose for a card program to 
be Medicare-endorsed, we believe that the proposed customer service 
requirements would represent usual and customary practice for the 
programs we endorse and would be associated with minimal new costs 
except as described below.
    There would be an incremental cost associated with each additional 
enrollment of a Medicare beneficiary. For the purpose of this estimate, 
we assume that 15 drug card programs would be endorsed. We assume that 
a total of 10 million beneficiaries would enroll. Using the 2000 
Medicare+Choice (M+C) disenrollment rate, we assume an additional 11.5 
percent of beneficiaries would disenroll and reenroll for a total of 
11.15 million enrollments. As reported in the Collection of Information 
Requirements section elsewhere in this proposed rule, we believe that 
each additional enrollment would take 15 minutes. This time estimate 
reflects the time necessary to provide beneficiaries with all the 
information required in the proposed regulations including: Educating 
the beneficiary by phone on how the discount card program works, 
answering questions about specific drugs in the formulary and their 
prices, explaining the confidentiality requirements, obtaining and 
storing a hard copy of the beneficiary's enrollment signature, and 
processing the transaction electronically.
    This estimate reflects the marginal cost of each additional 
enrollment in the first year; we assume that each drug card program 
sponsor would have the basic infrastructure. We assume that the card 
program sponsor would hire or retain the services of customer service 
representatives to conduct the enrollment function.
    We again use wage and compensation data produced by the U.S. 
Department of Labor, Bureau of Labor Statistics. The national mean 
hourly wage rate of $12.75 for a customer service representative was 
taken from a report entitled, ``2000 National Occupational Employment 
and Age Estimates, Office and Administrative Support Occupations'' 
(http://www.bls.gov/oes/2000/oes_43Of.htm). We age this wage rate to 
2002 using the same aging factors (3.8 percent for 2001 and 4.0 percent 
for 2002) used to age the wages for the administrative consortium 
staff. We use a compensation factor of 1.355 obtained from the same 
report used to calculate compensation for the consortium staff, for a 
total 2002 wage and compensation rate of $38,792 per customer service 
representative. We apply a factor of 1 to this rate to provide an 
overhead amount of $38,792.
    We estimate lease space per customer service representative using 
150 square feet per office at $25 per square foot for full service, 
leasing in a metropolitan area, obtained from a commercial real estate 
broker for a per office amount of $3,750. The total cost per 
representative for wages, compensation, overhead and leased space would 
be $81,334.
    Assuming that each customer service representative works seven 
hours per day, 5 days per week, 50 weeks per year, each representative 
would work 105,000 minutes per year. This would permit each 
representative to enroll 7000 beneficiaries per year (105,000 divided 
by 15 minutes per enrollment).
    We estimate that for all 11.15 million new enrollees to be 
processed by telephone, a total of 1,593 customer service 
representatives would be hired or retained. As Table 5 shows, the 
estimated cost for a national card program sponsor would be $12.46 
million, and for a regional card program sponsor, $977,774, with a per 
enrollee cost of $11.62.
    In the second year, we estimate that 1.29 million beneficiaries 
would be enrolled. This number reflects a growth factor in Medicare 
enrollment of 1.3 percent, from Table 4 of this regulatory impact 
analysis, applied to the 10 million beneficiaries enrolled in the first 
year, and also accounts for only the 11.5 percent who we assume would 
disenroll and reenroll. The number of customer service representatives 
needed would be 185. As Table 5 shows, the estimated cost for a 
national card program sponsor would be $1.44 million, and for a 
regional card program sponsor, $113,557, with a per enrollee cost of 
$11.62.
    The enrollment process described above would assure that 
beneficiaries understand how to fully benefit from the drug discount 
card program in which they enroll, and would assure the confidentiality 
of their personal information, as required in this proposed regulation. 
We welcome comments on different methods to efficiently enroll 
beneficiaries in the context of our requirements to provide information 
and assure that beneficiary personal information is kept confidential. 
We would also be interested in comments concerning the reliability, 
security, and ability to audit electronic rather than hard copy 
signatures, and on differential costs for an electronic enrollment 
process.
    Another customer service requirement that would be significantly 
affected by the large number of anticipated additional enrollments per 
drug discount card program is the additional capacity and maintenance 
of the customer service call center for non-enrollment related calls. 
We estimate that for the first year the customer service lines, across 
all card program sponsors, would be used for disenrollment, or 11.5 
percent of all card programs' enrollees, or 1.28 million disenrollee 
related calls. We assume an additional 50 percent of this number for 
other non-enrollment related calls, for a total of 1.92 million calls. 
Using our CBC estimated additional cost per call, reported in 2002 
dollars in the amount of $5 for the Medicare 1-800 line, we estimate, 
as reported in Table 5, that the cost of the additional call volume 
generated by this proposed initiative for a national card program 
sponsor in the first year would be $925,397, and for a regional card 
program sponsor, $72,580, with a per new enrollee cost of $0.86.
    For the second year estimate, the call volume is adjusted to 
reflect 1.3 percent growth in Medicare enrollment, for a total cost per 
national card program sponsor of $937,427, and $73,523 per regional 
card program sponsor, with a per new enrollee cost of $7.52.
    We believe that beneficiaries would benefit significantly from 
telephone access to the card programs to register their concerns and 
complaints, or to obtain information for evaluating which card program 
would best meet their needs.
    We presume that sponsors would recover these customer service costs 
in enrollment fees and that portion of the pharmaceutical manufacturing 
rebates that are not shared either directly or indirectly with 
beneficiaries through pharmacies. These costs would have the effect of 
lowering the amount of negotiated rebate that could be passed through, 
or of increasing the enrollment fee.
4. Total Costs of Requirements for Card Sponsors
    As shown in Table 5, the costs of the administrative consortium 
operations and the customer service requirements, in the first year 
would total, per national card program sponsor, $13.65 million, and per 
regional card program sponsor,

