Federal Register / Vol. 77, No. 8 / Thursday, January 12, 2012 / Rules and Regulations 1877 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 423 

[CMS–4131–F2] 

RIN 0938–AP64 

Medicare Program; Medicare 

Advantage and Prescription Drug 

Benefit Programs: Negotiated Pricing 

and Remaining Revisions; Prescription 

Drug Benefit Program: Payments to 

Sponsors of Retiree Prescription Drug 

Plans 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule implements 

and finalizes provisions regarding the 

reporting of gross covered retiree planrelated prescription drug costs (gross 

retiree costs) and retained rebates by 

Retiree Drug Subsidy (RDS) sponsors; 

and the scope of our waiver authority 

under the Social Security Act (the Act). 

DATES: Effective Date: These regulations 

are effective on March 12, 2012. 

FOR FURTHER INFORMATION CONTACT: 

John Campbell, (410) 786–0542. 

Joseph Hefter, (410) 786–5751. 

James Slade, (410) 786–1073. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Balanced Budget Act of 1997 

(BBA) (Pub. L. 105–33) established a 

new ‘‘Part C’’ in the Medicare statute 

(sections 1851 through 1859 of the 

Social Security Act (the Act)) that 

established the Medicare+Choice (M+C) 

program. Under section 1851(a)(1) of the 

Act, every individual entitled to 

Medicare Part A and enrolled under 

Medicare Part B, except for most 

individuals with end-stage renal disease 

(ESRD), could elect to receive benefits 

either through the original Medicare 

program or an M+C plan, if one was 

offered where he or she lived. 

Subsequently, the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) was enacted on December 8, 

2003. This legislation established the 

Medicare prescription drug benefit 

program (Part D) and made significant 

revisions to the provisions in Medicare 

Part C, governing what was renamed the 

Medicare Advantage (MA) program 

(formerly Medicare+Choice). The MMA 

directed that important aspects of the 

new Medicare prescription drug benefit 

program under Part D be similar to and 

coordinated with regulations for the MA 

program. The MMA also created a 

subsidy program involving payments to 

sponsors of Retiree Prescription Drug 

Programs, or the Retiree Drug Subsidy 

(RDS) Program. This program allows 

subsidy payments to sponsors of 

qualified retiree prescription drug plans 

for Part D drug costs for individuals 

who are eligible for, but not enrolled in, 

a Medicare Part D plan. The MMA also 

specified that implementation of the 

prescription drug benefit and revised 

MA program provisions take place by 

January 1, 2006. Thus, we published 

final rules for the MA and Part D 

prescription drug programs in the 

January 28, 2005 Federal Register (70 

FR 4588 through 4741 and 70 FR 4194 

through 4585, respectively). 

We published a proposed rule on May 

16, 2008 (73 FR 28556) that proposed to 

make the Part D and RDS policies the 

same with respect to the reporting of 

negotiated prices and retained rebates. 

The May 2008 proposed rule would 

have required that Prescription Drug 

Benefit Program (Part D) and Retiree 

Drug Subsidy (RDS) sponsors report the 

pass-through negotiated prices and 

included a proposed definition of 

‘‘negotiated price’’ to be included at 

§ 423.882 that paralleled the definition 

at § 423.100. The May 2008 proposed 

rule also proposed to include 

definitions of ‘‘actually paid,’’ 

‘‘administrative costs,’’ ‘‘allowable 

retiree costs,’’ and ‘‘gross covered retiree 

plan-related prescription drug costs’’ 

that reflected Part D policy on retained 

rebates and ‘‘pass-through’’ negotiated 

prices, and proposed to apply the 

policies to the RDS Program. Thus, our 

proposed rule would have also required 

RDS sponsors to report rebates retained 

by an intermediary contracting 

organization, such as a pharmacy 

benefit manager (PBM), that may have 

been received by an intermediary 

contracting organization based on the 

utilization by the RDS sponsor’s 

enrollees, but not passed through to the 

plan sponsor. 

In the January 12, 2009 Federal 

Register (74 FR 1494), we published a 

final rule with comment period that 

responded to comments on the May 16, 

2008 proposed rule and finalized Part C 

and Part D regulations from that 

proposed rule that either were not 

impacted by Medicare Improvements for 

Patients and Providers Act of 2008 

(MIPPA) (Pub. L. 110–275), which was 

enacted on July 15, 2008, or that 

complemented MIPPA provisions. In 

addition, the final rule with comment 

period—(1) Deferred finalizing the RDS 

definition of ‘‘negotiated prices’’ and 

implemented, on an interim final basis, 

definitions of the other terms that 

reflected existing RDS policy, but did 

not reflect the new Part D policy on 

negotiated prices and retained rebates; 

(2) solicited public comment on 

whether we have the authority to adopt 

different reporting structures for Part D 

versus the RDS Program; and (3) set 

forth three theories under which we 

might have such authority. 

Also in the January 12, 2009 Federal 

Register, we published a proposed rule 

that would make regulatory revisions 

based on a change in our interpretation 

of section 1860D–22(b) of the Act. This 

provision would be interpreted as 

providing us with the authority to waive 

or modify requirements that hinder the 

design of, the offering of, or enrollment 

in an RDS plan. 

II. Provisions of the Rules and Analysis 

and Response to Public Comments 

Based on comments on the May 2008 

proposed rule, in our January 12, 2009 

final rule with comment period (74 FR 

1494), we deferred finalizing the 

definition of ‘‘negotiated prices’’ and 

implemented, on an interim final basis, 

definitions of the other terms that 

reflected existing RDS policy, but did 

not reflect the new Part D policy on 

negotiated prices and retained rebates. 

Stakeholders that commented on the 

May 2008 proposed rule argued that the 

majority of RDS sponsors are large 

employers that are sophisticated 

purchasers with a great amount of 

leverage, and are in the best negotiating 

position to decide which pricing 

structure is most appropriate for them. 