[[Page 10289]]

$1.07 million, with a per new enrollee cost of $12.73.
    In the second year, total costs for a national card program sponsor 
would be $2.49 million, and for a regional card program sponsor, 
$195,701, with a per new enrollee cost of $20.02.
    For national and regional programs, this cost analysis for both the 
first and second year of operation demonstrates that a one-time 
enrollment fee of $25 (a new fee could be charged if the beneficiary 
switches programs) could cover the major administrative costs 
associated with this proposed initiative. Alternatively, a drug card 
program sponsor could choose to charge a lower or no enrollment fee and 
support operating expenses through a portion of the manufacturer 
rebates.
    The numbers in Table 5 do not add exactly due to rounding.

                     Table 5.--Summary of Cost Estimates for Major Administrative Activities
----------------------------------------------------------------------------------------------------------------
                                                                                                Per new enrollee
                                                                                                   cost (11.15
                                                                                                     million
                                  Year One                                    Per sponsor cost   enrollments: 10
                                                                                                  million first
                                                                                                      time)
----------------------------------------------------------------------------------------------------------------
Consortium & Its Administrative Cost:
    National................................................................          $265,149             $0.25
    Regional................................................................            20,796              0.25
Enrollment Cost:
    National................................................................        12,466,618             11.62
    Regional................................................................           977,774             11.62
Non-enrollment Call Center Costs:
    National................................................................           925,397              0.86
    Regional................................................................            72,580              0.86
                                                                             -----------------------------------
          Total:
              National......................................................        13,657,165             12.73
              Regional......................................................         1,071,150             12.73
----------------------------------------------------------------------------------------------------------------

                                                                                                Per new enrollee
                                                                                                   cost (1.29
                                  Year Two                                    Per sponsor cost    million total
                                                                                                  enrollments)
----------------------------------------------------------------------------------------------------------------
Consortium & Its Administrative Cost:
    National................................................................          $109,902             $0.88
    Regional................................................................             8,619              0.88
Enrollment Cost:
    National................................................................         1,447,860             11.62
    Regional................................................................           113,557             11.62
Non-enrollment Call Center Costs:
    National................................................................           937,427              7.52
    Regional................................................................            73,523              7.52
                                                                             -----------------------------------
          Total:
              National......................................................         2,495,191             20.02
              Regional......................................................           195,701             20.02
----------------------------------------------------------------------------------------------------------------

5. Medicare's Beneficiary Education and Outreach Plans
    Medicare beneficiaries would benefit from the education and 
outreach plans we outline in this proposed rule. The information we 
would impart on our web site, through brochures, and in beneficiary 
calls to the 1-800-Medicare telephone number would assist beneficiaries 
in gaining knowledge about whether and how to participate in a 
Medicare-endorsed prescription drug card program, and impart basic 
information on how to use tools to manage drug costs.
    Also, we would benefit from the infrastructure built for, and the 
experience gained in educating beneficiaries about, using private 
sector tools to lower their out-of-pocket prescription drug costs and 
enhance the pharmacy services they would receive in preparation for a 
Medicare prescription drug benefit. The costs associated with these 
efforts would be subsumed in our existing budget.

H. Conclusion

    Evidence of trends in prescription drug use and spending, changes 
in pharmacy acquisition costs for drugs at a time of the increased 
presence of pharmacy benefit management strategies, and strategies for 
varying drug prices and manufacturer rebates or discounts seems to 
indicate a dynamic market that adjusts and returns to equilibrium. 
Pharmacy benefit management has been a feature of all the major 
Medicare prescription drug benefit legislative proposals. The 
implementation of a Medicare-endorsed prescription drug discount card 
assistance initiative in this environment would educate Medicare 
beneficiaries and provide them with experience with the private sector 
tools used to provide pharmacy benefits to practically all Americans 
who have a drug benefit. The Medicare-endorsed prescription drug card 
programs would need to garner significant Medicare market share to 
successfully negotiate manufacturer rebates and discounts to cover 
administrative costs, keep enrollment fees low and pass through an 
amount to beneficiaries to keep their drug prices and pharmacy services 
competitive. This initiative may help ease the transition of the market 
to a full Medicare prescription drug benefit.

I. Alternatives Considered

    We are committed to working with the Congress on a prescription 
drug benefit in the context of Medicare reform. We considered not 
pursuing any other immediate effort to assist and

[[Page 10290]]

educate Medicare beneficiaries about how to lower their out-of-pocket 
costs prior to the enactment and implementation of a Medicare 
prescription drug benefit. However, we concluded that the drug card 
initiative would provide beneficiaries with immediate help with the 
cost of prescription drugs, and also could improve access to better 
quality prescription drug related services. We believe that access to 
prescription drugs is so fundamental in today's health care environment 
that beneficiaries should receive information, counseling, and 
assistance regarding prescription drug discount programs until a 
Medicare prescription drug benefit is enacted and implemented. 
Furthermore, we believe that through real world experience with drug 
assistance card programs, Medicare beneficiaries would be better 
educated concerning the economic and quality decisions made by private 
sector purchasers and individuals with drug coverage. A Medicare 
prescription drug benefit would probably involve the private sector 
tools currently used by health insurers to lower prescription drug 
costs and provide higher quality pharmaceutical services. Experience 
through the proposed drug discount card initiative would better prepare 
Medicare beneficiaries, particularly those without drug coverage, to 
make informed decisions about a drug plan that is best for them. 
Additionally, we would gain experience in educating Medicare 
beneficiaries about prescription drugs.
    We considered alternatives to major proposed features of the 
initiative, including requiring manufacturer rebates and not permitting 
mail order only programs to be Medicare endorsed. In deciding to 
propose requiring manufacturer rebates, we underscore our commitment to 
mitigating the effect on pharmacies and drugs stores, particularly 
small entities. Manufacturer rebates would have to be shared with 
beneficiaries, either directly or indirectly through pharmacies (lower 
prices, pharmacy counseling or other services that ultimately benefit 
the Medicare beneficiary). Since card sponsors would not rely solely on 
pharmacy discounts to compete for customers, pressure would be relieved 
from pharmacies. To the extent that rebates would be shared through 
pharmacies, both pharmacies and beneficiaries would benefit. Requiring 
rebates also would bring the design of the proposed initiative closer 
to that of insured products, which rely on manufacturer rebates, as 
well as any discount offered by the pharmacies, to lower costs.
    We also considered permitting a mail order only option. Mail order 
programs have some popularity, and may be a convenient option for some 
beneficiaries. However, we decided not to propose a mail order-only 
option because we believe that requiring strong access to retail 
pharmacies would be in the best interests of beneficiaries, the 
majority of whom rely on retail pharmacies. Requiring retail access 
also would mitigate the impact of the proposed initiative on retail 
pharmacies, particularly small pharmacies that rely on Medicare 
beneficiaries to make purchases on non-prescription drug items when 
they enter the pharmacy to fill prescriptions.
    We also considered alternative sets of requirements for Medicare 
endorsement. For example, we could have proposed only requirements 
pertaining to rebates, discounts, and access to retail pharmacies, 
while eliminating the size, structure and experience, and customer 
service requirements. However, we concluded that beneficiary confidence 