Commenters on the May 2008 proposed 

rule also argued that to extend the Part 

D policy of requiring the reporting of 

pass-through prices (and retained 

rebates) would cause RDS sponsors to 

leave the program and place retirees in 

the Medicare Part D program. 

We also at that time requested 

comment on whether we have the 

authority to adopt different reporting 

structures for Part D versus the RDS 

Program, and our final rule with 

comment period set forth three theories 

under which we might have such 

authority. These legal theories are 

described in detail in our January 12, 

2009 final rule with comment period (74 

FR 1494, 74 FR 1516, and 74 FR 1519). 

Although the three legal theories were 

articulated in connection with our 

decision to defer finalizing the proposed 

definition of ‘‘negotiated prices’’ in the 

RDS regulations (which would have 

tracked the Part D definition at 

§ 423.100), we also stated in the January 

12, 2009 final rule with comment period 

that we believed these three legal 

theories also could have applicability to 


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1878 Federal Register / Vol. 77, No. 8 / Thursday, January 12, 2012 / Rules and Regulations 

the issue of whether we could adopt a 

policy for retained rebates that differed 

between RDS and Part D, and we sought 

comment on that issue as well. 

A. Provisions of the Final Rule With 

Comment Period 

In the January 12, 2009 Federal 

Register (74 FR 1494), we published a 

final rule with comment period that 

finalized certain requirements relating 

to the MA and Part D Programs, and 

implemented certain requirements for 

the RDS Program on an interim basis. In 

the preamble discussion of these interim 

final regulations, we indicated that we 

agree with concerns expressed by 

commenters regarding the application to 

the RDS program of two Part D policies 

that were being finalized. We also 

indicated that the interim final 

regulations preserve the status quo for 

the RDS program with respect to these 

policies while we invited comment on 

three different legal theories under 

which we could potentially apply 

different cost reporting structures 

between the Part D and RDS Programs. 

That is, under Part D, sponsors are 

required to report pass-through pricing 

and retained rebates, but under the RDS 

Program, sponsors would be permitted 

to choose whether or not to report drug 

costs on a pass-through or lock-in basis, 

and could choose to report rebates and 

other price concessions that are retained 

by a pharmacy benefit management 

company or other intermediary 

contracting organization. In addition, 

the January 2009 proposed rule noted 

that we were specifically soliciting 

comments on the possibility of applying 

one or more of these legal theories. 

We received comments from 10 

stakeholders on the final rule with 

comment period. Commenters included 

advocacy groups representing the 

insurance industry, and employers and 

other organizations that sponsor or 

administer retirement and health 

benefits; pharmacy benefit managers; a 

health care consortium; and a 

consultant. 

Commenters generally supported 

allowing the RDS Program reporting 

structure to be different from the Part D 

reporting structure, and commenters 

generally believed that we have the 

authority to allow differing reporting 

structures. In this final rule, based on 

the comments received both on the 

interim final portions of the January 12, 

2009 final rule with comment period, as 

well as comments received on the 

proposed rule published the same day, 

we are finalizing the RDS language as 

specified in the January 2009 final rule 

with comment period (73 FR 1494) 

(with the correction discussed in section 

II.C. of this final rule), and the proposed 

regulatory changes for part 423 subpart 

J in the January 2009 proposed rule (74 

FR 1550). Therefore we are finalizing 

the definitions of ‘‘actually paid,’’ 

‘‘administrative costs,’’ ‘‘allowable 

retiree costs,’’ ‘‘gross covered retiree 

plan-related prescription drug costs, or 

gross retiree costs,’’ as they were 

published in the January 12, 2009 final 

rule with comment period. We are also 

finalizing the revision of 

§ 423.888(b)(5)(i) so that it references 

the term ‘‘gross covered plan-related 

retiree prescription drug costs,’’ which 

is a term defined in part 423 subpart R, 

rather than ‘‘gross prescription drug 

costs,’’ which is not. Finally, we are 

making the one technical change to the 

definition of ‘‘actually paid’’ to make 

clear that direct and indirect 

remuneration can be from any source, as 

opposed to only from manufacturers or 

pharmacies. (We are also finalizing the 

regulatory waiver language set out in 

§ 423.458(c) as proposed on the same 

day in the January 2009 proposed rule, 

as discussed in this section.) 

While we believe the Part D and RDS 

Programs are mutually exclusive 

programs, both are established under 

Part D–Voluntary Prescription Drug 

Benefit Program, and implemented 

under 42 CFR part 423. Therefore, we 

believe it is best to interpret parallel 

statutory language in the same manner, 

but use waiver authority to waive RDS 

requirements that, if interpreted 

consistently with parallel Part D 

requirements, would hinder the offering 

of, design of, or enrollment in, RDS 

plans. 

1. Legal Theory 1: Interpretation of 

‘‘Actually Paid’’ 

In our January 12, 2009 final rule with 

comment period (74 FR 1516), we 

articulated our first of three legal 

theories that would authorize us to 

adopt a different reporting policy for 

RDS than for Part D. Under this theory, 

when an RDS sponsor makes a payment 

to an entity (such as a PBM) that 

includes amounts for Part D drug 

ingredient and dispensing costs and 

amounts to manage the sponsor’s drug 

benefit plan, the amount of that 

payment represents the ‘‘costs that are 

actually paid by the sponsor’’ for 

purposes of calculating the subsidy. 

Under this argument, we would 

calculate the subsidy payment based on 

the RDS sponsor’s payment to the PBM, 

excluding discounts, chargebacks, and 

average percentage rebates. A problem 

with this theory is that it would 

arguably read out of the statute the 

phrase ‘‘for the portion of the retiree’s 

gross covered retiree plan-related 

prescription drug costs’’ because the 

amount actually paid could include 

administrative costs. 

Comment: Several commenters 

indicated that they view the Part D and 

RDS programs as mutually exclusive 

programs and that, as a result, we could 

interpret statutory provisions governing 

the two programs differently, even if the 

statutory language in the two provisions 

were the same. One commenter stated 

that based on Congressional intent it did 

not believe policy changes in Part D 

need to be in lockstep with other 

programs. One commenter specifically 

pointed out that the term 

‘‘administrative costs’’ does not have to 

be interpreted in the same manner 

between the Part D and RDS Programs. 

Another commenter indicated that, in 

light of fact that section 1860D–22 of the 

Act is titled ‘‘Special Rules for 

Employer-Sponsored Programs,’’ the 

MMA intended special treatment for 

retiree plans compared to Part D Plans. 

Response: We agree that the Part D 

program and the RDS program are 

different programs with different 

purposes, and as such, merit different 

treatment when appropriate to serve 

those different purposes. We also agree 

that the heading for section 1860D–22 of 

the Act implies that the RDS program 

merits special treatment. That said, we 

also believe that because the relevant 

provision uses the same statutory 

language in both programs to describe 

program costs, we should interpret the 

language consistently. Given these 

considerations, as described in further 

detail later in this section, we will use 

our waiver authority under section 

1860D–22(b) of the Act to waive or 

modify the RDS statutory requirements 

that would otherwise require that RDS 

sponsors report costs in the same 

manner as Part D sponsors. 

Comment: A commenter contended 

that the RDS sponsor incurs integrated 

costs that are directly related to the drug 

benefit management services necessary 

for the plan’s operation and therefore 

they should be considered costs 

‘‘actually paid.’’ Another commenter 

believes that the ‘‘actually paid’’ theory 

is not very strong because it reads out 

of the statute the prohibition on 

including administrative costs when 

determining a retiree’s ‘‘allowable 

retiree costs.’’ Another commenter 

believed that if CMS views costs a 

sponsor pays to a PBM under lock-in as 

‘‘drug costs incurred to purchase or 

reimburse the purchase of Part D 

drugs,’’ and not as administrative costs, 

the prohibition on including 

administrative costs would not be read 

out of the statute. One commenter stated 

that the same term can be interpreted 


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differently for different programs and 

that courts give deference to an agency’s 

reasonable interpretation of a statutory 

term. Another commenter believes that 

‘‘actually paid’’ means the lock-in price 

rather than the pass-through price. 

Response: We appreciate the 

comments on this issue. Based on the 

totality of the comments on our final 

rule with comment and proposed rule, 

however, we have determined that the 

best approach is to adopt legal theory 3, 

discussed in further detail below. Such 

an approach will permit us to impose 

reporting requirements on RDS sponsors 

that diverge from those under Part D 

without having to interpret parallel 

language in two different sections of the 

Part D statute (namely, sections 1860D– 

15 and 1860D–22 of the Act) 

inconsistently. Under the approach we 

are adopting, when an RDS sponsor 

makes a payment to an entity (such as 

a PBM) that includes amounts for Part 

D ingredient and dispensing costs and 

amounts to manage the sponsor’s drug 

benefit plan, the total amount of the 

payment can be used for purposes of 

calculating the subsidy; otherwise 

referred to as ‘‘lock-in’’ pricing. This 

lock-in amount paid will be sufficient 

for us to calculate the subsidy payment, 

excluding discounts, chargebacks, and 

average percentage rebates. Under this 

approach, RDS sponsors can choose to 

report either the lock-in or the passthrough price for reporting drug costs 

for purposes of subsidy payments (and 

can choose to report retained rebates). 

Comment: One commenter supported 

applying the Part D negotiated price 

definition to the RDS Program, but 

asked that adequate time be allowed to 

implement the changes needed to report 

costs based on pass-through, because 

the terms of its contracts with PBMs, 

and, in turn, the PBMs’ contracts with 

pharmacies and other providers, may 

need to be changed to accommodate the 

new reporting requirements. Most other 

commenters supported the existing RDS 

negotiated price policy, which allows an 

RDS sponsor to report either the lock-in 

or pass-through price, because it will 

promote continued participation of 

employers. 

Response: For the reasons described 

later in this preamble, we are not 

adopting a definition of negotiated 

prices for the RDS program. Thus, the 

Part D policy with respect to the use of 

pass-through negotiated prices does not 

apply to the RDS program. 

2. Legal Theory 2: Prohibition on 

Interference With Benefit Design of 

Retiree Drug Coverage 

The second legal theory on which we 

invited public comment was the theory 

that the RDS statute prohibits CMS from 

interfering in the benefit design of 

retiree drug coverage, and that requiring 

use of the ‘‘pass-through’’ methodology 

to report drug costs would interfere with 

the benefit design of qualified retiree 

prescription drug plans. 

Section 1860D–22(a)(6)(D) of the Act 

provides that nothing in the RDS statute 

shall be construed as ‘‘preventing 

employers to provide for flexibility in 

benefit design so long as the actuarial 

equivalence requirement is met.’’ Under 

this legal theory, requiring reporting of 

the pass-through price (and retained 

rebates) would be administratively 

burdensome, create an incentive for 

employers to redesign their RDS plans 

and their contractual arrangements with 

PBMs, and perhaps encourage 

employers to opt out of the RDS 

Program entirely. 

This argument rests on the 

assumption that—(1) contractual 

arrangements between an RDS sponsor 

and a PBM are ‘‘benefit design[s]’’; and 

(2) requiring an RDS sponsor to report 

the pass-through price for purposes of 

the subsidy would ‘‘prevent’’ employers 

from providing flexibility in those 

benefit designs. Arguably, section 

1860D–22(a)(6)(D) of the Act is most 

reasonably interpreted to prohibit us 

from mandating a certain benefit 

package in retiree drug plans, and not to 

prohibit us from imposing requirements 

that relate only to reporting costs to us. 