in discount card programs would also depend on the stable availability 
of reputable card programs and high quality customer service, which we 
believe only the full set of proposed requirements could assure. We 
think that beneficiary confidence would be an essential element to 
beneficiaries' participation, and consequently the role of competition 
in driving better pricing and quality.
    More specifically, among the key requirements we are proposing are 
requirements related to the following three areas: (1) Requirements 
related to the applicant's experience, structure, and agreement to 
jointly administer the administrative consortium; (2) requirements 
related to customer service; and (3) requirements related to rebates, 
discounts, and access.
    In the area of experience, structure, and agreement to jointly 
administer the administrative consortium, for example, we would require 
that national drug discount card program sponsors have 5 years of 
experience in pharmacy benefit management, or the administration of 
drug discount cards or low income drug assistance programs that provide 
prescription drugs at low or no cost and currently serve 2 million 
covered lives. We believe that these requirements would be necessary in 
order to help ensure that Medicare would endorse stable organizations 
that would be likely to exist for some time, and would be capable of 
serving large populations.
    In the area of customer service, we would require that card 
sponsors charge Medicare beneficiaries no more than a $25 initial 
enrollment fee. Card program sponsors would be allowed to choose to 
offer a lower, or no, initial enrollment fee. Unlike the current 
industry practice of assessing annual fees, we would require card 
sponsors that choose to charge an enrollment fee to do so only upon 
initial enrollment, not on an annual basis. We believe that this 
approach to enrollment fees would be a reasonable way for card program 
sponsors to defray operating expenses, while providing Medicare 
beneficiaries with a feature that is generally not found in the current 
market. We believe that the added market leverage achieved by the 
Medicare endorsement would more than offset the need to charge an 
annual enrollment fee. We also believe that the customer service call 
center would be essential to beneficiary education, assuring that 
beneficiaries would understand the best use of the card program's 
features, as well as providing a vehicle for problem solving to promote 
beneficiary confidence in the card program.
    In the area of rebates, discounts, and access, we would require, 
for example, that for the area to be served by the card program sponsor 
(either national or regional), 90 percent of the beneficiaries would 
have to live within 10 miles of a contracted pharmacy. Beneficiary 
access to retail pharmacies would be an important component of this 
proposed initiative, and we believe that this standard would preserve 
beneficiary access to the retail pharmacies that they trust.
    Another alternative we considered was to select one or more card 
program sponsors through a competitive approach. We considered this 
because we believed it could have allowed for deeper discounts, as 
potential card sponsors compete for the Medicare business. However, we 
decided to endorse all qualified applicants meeting the requirements in 
order to give beneficiaries an array of choices, and to let the market 
determine which card programs offer the best value to Medicare 
beneficiaries. We believe that our approach would more easily 
accommodate additional programs seeking Medicare endorsement, and that 
beneficiaries would select a Medicare-endorsed card program that is 
right for them.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 403

    Grant programs-health, Health insurance, Hospitals, 
Intergovernmental

[[Page 10291]]

relations, Medicare, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV, part 403 as 
set forth below:

PART 403--SPECIAL PROGRAMS AND PROJECTS

    1. The authority citation for part 403 is revised to read as 
follows:

    Authority: Sec. 4359 of the Omnibus Budget Reconciliation Act of 
1990 (42 U.S.C. 1359b-3) and secs. 1102 and 1871 of the Social 
Security Act (42 U.S.C. 1302 and 1395hh).

    2. Add a new subpart H, consisting of Secs. 403.800 through 
403.820, to part 403 to read as follows:

Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
Initiative

Sec.
403.800  Basis and scope.
403.802  Definitions.
403.804  General rules for Medicare endorsement.
403.806  Requirements for eligibility for endorsement.
403.807  Application process.
403.808  Agreement terms and conditions.
403.810  Administrative consortium responsibilities.
403.811  Beneficiary enrollment.
403.812  Withdrawal of endorsement.
403.820  Oversight and beneficiary education.
Subpart H--Medicare-Endorsed Prescription Drug Card Assistance 
Initiative

Sec. 403.800  Basis and scope.

    (a) Provisions of the legislation. This subpart implements, in 
part, the provisions of section 4359 of the Omnibus Budget 
Reconciliation Act of 1990 (OBRA). Section 4359 of OBRA requires the 
Secretary to establish a health insurance advisory service program (the 
beneficiary assistance program) to assist Medicare beneficiaries with 
the receipt of services (including both covered and uncovered benefits) 
under the Medicare and Medicaid programs and other health insurance 
programs. The subpart is also based on sections 1102 and 1871 of the 
Social Security Act.
    (b) Scope of subpart. This subpart sets forth the standards and 
procedures CMS uses to implement the Medicare-Endorsed Prescription 
Drug Card Assistance Initiative.

Sec. 403.802  Definitions.

    For purposes of this subpart, the following definitions apply:
    Administrative Consortium means the group of Medicare-endorsed 
prescription drug card program sponsors formed to jointly carry out 
specific administrative tasks associated with operating the Medicare-
endorsed prescription drug card programs in accordance with the 
Medicare endorsement agreement.
    Applicant means the organization or entity (along with any 
subcontractors or others with whom it has legal arrangements for the 
purpose of meeting the requirements for endorsement) that is applying 
for Medicare endorsement of its prescription drug card program.
    Application means the document submitted to CMS by an applicant 
that demonstrates compliance with the requirements specified in this 
subpart in order to obtain Medicare endorsement of the applicant's drug 
card program.
    Medicare-endorsed prescription drug card assistance initiative 
means an effort whereby CMS solicits applications for Medicare 
endorsement of prescription drug card programs, reviews them, offers 
agreements to program sponsors who meet all of the requirements for 
endorsement, and awards Medicare endorsements to program sponsors who 
sign the agreement.
    Medicare-endorsed prescription drug card program means a program 
developed by an organization or group of organizations, endorsed by CMS 
under the Medicare-endorsed prescription drug card assistance 
initiative to educate Medicare beneficiaries about tools to lower their 
prescription drug costs and to offer prescription drug cards to 
Medicare beneficiaries.
    Medicare-endorsed prescription drug card program sponsor means any 
applicant that has received endorsement from Medicare for its 
prescription drug card program.
    Solicitation means a notice published in the Federal Register 
announcing a request for applications from applicants seeking Medicare 
endorsement for their prescription drug card programs.

Sec. 403.804  General rules for Medicare endorsement.

    (a) Applications. Applicants may submit applications to participate 
in the Medicare-endorsed prescription drug card assistance initiative 
and become a Medicare-endorsed prescription drug card program sponsor.
    (b) Number of programs sponsored. An organization or entity may 
have operational responsibilities in more than one drug card program. A 
separate application must be submitted for each program. A sponsoring 
organization or entity may be the primary organization or entity in 
only one application per solicitation, and may sponsor only one 
Medicare-endorsed prescription drug card program at any time.
    (c) Requirements. In order to be eligible for endorsement, 
applicants must submit applications and meet all of the requirements 
specified in Sec. 403.806.
    (d) Eligibility to receive endorsement. Any applicant that submits 
an application containing all information necessary to determine 
whether the applicant meets all of the requirements in Sec. 403.806; 
and that meets all of the requirements in Sec. 403.806; will be 
eligible to enter into an agreement with CMS to receive a Medicare 
endorsement.
    (e) Period of endorsement. In Year One of the initiative, the 
Medicare endorsement will be effective for 15 months. CMS will consider 
card program sponsor performance under an existing Medicare endorsement 
as a factor in determining eligibility for endorsement in future annual 
cycles.
    (f) Termination of endorsement by CMS. CMS may terminate the 
endorsement at any time.
    (g) Termination of participation by Medicare-endorsed drug card 
sponsor. A Medicare-endorsed prescription drug card program sponsor may 
choose not to continue participation in the Medicare-endorsed 
prescription drug card assistance initiative. In Year One, termination 
would be effective 30 days after providing written notice to CMS.
    (h) Notification of beneficiaries of termination of participation. 
In the event of termination of participation in the initiative by the 
drug card program sponsor, or termination by CMS, the Medicare-endorsed 
prescription drug card program sponsor must notify all of its Medicare 
beneficiary enrollees in writing that they may enroll in an alternative 
Medicare-endorsed prescription drug card program. This notice must be 
provided by United States mail within 10 days of providing CMS with 
notice of termination or within 10 days of receiving notice of 
termination from CMS.