The provision’s context suggests that 

Congress was concerned with the 

benefit design of a retiree drug plan 

itself, and not with the relationship 

between an RDS sponsor and its 

contractors. 

Comment: We received several 

comments in favor of our adopting legal 

theory 2. Several commenters noted that 

imposing Part D reporting requirements 

on the RDS program would reduce 

sponsors’ flexibility in plan design, 

either directly or as a result of having to 

undertake contract modifications. One 

commenter stated that to require the 

Part D reporting structure for the RDS 

Program would alter the underpinnings 

of employer plan operations and result 

in RDS sponsors’ modifying their plan 

benefits, because cost assumptions for 

prescriptions filled at a pharmacy 

would no longer be fixed. The 

commenter stated its belief that this cost 

variability, in turn, would likely result 

in changes in cost-sharing and could 

constrain RDS sponsors’ flexibility in 

benefit design. Other commenters 

believe that requiring reporting of passthrough prices would discourage RDS 

sponsors from offering retiree drug 

coverage, which would push these 

retirees into Part D. Commenters also 

stated that requiring pass-through 

reporting would require considerable 

retooling of information systems. 

Response: We appreciate the 

comments about the effect of the Part D 

reporting requirements on RDS 

sponsors. Based on the comments, we 

agree that imposing the Part D reporting 

requirements on RDS sponsors could 

constrain plan flexibility and ultimately 

reduce the number of RDS plans 

available to Part D eligible individuals. 

In other words, these requirements 

could hinder the offering of, design of, 

or enrollment in such plans. Although 

we are not foreclosing the possibility 

that we could interpret section 1860D– 

22(a)(6) of the Act in the manner 

described in our final rule with 

comment, we do not believe, given our 

decision to adopt legal theory 3, that it 

is necessary to adopt legal theory 2 at 

this time. Thus, using our waiver 

authority under 1860D–22(b) of the Act, 

we will allow an RDS sponsor to report 

either the lock-in or pass-through prices 

(and to choose whether or not to report 

retained rebates). We believe this is the 

most prudent approach because it will 

help keep Part D eligible individuals in 

health plans with which they are 

satisfied. 

3. Legal Theory 3: Change in 

Interpretation of Waiver Authority 

The third legal theory on which we 

invited public comment involved a 

change in our interpretation of waiver 

authority in section 1860D–22(b) of the 

Act, and the use of that authority to 

modify requirements for RDS sponsors. 

The waiver authority in section 1860D– 

22(b) of the Act appears in a section of 

the Act that is otherwise devoted 

entirely to provisions that apply to the 

RDS Program. It provides that employer 

group waiver provisions in section 

1857(i) of the Act (Medicare Part C) 

apply with respect to ‘‘prescription drug 

plans in relation to employment based 

retiree health coverage’’ in a manner 

similar to how they apply to 

employment-based MA plans. Under 

ordinary principles of statutory 

construction, when a term is defined in 

statute, the definition applies when the 

same statute employs that term. Thus, 

the plainest reading of the waiver 

authority in section 1860D–22(b) of the 

Act is that it applies only to prescription 

drug plans (PDPs), and not to qualified 

retiree prescription drug plans (QRPDP). 

However, given the fact that this waiver 

authority appears in a section otherwise 

devoted to the RDS program, and that 

the term ‘‘qualified retiree prescription 

drug plan’’ includes the three words, 

‘‘prescription drug plan,’’ we believed 

an argument might be made in this case 


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that the term ‘‘prescription drug plan’’ 

was intended to encompass both a Part 

D ‘‘prescription drug plan’’ and a 

qualified retiree ‘‘prescription drug 

plan’’ (that is, this waiver authority 

extends both to PDPs and QRPDPs), as 

long as the plan is offered ‘‘in relation 

to employment-based retiree health 

coverage’’ in either case. In the January 

12, 2009 proposed rule, we proposed to 

change the regulations in Subpart J that 

interpret the waiver authority as 

applying only to Part D PDPs. 

Comment: Some commenters believe 

that use of the waiver authority is the 

strongest theory upon which to rely for 

purposes of permitting diverging 

reporting requirements in RDS and Part 

D. Several commenters agreed that the 

term ‘‘qualified retiree prescription drug 

plan’’ includes the words ‘‘prescription 

drug plan,’’ and therefore the waiver 

authority applies to RDS sponsors as 

long as a plan is offered ‘‘in relation to 

employment based retiree health 

coverage.’’ Several commenters stated 

that we have the authority to construe 

the waiver authority to include RDS 

plans because even though the term 

‘‘prescription drug plan’’ is defined to 

include only Part D plans, the phrase 

‘‘prescription drug plans in relation to 

employment based retiree health 

coverage’’ is not, and commenters argue 

that this phrase could be construed to 

include RDS plans. Another commenter 

notes that the statutory definition of a 

qualified retiree prescription drug plan 

includes the term ‘‘employment-based 

retiree health coverage.’’ Other 

commenters believe the term 

‘‘prescription drug plan’’ can be 

interpreted differently when used in 

different contexts, even in the same 

statute, and that courts will give 

deference to how the agency defines or 

interprets a term. 

Other commenters expressed concern 

that the use of the waiver authority to 

waive a Part D requirement that might 

hinder the RDS Program is inconsistent 

with the statutory construct of the 

waiver authority. One commenter notes 

that from a policy-perspective, Part D 

plans are very different from RDS 

sponsors, and these differences made 

the commenter uncertain whether 

waiver authority designed for MA and 

Part D would apply to the RDS program 

because we do not have the same type 

of authority over RDS sponsors as we do 

over MA organizations and Part D plans. 