Sec. 403.806  Requirements for eligibility for endorsement.

    (a) General. To be eligible for Medicare endorsement, an applicant 
must submit an application demonstrating that it meets and will comply 
with the requirements described in this section.
    (b) Applicant structure, experience, and participation in 
administrative consortium--(1) The applicant must

[[Page 10292]]

apply as either a national or a regional program.
    (i) To qualify as a national program, a single organization or 
entity that is either the applicant or a subcontractor or under other 
legal arrangement with the applicant must--
    (A) Have no less than 5 years experience in pharmacy benefit 
management, in administering a prescription drug discount program, or 
in administering a low income drug assistance program that provides 
prescription drugs at low or no cost;
    (B) Currently manage at least 2 million covered lives in an insured 
pharmacy benefit, prescription drug discount program, or a low income 
drug assistance program that provides prescription drugs at low or no 
cost; and
    (C) Have a pharmacy network serving all 50 States and the District 
of Columbia.
    (ii) To qualify as a regional program, a single organization or 
entity that is either the applicant or a subcontractor or under other 
legal arrangement with the applicant must--
    (A) Have no less than 5 years experience in pharmacy benefit 
management, in administering a prescription drug discount program, or 
in administering a low income drug assistance program that provides 
prescription drugs at low or no cost;
    (B) Currently manage at least 1 million covered lives in an insured 
pharmacy benefit, a prescription drug discount program, or a low income 
drug assistance program that provides prescription drugs at low or no 
cost; and
    (C) Have a regional pharmacy network serving at least two 
contiguous States.
    (2) The applicant must demonstrate that it is financially solvent.
    (3) The applicant must have a satisfactory record of integrity and 
business ethics.
    (4) The applicant must agree to, and demonstrate the ability to, 
jointly administer, abide by the guidelines of, and fund a private 
administrative consortium with other Medicare-endorsed prescription 
drug program sponsors in accordance with the requirements of this 
subpart.
    (5) The applicant must comply with all applicable Federal and State 
laws.
    (c) Customer service. The applicant must do the following:
    (1) Limit its one time enrollment fee in Year One to no more than 
$25. In future years, CMS may adjust the fee based on a determination 
of what is a reasonable amount to defray costs of the applicant's 
administrative activities.
    (2) Provide information and outreach materials regarding its 
Medicare-endorsed prescription drug card program to all enrolled 
Medicare beneficiaries.
    (3) Enroll all Medicare beneficiaries who wish to participate in 
its Medicare-endorsed prescription drug card program.
    (4) Maintain a toll free customer call center that is open during 
usual business hours and that provides customer telephone service in 
accordance with standard business practices.
    (5) Protect the privacy and confidentiality of beneficiaries and 
beneficiary-specific information.
    (6) Not send or otherwise direct market to beneficiaries materials 
unrelated to the Medicare-endorsed prescription drug card program, 
unless the beneficiary provides prior written consent to receive these 
materials.
    (7) Maintain written privacy policies describing how privacy and 
confidentiality will be protected. Such privacy policies must explain 
how the applicant will notify beneficiaries of the expected uses of 
their personal information.
    (d) Discounts, rebates, and access. The applicant must--
    (1) Offer a discount on at least one brand name or generic 
prescription drug in each of the therapeutic drug classes, groups, or 
subgroups representing the prescription drugs commonly needed by 
Medicare beneficiaries;
    (2) Obtain substantial pharmaceutical manufacturer drug rebates or 
discounts on brand name drugs, and ensure that a substantial share is 
provided to beneficiaries either directly or indirectly through 
pharmacies;
    (3) Guarantee that for the drugs on which the applicant will offer 
discounts, Medicare beneficiaries enrolled in its Medicare-endorsed 
prescription drug discount card program will receive the lower of the 
discounted price available through the program, or the price the 
pharmacy would charge a cash paying customer;
    (4) Have a national or regional contracted pharmacy network 
sufficient to ensure that pharmacies are locally accessible to 
beneficiaries where the drug discount card will be offered; and
    (5) Provide to the administrative consortium information on drugs 
and their pricing included in the applicant's formularies.

Sec. 403.807  Application process.