Response: After consideration of these 

comments, we agree that we can 

construe the waiver authority in section 

1860D–22(b) of the Act to apply to RDS 

plans if we read the phrase 

‘‘prescription drug plans in relation to 

employment-based retiree coverage’’ as 

a whole, and interpret it to apply to RDS 

plans. Under this interpretation, we are 

authorized to waive requirements that 

hinder the design of, the offering of, or 

enrollment in RDS plans. We interpret 

the term ‘‘gross covered retiree planrelated prescription drug costs,’’ as 

defined in section 1860D–22(a)(3)(C)(ii) 

of the Act, in a manner consistent with 

the term ‘‘gross prescription drug costs,’’ 

as defined in section 1860D–15(b)(3) of 

the Act. That is, we believe that the 

same terminology used in these statutes 

must be interpreted the same way. 

Using waiver authority, however, we are 

waiving the prohibition on including 

administrative costs in the calculation 

of gross retiree costs (at § 423.882 and 

§ 423.888) when an RDS sponsor pays 

an intermediary contracting 

organization on a lock-in basis to allow 

RDS reporting requirements that diverge 

from Part D requirements (see 74 FR 

1549). In other words, we are waiving 

the requirement that ‘‘gross covered 

retiree plan-related prescription drug 

costs’’ exclude administrative costs 

because to require their exclusion from 

the costs RDS sponsors report to us— 

whether in the form of pass-through 

negotiated prices or reporting of 

retained rebates—would hinder the 

design of, the offering of, or enrollment 

in RDS plans. This waiver of the 

prohibition on including administrative 

costs in the calculation of gross retiree 

costs will apply to costs paid on a lockin basis (and the reporting of retained 

rebates) because we do not want to 

interfere with the contracting 

arrangements between an RDS sponsor 

and its intermediary contracting 

organization. Of course, an RDS sponsor 

may exclude administrative costs from 

the calculation of gross retiree costs, if 

it chooses to do so. Therefore, we are 

not, as commenters suggest, using the 

waiver authority to waive Part D 

requirements; rather, we are using the 

waiver authority to waive RDS 

requirements that, if interpreted 

consistently with parallel language in 

the Part D statute, would require that we 

apply RDS reporting requirements that 

similarly parallel Part D requirements. 

Regardless of whether an RDS sponsor 

chooses to report drug costs on a lockin or pass-through basis, or whether the 

RDS sponsor reports retained rebates or 

not, for audit and other oversight 

purposes RDS sponsors must document 

the method of reporting drug costs and 

rebates, and produce the documentation 

in accordance with § 423.888. 

It is important to note that, with this 

authority, we are waiving only the 

prohibition on including administrative 

costs in the calculation of RDS 

payments, and only to the extent that 

such costs are included in the payment 

to the PBM or other intermediate 

contracting entity, whether as ‘‘lock in’’ 

prices or retained rebates. If RDS 

sponsors include in their contracts with 

intermediary contracting organizations 

specific administrative payments for 

specific administrative services, such 

payments could not be included in the 

calculation of RDS payments. We are 

not waiving any other RDS 

requirements, nor are we adopting any 

waivers for the RDS Program that exist 

relating to the EGHP Program. The 

converse is also true; we are not 

applying waivers for the RDS program 

to the EGHP program. 

If, in the future, we believe that we 

may need to waive another RDS 

requirement, we will post a proposal on 

the RDS public Web site with 

information on how stakeholders can 

comment on the proposal, and will 

allow sufficient time for stakeholders to 

comment. 

Comment: Commenters noted that the 

definition of ‘‘gross covered prescription 

drug costs’’ is not defined in the RDS 

statute and that the definition under the 

Part D statute is limited to Part D. 

Response: We believe the commenter 

is referring to the statutory definition of 

‘‘allowable retiree costs’’ in section 

1860D–22(b)(3)(C)(i) of the Act, which 

uses the term ‘‘gross covered 

prescription drug costs,’’ instead of the 

term ‘‘gross covered retiree plan-related 

prescription drug costs.’’ We do not 

believe this distinction is meaningful in 

light of section 1860D–22(a)(3) of the 

Act, which includes the term ‘‘gross 

covered prescription drug costs,’’ but 

cross-references the definition of ‘‘gross 

covered retiree plan-related prescription 

drug costs’’ at section 1860D– 

22(b)(3)(C)(ii) of the Act. However, even 

if the distinction were meaningful, both 

terms exclude administrative costs 

when calculating allowable costs, so 

this prohibition must be waived for 

purposes of the regulations we are 

finalizing in this final rule. 

Comment: A commenter argues that if 

rebates are retained by the PBM then 

they are not part of the cost of drugs for 

the RDS sponsor. If such rebates are part 

of the RDS sponsor’s PBM contract they 

will change the cost paid by the plan 

and should be reported. 

Response: Under the approach we are 

adopting for the RDS Program with 

respect to retained rebates, RDS 

sponsors are not required to report 

rebates that are retained by the PBM— 

we are waiving the requirement that 

such retained rebates be considered 

administrative costs that must be 

excluded from gross covered retiree 

plan-related prescription drug costs. Of 


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Federal Register / Vol. 77, No. 8 / Thursday, January 12, 2012 / Rules and Regulations 1881 

course, if an RDS sponsor chooses to 

report the retained rebates, the subsidy 

payment will be adjusted accordingly. 

B. Provisions of the Proposed Rule 

In the January 12, 2009 Federal 

Register (74 FR 1550), we published a 

proposed rule that would amend the 

regulations pertaining to our waiver 

authority under section 1860D–22(b) of 

the Act to broaden our interpretation of 

the waiver authority. The proposed rule 

would permit the waiver of 

requirements that hinder the design of, 

the offering of, or the enrollment in an 

employer-sponsored group prescription 

drug plan. In addition, the January 2009 

proposed rule (74 FR 1551) noted that 

we were specifically soliciting 

comments on the possibility of applying 

one or more of those legal theories. 

One of the legal theories discussed in 

the interim final rule with comment 

involves interpreting the waiver 

authority under section 1860D–22(b) of 

the Act (which incorporates waiver 

authority under section 1857(i) of the 

Act) to authorize us to waive 

requirements of the RDS statute to 

permit differences between the RDS and 

Part D programs with respect to the two 

policies in question. In our current 

regulations, however, we have 

interpreted section 1860D–22(b) of the 

Act to apply only to Medicare Part D 

plans, and not RDS plan sponsors. In 

order for us to change our interpretation 

of the scope of our waiver authority, 

therefore, we proposed to revise the 

regulations to specify that the waiver 

authority applies to the RDS program. 

Thus, to enable us potentially to 

adopt this legal theory, we published 

the January 2009 proposed rule to invite 

public comment on this proposed 

change. We also noted that after we 

have reviewed the comments received 

on the proposed rule and the RDS 

interim final regulations, we would 

determine whether to adopt any of the 

legal theories discussed in the preamble 

discussion of the RDS interim final rule, 

and whether to finalize the regulatory 

revisions based on our change in 

interpretation of section 1860D–22(b) of 

the Act set forth in the proposed rule. 

We received seven timely comments 

from stakeholders on the January 12, 

2009 proposed rule. Because the 

provisions of the January 2009 proposed 

rule are closely related to the legal 

theory provisions of the final rule with 

comment period, we responded to the 

comments regarding these provisions in 

section II.A. of this final rule. 

After review of the comments, we are 

finalizing our proposed changes to part 

423, Subpart J to reflect the proposed 

interpretation of our authority under 

section 1860D–22(b) of the Act. In 

addition, we are finalizing the 

regulations for the RDS program as set 

forth in the final rule with comment 

period. Specifically, we are declining to 

adopt the Part D definition of 

‘‘negotiated price,’’ we are not revising 

the definition of ‘‘actually paid’’ to 

require RDS sponsors to report retained 

rebates, and we are finalizing the other 

definitions set forth in § 423.882 and the 

provisions of § 423.888, as set forth in 

the final rule with comment period, 

subject to the modification described in 

section II.C. of this final rule. 

C. Technical Correction 

During our review of the comments 

on these rules, we noticed an 

inconsistency between the preamble 

discussions and the regulatory text in 

the May 2008 proposed rule; and the 

regulations text of the January 2009 final 

rule with comment period regarding the 

definition of the RDS term ‘‘actually 

paid’’. 

Specifically, the preamble discussions 

of the RDS term ‘‘actually paid’’ in the 

May 2008 and January 2009 proposed 

rule and final rule with comment 

period, and the regulations text of the 

May 2008 proposed rule (73 FR 28571, 

73 FR 28602, and 74 FR 1515, 

respectively), all note that direct and 

indirect remuneration can be from any 

source, and such remuneration will 

cause the amounts that are actually paid 

to be reduced. The regulatory text in the 

January 2009 final rule with comment 

period incorrectly specified that the 

direct and indirect remuneration may 

only be from any manufacturer or 

pharmacy. 

The statutory definition of ‘‘allowable 

retiree costs’’, when stating that such 

costs are costs that are actually paid (net 

of discounts, chargebacks, and average 

percentage rebates), does not limit the 

source from which these discounts, 

chargebacks, and average percentage 

rebates come (see section 1860D– 

22(a)(3)(C)) of the Act (42 U.S.C. 

1395w–132(a)(3)(C)). Limiting the 

source from which direct and indirect 

remuneration may be derived is not 

consistent with the proposed rule, or the 

preamble discussion in the interim final 

rule (nor is it consistent with the Part D 

regulations). 

Therefore, in this final rule, we are 

making a technical correction to the 

definition of the RDS definition of 

‘‘actually paid’’ (see § 423.882) by 

revising the phrase ‘‘from any 

manufacturer or pharmacy’’ to read 

‘‘from any source’’ because it does not 

matter from what source direct or 

indirect remuneration comes, as long as 

the remuneration serves to decrease the 

costs incurred under the qualified 

retiree prescription drug plan. So the 

definition in § 423.882 will read as 

follows: 

Actually paid means, that the costs must be 

actually incurred by the qualified retiree 

prescription drug plan and must be net of 

any direct or indirect remuneration 

(including discounts, charge backs or rebates, 

cash discounts, free goods contingent on a 

purchase agreement, up-front payments, 

coupons, goods in kind, free or reduced-price 

services, grants, or other price concessions or 

similar benefits offered to some or all 

purchasers) from any source that would serve 

to decrease the costs incurred under the 

qualified retiree prescription drug plan. 

III. Provisions of the Final Rule 

In this final rule, we are adopting the 

provisions of the January 2009 proposed 

rule and the provisions of the final rule 

with comment period (see section II.B.3. 

of this final rule) with the technical 

correction to § 423.882 described in 

section II.C. of this final rule. 

IV. Collection of Information 

Requirements 

This document does not impose 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995. 

V. Regulatory Impact Statement 

A. Overall Impact 

We have examined the impacts of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), the 

Regulatory Flexibility Act (RFA) 

(September 19, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act, section 202 of the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), Executive Order 13132 on 

Federalism (August 4, 1999), and the 

Congressional Review Act (5 U.S.C. 

804(2)). 