    (a) CMS will solicit applications through an application process.
    (b) CMS will review applications and determine whether the 
applicant has met and is able to comply with all of the requirements 
set forth in Sec. 403.806 to become Medicare-endorsed.
    (c) All applications that demonstrate that the applicant has met 
and is able to comply with all of the requirements to become Medicare-
endorsed will be eligible to enter into an agreement to receive 
Medicare endorsement from CMS.

Sec. 403.808  Agreement terms and conditions.

    In order to receive a Medicare endorsement, an applicant that 
complies with all of the application procedures and meets all of the 
requirements described in this subpart must enter into a written 
agreement with CMS. The agreement must include a statement by the 
applicant that it has met the requirements of this subpart and will 
continue to meet all requirements as long as the agreement is in 
effect.

Sec. 403.810  Administrative consortium responsibilities.

    (a) The administrative consortium will be responsible for--
    (1) Ensuring that beneficiaries are not enrolled in more than one 
Medicare-endorsed prescription drug card program at the same time;
    (2) Facilitating the publication of, or publishing, information, 
including comparative price information on discounted drugs, that 
assists beneficiaries in determining which Medicare-endorsed 
prescription drug card program is the most appropriate for their needs; 
and
    (3) Ensuring the integrity of the information distributed by the 
Medicare-endorsed prescription drug card programs.
    (b) In order to facilitate the formation of the administrative 
consortium and ensure that all functions are performed in a timely 
manner, CMS may assist in the start-up of the administrative consortium 
and perform any of the functions in this section for a transitional 
period of time.

Sec. 403.811  Beneficiary enrollment

    (a) Individual enrollment. (1) Medicare beneficiaries who are 
enrolling in a Medicare-endorsed prescription drug card program for the 
first time may enroll at any time.
    (2) Once enrolled, a Medicare beneficiary may belong to only one 
Medicare-endorsed prescription drug card program at a time.
    (3) Once enrolled, and except as provided in paragraph (a)(4) of 
this section, enrollees may change enrollment to a different Medicare-
endorsed prescription drug card program every 6 months, to be effective 
the first day of the following January or July following the request 
for change, whichever comes first.

[[Page 10293]]

    (4) If the Medicare endorsement of a prescription drug card program 
is terminated, either by CMS or by the sponsor, enrolled Medicare 
beneficiaries may enroll in a different Medicare-endorsed prescription 
drug card program at any time.
    (b) Group enrollment. (1) The prescription drug card program 
sponsor may accept group enrollment from health insurers and must 
assure --
    (i) Disclosure to Medicare beneficiaries of the intent to enroll 
them as a group;
    (ii) Disclosure to beneficiaries of the enrollment exclusivity 
restrictions and other enrollment rules of the initiative;
    (iii) Disclosure to beneficiaries of all expected uses of their 
personal information under the endorsed drug discount program; and
    (iv) Written consent is obtained and maintained from each 
beneficiary in the group to be enrolled in the drug card program.
    (2) Medicare+Choice (M+C) organizations may subsidize the 
enrollment fee and offer the drug card program as part of their 
Adjusted Community Rate filing, but may not require enrollment in a 
drug card program as a condition of enrollment in any of their M+C 
plans.

Sec. 403.812  Withdrawal of endorsement.

    If CMS obtains evidence that a Medicare-endorsed prescription drug 
card program or its sponsor has failed to meet any of the requirements 
for endorsement or has not complied with the agreement necessary to 
receive endorsement under this subpart, CMS may withdraw the 
endorsement. CMS may also take appropriate intermediate actions, and 
may also refer the card program sponsor to appropriate Federal or State 
authorities, including the Office of the Inspector General, for 
sanctions or prosecution under section 1140 of the Social Security Act.

Sec. 403.820  Oversight and beneficiary education.

    (a) The Medicare-endorsed prescription drug card program sponsor 
must report to CMS the number of Medicare beneficiaries enrolled in, 
and disenrolled from, the Medicare-endorsed prescription drug card 
program on a form and at times specified by CMS.
    (b) The Medicare-endorsed prescription drug card program sponsor 
must maintain a customer grievance process acceptable to CMS.
    (c) CMS will conduct beneficiary education about, and oversight of, 
the Medicare-endorsed prescription drug card programs, as determined by 
CMS.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)
    Dated: December 18, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: December 18, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-5129 Filed 2-28-02; 4:00 pm]
BILLING CODE 4120-01-P