Executive Order 12866 directs 

agencies to assess all costs and benefits 

of available regulatory alternatives and, 

if regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety effects, distributive impacts, 

and equity). A regulatory impact 

analysis (RIA) must be prepared for 

major rules with economically 

significant effects ($100 million or more 

in any 1 year). This rule is not a 

significant and/or an economically 

significant rule. This rule will not 

impose added benefits or costs on 

stakeholders because it allows 


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1882 Federal Register / Vol. 77, No. 8 / Thursday, January 12, 2012 / Rules and Regulations 

stakeholders the same reporting 

flexibilities that they exercise currently. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. For purposes of the RFA, we 

estimate that this rule will not have a 

significant impact on a substantial 

number of small entities. In fact, the 

policy approach taken in this final rule 

is intended to minimize impacts on any 

size business, including small 

businesses, or other small entities. This 

final rule allows RDS sponsors the 

flexibility to report drug costs on either 

a pass-through or lock-in basis, so that 

they may negotiate arrangements most 

beneficial to the RDS sponsor, and 

allows RDS sponsors to choose whether 

they will report retained rebates. This 

rule does not affect hospitals or other 

health care providers because the rule 

relates to how an RDS sponsor reports 

drug costs in order to receive an RDS 

payment. The amounts reported do not 

relate to the amounts actually paid to 

hospitals and other providers because 

the subsidy is an after-the-fact subsidy; 

meaning that the drug costs are incurred 

and paid and then an RDS sponsor may 

receive an RDS payment. Therefore, the 

Secretary has determined that this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a metropolitan statistical area and has 

fewer than 100 beds. This rule will not 

have a significant impact on small rural 

hospitals, because it does not relate to 

small rural hospitals either directly or 

indirectly. Therefore, the Secretary has 

determined that this final rule will not 

have a significant impact on the 

operations of a substantial number of 

small rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2011, that 

threshold is approximately $136 

million. This rule does not contain 

mandates that will impose spending 

costs on State, local, or tribal 

governments in the aggregate, or by the 

private sector, of $136 million or more. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a final 

rule that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

This rule will not have a substantial 

direct effect on State or local 

governments, nor will it preempt States, 

or otherwise have a Federalism 

implication. 

B. Anticipated Effects 

We do not anticipate effects on RDS 

sponsors, other providers or the 

Medicare program. 

C. Alternatives Considered 

We considered requiring RDS 

sponsors to report pass-through pricing 

and to require the reporting of retained 

rebates but decided against this 

approach because commenters believe 

that requiring these reporting structures 

could cause RDS sponsors not to 

participate in the RDS Program. 

D. Conclusion 

We do not believe that this rule will 

have an impact on RDS sponsors or any 

other stakeholders. We do not believe 

that a regulatory flexibility analysis, or 

an analysis required by section 1102(b) 

of the Act, are required, beyond the 

analysis performed in this section and 

the discussions provided in the section 

II. of this final rule. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects in 42 CFR Part 423 

Administrative practice and 

procedure, Emergency medical services, 

Health facilities, Health maintenance 

organizations (HMO), Health 

professionals, Medicare, Penalties, 

Privacy, Reporting and recordkeeping 

requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR part 

423 as set forth below: 

PART 423—VOLUNTARY MEDICARE 

PRESCRIPTION DRUG BENEFIT 

■ 1. The authority citation for part 423 

continues to read as follows: 

Authority: Secs. 1102, 1860D–1 through 

1860D–42, and 1871 of the Social Security 

Act (42 U.S.C. 1302, 1395w–101 through 

1395w–152, and 1395hh). 

Subpart J—Coordination of Part D 

Plans With Other Prescription Drug 

Coverage 

■ 2. Section 423.454 is amended by 

revising the definition ‘‘Employersponsored group prescription drug 

plan’’ to read as follows: 

§ 423.454 Definitions. 

* * * * * 

Employer-sponsored group 

prescription drug plan means, 

prescription drug coverage offered to 

retirees who are Part D eligible 

individuals under employment-based 

retiree health coverage. For purposes of 

this subpart, employment-based retiree 

health coverage is such coverage (as 

defined in § 423.882) provided through 

a Medicare Part D plan, or for which a 

plan sponsor could qualify for payments 

under Subpart R of this part. 

* * * * * 

■ 3. Section 423.458 is amended as 

follows: 

■ A. Republishing the heading of 

paragraph (c). 

■ B. Revising paragraph (c)(1). 

■ B. Redesignating paragraph (c)(2) as 

paragraph (c)(3). 

■ D. Adding a new paragraph (c)(2). 

The revision and addition read as 

follows: 

§ 423.458 Application of Part D rules to 

certain Part D plans on and after January 

1, 2006. 

* * * * * 

(c) Employer group waiver—(1) 

General rule for employer-sponsored 

group prescription drug plans that are 

Medicare Part D plans. CMS may waive 

or modify any requirement under this 

part that hinders the design of, the 

offering of, or the enrollment in an 

employer-sponsored group prescription 

drug plan, including authorizing the 

establishment of separate premium 

amounts for enrollees of the employersponsored group prescription drug plan 

and limitations on enrollment in such 

plan to Part D eligible individuals 

participating in the sponsor’s 

employment-based retiree health 

coverage. Any entity seeking to offer, 

sponsor, or administer an employersponsored group prescription drug plan 

may request, in writing, a waiver or 

modification of additional requirements 

under this Part that hinder its design of, 

the offering of, or the enrollment in, 

such employer-sponsored group 

prescription drug plan. 

(2) General rule for employersponsored group prescription drug 

plans for which a sponsor could qualify 

for payments under Subpart R of this 

part. CMS may waive or modify any 


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Federal Register / Vol. 77, No. 8 / Thursday, January 12, 2012 / Rules and Regulations 1883 

requirement under this part that hinders 

the design of, the offering of, or the 

enrollment in an employer-sponsored 

group prescription drug plan. 

* * * * * 

Subpart R—Payments to Sponsors of 

Retiree Prescription Drug Plans 

§ 423.882 [Amended] 

■ 4. In § 423.882, the definition of 

‘‘Actually paid’’ is amended by 

removing the phrase ‘‘manufacturer or 

pharmacy’’ and adding the term 

‘‘source’’ in its place. 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: November 3, 2011. 

Donald M. Berwick, 

Administrator, Centers for Medicare and 

Medicaid Services. 

Approved: January 6, 2012 

Kathleen Sebelius, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2012–473 Filed 1–11–12; 8:45 am] 

BILLING CODE 4120–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Federal Emergency Management 

Agency 

44 CFR Part 64 

[Docket ID FEMA–2011–0020; Internal 

Agency Docket No. FEMA–8093] 

Suspension of Community Eligibility 

for Repealing Its Floodplain 

Management Regulations 

AGENCY: Federal Emergency 

Management Agency, DHS. 

ACTION: Final rule. 

SUMMARY: FEMA is suspending one 

community because it repealed its 

floodplain management regulations 

under the National Flood Insurance 

Program (NFIP). If documentation is 

received from the community before the 

effective suspension date, indicating it 

has amended its floodplain management 

regulations in compliance with the NFIP 

requirements, FEMA will withdraw the 

suspension by publication in the 

Federal Register on a subsequent date. 

DATES: Effective Dates: The effective 

date of the community’s scheduled 

suspension is the date listed in the 

fourth column of the following table. 

FOR FURTHER INFORMATION CONTACT: 

David Stearrett, Mitigation Directorate, 

1800 South Bell Street Arlington, VA 

20598–3072, (202) 646–2953. 

SUPPLEMENTARY INFORMATION: The 

National Flood Insurance Program 

(NFIP) enables property owners to 

purchase flood insurance that is 

generally not otherwise available. In 

return, communities agree to adopt and 

implement local floodplain management 

regulations that contribute to protecting 

lives and reducing the risk of property 

damage from future flooding. Section 

1315 of the National Flood Insurance 

Act of 1968, as amended (42 U.S.C. 

4022), prohibits flood insurance 

coverage authorized under the National 

Flood Insurance Program (42 U.S.C. 

4001–4128) unless an appropriate 

public body adopts adequate floodplain 

management measures with effective 

administration and enforcement 

processes. 

The community listed in this notice 

no longer complies with the NFIP 

requirements set forth at 44 CFR part 59 

et seq. Under 44 CFR 59.24(d), 

communities will be suspended from 

the NFIP for repealing its floodplain 

management regulations. Accordingly, 

FEMA is suspending Graham County, 

North Carolina (‘‘the County’’) on the 

effective date in the fourth column of 

the table. As of that date, the purchase 

of new flood insurance policies or the 

renewal of existing flood insurance 

policies under the NFIP will no longer 

be available. 

FEMA will not suspend Graham 

County, however, if the community 

submits the documentation required 

under 44 CFR 59.24(d) to show that it 

has amended its floodplain management 

regulations to adopt the current effective 

Flood Insurance Study and Flood 

Insurance Rate Map dated April 19, 

2010. This documentation must be 

received by FEMA before the actual 

suspension date. If Graham County 

successfully demonstrates its 

compliance with NFIP regulations, 

FEMA will continue its eligibility for 

the sale of NFIP insurance. FEMA will 

then publish in the Federal Register a 

notice withdrawing the suspension of 

the community. In the interim, if you 

wish to determine whether FEMA has 

suspended the County on the 

suspension date, please contact the 

FEMA Region IV office at (770) 220– 

5414. Additional information may also 

be found at http://www.fema.gov/plan/ 

prevent/floodplain/nfipkeywords/ 

suspension.shtm. 

FEMA identified the special flood 

hazard areas (SFHAs) in this community 

by publishing a Flood Insurance Rate 

Map. The effective date of this map is 

indicated in the last column of the table. 

By law, no Federally regulated entity 

may provide financial assistance for 

acquisition or construction purposes for 

property located in a SFHA unless the 

community in which the property is 

located is participating in the NFIP (42 

U.S.C. 4106(a)). The prohibition against 

certain types of Federal disaster 

assistance also becomes effective for 

Graham County, North Carolina, on the 

date shown in the fourth column (42 

U.S.C. 4106(b)). 

The Administrator finds that notice 

and public comment procedure under 

5 U.S.C. 553(b) are impracticable and 

unnecessary because the community 

listed in this final rule has been 

adequately notified. The community 

received a letter dated August 3, 2011, 

and a subsequent Suspension Letter. 

FEMA addressed these notifications to 

the Chairman of the Graham County 

Board of Commissioners indicating that 

we will suspend the County unless the 

County takes the required corrective 

actions and remedial measures before 

the effective suspension date. Because 

we have made these notifications, this 

final rule may take effect within less 

than 30 days. 

National Environmental Policy Act. 

This rule is categorically excluded from 

the requirements of 44 CFR Part 10, 

Environmental Considerations. No 

environmental impact assessment has 

been prepared. 

Regulatory Flexibility Act. The 

Administrator has determined that this 

rule is exempt from the requirements of 

the Regulatory Flexibility Act because 

the National Flood Insurance Act of 

1968, as amended, 42 U.S.C. 4022, 

prohibits flood insurance coverage 

unless an appropriate public body 

adopts adequate floodplain management 

measures with effective enforcement 

measures. The community listed no 

longer complies with the statutory 

requirements, and after the effective 

date, flood insurance will no longer be 

available in the community unless 

remedial action takes place. 

Regulatory Classification. This final 

rule is not a significant regulatory action 

under the criteria of section 3(f) of 

Executive Order 12866 of September 30, 

1993, Regulatory Planning and Review, 

58 FR 51735. 

Executive Order 13132, Federalism. 

This rule involves no policies that have 

federalism implications under Executive 

Order 13132. 

Executive Order 12988, Civil Justice 

Reform. This rule meets the applicable 

standards of Executive Order 12988. 

Paperwork Reduction Act. This rule 

does not involve any collection of 

information for purposes of the 


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